The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral part
of consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral
part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The consolidated
financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern
Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively,
“Corporation”), as well as C&N Bank’s wholly-owned subsidiary, C&N Financial Services Corporation. In
December 2018, C&N Bank established a new entity, Northern Tier Holding LLC, for the purpose of acquiring, holding and disposing
of real property acquired by C&N Bank. C&N Bank is the sole member of Northern Tier Holding LLC. All material intercompany
balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS - The
Corporation provides banking and related services to individual and corporate customers. Lending products include commercial, mortgage
and consumer loans, as well as specialized instruments such as commercial letters-of-credit. Deposit products include various types
of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, Individual Retirement
Accounts and certificates of deposit. As discussed further in Note 3, in 2019 the Corporation expanded its primary market area
from its historic concentration in northcentral Pennsylvania and southern New York State by acquiring Monument Bancorp, Inc. (“Monument”)
with offices in Southeastern Pennsylvania. In 2019, the Corporation also expanded into south central Pennsylvania by opening a
lending office in York.
The Corporation provides Trust
and Financial Management services, including administration of trusts and estates, retirement plans, and other employee benefit
plans, and investment management services. The Corporation offers a variety of personal and commercial insurance products through
C&N Financial Services Corporation. C&N Financial Services Corporation also offers mutual funds, annuities, educational
savings accounts and other investment products through registered agents.
Management has determined that
the Corporation has one reportable segment, “Community Banking.” All of the Corporation’s activities are interrelated,
and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others.
The Corporation is subject to competition
from other financial institutions. It is also subject to regulation by certain federal and state agencies and undergoes periodic
examination by those regulatory authorities. As a consequence, the Corporation’s business is particularly susceptible to
being affected by future federal and state legislation and regulations.
USE OF ESTIMATES - The financial
information is presented in accordance with generally accepted accounting principles and general practice for financial institutions
in the United States of America (“U.S. GAAP”). In preparing financial statements, management is required to make estimates
and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial
statements and as such, actual results could differ from those estimates.
Material estimates that are particularly
susceptible to change include: (1) the allowance for loan losses, (2) fair values of debt securities based on estimates from independent
valuation services or from brokers and (3) assessment of impaired securities to determine whether or not the securities are other-than-temporarily
impaired.
INVESTMENT SECURITIES - Investment
securities are accounted for as follows:
Available-for-sale debt securities -
includes debt securities not classified as held-to-maturity or trading. Such securities are reported at fair value, with unrealized
gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (loss), net of tax.
Premiums on non-amortizing available-for-sale debt securities are amortized using the level yield method to the earliest call date,
while discounts on non-amortizing securities are amortized to the maturity date. Premiums and discounts on amortizing securities
(mortgage-backed securities) are amortized using the level yield method over the remaining contractual life of the securities,
adjusted for actual prepayments. Realized gains and losses on sales of available-for-sale securities are computed on the basis
of specific identification of the adjusted cost of each security. Securities within the available-for-sale portfolio may be used
as part of the Corporation’s asset and liability management strategy and may be sold in response to changes in interest rate
risk, prepayment risk or other factors.
Other-than-temporary impairment –
Credit-related declines in the fair value of available-for-sale debt securities that are deemed to be other-than-temporary are
reflected in earnings as realized losses. In estimating other-than-temporary impairment (OTTI) losses, management considers (1)
the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects
of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more
likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis. The
credit-related impairment is recognized in earnings and is the difference between a security’s amortized cost basis and the
present value of expected future cash flows discounted at the security’s effective interest rate. For debt securities classified
as held-to-maturity, if any, the amount of noncredit-related impairment is recognized in other comprehensive income and accreted
over the remaining life of the debt security as an increase in the carrying value of the security.
Marketable equity security –
The marketable equity security is carried at fair value with unrealized gains and losses included in other noninterest income in
the consolidated statements of income.
Restricted equity securities
- Restricted equity securities consist primarily of Federal Home Loan Bank of Pittsburgh stock, and are carried at cost and evaluated
for impairment. Holdings of restricted equity securities are included in Other Assets in the consolidated balance sheets, and dividends
received on restricted securities are included in Other Income in the consolidated statements of income.
LOANS HELD FOR SALE -
Mortgage loans held for sale are reported at the lower of cost or market, determined in the aggregate.
LOANS RECEIVABLE - Loans
originated by the Corporation which management has the intent and ability to hold for the foreseeable future or until maturity
or payoff are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees. Interest income
is accrued on the unpaid principal balance. Loan origination and commitment fees, as well as certain direct origination costs,
are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method.
The loans receivable portfolio is segmented
into residential mortgage, commercial and consumer loans. The residential mortgage segment includes the following classes: first
and junior lien residential mortgages, home equity lines of credit and residential construction loans. The most significant classes
of commercial loans are commercial loans secured by real estate, non-real estate secured commercial and industrial loans, loans
to political subdivisions, commercial construction, multi-family residential and loans secured by farmland.
Loans are placed on nonaccrual
status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood
of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied
as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest
payments received. 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. Also, the amortization of deferred loan fees is discontinued when a loan is placed
on nonaccrual status.
PURCHASED LOANS – The
Corporation purchased loans in connection with its acquisition of Monument, some of which had, at the acquisition date of April
1, 2019, shown evidence of credit deterioration since origination. The Corporation considers several factors as indicators that
an acquired loan has evidence of deterioration in credit quality. These factors include loans 90 days or more past due, loans
with an internal risk rating of substandard or below, loans classified as nonaccrual by the acquired institution and loans that
have been previously modified in a troubled debt restructuring. The purchased loans that showed evidence of credit impairment
were designated as the purchased credit impaired (“PCI”) loans and were recorded at fair value, with no carryover
of the allowance for loan losses. The PCI loans acquired are secured by real estate and the fair value of each loan at the acquisition
date was determined based on the estimated proceeds to be derived from selling the collateral, net of selling costs. The PCI loans
were placed into nonaccrual status upon acquisition (and remained in nonaccrual status at December 31, 2019) as the Corporation
cannot reasonably estimate cash flows expected to be collected in order to compute yield on the loans.
For purchased loans that did
not show evidence of credit deterioration at the acquisition date, the difference between the fair value of the loan at the acquisition
date and the loan’s contractual amount is being amortized as a yield adjustment over the estimated remaining life of the
loan using the effective interest method.
ALLOWANCE FOR LOAN LOSSES
- The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the 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 collection of all, or part, of the principal balance is highly
unlikely. Non-residential consumer loans are generally charged off no later than when they are 120 days past due on a contractual
basis, or earlier in the event of bankruptcy or if there is an amount deemed uncollectible.
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 Corporation’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.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s
allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments
of information available to them at the time of their examination. In the process of evaluating the loan portfolio, management
also considers the Corporation’s exposure to losses from unfunded loan commitments. As of December 31, 2019 and 2018, management
determined that no allowance for credit losses related to unfunded loan commitments was required.
The allowance consists primarily
of two major components – (1) a specific component based on a detailed assessment of certain larger loan relationships, mainly
commercial purpose, determined on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio, except
for the performing loans purchased in 2019 from Monument, based on a collective evaluation of pools of loans with similar risk
characteristics. The general component is assigned to each pool of loans based on both historical net charge-off experience, and
an evaluation of certain qualitative factors. 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 above methodologies for estimating specific and general losses in the portfolio.
The specific component relates
to loans that are classified as impaired based on a detailed assessment of certain larger loan relationships evaluated by a management
committee referred to as the Watch List Committee. Specific loan relationships are identified for evaluation based on the related
credit risk rating. For individual loans classified as impaired, an allowance is established when the collateral value less estimated
selling costs, present value of discounted cash flows or observable market price of the impaired loan is lower than the carrying
value of that loan.
The scope of loans reviewed individually each
quarter to determine if they are impaired include all commercial loan relationships greater than $200,000 and any residential mortgage
or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or
Doubtful. Loans that are individually reviewed, but which are determined to not be impaired, are combined with all remaining loans
that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss
characteristics for purposes of determining the general component of the allowance. All loans classified as troubled debt restructurings
and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with
an estimated loss of $100,000 or more, are individually evaluated for impairment.
Loans acquired from Monument
that did not show evidence of credit deterioration at the acquisition date (April 1, 2019) were initially recorded at fair value,
including a discount for credit losses reflecting an estimate of the present value of credit losses based on market expectations.
None of the performing loans purchased were impaired at December 31, 2019, and these purchased performing loans were excluded from
the loan pools for which the general component of the allowance for loan losses was calculated. A provision for loan losses on
purchased performing loans would be recognized only when the required allowance for loan losses or charge-off would exceed any
remaining purchase discount at the loan level.
The general component covers
pools of loans by loan class including commercial loans not considered individually impaired, as well as smaller balance homogeneous
classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation
generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such a loan:
(1) is subject to a restructuring agreement, (2) has an outstanding balance of $400,000 or more and a credit grade of Special Mention,
Substandard or Doubtful, or (3) has an estimated loss of $100,000 or more. The pools of loans for each loan segment are evaluated
for loss exposure based upon average historical net charge-off rates, adjusted for qualitative factors. The time period used in
determining the average historical net charge-off rate for each loan class is based on management’s evaluation of an appropriate
time period that captures an historical loss experience relevant to the current portfolio. Qualitative risk factors (described
in the following paragraph) are evaluated for the impact on each of the three distinct segments (residential mortgage, commercial
and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining
conditions based on management’s judgment using relevant information available at the time of the evaluation. Any adjustments
to the factors are supported by a narrative documentation of changes in conditions accompanying the allowance for loan losses calculation.
The qualitative factors used in the general
component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s
credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within
its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory
requirements and other factors.
Loans are classified as impaired when,
based on current information and events, it is probable that the Corporation 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 shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial loans by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted
at the loan’s effective rate or by the loan’s observable market price.
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 are 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 and industrial 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 aging data 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.
Loans whose terms are modified are classified
as troubled debt restructurings if the Corporation grants such borrowers concessions and it is deemed that those borrowers are
experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve reductions in required
payments, an extension of a loan’s stated maturity date or a temporary reduction in interest rate. Loans classified as troubled
debt restructurings are designated as impaired. Nonaccrual troubled debt restructurings may be restored to accrual status if the
ultimate collectability of principal and interest payments under the modified terms is not in doubt, and there has been a period
(generally, for at least six consecutive months) of satisfactory payment performance by the borrower either immediately before
or after the restructuring.
BANK PREMISES AND EQUIPMENT
- Bank premises and equipment are stated at cost less accumulated depreciation. Repair and maintenance expenditures which extend
the useful lives of assets are capitalized, and other repair and maintenance expenditures are expensed as incurred. Depreciation
expense is computed using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS -
The Corporation reviews long-lived assets, such as premises and equipment and intangibles, for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be recoverable. These changes in circumstances may include a
significant decrease in the market value of an asset or the manner in which an asset is used. If there is an indication the carrying
value of an asset may not be recoverable, future undiscounted cash flows expected to result from use of the asset are estimated.
If the sum of the expected cash flows is less than the carrying value of the asset, a loss is recognized for the difference between
the carrying value and fair market value of the asset.
FORECLOSED ASSETS HELD FOR SALE -
Foreclosed assets held for sale consist of real estate acquired by foreclosure and are initially recorded at fair value, less estimated
selling costs.
GOODWILL - Goodwill
represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill is tested at least annually
at December 31 for impairment, or more often if events or circumstances indicate there may be impairment. The Corporation has the
option of performing a qualitative assessment to determine whether any further quantitative testing for impairment is necessary.
The option of whether or not to perform a qualitative assessment is made annually.
CORE DEPOSIT INTANGIBLES – Amortization
of core deposit intangibles is calculated using an accelerated method. In determining amortization using the accelerated method
for any given period, the amount of expected cash flows for that period that were used in determining the acquisition-date fair
value is divided by the total amount of expected cash flows over the life of the asset. That percentage is multiplied by the initial
carrying amount of the asset to arrive at amortization expense for that period. If the Corporation’s cash flow patterns differ
significantly from the initial estimates, the amortization schedule would be adjusted prospectively.
SERVICING RIGHTS - The estimated
fair value of servicing rights related to mortgage loans sold and serviced by the Corporation is recorded as an asset upon the
sale of such loans. The valuation of servicing rights is adjusted quarterly, with changes in fair value included in Loan Servicing
Fees, Net, in the consolidated statements of income. Significant inputs to the valuation include expected net servicing income
to be received, the expected life of the underlying loans and the discount rate. The servicing rights asset is included in Other
Assets in the consolidated balance sheets.
INCOME TAXES - Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted tax laws. Deferred
tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available
evidence. Tax benefits from investments in limited partnerships that have qualified for federal low-income tax credits are recognized
as a reduction in the provision for income tax over the term of the investment using the effective yield method. The Corporation
includes income tax penalties in the provision for income tax. The Corporation has no accrued interest related to unrecognized
tax benefits.
STOCK COMPENSATION PLANS - The Corporation’s
stock-based compensation policy applies to all forms of stock-based compensation including stock options and restricted stock units.
All stock-based compensation is accounted for under the fair value method as required by U.S. GAAP. The expense associated with
stock-based compensation is recognized over the vesting period of each individual arrangement.
The fair value of each stock option is
estimated on the date of grant using the Black-Scholes-Merton option valuation model. The fair value of restricted stock is based
on the current market price on the date of grant.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
- In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements
when they become payable.
CASH FLOWS - The Corporation utilizes
the net reporting of cash receipts and cash payments for certain deposit and lending activities. Cash equivalents include federal
funds sold and all cash and amounts due from depository institutions and interest-bearing deposits in other banks with original
maturities of three months or less.
REVENUE RECOGNITION - As of January
1, 2018, the Corporation adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606),
as well as subsequent ASUs that modified Topic 606. The Company 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. The Corporation generally fully satisfies its performance obligations on its contracts with customers
as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity.
Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment
involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts
with customers.
Additional disclosures related to the Corporation’s
largest sources of noninterest income within the consolidated statements of income that are subject to Topic 606 are as follows:
Trust and financial management revenue
– C&N Bank’s trust division provides a wide range of financial services, including wealth management services
for individuals, businesses and retirement funds, administration of 401(k) and other retirement plans, retirement planning, estate
planning and estate settlement services. Trust clients are located primarily within the Corporation’s geographic markets.
Assets held in a fiduciary capacity by C&N Bank are not the Corporation’s assets and are therefore not included in the
consolidated balance sheets. The fair value of trust assets under management was approximately $1,007,113,000 at December 31, 2019
and $862,517,000 at December 31, 2018. Trust and financial management revenue is included within noninterest income in the consolidated
statements of income.
Trust revenue is recorded on a cash basis,
which is not materially different from the accrual basis. The majority (approximately 82%, based on annual 2019 results) of trust
revenue is earned and collected monthly, with the amount determined based on a percentage of the fair value of the trust assets
under management. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size
of assets under management. The services provided under such a contract represent a single performance obligation under the ASU
because it embodies a series of distinct goods or services that are substantially the same and have the same pattern of transfer
to the customer. None of the contracts with trust customers provide for incentive-based fees. In addition to wealth management
fees, trust revenue includes fees for provision of services, including employee benefit plan administration, tax return preparation
and estate planning and settlement. Fees for such services are billed based on contractual arrangements or established fee schedules
and are typically billed upon completion of providing such services. The costs of acquiring trust customers are incremental and
recognized within noninterest expense in the consolidated statements of income.
Service charges on deposit accounts
- Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft
fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged
for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional
fees for services provided to retail and business customers, mainly associated with checking accounts. 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. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred
within noninterest expense in the consolidated statements of income.
Interchange revenue from debit card transactions
– The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit
accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s
debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor
and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange
revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services
are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated
with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements
of income.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB)
issues ASUs to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that
have significant implications (elected or required) within the consolidated financial statements, or that management expects may
have a significant impact on financial statements issued in the foreseeable future.
Recent Accounting Pronouncements - Adopted
Effective December 31,
2019, the Corporation elected early adoption of ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which
simplified accounting for goodwill impairment by removing step 2 of the goodwill impairment test thus eliminating the need to
determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill
impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. Adoption of this ASU did not have a material impact on the Corporation’s consolidated financial
statements.
Effective January 1, 2019, the
Corporation adopted ASU 2016-02, Leases (Topic 842), as modified by subsequent ASUs, which changed U.S. GAAP by requiring that
lease assets and liabilities arising from operating leases be recognized on the balance sheet. Topic 842, as modified, does not
significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee
from prior U.S. GAAP. For leases with a term of 12 months or less, the Corporation made an accounting policy election by class
of underlying asset not to recognize lease assets and liabilities. The Corporation elected to adopt this pronouncement using an
optional transition method resulting in recognition of right-of-use assets and lease liabilities for operating leases of $1,132,000
on its consolidated balance sheets at January 1, 2019, with no adjustment to stockholders’ equity and no material impact
to its consolidated statements of income. At December 31, 2019, right-of-use assets of $1,637,000 were included in other assets,
and the related liabilities totaling the same amount were included in accrued interest and other liabilities, in the consolidated
balance sheets.
In February 2018, the FASB issued
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits, but does not require,
entities to reclassify tax effects stranded in accumulated other
comprehensive income resulting
from the Tax Cuts and Jobs Act of 2017 to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded
tax effects for all items accounted for in accumulated other comprehensive income. The Corporation elected early adoption and adopted
this standard update, effective January 1, 2018. The Corporation’s stranded tax effects were related to valuation of the
net deferred tax asset attributable to items of accumulated other comprehensive income (loss), which are unrealized gains (losses)
on available-for-sale debt securities and unfunded defined benefit plan obligations. Adoption resulted in a reclassification between
two categories of stockholders’ equity at January 1, 2018, with an increase of $325,000 in retained earnings and a decrease
in accumulated other comprehensive loss for the same amount (no net change in stockholders’ equity).
Effective January 1, 2018, the
Corporation elected early adoption of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). This
Update shortens the amortization period for certain callable debt securities held at a premium. Discounts will continue to be amortized
to maturity. Adoption resulted in a reduction in retained earnings and corresponding increase in accumulated other comprehensive
loss (no net change in stockholders’ equity) of $26,000 at January 1, 2018 for the cumulative after-tax impact of the change
in accounting for debt securities held as of that date.
Effective January 1, 2018, the
Corporation adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The guidance affects the accounting
for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial
instruments. ASU 2016-01 was effective for the Corporation on January 1, 2018 and resulted in the following changes:
|
·
|
A marketable equity
security previously included in available-for-sale securities on the consolidated balance sheets is presented as a separate asset.
|
|
·
|
Changes in the fair
value of the marketable equity security are captured in the consolidated statements of income.
|
|
·
|
Retained earnings
was reduced and a corresponding increase in accumulated other comprehensive loss was recognized (no net change in stockholders’
equity) of $22,000 at January 1, 2018 for the after-tax impact of the change in accounting for the unrealized loss on the marketable
equity security.
|
|
·
|
Adoption of ASU
2016-01 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. Further information regarding valuation of financial instruments is provided in Note 21.
|
Recently Issued But Not Yet Effective
Accounting Pronouncements
ASU 2016-13, Financial Instruments-Credit
Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities
from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement
of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit
loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques
will change to reflect the full amount of expected credit losses.
In addition, ASU 2016-13 amends the accounting for credit losses
on debt securities and purchased financial assets with credit deterioration. The effect of implementing this ASU is recorded through
a cumulative-effect adjustment to retained earnings. The Corporation has formed a cross functional management team and is working
with an outside vendor assessing alternative loss estimation methodologies and the Corporation’s data and system needs to
evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations.
In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies,
including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.
ASU 2018-13, Fair Value Measurement
(Topic 820) 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 value measurements. ASU 2018-13 clarifies that disclosure regarding measurement
uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13
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 Corporation beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses,
the range and weighted average of significant unobservable inputs used to develop Level 3 fair value 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 Corporation does not expect adoption of this ASU to have a material impact on its consolidated
financial position or results of operations.
ASU 2018-15, Intangibles –
Goodwill and Other – Internal-Use Software (Subtopic 350-40) was issued to help entities evaluate the accounting for fees
paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement
includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service
element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance will
become effective for the Corporation beginning in the first quarter 2020, with early adoption permitted. The Corporation does not
expect adoption of this ASU to have a material impact on its consolidated financial statements.
3. BUSINESS COMBINATION AND PENDING ACQUISITION
Business Combination –
Acquisition of Monument Bancorp, Inc.
On April 1, 2019, the Corporation
completed its acquisition of 100% of the common stock of Monument. Monument was the parent company of Monument Bank, a commercial
bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Pursuant to the merger, Monument
was merged into Citizens & Northern Corporation and Monument Bank was merged into C&N Bank. Management believes the acquisition
provides an opportunity to leverage the Corporation’s capital and deposits in a higher growth market and aligns with the
Corporation’s focus to proactively deploy capital to enhance long-term shareholder value.
The consolidated financial statements
include the formerly separate Monument operations from April 1, 2019 through December 31, 2019. Since the activities of the former
Monument operations have been combined with those of the Corporation, separate disclosure of Monument-related financial information
included in the consolidated financial statements is not practicable.
Total purchase consideration
was $42,651,000, including cash paid to former Monument shareholders totaling $9,517,000 and 1,279,825 shares of Corporation common
stock issued with a value of $32,953,000, (net of costs directly related to stock issuance of $181,000 included in the cash portion
of merger consideration transferred in the table below).
The merger was accounted for
using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed
liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and
liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information
relative to closing date fair values become available. In the fourth quarter 2019, the Corporation recorded an adjustment to the
initial fair value measurements of miscellaneous receivables and accrued liabilities made as of April 1, 2019. The adjustment resulted
in an increase in other assets of $216,000 and a decrease in other liabilities of $14,000, with a corresponding reduction in goodwill
of $230,000.
The fair value of assets acquired
(as adjusted in the fourth quarter 2019), excluding goodwill, totaled $375,138,000, while the fair value of liabilities assumed
totaled $348,933,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At
December 31, 2019, goodwill associated with the acquisition was $16,446,000. The goodwill resulting from the acquisition
represents the value expected from the expansion of the Corporation’s market into Southeastern Pennsylvania. Goodwill acquired
in the Monument merger is not deductible for tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.
The following table summarizes
the consideration paid for Monument and the estimated fair values of the assets acquired and liabilities assumed at the acquisition
date:
(In Thousands)
|
|
|
|
Fair value of consideration transferred:
|
|
|
|
|
Cash
|
|
$
|
9,698
|
|
Common stock issued
|
|
|
32,953
|
|
Total consideration transferred
|
|
$
|
42,651
|
|
Estimated fair values
of assets acquired and (liabilities) assumed:
(In Thousands)
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,920
|
|
Available-for-sale debt securities
|
|
|
94,568
|
|
Loans receivable
|
|
|
259,295
|
|
Accrued interest receivable
|
|
|
1,593
|
|
Bank premises and equipment
|
|
|
1,465
|
|
Foreclosed assets held for sale
|
|
|
1,064
|
|
Deferred tax asset, net
|
|
|
771
|
|
Core deposit intangible
|
|
|
1,461
|
|
Goodwill
|
|
|
16,446
|
|
Other assets
|
|
|
7,001
|
|
Deposits
|
|
|
(223,303
|
)
|
Short-term borrowings
|
|
|
(111,568
|
)
|
Subordinated debt
|
|
|
(12,375
|
)
|
Accrued interest and other liabilities
|
|
|
(1,687
|
)
|
Estimated excess fair value of assets acquired over liabilities assumed
|
|
$
|
42,651
|
|
In the consolidated statements
of cash flows, noncash investing and financing activities include the issuance of common stock as part of the merger consideration
as well as the following categories of assets acquired and liabilities assumed from Monument as reflected in the table above: available-for-sale
debt securities, loans receivable, bank premises and equipment, foreclosed assets held for sale, core deposit intangible, goodwill,
Federal Home Loan Bank of Pittsburgh stock of $5,478,000 (included in other assets above), deposits, short-term borrowings and
subordinated debt.
Acquisition date fair values
for available-for-sale securities were determined using Level 1 inputs consistent with the methods discussed further in Note 21.
The Corporation sold the acquired securities in April 2019 for approximately no realized gain or loss.
The determination of estimated
fair values of the acquired loans required the Corporation to make certain estimates about discount rates, future expected cash
flows, market conditions and other future events that are highly subjective in nature. Based on such factors as past due status,
nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were evaluated, and four loans (from three relationships)
displayed evidence of credit quality deterioration. These loans are accounted for under ASC 310-30 (purchased credit impaired,
or “PCI”). The majority of the purchased loans did not display evidence of impairment, and thus are accounted for under
ASC 310-20. Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as
prepayments, default rates and severity of loss given default. These assumptions were developed based on the portfolio characteristics
as of the acquisition date as well as available market research. The fair value estimates for acquired loans were based on the
amount and timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing
market interest rates applicable to the types of acquired loans, which the Corporation considers Level 3 fair value measurements.
Loans acquired from Monument
were measured at fair value at the acquisition date with no carryover of an allowance for loan losses. The following table presents
performing and PCI loans acquired, by loan segment and class, at April 1, 2019:
(In Thousands)
|
|
Performing
|
|
|
PCI
|
|
|
Total
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
107,645
|
|
|
$
|
77
|
|
|
$
|
107,722
|
|
Residential mortgage loans - junior liens
|
|
|
2,433
|
|
|
|
0
|
|
|
|
2,433
|
|
Home equity lines of credit
|
|
|
2,674
|
|
|
|
0
|
|
|
|
2,674
|
|
1-4 Family residential construction
|
|
|
510
|
|
|
|
0
|
|
|
|
510
|
|
Total residential mortgage
|
|
|
113,262
|
|
|
|
77
|
|
|
|
113,339
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
113,821
|
|
|
|
364
|
|
|
|
114,185
|
|
Commercial and industrial
|
|
|
7,571
|
|
|
|
0
|
|
|
|
7,571
|
|
Commercial construction and land
|
|
|
4,617
|
|
|
|
0
|
|
|
|
4,617
|
|
Loans secured by farmland
|
|
|
267
|
|
|
|
0
|
|
|
|
267
|
|
Multi-family (5 or more) residential
|
|
|
17,493
|
|
|
|
0
|
|
|
|
17,493
|
|
Other commercial loans
|
|
|
835
|
|
|
|
0
|
|
|
|
835
|
|
Total commercial
|
|
|
144,604
|
|
|
|
364
|
|
|
|
144,968
|
|
Consumer
|
|
|
988
|
|
|
|
0
|
|
|
|
988
|
|
Total
|
|
$
|
258,854
|
|
|
$
|
441
|
|
|
$
|
259,295
|
|
The following table presents
the preliminary fair value adjustments made to the amortized cost basis of loans acquired at April 1, 2019:
(In Thousands)
|
|
|
|
Gross amortized cost at acquisition
|
|
$
|
263,334
|
|
Market rate adjustment
|
|
|
(1,807
|
)
|
Credit fair value adjustment on non-credit impaired loans (accretable)
|
|
|
(1,914
|
)
|
Credit fair value adjustment on impaired loans (non-accretable)
|
|
|
(318
|
)
|
Estimated fair value of acquired loans
|
|
$
|
259,295
|
|
The market rate adjustment represents
the movement in interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The
credit adjustment made on non-PCI loans represents changes in credit quality of the underlying borrowers from loan inception to
the acquisition date.
The credit adjustment on PCI
loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that have been deemed uncollectible
for each loan. The PCI loans are secured by real estate and the fair value of each loan was determined based on the estimated proceeds
to be derived from selling the collateral, net of selling costs. The PCI loans were placed into nonaccrual status upon acquisition
(and remained in nonaccrual status at December 31, 2019) as the Corporation cannot reasonably estimate cash flows expected to be
collected in order to compute yield on the loans.
The Corporation recognized a
core deposit intangible of $1,461,000. The core deposit intangible represents the estimated value of lower-cost funding provided
by the nonmaturity deposits assumed in comparison with the Corporation’s estimated cost of borrowing funds in the market.
The core deposit intangible will be amortized over a weighted-average life of 4.4 years.
Deposit liabilities assumed were
segregated into two categories: (1) nonmaturity deposits (checking, savings and money market), and (2) time deposits (deposit accounts
with a stated maturity). The fair values of both categories of deposits were determined using level 2 fair value measurements.
For nonmaturity deposits, the acquisition date outstanding balance of the assumed demand deposit accounts approximates fair value.
In determining the fair value of time deposits, the Corporation discounted the contractual cash flows of the deposit accounts using
prevailing market interest rates for time deposit accounts of similar type and duration.
Short-term borrowings assumed
consisted of advances from the Federal Home Loan Bank of Pittsburgh. The fair value of short-term borrowings was determined using
Level 2 measurements by discounting the contractual cash flows of the borrowings using Federal Home Loan Bank interest rates available
April 1, 2019 for advances to the same maturities as those of the deposits assumed.
Subordinated debt assumed included
two issues: (1) agreements with par values totaling $5,375,000 which were redeemed on April 1, 2019; and (2) agreements with par
values totaling $7,000,000, maturing April 1, 2027 and which may be redeemed at par beginning April 1, 2022. The fair value of
subordinated debt was determined using Level 2 measurements by comparing the interest rates on the debt to the rates on similar
recent issues of comparable size by other similar-sized banking companies. In the fourth quarter 2019, the Corporation redeemed
subordinated debt with a par value of $500,000, resulting in a loss of $10,000 (included in other noninterest expense in the consolidated
statements of income).
Merger-related expenses associated
with the Monument transaction totaled of $3,812,000 in 2019 and $328,000 in 2018. Merger-related expenses include costs associated
with termination of data processing contracts, conversion of Monument’s customer accounting data into the Corporation’s
core system, severance and similar expenses, legal and other professional fees and various other costs.
The following table presents
pro forma information as if the merger between the Corporation and Monument had been completed on January 1, 2018. The pro forma
information does not necessarily reflect the results of operations that would have occurred had the merger taken place at the beginning
of 2018. The supplemental pro forma information excludes the after-tax cost of merger-related expenses totaling $3,270,000 in 2019
and $305,000 in 2018. The pro forma information does not include the impact of possible business model changes nor does it consider
any potential impacts of current market conditions or revenues, expense efficiencies or other factors.
|
|
Year Ended
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
(In Thousands Except Per Share Data)
|
|
2019
|
|
|
2018
|
|
Interest income
|
|
$
|
68,817
|
|
|
$
|
66,528
|
|
Interest expense
|
|
|
11,517
|
|
|
|
10,516
|
|
Net interest income
|
|
|
57,300
|
|
|
|
56,012
|
|
Provision for loan losses
|
|
|
894
|
|
|
|
1,059
|
|
Net interest income after provision for loan losses
|
|
|
56,406
|
|
|
|
54,953
|
|
Noninterest income
|
|
|
19,300
|
|
|
|
18,712
|
|
Net gains on securities
|
|
|
23
|
|
|
|
2,763
|
|
Other noninterest expenses
|
|
|
47,178
|
|
|
|
46,586
|
|
Income before income tax provision
|
|
|
28,551
|
|
|
|
29,842
|
|
Income tax provision
|
|
|
4,954
|
|
|
|
4,812
|
|
Net income
|
|
$
|
23,597
|
|
|
$
|
25,030
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share - basic
|
|
$
|
1.65
|
|
|
$
|
1.84
|
|
Earnings per common share - diluted
|
|
$
|
1.64
|
|
|
$
|
1.84
|
|
Pending Acquisition of Covenant Financial,
Inc.
In December 2019, the Corporation
announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”) in a transaction valued on December 18,
2019 at approximately $77 million. Under the terms of the definitive agreement, the Corporation will pay cash for 25% of the Covenant
shares and will convert 75% of Covenant shares to the Corporation’s common stock. Covenant is the holding company for Covenant
Bank, which operates banking offices in Bucks and Chester Counties of PA. Covenant had total assets of $516 million, liabilities
of $474 million and stockholders’ equity of $42 million at December 31, 2019. The merger is subject to satisfaction of customary
closing conditions, including receipt of regulatory approvals and approval of Covenant’s shareholders. The merger is expected
to close in the third quarter 2020. In 2019, the Corporation incurred merger-related expenses totaling $287,000 related to the
planned acquisition of Covenant. Management estimates pre-tax merger-related expenses associated with the Covenant acquisition
will total approximately $8 million ($6.6 million, net of tax), with most of the expenses expected to be incurred in the third
quarter 2020.
4. PER SHARE DATA
Basic earnings per common share are calculated
using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain
nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and
an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders.
Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine
basic earnings per common share.
Diluted earnings per common share are calculated
under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using
weighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock
options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share
price of the Corporation's common stock during the period.
|
|
Years Ended
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,504,000
|
|
|
$
|
22,013,000
|
|
Less: Dividends and undistributed earnings allocated to participating securities
|
|
|
(100,000
|
)
|
|
|
(110,000
|
)
|
Net income attributable to common shares
|
|
$
|
19,404,000
|
|
|
$
|
21,903,000
|
|
Basic weighted-average common shares outstanding
|
|
|
13,298,736
|
|
|
|
12,219,209
|
|
Basic earnings per common share (a)
|
|
$
|
1.46
|
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net income attributable to common shares
|
|
$
|
19,404,000
|
|
|
$
|
21,903,000
|
|
Basic weighted-average common shares outstanding
|
|
|
13,298,736
|
|
|
|
12,219,209
|
|
Dilutive effect of potential common stock arising from stock options
|
|
|
22,823
|
|
|
|
38,159
|
|
Diluted weighted-average common shares outstanding
|
|
|
13,321,559
|
|
|
|
12,257,368
|
|
Diluted earnings per common share (a)
|
|
$
|
1.46
|
|
|
$
|
1.79
|
|
(a)
Basic and diluted earnings per share under the two-class method are determined on net income reported on the income
statement less earnings allocated to nonvested restricted
shares with nonforfeitable dividends (participating securities).
The weighted-average number of nonvested
restricted shares outstanding was 68,358 shares in 2019 and 61,778 shares in 2018.
Stock options that are anti-dilutive are
excluded from net income per share calculations. There were no anti-dilutive instruments in 2019 or 2018.
5. COMPREHENSIVE INCOME
Comprehensive income (loss) is the total
of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive
income (loss). The components of other comprehensive income (loss), and the related tax effects, are as follows:
|
|
Before-Tax
|
|
|
Income Tax
|
|
|
Net-of-Tax
|
|
(In Thousands)
|
|
Amount
|
|
|
Effect
|
|
|
Amount
|
|
2019
|
|
|
|
|
|
|
|
|
|
Unrealized gains on available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on available-for-sale securities
|
|
$
|
9,920
|
|
|
($
|
2,084
|
)
|
|
$
|
7,836
|
|
Reclassification adjustment for gains realized in income
|
|
|
(23
|
)
|
|
|
5
|
|
|
|
(18
|
)
|
Other comprehensive income on available-for-sale debt securities
|
|
|
9,897
|
|
|
|
(2,079
|
)
|
|
|
7,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded pension and postretirement obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes from plan amendments and actuarial gains and losses
|
|
|
|
|
|
|
|
|
|
|
|
|
included in other comprehensive income
|
|
|
87
|
|
|
|
(19
|
)
|
|
|
68
|
|
Amortization of prior service cost and net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net periodic benefit cost
|
|
|
(32
|
)
|
|
|
7
|
|
|
|
(25
|
)
|
Other comprehensive income on unfunded retirement obligations
|
|
|
55
|
|
|
|
(12
|
)
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
$
|
9,952
|
|
|
($
|
2,091
|
)
|
|
$
|
7,861
|
|
|
|
Before-Tax
|
|
|
Income Tax
|
|
|
Net-of-Tax
|
|
(In Thousands)
|
|
Amount
|
|
|
Effect
|
|
|
Amount
|
|
2018
|
|
|
|
|
|
|
|
|
|
Unrealized losses on available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on available-for-sale securities
|
|
($
|
3,392
|
)
|
|
$
|
712
|
|
|
($
|
2,680
|
)
|
Reclassification adjustment for losses realized in income
|
|
|
288
|
|
|
|
(60
|
)
|
|
|
228
|
|
Other comprehensive loss on available-for-sale debt securities
|
|
|
(3,104
|
)
|
|
|
652
|
|
|
|
(2,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded pension and postretirement obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes from plan amendments and actuarial gains and losses
|
|
|
|
|
|
|
|
|
|
|
|
|
included in other comprehensive income
|
|
|
101
|
|
|
|
(21
|
)
|
|
|
80
|
|
Amortization of prior service cost and net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net periodic benefit cost
|
|
|
(17
|
)
|
|
|
3
|
|
|
|
(14
|
)
|
Other comprehensive income on unfunded retirement obligations
|
|
|
84
|
|
|
|
(18
|
)
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
($
|
3,020
|
)
|
|
$
|
634
|
|
|
($
|
2,386
|
)
|
Changes in the components of accumulated
other comprehensive income (loss), included in stockholders’ equity, are as follows:
|
|
Unrealized
|
|
|
|
|
|
Accumulated
|
|
|
|
Gains
|
|
|
Unfunded
|
|
|
Other
|
|
|
|
(Losses)
|
|
|
Retirement
|
|
|
Comprehensive
|
|
(In Thousands)
|
|
on Securities
|
|
|
Obligations
|
|
|
Income (Loss)
|
|
2019
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(4,307
|
)
|
|
$
|
137
|
|
|
$
|
(4,170
|
)
|
Other comprehensive income during year ended December
31, 2019
|
|
|
7,818
|
|
|
|
43
|
|
|
|
7,861
|
|
Balance, end of period
|
|
$
|
3,511
|
|
|
$
|
180
|
|
|
$
|
3,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(1,566
|
)
|
|
$
|
59
|
|
|
$
|
(1,507
|
)
|
Impact of change in enacted income tax rate
|
|
|
(337
|
)
|
|
|
12
|
|
|
|
(325
|
)
|
Impact of change in the method of premium amortization
of callable debt securities
|
|
|
26
|
|
|
|
0
|
|
|
|
26
|
|
Impact of change in the method of accounting for
marketable equity security
|
|
|
22
|
|
|
|
0
|
|
|
|
22
|
|
Other comprehensive (loss) income during year ended
December 31, 2018
|
|
|
(2,452
|
)
|
|
|
66
|
|
|
|
(2,386
|
)
|
Balance, end of period
|
|
$
|
(4,307
|
)
|
|
$
|
137
|
|
|
$
|
(4,170
|
)
|
Items reclassified out of each component of
accumulated other comprehensive income (loss) are as follows:
For the Year Ended December 31, 2019
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Reclassified from
|
|
|
|
|
|
Accumulated Other
|
|
|
|
Details about Accumulated Other
|
|
Comprehensive
|
|
|
Affected Line Item in the Consolidated
|
Comprehensive Income (Loss) Components
|
|
Income (Loss)
|
|
|
Statements of Income
|
Unrealized gains and losses on available-for-sale debt
securities
|
|
$
|
(23
|
)
|
|
Realized gains on available-for-sale debt securities, net
|
|
|
|
5
|
|
|
Income tax provision
|
|
|
|
(18
|
)
|
|
Net of tax
|
Amortization of defined benefit pension and postretirement items:
|
|
|
|
|
|
|
Prior service cost
|
|
|
(31
|
)
|
|
Other noninterest expense
|
Actuarial gain
|
|
|
(1
|
)
|
|
Other noninterest expense
|
|
|
|
(32
|
)
|
|
Total before tax
|
|
|
|
7
|
|
|
Income tax provision
|
|
|
|
(25
|
)
|
|
Net of tax
|
Total reclassifications for the period
|
|
$
|
(43
|
)
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Reclassified from
|
|
|
|
|
|
Accumulated Other
|
|
|
|
Details about Accumulated Other
|
|
Comprehensive
|
|
|
Affected Line Item in the Consolidated
|
Comprehensive Income (Loss) Components
|
|
Income (Loss)
|
|
|
Statements of Income
|
Unrealized gains and losses on available-for-sale debt securities
|
|
$
|
288
|
|
|
Realized losses on available-for-sale debt securities, net
|
|
|
|
(60
|
)
|
|
Income tax provision
|
|
|
|
228
|
|
|
Net of tax
|
Amortization of defined benefit pension and postretirement items:
|
|
|
|
|
|
|
Prior service cost
|
|
|
(30
|
)
|
|
Other noninterest expense
|
Actuarial loss
|
|
|
13
|
|
|
Other noninterest expense
|
|
|
|
(17
|
)
|
|
Total before tax
|
|
|
|
3
|
|
|
Income tax provision
|
|
|
|
(14
|
)
|
|
Net of tax
|
Total reclassifications for the period
|
|
$
|
214
|
|
|
|
6. CASH AND DUE FROM BANKS
Cash and due from banks at December 31,
2019 and 2018 include the following:
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
31,122
|
|
|
$
|
32,827
|
|
Certificates of deposit
|
|
|
4,080
|
|
|
|
4,660
|
|
Total cash and due from banks
|
|
$
|
35,202
|
|
|
$
|
37,487
|
|
Certificates of deposit are issues by U.S.
banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains
cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.
The Corporation is required to maintain
reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank. The reserves are based on
deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $20,148,000 at
December 31, 2019 and $18,141,000 at December 31, 2018.
7. SECURITIES
Amortized cost and fair value of available-for-sale
debt securities at December 31, 2019 and 2018 are summarized as follows:
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Obligations of U.S. Government agencies
|
|
$
|
16,380
|
|
|
$
|
620
|
|
|
$
|
0
|
|
|
$
|
17,000
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
|
|
|
68,787
|
|
|
|
2,011
|
|
|
|
(38
|
)
|
|
|
70,760
|
|
Taxable
|
|
|
35,446
|
|
|
|
927
|
|
|
|
(70
|
)
|
|
|
36,303
|
|
Mortgage-backed securities issued or guaranteed by
U.S. Government agencies or sponsored agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities
|
|
|
58,875
|
|
|
|
472
|
|
|
|
(137
|
)
|
|
|
59,210
|
|
Residential collateralized mortgage obligations
|
|
|
115,025
|
|
|
|
308
|
|
|
|
(610
|
)
|
|
|
114,723
|
|
Commercial mortgage-backed securities
|
|
|
47,765
|
|
|
|
1,069
|
|
|
|
(107
|
)
|
|
|
48,727
|
|
Total
|
|
$
|
342,278
|
|
|
$
|
5,407
|
|
|
($
|
962
|
)
|
|
$
|
346,723
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Obligations of U.S. Government agencies
|
|
$
|
12,331
|
|
|
$
|
169
|
|
|
$
|
0
|
|
|
$
|
12,500
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
|
|
|
84,204
|
|
|
|
949
|
|
|
|
(1,201
|
)
|
|
|
83,952
|
|
Taxable
|
|
|
27,618
|
|
|
|
208
|
|
|
|
(127
|
)
|
|
|
27,699
|
|
Mortgage-backed securities issued or guaranteed by
U.S. Government agencies or sponsored agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities
|
|
|
54,827
|
|
|
|
48
|
|
|
|
(1,430
|
)
|
|
|
53,445
|
|
Residential collateralized mortgage obligations
|
|
|
148,964
|
|
|
|
238
|
|
|
|
(3,290
|
)
|
|
|
145,912
|
|
Commercial mortgage-backed securities
|
|
|
40,781
|
|
|
|
166
|
|
|
|
(1,182
|
)
|
|
|
39,765
|
|
Total
|
|
$
|
368,725
|
|
|
$
|
1,778
|
|
|
($
|
7,230
|
)
|
|
$
|
363,273
|
|
The following table presents gross unrealized
losses and fair value of available-for-sale debt securities with unrealized loss positions that are not deemed to be other-than-temporarily
impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at December
31, 2019 and 2018:
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2019
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(In Thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
|
|
$
|
6,429
|
|
|
($
|
38
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,429
|
|
|
($
|
38
|
)
|
Taxable
|
|
|
5,624
|
|
|
|
(68
|
)
|
|
|
161
|
|
|
|
(2
|
)
|
|
|
5,785
|
|
|
|
(70
|
)
|
Mortgage-backed securities issued or guaranteed by
U.S. Government agencies or sponsored agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities
|
|
|
9,771
|
|
|
|
(35
|
)
|
|
|
14,787
|
|
|
|
(102
|
)
|
|
|
24,558
|
|
|
|
(137
|
)
|
Residential collateralized mortgage obligations
|
|
|
31,409
|
|
|
|
(195
|
)
|
|
|
30,535
|
|
|
|
(415
|
)
|
|
|
61,944
|
|
|
|
(610
|
)
|
Commercial mortgage-backed securities
|
|
|
0
|
|
|
|
0
|
|
|
|
8,507
|
|
|
|
(107
|
)
|
|
|
8,507
|
|
|
|
(107
|
)
|
Total
|
|
$
|
53,233
|
|
|
($
|
336
|
)
|
|
$
|
53,990
|
|
|
($
|
626
|
)
|
|
$
|
107,223
|
|
|
($
|
962
|
)
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2018
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(In Thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
|
|
$
|
5,084
|
|
|
($
|
11
|
)
|
|
$
|
32,684
|
|
|
($
|
1,190
|
)
|
|
$
|
37,768
|
|
|
($
|
1,201
|
)
|
Taxable
|
|
|
980
|
|
|
|
(2
|
)
|
|
|
11,418
|
|
|
|
(125
|
)
|
|
|
12,398
|
|
|
|
(127
|
)
|
Mortgage-backed securities issued or guaranteed by
U.S. Government agencies or sponsored agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities
|
|
|
5,592
|
|
|
|
(4
|
)
|
|
|
42,309
|
|
|
|
(1,426
|
)
|
|
|
47,901
|
|
|
|
(1,430
|
)
|
Residential collateralized mortgage obligations
|
|
|
1,892
|
|
|
|
(8
|
)
|
|
|
101,662
|
|
|
|
(3,282
|
)
|
|
|
103,554
|
|
|
|
(3,290
|
)
|
Commercial mortgage-backed securities
|
|
|
0
|
|
|
|
0
|
|
|
|
32,552
|
|
|
|
(1,182
|
)
|
|
|
32,552
|
|
|
|
(1,182
|
)
|
Total
|
|
$
|
13,548
|
|
|
($
|
25
|
)
|
|
$
|
220,625
|
|
|
($
|
7,205
|
)
|
|
$
|
234,173
|
|
|
($
|
7,230
|
)
|
Gross realized gains and losses from available-for-sale
securities and the related income tax provision were as follows:
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Gross realized gains from sales
|
|
$
|
24
|
|
|
$
|
259
|
|
Gross realized losses from sales
|
|
|
(1
|
)
|
|
|
(547
|
)
|
Net realized gains (losses)
|
|
$
|
23
|
|
|
($
|
288
|
)
|
Income tax (credit) provision related to net realized gains (losses)
|
|
$
|
5
|
|
|
($
|
60
|
)
|
The amortized cost and fair value of available-for-sale
debt securities by contractual maturity are shown in the following table as of December 31, 2019. Actual maturities may differ
from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment
penalties.
|
|
December 31, 2019
|
|
|
|
Amortized
|
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
|
Value
|
|
Due in one year or less
|
|
$
|
7,216
|
|
|
$
|
7,247
|
|
Due from one year through five years
|
|
|
31,627
|
|
|
|
32,408
|
|
Due from five years through ten years
|
|
|
42,709
|
|
|
|
43,845
|
|
Due after ten years
|
|
|
39,061
|
|
|
|
40,563
|
|
Sub-total
|
|
|
120,613
|
|
|
|
124,063
|
|
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
|
|
|
|
|
|
|
|
|
Residential pass-through securities
|
|
|
58,875
|
|
|
|
59,210
|
|
Residential collateralized mortgage obligations
|
|
|
115,025
|
|
|
|
114,723
|
|
Commercial mortgage-backed securities
|
|
|
47,765
|
|
|
|
48,727
|
|
Total
|
|
$
|
342,278
|
|
|
$
|
346,723
|
|
The Corporation’s mortgage-backed
securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’
ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans
and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized
mortgage obligations are shown in one period.
Investment securities carried
at $215,270,000 at December 31, 2019 and $229,418,000 at December 31, 2018 were pledged as collateral for public deposits, trusts
and certain other deposits as provided by law. See Note 12 for information concerning securities pledged to secure borrowing arrangements.
Management evaluates securities for OTTI
at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is
given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be
required to sell the security before its anticipated recovery.
A summary of information management considered
in evaluating debt and equity securities for OTTI at December 31, 2019 and 2018 is provided below.
Debt Securities
At December 31, 2019 and 2018, management
performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information
obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources.
The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well
as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management
believes impairment of these debt securities at December 31, 2019 and 2018 to be temporary.
Equity Securities
C&N Bank is a member of the Federal
Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank
is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must
ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock,
included in Other Assets in the consolidated balance sheets, was $10,131,000 at December 31, 2019 and $5,582,000 at December 31,
2018. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at
December 31, 2019 and December 31, 2018. In making this determination, management concluded that recovery of total outstanding
par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh
has made publicly available.
The Corporation’s marketable equity
security, with carrying values of $979,000 at December 31, 2019 and $950,000 at December 31, 2018, consisted exclusively of one
mutual fund. There was an unrealized loss on the mutual fund of $21,000 at December 31, 2019 and $50,000 at December 31, 2018.
The decrease in the unrealized loss of $29,000 in 2019 and the increase in the unrealized loss of $21,000 in 2018 are included
in other noninterest income in the consolidated statements of income.
In the year ended December 31, 2018, the
Corporation recorded pre-tax gains from sales of a restricted equity security (Visa Class B stock) totaling $2,321,000. The Corporation
had received 19,789 shares of Visa Class B stock pursuant to Visa’s 2007 initial public offering. Until the second quarter
2018, the carrying value of the shares was $0, which represented the Corporation’s cost basis. Class B shares are subject
to restrictions on transfer, essentially limiting their transferability to other owners of Class B shares. In the second and third
quarters of 2018, the Corporation sold all of its Visa Class B stock.
A summary of realized and unrealized gains
and losses recognized on equity securities is as follows:
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Net gains recognized during the period on equity
securities
|
|
$
|
29
|
|
|
$
|
2,300
|
|
Less: net gains recognized during the
period on equity securities sold during the period
|
|
|
0
|
|
|
|
(2,321
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) recognized during the period
on equity securities still held at the reporting date
|
|
$
|
29
|
|
|
$
|
(21
|
)
|
8. LOANS
Loans outstanding at December 31, 2019 and
2018 are summarized as follows:
Summary of Loans by Type
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
510,641
|
|
|
$
|
372,339
|
|
Residential mortgage loans - junior liens
|
|
|
27,503
|
|
|
|
25,450
|
|
Home equity lines of credit
|
|
|
33,638
|
|
|
|
34,319
|
|
1-4 Family residential construction
|
|
|
14,798
|
|
|
|
24,698
|
|
Total residential mortgage
|
|
|
586,580
|
|
|
|
456,806
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
301,227
|
|
|
|
162,611
|
|
Commercial and industrial
|
|
|
126,374
|
|
|
|
91,856
|
|
Political subdivisions
|
|
|
53,570
|
|
|
|
53,263
|
|
Commercial construction and land
|
|
|
33,555
|
|
|
|
11,962
|
|
Loans secured by farmland
|
|
|
12,251
|
|
|
|
7,146
|
|
Multi-family (5 or more) residential
|
|
|
31,070
|
|
|
|
7,180
|
|
Agricultural loans
|
|
|
4,319
|
|
|
|
5,659
|
|
Other commercial loans
|
|
|
16,535
|
|
|
|
13,950
|
|
Total commercial
|
|
|
578,901
|
|
|
|
353,627
|
|
Consumer
|
|
|
16,741
|
|
|
|
17,130
|
|
Total
|
|
|
1,182,222
|
|
|
|
827,563
|
|
Less: allowance for loan losses
|
|
|
(9,836
|
)
|
|
|
(9,309
|
)
|
Loans, net
|
|
$
|
1,172,386
|
|
|
$
|
818,254
|
|
In the table above, outstanding loan balances
are presented net of deferred loan origination fees, net, of $2,482,000 at December 31, 2019 and $1,999,000 at December 31, 2018.
As described in Note 3, effective April 1,
2019, the Corporation acquired loans pursuant to the acquisition of Monument. The loans acquired from Monument were recorded at
an initial fair value of $259,295,000. The gross amortized cost of loans acquired from Monument on April 1, 2019 was reduced $1,807,000
based on movements in interest rates (market rate adjustment) and was also reduced $1,914,000 based on a credit fair value adjustment
on non-impaired loans and by $318,000 based on a credit fair value adjustment on impaired loans. In 2019, adjustments to these
initial discounts to the carrying amounts of loans were recognized as follows:
|
|
|
|
|
Credit
|
|
|
|
|
|
|
Market
|
|
|
Adjustment on
|
|
|
Credit
|
|
|
|
Rate
|
|
|
Non-impaired
|
|
|
Adjustment on
|
|
(In Thousands)
|
|
Adjustment
|
|
|
Loans
|
|
|
PCI Loans
|
|
Adjustments to gross amortized cost of loans at acquisition
|
|
$
|
(1,807
|
)
|
|
$
|
(1,914
|
)
|
|
$
|
(318
|
)
|
Accretion recognized in interest income
|
|
|
392
|
|
|
|
698
|
|
|
|
|
|
Recovery from PCI loan pay-off
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Adjustments to gross amortized cost of loans at December 31, 2019
|
|
$
|
(1,415
|
)
|
|
$
|
(1,216
|
)
|
|
$
|
(308
|
)
|
The Corporation grants loans to individuals
as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically
concentrated in northcentral Pennsylvania, the southern tier of New York State, southeastern Pennsylvania and southcentral Pennsylvania.
Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts
is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar
businesses or activities that exceed 10% of total loans at December 31, 2019.
Transactions within the allowance for loan
losses, summarized by segment and class, were as follows:
Year Ended December 31, 2019
|
|
Dec. 31,
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31,
|
|
(In Thousands)
|
|
2018
Balance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision (Credit)
|
|
|
2019
Balance
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
3,156
|
|
|
$
|
(166
|
)
|
|
$
|
4
|
|
|
$
|
411
|
|
|
$
|
3,405
|
|
Residential mortgage loans - junior liens
|
|
|
325
|
|
|
|
(24
|
)
|
|
|
2
|
|
|
|
81
|
|
|
|
384
|
|
Home equity lines of credit
|
|
|
302
|
|
|
|
0
|
|
|
|
5
|
|
|
|
(31
|
)
|
|
|
276
|
|
1-4 Family residential construction
|
|
|
203
|
|
|
|
0
|
|
|
|
1
|
|
|
|
(87
|
)
|
|
|
117
|
|
Total residential mortgage
|
|
|
3,986
|
|
|
|
(190
|
)
|
|
|
12
|
|
|
|
374
|
|
|
|
4,182
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
2,538
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(617
|
)
|
|
|
1,921
|
|
Commercial and industrial
|
|
|
1,553
|
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
(162
|
)
|
|
|
1,391
|
|
Commercial construction and land
|
|
|
110
|
|
|
|
0
|
|
|
|
0
|
|
|
|
856
|
|
|
|
966
|
|
Loans secured by farmland
|
|
|
102
|
|
|
|
0
|
|
|
|
0
|
|
|
|
56
|
|
|
|
158
|
|
Multi-family (5 or more) residential
|
|
|
114
|
|
|
|
0
|
|
|
|
0
|
|
|
|
42
|
|
|
|
156
|
|
Agricultural loans
|
|
|
46
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(5
|
)
|
|
|
41
|
|
Other commercial loans
|
|
|
128
|
|
|
|
0
|
|
|
|
0
|
|
|
|
27
|
|
|
|
155
|
|
Total commercial
|
|
|
4,591
|
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
197
|
|
|
|
4,788
|
|
Consumer
|
|
|
233
|
|
|
|
(183
|
)
|
|
|
39
|
|
|
|
192
|
|
|
|
281
|
|
Unallocated
|
|
|
499
|
|
|
|
0
|
|
|
|
0
|
|
|
|
86
|
|
|
|
585
|
|
Total Allowance for Loan Losses
|
|
$
|
9,309
|
|
|
$
|
(379
|
)
|
|
$
|
57
|
|
|
$
|
849
|
|
|
$
|
9,836
|
|
Year Ended December 31, 2018
|
|
Dec. 31,
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31,
|
|
(In Thousands)
|
|
2017
Balance
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision (Credit)
|
|
|
2018
Balance
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
3,200
|
|
|
$
|
(108
|
)
|
|
$
|
4
|
|
|
$
|
60
|
|
|
$
|
3,156
|
|
Residential mortgage loans - junior liens
|
|
|
224
|
|
|
|
0
|
|
|
|
4
|
|
|
|
97
|
|
|
|
325
|
|
Home equity lines of credit
|
|
|
296
|
|
|
|
(50
|
)
|
|
|
0
|
|
|
|
56
|
|
|
|
302
|
|
1-4 Family residential construction
|
|
|
243
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(40
|
)
|
|
|
203
|
|
Total residential mortgage
|
|
|
3,963
|
|
|
|
(158
|
)
|
|
|
8
|
|
|
|
173
|
|
|
|
3,986
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
2,584
|
|
|
|
(21
|
)
|
|
|
0
|
|
|
|
(25
|
)
|
|
|
2,538
|
|
Commercial and industrial
|
|
|
1,065
|
|
|
|
(144
|
)
|
|
|
6
|
|
|
|
626
|
|
|
|
1,553
|
|
Commercial construction and land
|
|
|
150
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(40
|
)
|
|
|
110
|
|
Loans secured by farmland
|
|
|
105
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(3
|
)
|
|
|
102
|
|
Multi-family (5 or more) residential
|
|
|
172
|
|
|
|
0
|
|
|
|
311
|
|
|
|
(369
|
)
|
|
|
114
|
|
Agricultural loans
|
|
|
57
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(11
|
)
|
|
|
46
|
|
Other commercial loans
|
|
|
102
|
|
|
|
0
|
|
|
|
0
|
|
|
|
26
|
|
|
|
128
|
|
Total commercial
|
|
|
4,235
|
|
|
|
(165
|
)
|
|
|
317
|
|
|
|
204
|
|
|
|
4,591
|
|
Consumer
|
|
|
159
|
|
|
|
(174
|
)
|
|
|
41
|
|
|
|
207
|
|
|
|
233
|
|
Unallocated
|
|
|
499
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
499
|
|
Total Allowance for Loan Losses
|
|
$
|
8,856
|
|
|
$
|
(497
|
)
|
|
$
|
366
|
|
|
$
|
584
|
|
|
$
|
9,309
|
|
In the evaluation of the loan portfolio, management
determines two major components for the allowance for loan losses – (1) a specific component based on an assessment of certain
larger relationships, mainly commercial purpose loans, on a loan-by-loan basis; and (2) a general component for the remainder of
the portfolio, except for performing loans purchased in 2019 from Monument, based on a collective evaluation of pools of loans
with similar risk characteristics. The general component is assigned to each pool of loans based on both historical net charge-off
experience, and an evaluation of certain qualitative factors. 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 above methodologies for estimating specific and general losses in
the portfolio.
Loans acquired from Monument that were identified
as having a deterioration in credit quality (purchased credit impaired, or PCI) were valued at $441,000 at April 1, 2019 and December
31, 2019. The remainder of the portfolio was deemed to be the performing component of the portfolio. None of the performing loans
purchased were found to be impaired at December 31, 2019, and the performing loans purchased in 2019 were excluded from the loan
pools for which the general component of the allowance for loan losses was calculated.
In determining the larger loan relationships
for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the
risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,”
or “Doubtful” on the basis of currently existing facts, conditions and values. Loans that do not currently expose the
Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s
close attention, are deemed to be Special Mention. Substandard loans include those characterized by the distinct possibility that
the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses
inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation
in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Risk ratings are
updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” column
in the table below.
The following tables summarize the aggregate
credit quality classification of outstanding loans by risk rating as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
(In Thousands)
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Impaired
|
|
|
Total
|
|
Residential Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage loans - first liens
|
|
$
|
500,963
|
|
|
$
|
193
|
|
|
$
|
9,324
|
|
|
$
|
84
|
|
|
$
|
77
|
|
|
$
|
510,641
|
|
Residential Mortgage loans - junior liens
|
|
|
26,953
|
|
|
|
79
|
|
|
|
471
|
|
|
|
0
|
|
|
|
0
|
|
|
|
27,503
|
|
Home Equity lines of credit
|
|
|
33,170
|
|
|
|
59
|
|
|
|
409
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33,638
|
|
1-4 Family residential construction
|
|
|
14,798
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14,798
|
|
Total residential mortgage
|
|
|
575,884
|
|
|
|
331
|
|
|
|
10,204
|
|
|
|
84
|
|
|
|
77
|
|
|
|
586,580
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
294,397
|
|
|
|
4,773
|
|
|
|
1,693
|
|
|
|
0
|
|
|
|
364
|
|
|
|
301,227
|
|
Commercial and Industrial
|
|
|
114,293
|
|
|
|
9,538
|
|
|
|
2,543
|
|
|
|
0
|
|
|
|
0
|
|
|
|
126,374
|
|
Political subdivisions
|
|
|
53,570
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
53,570
|
|
Commercial construction and land
|
|
|
32,224
|
|
|
|
0
|
|
|
|
1,331
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33,555
|
|
Loans secured by farmland
|
|
|
6,528
|
|
|
|
4,681
|
|
|
|
1,042
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,251
|
|
Multi-family (5 or more) residential
|
|
|
30,160
|
|
|
|
0
|
|
|
|
910
|
|
|
|
0
|
|
|
|
0
|
|
|
|
31,070
|
|
Agricultural loans
|
|
|
3,343
|
|
|
|
335
|
|
|
|
641
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4,319
|
|
Other commercial loans
|
|
|
16,416
|
|
|
|
0
|
|
|
|
119
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,535
|
|
Total commercial
|
|
|
550,931
|
|
|
|
19,327
|
|
|
|
8,279
|
|
|
|
0
|
|
|
|
364
|
|
|
|
578,901
|
|
Consumer
|
|
|
16,720
|
|
|
|
0
|
|
|
|
21
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,741
|
|
Totals
|
|
$
|
1,143,535
|
|
|
$
|
19,658
|
|
|
$
|
18,504
|
|
|
$
|
84
|
|
|
$
|
441
|
|
|
$
|
1,182,222
|
|
December 31, 2018
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Residential Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
363,407
|
|
|
$
|
937
|
|
|
$
|
7,944
|
|
|
$
|
51
|
|
|
$
|
372,339
|
|
Residential mortgage loans - junior liens
|
|
|
24,841
|
|
|
|
176
|
|
|
|
433
|
|
|
|
0
|
|
|
|
25,450
|
|
Home equity lines of credit
|
|
|
33,659
|
|
|
|
59
|
|
|
|
601
|
|
|
|
0
|
|
|
|
34,319
|
|
1-4 Family residential construction
|
|
|
24,698
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
24,698
|
|
Total residential mortgage
|
|
|
446,605
|
|
|
|
1,172
|
|
|
|
8,978
|
|
|
|
51
|
|
|
|
456,806
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
156,308
|
|
|
|
740
|
|
|
|
5,563
|
|
|
|
0
|
|
|
|
162,611
|
|
Commercial and Industrial
|
|
|
84,232
|
|
|
|
5,230
|
|
|
|
2,394
|
|
|
|
0
|
|
|
|
91,856
|
|
Political subdivisions
|
|
|
53,263
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
53,263
|
|
Commercial construction and land
|
|
|
11,887
|
|
|
|
0
|
|
|
|
75
|
|
|
|
0
|
|
|
|
11,962
|
|
Loans secured by farmland
|
|
|
5,171
|
|
|
|
168
|
|
|
|
1,796
|
|
|
|
11
|
|
|
|
7,146
|
|
Multi-family (5 or more) residential
|
|
|
7,180
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
7,180
|
|
Agricultural loans
|
|
|
4,910
|
|
|
|
84
|
|
|
|
665
|
|
|
|
0
|
|
|
|
5,659
|
|
Other commercial loans
|
|
|
13,879
|
|
|
|
0
|
|
|
|
71
|
|
|
|
0
|
|
|
|
13,950
|
|
Total commercial
|
|
|
336,830
|
|
|
|
6,222
|
|
|
|
10,564
|
|
|
|
11
|
|
|
|
353,627
|
|
Consumer
|
|
|
17,116
|
|
|
|
0
|
|
|
|
14
|
|
|
|
0
|
|
|
|
17,130
|
|
Totals
|
|
$
|
800,551
|
|
|
$
|
7,394
|
|
|
$
|
19,556
|
|
|
$
|
62
|
|
|
$
|
827,563
|
|
As shown in the tables immediately above,
total loans classified as special mention increased to $19,658,000 at December 31, 2019 from $7,394,000 at December 31, 2018. At
December 31, 2019, there were 60 loans classified as special mention, with an average balance of $328,000. In comparison, at December
31, 2018, there were 53 loans classified as special mention, with an average balance of $140,000. Of the total balance of special
mention loans at December 31, 2019, loans of $500,000 or more totaled $15,357,000, or 78% of the total. Special mention loans with
balances of $500,000 or more at December 31, 2019 included 9 commercial loans to 7 different borrowers, summarized with comparative
December 31, 2018 (if applicable) as follows:
|
|
|
|
|
|
|
|
Risk
|
|
|
|
Balance,
|
|
|
Balance,
|
|
|
Rating
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
4 loans downgraded in 2019
|
|
$
|
6,668
|
|
|
$
|
7,043
|
|
|
|
Pass
|
|
1 loan with no change in rating in 2019
|
|
|
984
|
|
|
|
1,098
|
|
|
|
Special Mention
|
|
2 loans upgraded in 2019
|
|
|
3,570
|
|
|
|
3,781
|
|
|
|
Substandard
|
|
2 loans originated in 2019
|
|
|
4,135
|
|
|
|
0
|
|
|
|
N/A
|
|
Total Special Mention Loans of $500,000 or More at December 31, 2019
|
|
$
|
15,357
|
|
|
$
|
11,922
|
|
|
|
|
|
There was no specific allowance for loan losses
recorded on any loans classified as special mention at December 31, 2019. At December 31, 2018, there were specific allowances
totaling $1,365,000 on the 2 loans in the table above that were upgraded from substandard at December 31, 2018 to special mention
at December 31, 2019. These loans were no longer considered impaired in 2019 and the specific allowances were eliminated in 2019.
One of the loans originated in 2019 and classified as special mention at December 31, 2019, with an outstanding balance of $3,500,000
at December 31, 2019, was made on a partially unsecured basis. The Corporation estimates the liquidation value of the related collateral,
net of selling costs, would be approximately $1,500,000, with a shortfall of $2,000,000. Despite the shortfall from the estimated
value of the collateral, based on available information, the Corporation believes the loan should be repaid in full due to the
high reported value of the borrower’s net worth.
At December 31, 2019, total loans classified
as substandard amounted to $18,504,000, down from $19,556,000 at December 31, 2018. At December 31, 2019, there were 225 loans
classified as substandard, with an average balance of $82,000. In comparison, at December 31, 2018, there were 215 loans classified
as substandard, with an average balance of $91,000. Of the total balance of substandard loans at December 31, 2019, loans of
$500,000 or more totaled $4,185,000, or 23% of the total, with the largest balance from one commercial construction loan with an
outstanding balance of $1,261,000 and a specific allowance for loan losses of $678,000.
The following tables present a summary of
loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used
as of December 31, 2019 and 2018:
|
|
Loans:
|
|
|
Allowance
for Loan Losses:
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Individually
|
|
|
Collectively
|
|
|
Performing
|
|
|
|
|
|
Individually
|
|
|
Collectively
|
|
|
|
|
(In Thousands)
|
|
Evaluated
|
|
|
Evaluated
|
|
|
Loans
|
|
|
Totals
|
|
|
Evaluated
|
|
|
Evaluated
|
|
|
Totals
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans - first liens
|
|
$
|
1,023
|
|
|
$
|
405,186
|
|
|
$
|
104,432
|
|
|
$
|
510,641
|
|
|
$
|
0
|
|
|
$
|
3,405
|
|
|
$
|
3,405
|
|
Residential mortgage loans
- junior liens
|
|
|
368
|
|
|
|
24,730
|
|
|
|
2,405
|
|
|
|
27,503
|
|
|
|
176
|
|
|
|
208
|
|
|
|
384
|
|
Home equity lines of credit
|
|
|
0
|
|
|
|
32,147
|
|
|
|
1,491
|
|
|
|
33,638
|
|
|
|
0
|
|
|
|
276
|
|
|
|
276
|
|
1-4
Family residential construction
|
|
|
0
|
|
|
|
14,640
|
|
|
|
158
|
|
|
|
14,798
|
|
|
|
0
|
|
|
|
117
|
|
|
|
117
|
|
Total
residential mortgage
|
|
|
1,391
|
|
|
|
476,703
|
|
|
|
108,486
|
|
|
|
586,580
|
|
|
|
176
|
|
|
|
4,006
|
|
|
|
4,182
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured
by real estate
|
|
|
684
|
|
|
|
198,532
|
|
|
|
102,011
|
|
|
|
301,227
|
|
|
|
0
|
|
|
|
1,921
|
|
|
|
1,921
|
|
Commercial and industrial
|
|
|
1,467
|
|
|
|
122,313
|
|
|
|
2,594
|
|
|
|
126,374
|
|
|
|
149
|
|
|
|
1,242
|
|
|
|
1,391
|
|
Political subdivisions
|
|
|
0
|
|
|
|
53,570
|
|
|
|
0
|
|
|
|
53,570
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial construction
and land
|
|
|
1,261
|
|
|
|
29,710
|
|
|
|
2,584
|
|
|
|
33,555
|
|
|
|
678
|
|
|
|
288
|
|
|
|
966
|
|
Loans secured by farmland
|
|
|
607
|
|
|
|
11,386
|
|
|
|
258
|
|
|
|
12,251
|
|
|
|
48
|
|
|
|
110
|
|
|
|
158
|
|
Multi-family (5 or more)
residential
|
|
|
0
|
|
|
|
10,617
|
|
|
|
20,453
|
|
|
|
31,070
|
|
|
|
0
|
|
|
|
156
|
|
|
|
156
|
|
Agricultural loans
|
|
|
76
|
|
|
|
4,243
|
|
|
|
0
|
|
|
|
4,319
|
|
|
|
0
|
|
|
|
41
|
|
|
|
41
|
|
Other
commercial loans
|
|
|
0
|
|
|
|
15,947
|
|
|
|
588
|
|
|
|
16,535
|
|
|
|
0
|
|
|
|
155
|
|
|
|
155
|
|
Total
commercial
|
|
|
4,095
|
|
|
|
446,318
|
|
|
|
128,488
|
|
|
|
578,901
|
|
|
|
875
|
|
|
|
3,913
|
|
|
|
4,788
|
|
Consumer
|
|
|
0
|
|
|
|
16,741
|
|
|
|
0
|
|
|
|
16,741
|
|
|
|
0
|
|
|
|
281
|
|
|
|
281
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,486
|
|
|
$
|
939,762
|
|
|
$
|
236,974
|
|
|
$
|
1,182,222
|
|
|
$
|
1,051
|
|
|
$
|
8,200
|
|
|
$
|
9,836
|
|
|
|
Loans:
|
|
|
Allowance for Loan Losses:
|
|
December 31, 2018
|
|
Individually
|
|
|
Collectively
|
|
|
|
|
|
Individually
|
|
|
Collectively
|
|
|
|
|
(In Thousands)
|
|
Evaluated
|
|
|
Evaluated
|
|
|
Totals
|
|
|
Evaluated
|
|
|
Evaluated
|
|
|
Totals
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
991
|
|
|
$
|
371,348
|
|
|
$
|
372,339
|
|
|
$
|
0
|
|
|
$
|
3,156
|
|
|
$
|
3,156
|
|
Residential mortgage loans - junior liens
|
|
|
293
|
|
|
|
25,157
|
|
|
|
25,450
|
|
|
|
116
|
|
|
|
209
|
|
|
|
325
|
|
Home equity lines of credit
|
|
|
0
|
|
|
|
34,319
|
|
|
|
34,319
|
|
|
|
0
|
|
|
|
302
|
|
|
|
302
|
|
1-4 Family residential construction
|
|
|
0
|
|
|
|
24,698
|
|
|
|
24,698
|
|
|
|
0
|
|
|
|
203
|
|
|
|
203
|
|
Total residential mortgage
|
|
|
1,284
|
|
|
|
455,522
|
|
|
|
456,806
|
|
|
|
116
|
|
|
|
3,870
|
|
|
|
3,986
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
4,302
|
|
|
|
158,309
|
|
|
|
162,611
|
|
|
|
781
|
|
|
|
1,757
|
|
|
|
2,538
|
|
Commercial and industrial
|
|
|
2,157
|
|
|
|
89,699
|
|
|
|
91,856
|
|
|
|
659
|
|
|
|
894
|
|
|
|
1,553
|
|
Political subdivisions
|
|
|
0
|
|
|
|
53,263
|
|
|
|
53,263
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial construction and land
|
|
|
0
|
|
|
|
11,962
|
|
|
|
11,962
|
|
|
|
0
|
|
|
|
110
|
|
|
|
110
|
|
Loans secured by farmland
|
|
|
1,349
|
|
|
|
5,797
|
|
|
|
7,146
|
|
|
|
49
|
|
|
|
53
|
|
|
|
102
|
|
Multi-family (5 or more) residential
|
|
|
0
|
|
|
|
7,180
|
|
|
|
7,180
|
|
|
|
0
|
|
|
|
114
|
|
|
|
114
|
|
Agricultural loans
|
|
|
665
|
|
|
|
4,994
|
|
|
|
5,659
|
|
|
|
0
|
|
|
|
46
|
|
|
|
46
|
|
Other commercial loans
|
|
|
0
|
|
|
|
13,950
|
|
|
|
13,950
|
|
|
|
0
|
|
|
|
128
|
|
|
|
128
|
|
Total commercial
|
|
|
8,473
|
|
|
|
345,154
|
|
|
|
353,627
|
|
|
|
1,489
|
|
|
|
3,102
|
|
|
|
4,591
|
|
Consumer
|
|
|
17
|
|
|
|
17,113
|
|
|
|
17,130
|
|
|
|
0
|
|
|
|
233
|
|
|
|
233
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
Total
|
|
$
|
9,774
|
|
|
$
|
817,789
|
|
|
$
|
827,563
|
|
|
$
|
1,605
|
|
|
$
|
7,205
|
|
|
$
|
9,309
|
|
Summary information related to impaired loans
as of December 31, 2019 and 2018 is as follows:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Related
|
|
|
Principal
|
|
|
Recorded
|
|
|
Related
|
|
(In Thousands)
|
|
Balance
|
|
|
Investment
|
|
|
Allowance
|
|
|
Balance
|
|
|
Investment
|
|
|
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
645
|
|
|
$
|
617
|
|
|
$
|
0
|
|
|
$
|
750
|
|
|
$
|
721
|
|
|
$
|
0
|
|
Residential mortgage loans - junior liens
|
|
|
42
|
|
|
|
42
|
|
|
|
0
|
|
|
|
54
|
|
|
|
54
|
|
|
|
0
|
|
Commercial loans secured by real estate
|
|
|
684
|
|
|
|
684
|
|
|
|
0
|
|
|
|
1,787
|
|
|
|
1,787
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
563
|
|
|
|
563
|
|
|
|
0
|
|
|
|
817
|
|
|
|
817
|
|
|
|
0
|
|
Loans secured by farmland
|
|
|
129
|
|
|
|
129
|
|
|
|
0
|
|
|
|
862
|
|
|
|
862
|
|
|
|
0
|
|
Agricultural loans
|
|
|
76
|
|
|
|
76
|
|
|
|
0
|
|
|
|
665
|
|
|
|
665
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17
|
|
|
|
17
|
|
|
|
0
|
|
Total with no related allowance recorded
|
|
|
2,139
|
|
|
|
2,111
|
|
|
|
0
|
|
|
|
4,952
|
|
|
|
4,923
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With a related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
|
406
|
|
|
|
406
|
|
|
|
0
|
|
|
|
270
|
|
|
|
270
|
|
|
|
0
|
|
Residential mortgage loans - junior liens
|
|
|
326
|
|
|
|
326
|
|
|
|
176
|
|
|
|
239
|
|
|
|
239
|
|
|
|
116
|
|
Commercial loans secured by real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,515
|
|
|
|
2,515
|
|
|
|
781
|
|
Commercial and industrial
|
|
|
904
|
|
|
|
904
|
|
|
|
149
|
|
|
|
1,340
|
|
|
|
1,340
|
|
|
|
659
|
|
Construction and other land loans
|
|
|
1,261
|
|
|
|
1,261
|
|
|
|
678
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Loans secured by farmland
|
|
|
478
|
|
|
|
478
|
|
|
|
48
|
|
|
|
487
|
|
|
|
487
|
|
|
|
49
|
|
Total with a related allowance recorded
|
|
|
3,375
|
|
|
|
3,375
|
|
|
|
1,051
|
|
|
|
4,851
|
|
|
|
4,851
|
|
|
|
1,605
|
|
Total
|
|
$
|
5,514
|
|
|
$
|
5,486
|
|
|
$
|
1,051
|
|
|
$
|
9,803
|
|
|
$
|
9,774
|
|
|
$
|
1,605
|
|
In the table immediately above, two loans
to one borrower are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior
liens classes. These loans are collateralized by one property, and the allowance associated with these loans was determined based
on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation
were to sell the property.
The average balance of impaired loans and
interest income recognized on impaired loans is as follows:
|
|
|
|
|
|
|
|
Interest Income Recognized
|
|
|
|
Average Investment in
|
|
|
on Impaired Loans
|
|
|
|
Impaired Loans
|
|
|
on a Cash Basis
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first lien
|
|
$
|
1,440
|
|
|
$
|
980
|
|
|
$
|
87
|
|
|
$
|
52
|
|
Residential mortgage loans - junior lien
|
|
|
288
|
|
|
|
297
|
|
|
|
12
|
|
|
|
11
|
|
Home equity lines of credit
|
|
|
26
|
|
|
|
0
|
|
|
|
4
|
|
|
|
0
|
|
Total residential mortgage
|
|
|
1,754
|
|
|
|
1,277
|
|
|
|
103
|
|
|
|
63
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
1,562
|
|
|
|
4,897
|
|
|
|
19
|
|
|
|
141
|
|
Commercial and industrial
|
|
|
1,186
|
|
|
|
708
|
|
|
|
25
|
|
|
|
47
|
|
Commercial construction and land
|
|
|
556
|
|
|
|
0
|
|
|
|
71
|
|
|
|
0
|
|
Loans secured by farmland
|
|
|
1,276
|
|
|
|
1,357
|
|
|
|
49
|
|
|
|
35
|
|
Multi-family (5 or more) residential
|
|
|
0
|
|
|
|
314
|
|
|
|
0
|
|
|
|
0
|
|
Agricultural loans
|
|
|
399
|
|
|
|
542
|
|
|
|
31
|
|
|
|
46
|
|
Other commercial loans
|
|
|
20
|
|
|
|
0
|
|
|
|
4
|
|
|
|
0
|
|
Total commercial
|
|
|
4,999
|
|
|
|
7,818
|
|
|
|
199
|
|
|
|
269
|
|
Consumer
|
|
|
3
|
|
|
|
18
|
|
|
|
0
|
|
|
|
1
|
|
Total
|
|
$
|
6,756
|
|
|
$
|
9,113
|
|
|
$
|
302
|
|
|
$
|
333
|
|
The breakdown by portfolio segment and class
of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Past Due
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
|
90+ Days and
|
|
|
|
|
|
90+ Days and
|
|
|
|
|
(In Thousands)
|
|
Accruing
|
|
|
Nonaccrual
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
878
|
|
|
$
|
4,679
|
|
|
$
|
1,633
|
|
|
$
|
4,750
|
|
Residential mortgage loans -
junior liens
|
|
|
53
|
|
|
|
326
|
|
|
|
151
|
|
|
|
239
|
|
Home equity lines of credit
|
|
|
71
|
|
|
|
73
|
|
|
|
219
|
|
|
|
27
|
|
Total residential mortgage
|
|
|
1,002
|
|
|
|
5,078
|
|
|
|
2,003
|
|
|
|
5,016
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
107
|
|
|
|
1,148
|
|
|
|
394
|
|
|
|
3,958
|
|
Commercial and industrial
|
|
|
15
|
|
|
|
1,051
|
|
|
|
18
|
|
|
|
2,111
|
|
Commercial construction and land
|
|
|
0
|
|
|
|
1,311
|
|
|
|
0
|
|
|
|
52
|
|
Loans secured by farmland
|
|
|
43
|
|
|
|
565
|
|
|
|
459
|
|
|
|
1,297
|
|
Agricultural loans
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
665
|
|
Other commercial
|
|
|
0
|
|
|
|
49
|
|
|
|
0
|
|
|
|
0
|
|
Total commercial
|
|
|
165
|
|
|
|
4,124
|
|
|
|
871
|
|
|
|
8,083
|
|
Consumer
|
|
|
40
|
|
|
|
16
|
|
|
|
32
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,207
|
|
|
$
|
9,218
|
|
|
$
|
2,906
|
|
|
$
|
13,113
|
|
The amounts shown in the table immediately
above include loans classified as troubled debt restructurings (described in more detail below), if such loans are considered past
due ninety days or more, or nonaccrual.
The tables below present a summary of the
contractual aging of loans as of December 31, 2019 and 2018:
|
|
As
of December 31, 2019
|
|
|
As
of December 31, 2018
|
|
|
|
Current
&
|
|
|
|
|
|
|
|
|
|
|
|
Current
&
|
|
|
|
|
|
|
|
|
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
|
|
|
Past
Due
|
|
|
Past
Due
|
|
Past
Due
|
|
|
|
|
|
|
Less
than
|
|
|
30-89
|
|
|
90+
|
|
|
|
|
|
Less
than
|
|
|
30-89
|
|
90+
|
|
|
|
|
(In Thousands)
|
|
30
Days
|
|
|
Days
|
|
|
Days
|
|
|
Total
|
|
|
30
Days
|
|
|
Days
|
|
Days
|
|
|
Total
|
|
Residential
mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens
|
|
$
|
499,024
|
|
|
$
|
7,839
|
|
|
$
|
3,778
|
|
|
$
|
510,641
|
|
|
$
|
361,362
|
|
|
$
|
6,414
|
|
$
|
4,563
|
|
|
$
|
372,339
|
|
Residential mortgage loans - junior liens
|
|
|
27,041
|
|
|
|
83
|
|
|
|
379
|
|
|
|
27,503
|
|
|
|
24,876
|
|
|
|
184
|
|
|
390
|
|
|
|
25,450
|
|
Home equity lines of credit
|
|
|
33,115
|
|
|
|
452
|
|
|
|
71
|
|
|
|
33,638
|
|
|
|
33,611
|
|
|
|
480
|
|
|
228
|
|
|
|
34,319
|
|
1-4 Family residential construction
|
|
|
14,758
|
|
|
|
40
|
|
|
|
0
|
|
|
|
14,798
|
|
|
|
24,531
|
|
|
|
167
|
|
|
0
|
|
|
|
24,698
|
|
Total
residential mortgage
|
|
|
573,938
|
|
|
|
8,414
|
|
|
|
4,228
|
|
|
|
586,580
|
|
|
|
444,380
|
|
|
|
7,245
|
|
|
5,181
|
|
|
|
456,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate
|
|
|
299,640
|
|
|
|
737
|
|
|
|
850
|
|
|
|
301,227
|
|
|
|
160,668
|
|
|
|
226
|
|
|
1,717
|
|
|
|
162,611
|
|
Commercial and industrial
|
|
|
126,221
|
|
|
|
16
|
|
|
|
137
|
|
|
|
126,374
|
|
|
|
90,915
|
|
|
|
152
|
|
|
789
|
|
|
|
91,856
|
|
Political subdivisions
|
|
|
53,570
|
|
|
|
0
|
|
|
|
0
|
|
|
|
53,570
|
|
|
|
53,263
|
|
|
|
0
|
|
|
0
|
|
|
|
53,263
|
|
Commercial construction and land
|
|
|
33,505
|
|
|
|
0
|
|
|
|
50
|
|
|
|
33,555
|
|
|
|
11,910
|
|
|
|
0
|
|
|
52
|
|
|
|
11,962
|
|
Loans secured by farmland
|
|
|
11,455
|
|
|
|
666
|
|
|
|
130
|
|
|
|
12,251
|
|
|
|
5,390
|
|
|
|
487
|
|
|
1,269
|
|
|
|
7,146
|
|
Multi-family (5 or more) residential
|
|
|
31,070
|
|
|
|
0
|
|
|
|
0
|
|
|
|
31,070
|
|
|
|
7,104
|
|
|
|
76
|
|
|
0
|
|
|
|
7,180
|
|
Agricultural loans
|
|
|
4,318
|
|
|
|
1
|
|
|
|
0
|
|
|
|
4,319
|
|
|
|
5,624
|
|
|
|
29
|
|
|
6
|
|
|
|
5,659
|
|
Other commercial loans
|
|
|
16,535
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,535
|
|
|
|
13,950
|
|
|
|
0
|
|
|
0
|
|
|
|
13,950
|
|
Total
commercial
|
|
|
576,314
|
|
|
|
1,420
|
|
|
|
1,167
|
|
|
|
578,901
|
|
|
|
348,824
|
|
|
|
970
|
|
|
3,833
|
|
|
|
353,627
|
|
Consumer
|
|
|
16,496
|
|
|
|
189
|
|
|
|
56
|
|
|
|
16,741
|
|
|
|
16,991
|
|
|
|
93
|
|
|
46
|
|
|
|
17,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,166,748
|
|
|
$
|
10,023
|
|
|
$
|
5,451
|
|
|
$
|
1,182,222
|
|
|
$
|
810,195
|
|
|
$
|
8,308
|
|
$
|
9,060
|
|
|
$
|
827,563
|
|
Nonaccrual loans are included in the contractual
aging immediately above. A summary of the contractual aging of nonaccrual loans at December 31, 2019 and 2018 is as follows:
|
|
Current &
|
|
|
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
|
|
|
|
Less than
|
|
|
30-89
|
|
|
90+
|
|
|
|
|
(In Thousands)
|
|
30 Days
|
|
|
Days
|
|
|
Days
|
|
|
Total
|
|
December 31, 2019 Nonaccrual Totals
|
|
$
|
3,840
|
|
|
$
|
1,134
|
|
|
$
|
4,244
|
|
|
$
|
9,218
|
|
December 31, 2018 Nonaccrual Totals
|
|
$
|
5,793
|
|
|
$
|
1,166
|
|
|
$
|
6,154
|
|
|
$
|
13,113
|
|
Loans whose terms are modified are classified
as Troubled Debt Restructurings (TDRs) if the Corporation grants such borrowers concessions and it is deemed that those borrowers
are experiencing financial difficulty. Loans classified as TDRs are designated as impaired and reviewed each quarter to determine
if a specific allowance for loan losses is required. The outstanding balance of loans subject to TDRs, as well as the contractual
aging information at December 31, 2019 and 2018 is as follows:
Troubled Debt Restructurings (TDRs):
|
|
Current &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
30-89
|
|
|
90+
|
|
|
|
|
|
|
|
(In Thousands)
|
|
30 Days
|
|
|
Days
|
|
|
Days
|
|
|
Nonaccrual
|
|
|
Total
|
|
December 31, 2019 Totals
|
|
$
|
889
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,737
|
|
|
$
|
2,626
|
|
December 31, 2018 Totals
|
|
$
|
612
|
|
|
$
|
43
|
|
|
$
|
0
|
|
|
$
|
2,884
|
|
|
$
|
3,539
|
|
At December 31, 2019 and 2018, there were
no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.
A summary of TDRs that occurred during 2019
and 2018 is as follows:
(Balances in Thousands)
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Post-
|
|
|
|
|
|
Post-
|
|
|
|
Number
|
|
|
Modification
|
|
|
Number
|
|
|
Modification
|
|
|
|
of
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
|
|
Loans
|
|
|
Investment
|
|
|
Loans
|
|
|
Investment
|
|
Residential mortgage - first liens:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced monthly payments and extended maturity date
|
|
|
1
|
|
|
$
|
271
|
|
|
|
0
|
|
|
$
|
0
|
|
Reduced monthly payments for a six-month period
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
80
|
|
Residential mortgage - junior liens,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced monthly payments and extended maturity date
|
|
|
1
|
|
|
|
18
|
|
|
|
0
|
|
|
|
0
|
|
Commercial loans secured by real estate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended interest only payments for a six-month period
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
36
|
|
Commercial and industrial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended interest only payments for a six-month period
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
46
|
|
Reduced monthly payments and extended maturity date
|
|
|
8
|
|
|
|
177
|
|
|
|
0
|
|
|
|
0
|
|
Commercial construction and land,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended interest only payments and reduced monthly
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payments with a balloon payment at maturity
|
|
|
1
|
|
|
|
1,261
|
|
|
|
0
|
|
|
|
0
|
|
Agricultural loans,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced monthly payments and extended maturity date
|
|
|
1
|
|
|
|
84
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
12
|
|
|
$
|
1,811
|
|
|
|
4
|
|
|
$
|
162
|
|
There were no differences between the outstanding
contractual amounts and the recorded investments in receivables resulting from TDRs that occurred in 2019 and 2018. At December
31, 2019, the Corporation maintained a specific allowance for loan losses of $678,000 related to the commercial construction loan
for which a TDR occurred in 2019. The other loans for which TDRs were granted in 2019 are associated with one relationship for
which payment defaults occurred in 2019 as described below.
In 2019 and 2018, payment defaults on loans
for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:
|
|
2019
|
|
|
2018
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
of
|
|
|
Recorded
|
|
|
of
|
|
|
Recorded
|
|
(Balances in Thousands)
|
|
Loans
|
|
|
Investment
|
|
|
Loans
|
|
|
Investment
|
|
Residential mortgage - first liens
|
|
|
1
|
|
|
$
|
261
|
|
|
|
0
|
|
|
|
0
|
|
Residential mortgage - junior liens
|
|
|
1
|
|
|
|
18
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
8
|
|
|
|
170
|
|
|
|
0
|
|
|
|
0
|
|
Agricultural loans
|
|
|
1
|
|
|
|
81
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
11
|
|
|
$
|
530
|
|
|
|
0
|
|
|
$
|
0
|
|
All of the TDRs for which payment defaults
occurred in 2019 were related to one commercial relationship. These loans were individually evaluated for impairment at December
31, 2019 and 2018, and no specific allowance for loan losses was recognized because the estimated values of collateral and U.S.
Government (Small Business Administration) guarantees exceeded the outstanding balances of the loans.
The carrying amount of foreclosed residential
real estate properties held as a result of obtaining physical possession (included in Foreclosed assets held for sale in the consolidated
balance sheets) is as follows:
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Foreclosed residential real estate
|
|
$
|
292
|
|
|
$
|
64
|
|
The recorded investment of consumer mortgage
loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Residential real estate in process of foreclosure
|
|
$
|
1,717
|
|
|
$
|
1,097
|
|
9. BANK PREMISES AND EQUIPMENT
|
|
December 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
3,199
|
|
|
$
|
2,803
|
|
Buildings and improvements
|
|
|
28,403
|
|
|
|
27,343
|
|
Furniture and equipment
|
|
|
13,618
|
|
|
|
16,577
|
|
Construction in progress
|
|
|
1,655
|
|
|
|
2
|
|
Total
|
|
|
46,875
|
|
|
|
46,725
|
|
Less: accumulated depreciation
|
|
|
(29,705
|
)
|
|
|
(32,133
|
)
|
Net
|
|
$
|
17,170
|
|
|
$
|
14,592
|
|
Depreciation expense is included in the
following line items of the consolidated statements of income:
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Occupancy expense
|
|
$
|
775
|
|
|
$
|
849
|
|
Furniture and equipment expense
|
|
|
692
|
|
|
|
684
|
|
Data processing expenses
|
|
|
239
|
|
|
|
183
|
|
Telecommunications expenses
|
|
|
43
|
|
|
|
38
|
|
Total
|
|
$
|
1,749
|
|
|
$
|
1,754
|
|
10. GOODWILL AND OTHER INTANGIBLE ASSETS,
NET
Information related to the core deposit
intangibles is as follows:
|
|
December 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Gross amount
|
|
$
|
3,495
|
|
|
$
|
2,034
|
|
Accumulated amortization
|
|
|
(2,248
|
)
|
|
|
(2,025
|
)
|
Net
|
|
$
|
1,247
|
|
|
$
|
9
|
|
Amortization expense was $223,000
in 2019, including $214,000 related to the Monument transaction described in Note 3, and $3,000 in 2018. The amount of amortization
expense to be recognized in each of the ensuing five years is as follows:
(In Thousands)
|
|
|
|
2020
|
|
$
|
249
|
|
2021
|
|
|
193
|
|
2022
|
|
|
160
|
|
2023
|
|
|
133
|
|
2024
|
|
|
125
|
|
Changes in the carrying amount of goodwill
are summarized in the following table:
|
|
December 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Balance, beginning of period
|
|
$
|
11,942
|
|
|
$
|
11,942
|
|
Goodwill arising in business combination
|
|
|
16,446
|
|
|
|
0
|
|
Balance, end of period
|
|
$
|
28,388
|
|
|
$
|
11,942
|
|
In testing goodwill for impairment as
of December 31, 2019, the Corporation by-passed performing a qualitative assessment and performed a quantitative assessment based
on comparison of the Corporation’s market capitalization to its stockholders’ equity, resulting in the determination
that the fair value of its reporting unit, its community banking operation, exceeded its carrying value. Accordingly, there was
no goodwill impairment at December 31, 2019.
The Corporation’s assessment of goodwill for impairment
at December 31, 2018 was based on assessment of qualitative factors to determine whether it was more likely than not that the fair
value of its community banking operation was less than its carrying amount. The qualitative factors assessed included the Corporation’s
recent financial performance, economic conditions in the Corporation’s market area, macroeconomic conditions and other factors.
Based on the assessment of qualitative factors, the Corporation determined that it was not more likely than not that the fair value
of the community banking operation had fallen below its carrying value, and therefore, the Corporation did not perform a more detailed,
two-step goodwill impairment test and concluded there was no goodwill impairment as of December 31, 2018.
11. DEPOSITS
At December 31, 2019, the scheduled maturities
of time deposits are as follows:
(In Thousands)
|
|
|
|
2020
|
|
$
|
238,887
|
|
2021
|
|
|
83,197
|
|
2022
|
|
|
28,968
|
|
2023
|
|
|
12,003
|
|
2024
|
|
|
11,610
|
|
2025
|
|
|
30
|
|
Total
|
|
$
|
374,695
|
|
Time deposits of more than $250,000 totaled
$84,476,000 at December 31, 2019 and $36,094,000 at December 31, 2018. As of December 31, 2019, the remaining maturities or time
to next re-pricing of time deposits more than $250,000 was as follows:
(In Thousands)
|
|
|
|
Three months or less
|
|
$
|
19,176
|
|
Over 3 months through 12 months
|
|
|
52,093
|
|
Over 1 year through 3 years
|
|
|
6,601
|
|
Over 3 years
|
|
|
6,606
|
|
Total
|
|
$
|
84,476
|
|
12. BORROWED FUNDS AND SUBORDINATED
DEBT
Short-term borrowings (initial maturity within
one year) include the following:
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
FHLB-Pittsburgh borrowings
|
|
$
|
84,292
|
|
|
$
|
7,000
|
|
Customer repurchase agreements
|
|
|
1,928
|
|
|
|
5,853
|
|
Total short-term borrowings
|
|
$
|
86,220
|
|
|
$
|
12,853
|
|
Short-term borrowings from FHLB-Pittsburgh
are as follows:
|
|
Dec. 31,
|
|
|
Dec. 31
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Overnight borrowing
|
|
$
|
64,000
|
|
|
$
|
7,000
|
|
Other short-term advances
|
|
|
20,292
|
|
|
|
0
|
|
Total short-term FHLB-Pittsburgh borrowings
|
|
$
|
84,292
|
|
|
$
|
7,000
|
|
Overnight borrowings from FHLB-Pittsburgh
had an interest rate of 1.81% at December 31, 2019 and 2.62% at December 31, 2018. At December
31, 2019, other short-term advances included seven advances totaling $20,297,000 which are presented in the table net of the unamortized
purchase accounting adjustment, with a weighted-average effective rate of 2.28%.
The weighted average interest rate on total
short-term borrowings outstanding was 1.88% at December 31, 2019 and 1.47% at December 31, 2018. The maximum amount of total short-term
borrowings outstanding at any month-end was $86,220,000 in 2019 and $74,646,000 in 2018.
The Corporation had available credit with
other correspondent banks totaling $45,000,000 at December 31, 2019 and 2018. These lines of credit are primarily unsecured. No
amounts were outstanding at December 31, 2019 or 2018.
The Corporation has a line of credit with
the Federal Reserve Bank of Philadelphia’s Discount Window. At December 31, 2019, the Corporation had available credit in
the amount of $14,244,000 on this line with no outstanding advances. At December 31, 2018, the Corporation had available credit
in the amount of $15,262,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged
available-for-sale securities with a carrying value of $14,728,000 at December 31, 2019 and $15,710,000 at December 31, 2018.
The FHLB-Pittsburgh loan facility is collateralized
by qualifying loans secured by real estate with a book value totaling $778,877,000 at December 31, 2019 and $495,143,000 at December
31, 2018. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh
stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were $10,131,000
at December 31, 2019 and $5,582,000 at December 31, 2018. The Corporation’s total credit facility with FHLB-Pittsburgh was
$552,546,000 at December 31, 2019, including an unused (available) amount of $416,127,000. At December 31, 2018, the Corporation’s
total credit facility with FHLB-Pittsburgh was $361,614,000, including an unused (available) amount of $318,699,000.
The Corporation engages in repurchase agreements
with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers
on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on
customer repurchase agreements was 0.10% at December 31, 2019 and December 31, 2017. The carrying value of the underlying securities
was $1,951,000 at December 31, 2019 and $5,890,000 at December 31, 2018.
LONG-TERM BORROWINGS
Long-term borrowings from FHLB-Pittsburgh
are as follows:
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Loans matured in 2019 with a weighted-average rate of 2.36%
|
|
$
|
0
|
|
|
$
|
32,000
|
|
Loans maturing in 2020 with a weighted-average rate of 2.73%
|
|
|
5,069
|
|
|
|
3,271
|
|
Loans maturing in 2021 with a weighted-average rate of 1.54%
|
|
|
6,000
|
|
|
|
0
|
|
Loans maturing in 2022 with a weighted-average rate of 2.03%
|
|
|
20,000
|
|
|
|
0
|
|
Loans maturing in 2023 with a weighted-average rate of 1.70%
|
|
|
20,500
|
|
|
|
0
|
|
Loan maturing in 2025 with a rate of 4.91%
|
|
|
558
|
|
|
|
644
|
|
Total long-term FHLB-Pittsburgh borrowings
|
|
$
|
52,127
|
|
|
$
|
35,915
|
|
In connection with the Monument acquisition,
the Corporation assumed subordinated debt agreements with par values totaling $7,000,000, maturing April 1, 2027, which may be
redeemed at par beginning April 1, 2022. The agreements have fixed annual interest rates of 6.50%. The subordinated debt was recorded
at fair value, which was deemed to be equal to par value. In the fourth quarter 2019, the Corporation redeemed subordinated debt
with a par value of $500,000, resulting in a loss of $10,000 (included in other noninterest expense in the consolidated statements
of income). At December 31, 2019, the carrying value of the subordinated debt on the consolidated balance sheet is $6,500,000.
13. EMPLOYEE AND POSTRETIREMENT BENEFIT
PLANS
DEFINED BENEFIT PLANS
The Corporation sponsors a defined benefit
health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length
of service requirements. Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical
benefits. The plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to
benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability
balance at December 31, 2019 and December 31, 2018 and are not expected to significantly affect the Corporation's future expenses.
The Corporation uses a December 31 measurement date for the postretirement plan.
In an acquisition in 2007, the Corporation
assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan. This plan covers certain employees who were
employed by Citizens Trust Company on December 31, 2002, when the plan was amended to discontinue admittance of any future participant
and to freeze benefit accruals. Information related to the Citizens Trust Company Retirement Plan has been included in the tables
that follow. The Corporation uses a December 31 measurement date for this plan.
The
following table shows the funded status of the defined benefit plans:
|
|
Pension
|
|
|
Postretirement
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
CHANGE IN BENEFIT OBLIGATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
870
|
|
|
$
|
850
|
|
|
$
|
1,349
|
|
|
$
|
1,497
|
|
Service cost
|
|
|
0
|
|
|
|
0
|
|
|
|
33
|
|
|
|
40
|
|
Interest cost
|
|
|
28
|
|
|
|
25
|
|
|
|
50
|
|
|
|
51
|
|
Plan participants' contributions
|
|
|
0
|
|
|
|
0
|
|
|
|
184
|
|
|
|
206
|
|
Actuarial (gain) loss
|
|
|
91
|
|
|
|
11
|
|
|
|
(63
|
)
|
|
|
(192
|
)
|
Benefits paid
|
|
|
(13
|
)
|
|
|
(16
|
)
|
|
|
(227
|
)
|
|
|
(253
|
)
|
Benefit obligation at end of year
|
|
$
|
976
|
|
|
$
|
870
|
|
|
$
|
1,326
|
|
|
$
|
1,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN PLAN ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
847
|
|
|
$
|
923
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Actual return on plan assets
|
|
|
137
|
|
|
|
(60
|
)
|
|
|
0
|
|
|
|
0
|
|
Employer contribution
|
|
|
0
|
|
|
|
0
|
|
|
|
43
|
|
|
|
47
|
|
Plan participants' contributions
|
|
|
0
|
|
|
|
0
|
|
|
|
184
|
|
|
|
206
|
|
Benefits paid
|
|
|
(13
|
)
|
|
|
(16
|
)
|
|
|
(227
|
)
|
|
|
(253
|
)
|
Fair value of plan assets at end of year
|
|
$
|
971
|
|
|
$
|
847
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(5
|
)
|
|
$
|
(23
|
)
|
|
$
|
(1,326
|
)
|
|
$
|
(1,349
|
)
|
At December 31, 2019 and
2018, the following pension plan and postretirement plan liability amounts were recognized in the consolidated balance sheets:
|
|
Pension
|
|
|
Postretirement
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Accrued interest and other liabilities
|
|
$
|
5
|
|
|
$
|
23
|
|
|
$
|
1,326
|
|
|
$
|
1,349
|
|
At December 31, 2019 and 2018, the following
items included in accumulated other comprehensive income had not been recognized as components of expense:
Items not yet recognized as a
component of net periodic benefit cost:
|
|
Pension
|
|
|
Postretirement
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Prior service cost
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(248
|
)
|
|
$
|
(279
|
)
|
Net actuarial loss (gain)
|
|
|
255
|
|
|
|
299
|
|
|
|
(236
|
)
|
|
|
(194
|
)
|
Total
|
|
$
|
255
|
|
|
$
|
299
|
|
|
$
|
(484
|
)
|
|
$
|
(473
|
)
|
For the defined benefit pension plan, amortization
of the net actuarial loss is expected to be $16,000 in 2020. For the postretirement plan, the estimated amount of prior service
cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2020 is a reduction in
expense of $31,000, and net actuarial gain of $7,000 is expected to be amortized in 2020.
The accumulated benefit obligation for the
defined benefit pension plan was $976,000 at December 31, 2019 and $870,000 at December 31, 2018.
The components of net periodic benefit
costs from defined benefit plans are as follows:
|
|
Pension
|
|
|
Postretirement
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Service cost
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
33
|
|
|
$
|
40
|
|
Interest cost
|
|
|
28
|
|
|
|
25
|
|
|
|
50
|
|
|
|
51
|
|
Expected return on plan assets
|
|
|
(22
|
)
|
|
|
(20
|
)
|
|
|
0
|
|
|
|
0
|
|
Amortization of prior service cost
|
|
|
0
|
|
|
|
0
|
|
|
|
(31
|
)
|
|
|
(30
|
)
|
Recognized net actuarial loss (gain)
|
|
|
20
|
|
|
|
13
|
|
|
|
(21
|
)
|
|
|
0
|
|
Total net periodic benefit cost
|
|
$
|
26
|
|
|
$
|
18
|
|
|
$
|
31
|
|
|
$
|
61
|
|
The weighted-average assumptions used to
determine net periodic benefit cost are as follows:
|
|
Pension
|
|
|
Postretirement
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Citizens Trust Company Retirement Plan and postretirement plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.10
|
%
|
|
|
3.55
|
%
|
|
|
4.50
|
%
|
|
|
3.75
|
%
|
Expected return on plan assets
|
|
|
4.68
|
%
|
|
|
4.32
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The weighted-average assumptions used to
determine benefit obligations as of December 31, 2019 and 2018 are as follows:
|
|
Pension
|
|
|
Postretirement
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Discount rate
|
|
|
3.55
|
%
|
|
|
4.10
|
%
|
|
|
3.25
|
%
|
|
|
4.50
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Estimated future benefit payments, including
only estimated employer contributions for the postretirement plan, which reflect expected future service, are as follows:
(In Thousands)
|
|
Pension
|
|
|
Postretirement
|
|
2020
|
|
$
|
431
|
|
|
$
|
81
|
|
2021
|
|
|
11
|
|
|
|
85
|
|
2022
|
|
|
13
|
|
|
|
89
|
|
2023
|
|
|
181
|
|
|
|
81
|
|
2024
|
|
|
11
|
|
|
|
84
|
|
2025-2029
|
|
|
349
|
|
|
|
478
|
|
No estimated minimum contribution to the defined
benefit pension plan is required in 2020, though the Corporation may make discretionary contributions.
The expected return on pension plan assets
is a significant assumption used in the calculation of net periodic benefit cost. This assumption reflects the average long-term
rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit
obligation.
The fair values of pension plan assets
at December 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Mutual funds invested principally in:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
3
|
%
|
|
|
3
|
%
|
Debt securities
|
|
|
38
|
%
|
|
|
40
|
%
|
Equity securities
|
|
|
49
|
%
|
|
|
45
|
%
|
Alternative funds
|
|
|
10
|
%
|
|
|
12
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
C&N Bank’s Trust and Financial Management
Department manages the investment of the pension plan assets. The Plan’s securities include mutual funds invested principally
in debt securities, a diversified mix of large, mid- and small-capitalization U.S. stocks, foreign stocks and alternative asset
classes such as real estate, commodities, and inflation-protected securities. The fair values of plan assets are determined based
on Level 1 inputs (as described in Note 21). The Plan’s assets do not include any shares of the Corporation’s common
stock.
PROFIT SHARING AND DEFERRED COMPENSATION
PLANS
The Corporation has a profit sharing plan
that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation’s
matching contributions to the Plan depend upon the tax deferred contributions of employees. The Corporation’s total basic
and matching contributions were $891,000 in 2019 and $717,000 in 2018.
The Corporation has an Employee Stock Ownership
Plan (ESOP). Contributions to the ESOP are discretionary, and the ESOP uses funds contributed to purchase Corporation stock for
the accounts of ESOP participants. These purchases are made on the market (not directly from the Corporation), and employees are
not permitted to purchase Corporation stock under the ESOP. The ESOP includes a diversification feature, which allows participants,
upon reaching age 55 and 10 years of service (as defined), to sell up to 50% of their Corporation shares over a period of 6 years.
As of December 31, 2019, and 2018, there were no shares allocated for repurchase by the ESOP.
Dividends paid on shares held by the ESOP
are charged to retained earnings. All Corporation shares owned through the ESOP are included in the calculation of weighted-average
shares outstanding for purposes of calculating earnings per share - basic and diluted. The ESOP held 473,171 shares of Corporation
stock at December 31, 2019 and 444,843 shares at December 31, 2018, all of which had been allocated to Plan participants. The Corporation’s
contributions to the ESOP totaled $718,000 in 2019 and $605,000 in 2018.
The Corporation has a nonqualified supplemental
deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred
compensation were $251,000 in 2019 and $242,000 in 2018.
The Corporation also has a nonqualified
deferred compensation plan that allows selected officers the option to defer receipt of cash compensation, including base salary
and any cash bonuses or other cash incentives. This nonqualified deferred compensation plan does not provide for Corporation contributions.
STOCK-BASED COMPENSATION PLANS
The Corporation has a Stock Incentive Plan
for a selected group of senior officers. A total of 850,000 shares of common stock may be issued under the Stock Incentive Plan.
Awards may be made under the Stock Incentive Plan in the form of qualified options (“Incentive Stock Options,” as defined
in the Internal Revenue Code), nonqualified options, stock appreciation rights or restricted stock. Historically through December
31, 2019, all awards made under this Plan have consisted of Incentive Stock Options or restricted stock. Incentive Stock Options
have an exercise price equal to the market value of the stock at the date of grant, vest after 6 months and expire after 10 years.
There are 223,867 shares available for issuance under the Stock Incentive Plan as of December 31, 2019.
Also, the Corporation has an Independent
Directors Stock Incentive Plan. This plan permits awards of nonqualified stock options and/or restricted stock to non-employee
directors. A total of 235,000 shares of common stock may be issued under the Independent Directors Stock Incentive Plan. The recipients’
rights to exercise stock options under this plan expire 10 years from the date of grant. The exercise prices of all stock options
awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant. There are 109,965
shares available for issuance under the Independent Directors Stock Incentive Plan as of December 31, 2019.
Total stock-based compensation expense
is as follows:
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Restricted stock
|
|
$
|
798
|
|
|
$
|
855
|
|
Stock options
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
798
|
|
|
$
|
855
|
|
The following summarizes non-vested restricted
stock activity for the year ended December 31, 2019:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant Date
|
|
|
|
of Shares
|
|
|
Fair Value
|
|
Outstanding, December 31, 2018
|
|
|
60,345
|
|
|
$
|
23.81
|
|
Granted
|
|
|
48,137
|
|
|
$
|
24.47
|
|
Vested
|
|
|
(36,524
|
)
|
|
$
|
23.21
|
|
Forfeited
|
|
|
(3,758
|
)
|
|
$
|
25.08
|
|
Outstanding, December 31, 2019
|
|
|
68,200
|
|
|
$
|
24.53
|
|
Compensation cost related to restricted
stock is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and
actual forfeitures. As of December 31, 2019, there was $822,000 total unrecognized compensation cost related to restricted stock,
which is expected to be recognized over a weighted average period of 1.4 years.
In 2019 and 2018, the Corporation awarded
shares of restricted stock under the Stock Incentive Plan, as follows:
|
|
2019
|
|
|
2018
|
|
Time-based awards to independent directors
|
|
|
7,620
|
|
|
|
9,086
|
|
Time-based awards to employees
|
|
|
26,827
|
|
|
|
17,147
|
|
Performance-based awards to employees
|
|
|
13,690
|
|
|
|
8,289
|
|
Total
|
|
|
48,137
|
|
|
|
34,522
|
|
Time-based restricted stock awards granted
under the Independent Directors Stock Incentive Plan in 2019 and 2018 vest over one-year terms. Time-based restricted stock awards
granted to employees in 2019 and 2018 vest ratably over three-year terms, subject to continued employment and satisfactory job
performance. Performance-based restricted stock awards granted in 2019 and 2018 vest ratably over three-year terms, with vesting
contingent upon meeting conditions based on the Corporation’s earnings as specified in the agreements.
There were no stock options granted in
2019 or 2018. A summary of stock option activity is presented below:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding, beginning of year
|
|
|
115,714
|
|
|
$
|
18.49
|
|
|
|
165,660
|
|
|
$
|
18.49
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Exercised
|
|
|
(31,304
|
)
|
|
$
|
17.65
|
|
|
|
(41,210
|
)
|
|
$
|
18.69
|
|
Forfeited
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
Expired
|
|
|
(8,513
|
)
|
|
$
|
19.88
|
|
|
|
(8,736
|
)
|
|
$
|
17.50
|
|
Outstanding, end of year
|
|
|
75,897
|
|
|
$
|
18.69
|
|
|
|
115,714
|
|
|
$
|
18.49
|
|
Options exercisable at year-end
|
|
|
75,897
|
|
|
$
|
18.69
|
|
|
|
115,714
|
|
|
$
|
18.49
|
|
Weighted-average fair value of options forfeited
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
N/A
|
|
The weighted-average remaining contractual
term of outstanding stock options at December 31, 2019 was 2.7 years. The aggregate intrinsic value of stock options outstanding
was $726,000 at December 31, 2019. The total intrinsic value of options exercised was $276,000 in 2019 and $291,000 in 2018.
The Corporation has issued shares from
treasury stock for almost all stock option exercises through December 31, 2019. Management does not anticipate that stock repurchases
will be necessary to accommodate stock option exercises in 2020.
In January 2020, the Corporation awarded
30,381 shares of restricted stock under the Stock Incentive Plan and 7,580 shares of restricted stock under the Independent Directors
Stock Incentive Plans. The January 2020 restricted stock awards under the Stock Incentive Plan vest ratably over three years. The
2020 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Total estimated stock-based
compensation for 2020 is $920,000. The restricted stock awards made in January 2020 are not included in the tables above.
14. INCOME TAXES
The net deferred tax asset at December
31, 2019 and 2018 represents the following temporary difference components:
|
|
December 31,
|
|
|
December 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Unrealized holding losses on securities
|
|
$
|
0
|
|
|
$
|
1,145
|
|
Allowance for loan losses
|
|
|
2,080
|
|
|
|
2,005
|
|
Purchase accounting adjustments on loans
|
|
|
640
|
|
|
|
0
|
|
Other deferred tax assets
|
|
|
2,173
|
|
|
|
2,049
|
|
Total deferred tax assets
|
|
|
4,893
|
|
|
|
5,199
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities
|
|
|
934
|
|
|
|
0
|
|
Defined benefit plans - ASC 835
|
|
|
49
|
|
|
|
37
|
|
Bank premises and equipment
|
|
|
763
|
|
|
|
907
|
|
Core deposit intangibles
|
|
|
272
|
|
|
|
2
|
|
Other deferred tax liabilities
|
|
|
257
|
|
|
|
143
|
|
Total deferred tax liabilities
|
|
|
2,275
|
|
|
|
1,089
|
|
Deferred tax asset, net
|
|
$
|
2,618
|
|
|
$
|
4,110
|
|
The provision for income taxes includes
the following:
(In thousands)
|
|
2019
|
|
|
2018
|
|
Currently payable
|
|
$
|
3,618
|
|
|
$
|
4,350
|
|
Tax expense resulting from allocations of certain tax benefits to equity or as a reduction in other assets
|
|
|
115
|
|
|
|
87
|
|
Deferred
|
|
|
172
|
|
|
|
(187
|
)
|
Total provision
|
|
$
|
3,905
|
|
|
$
|
4,250
|
|
A reconciliation of income tax at the statutory
rate to the Corporation’s effective rate is as follows (amounts in thousands):
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
(Amounts in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Statutory provision
|
|
$
|
4,916
|
|
|
|
21.00
|
|
|
$
|
5,515
|
|
|
|
21.00
|
|
Tax-exempt interest income
|
|
|
(853
|
)
|
|
|
(3.64
|
)
|
|
|
(1,046
|
)
|
|
|
(3.98
|
)
|
Increase in cash surrender value and other income from
life insurance, net
|
|
|
(91
|
)
|
|
|
(0.39
|
)
|
|
|
(170
|
)
|
|
|
(0.65
|
)
|
ESOP Dividends
|
|
|
(113
|
)
|
|
|
(0.48
|
)
|
|
|
(98
|
)
|
|
|
(0.37
|
)
|
State income tax, net of Federal benefit
|
|
|
122
|
|
|
|
0.52
|
|
|
|
125
|
|
|
|
0.48
|
|
Other, net
|
|
|
(76
|
)
|
|
|
(0.32
|
)
|
|
|
(76
|
)
|
|
|
(0.29
|
)
|
Effective income tax provision
|
|
$
|
3,905
|
|
|
|
16.68
|
|
|
$
|
4,250
|
|
|
|
16.18
|
|
In December 2017, the Corporation recognized
an adjustment in the carrying value of the net deferred tax asset as a result of a reduction in the federal corporate income tax
rate to 21%, effective January 1, 2018, from the 35% marginal rate that had previously been in effect. At December 31, 2017, the
portion of the adjustment attributable to items of accumulated other comprehensive income (loss) were stranded in retained earnings,
including components related to unrealized losses on securities and defined benefit plans. As described in Note 2, the Corporation
elected early adoption of ASU 2018-02, resulting in a reclassification between two categories of stockholders’ equity at
January 1, 2018, with an increase of $325,000 in retained earnings and a decrease in accumulated other comprehensive loss for the
same amount (no net change in stockholders’ equity).
The Corporation has no unrecognized
tax benefits, nor pending examination issues related to tax positions taken in preparation of its income tax returns. With limited
exceptions, the Corporation is no longer subject to examination by the Internal Revenue Service for years prior to 2016.
15. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors
of the Corporation and its subsidiaries and any associates of the foregoing persons are as follows:
|
|
Beginning
|
|
|
New
|
|
|
|
|
|
Other
|
|
|
Ending
|
|
(In Thousands)
|
|
Balance
|
|
|
Loans
|
|
|
Repayments
|
|
|
Changes
|
|
|
Balance
|
|
11 directors, 8 executive officers 2019
|
|
$
|
15,144
|
|
|
$
|
1,027
|
|
|
$
|
(1,850
|
)
|
|
$
|
134
|
|
|
$
|
14,455
|
|
11 directors, 8 executive officers 2018
|
|
$
|
14,412
|
|
|
$
|
3,553
|
|
|
$
|
(1,417
|
)
|
|
$
|
(1,404
|
)
|
|
$
|
15,144
|
|
In the table above, other changes represent
net changes in the balance of existing lines of credit and transfers in and out of the related party category.
Deposits from related parties held by the
Corporation amounted to $8,828,000 at December 31, 2019 and $9,622,000 at December 31, 2018.
16. OFF-BALANCE SHEET RISK
The Corporation is a party to financial
instruments with off-balance sheet risk in the normal course of business to meet the financial 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 sheets. The
contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial
instruments.
The Corporation’s 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 Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts
represent credit risk at December 31, 2019 and 2018 are as follows:
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Commitments to extend credit
|
|
$
|
256,896
|
|
|
$
|
191,672
|
|
Standby letters of credit
|
|
|
8,446
|
|
|
|
7,227
|
|
Commitments to extend credit are legally
binding agreements to lend to customers. 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. The Corporation evaluates each customer’s creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, for extensions of credit is based
on management’s credit assessment of the counterparty.
Standby letters of credit are conditional
commitments issued by the Corporation guaranteeing performance by a customer to a third party. Those guarantees are issued primarily
to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Some of the standby letters of credit are collateralized by real estate or other assets, and others are unsecured. The extent to
which proceeds from liquidation of collateral would be expected to cover the maximum potential amount of future payments related
to standby letters of credit is not estimable. The Corporation has recorded no liability associated with standby letters of credit
as of December 31, 2019 and 2018.
Standby letters of credit as of December
31, 2019 expire as follows:
Year of Expiration
|
|
|
(In Thousands)
|
|
2020
|
|
|
$
|
7,809
|
|
2021
|
|
|
|
523
|
|
2022
|
|
|
|
114
|
|
Total
|
|
|
$
|
8,446
|
|
17. OPERATING LEASE COMMITMENTS AND
CONTINGENCIES
The Corporation leases certain branch locations,
office space and equipment. All leases are classified as operating leases. Leases with an initial term of 12 months or less are
not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
Certain leases include options to renew,
with renewal terms that can extend the lease term from one to eight years that are reasonably certain of being exercised. The discount
rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with
the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases
subsequently entered into after January 1, 2019. At December 31, 2019, discount rates ranged from 2.77% to 3.50%
with a weighted-average discount rate of 3.23%.
At December 31, 2019, right-of-use assets
of $1,637,000 were included in other assets, and the related liabilities totaling the same amount were included in accrued interest
and other liabilities, in the unaudited consolidated balance sheets. In 2019, right-of-use assets obtained in exchange for lease
liabilities totaled $745,000. In 2019, operating lease expenses totaling $214,000 are included in occupancy expense, net, and $37,000
are included in furniture and equipment expense.
A maturity analysis of the Corporation’s
lease liabilities at December 31, 2019 is as follows:
(In Thousands)
Lease Payments Due
2020
|
|
|
$
|
265
|
|
2021
|
|
|
|
265
|
|
2022
|
|
|
|
241
|
|
2023
|
|
|
|
229
|
|
2024
|
|
|
|
239
|
|
Thereafter
|
|
|
|
625
|
|
Total lease payments
|
|
|
|
1,864
|
|
Discount on cash flows
|
|
|
|
(227
|
)
|
Total lease liabilities
|
|
|
$
|
1,637
|
|
In the normal course of business, the Corporation
is subject to pending and threatened litigation in which claims for monetary damages are asserted. In management’s opinion,
the Corporation’s financial position and results of operations would not be materially affected by the outcome of these legal
proceedings.
18. REGULATORY MATTERS
As required by the Economic Growth, Regulatory
Relief, and Consumer Protection Act, in August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability
of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset
threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company
that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and
(3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim
final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase.
Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement
and is therefore excluded from consolidated capital requirements at December 31, 2019; however, C&N Bank remains subject to
regulatory capital requirements administered by the federal banking agencies.
Details concerning capital ratios at December
31, 2019 and December 31, 2018 are presented below. Management believes, as of December 31, 2019, that C&N Bank meets all capital
adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that
allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments
to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios
at December 31, 2019 and December 31, 2018 exceed the Corporation’s Board policy threshold levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum To Be Well
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Minimum To Maintain
|
|
|
Capitalized Under
|
|
|
Minimum To Meet
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Capital Conservation
|
|
|
Prompt Corrective
|
|
|
the Corporation's
|
|
|
|
Actual
|
|
|
Requirement
|
|
|
Buffer at Reporting Date
|
|
|
Action Provisions
|
|
|
Policy Thresholds
|
|
(Dollars in Thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
228,057
|
|
|
|
20.70
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
115,689
|
|
|
|
³10.5%
|
|
C&N Bank
|
|
|
205,863
|
|
|
|
18.75
|
%
|
|
|
87,817
|
|
|
|
³8%
|
|
|
|
115,260
|
|
|
|
³10.5%
|
|
|
|
109,771
|
|
|
|
³10%
|
|
|
|
115,260
|
|
|
|
³10.5%
|
|
Tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
211,388
|
|
|
|
19.19
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
93,653
|
|
|
|
³8.5%
|
|
C&N Bank
|
|
|
195,694
|
|
|
|
17.83
|
%
|
|
|
65,863
|
|
|
|
³6%
|
|
|
|
93,306
|
|
|
|
³8.5%
|
|
|
|
87,817
|
|
|
|
³8%
|
|
|
|
93,306
|
|
|
|
³8.5%
|
|
Common equity tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
211,388
|
|
|
|
19.19
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
77,126
|
|
|
|
³7%
|
|
C&N Bank
|
|
|
195,694
|
|
|
|
17.83
|
%
|
|
|
49,397
|
|
|
|
³4.5%
|
|
|
|
76,840
|
|
|
|
³7.0%
|
|
|
|
71,351
|
|
|
|
³6.5%
|
|
|
|
76,840
|
|
|
|
³7%
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
211,388
|
|
|
|
13.10
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
129,126
|
|
|
|
³8%
|
|
C&N Bank
|
|
|
195,694
|
|
|
|
12.24
|
%
|
|
|
63,940
|
|
|
|
³4%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
79,925
|
|
|
|
³5%
|
|
|
|
127,879
|
|
|
|
³8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
199,226
|
|
|
|
24.42
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
85,653
|
|
|
|
³10.5%
|
|
C&N Bank
|
|
|
176,499
|
|
|
|
21.75
|
%
|
|
|
64,916
|
|
|
|
³8%
|
|
|
|
80,130
|
|
|
|
³9.875%
|
|
|
|
81,145
|
|
|
|
³10%
|
|
|
|
85,202
|
|
|
|
³10.5%
|
|
Tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
189,589
|
|
|
|
23.24
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
69,338
|
|
|
|
³8.5%
|
|
C&N Bank
|
|
|
166,862
|
|
|
|
20.56
|
%
|
|
|
48,687
|
|
|
|
³6%
|
|
|
|
63,901
|
|
|
|
³7.875%
|
|
|
|
64,916
|
|
|
|
³8%
|
|
|
|
68,976
|
|
|
|
³8.5%
|
|
Common equity tier 1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
189,589
|
|
|
|
23.24
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
57,102
|
|
|
|
³7%
|
|
C&N Bank
|
|
|
166,862
|
|
|
|
20.56
|
%
|
|
|
36,515
|
|
|
|
³4.5%
|
|
|
|
51,730
|
|
|
|
³6.375%
|
|
|
|
52,744
|
|
|
|
³6.5%
|
|
|
|
56,801
|
|
|
|
³7%
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
189,589
|
|
|
|
14.78
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
102,634
|
|
|
|
³8%
|
|
C&N Bank
|
|
|
166,862
|
|
|
|
13.16
|
%
|
|
|
50,715
|
|
|
|
³4%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
63,394
|
|
|
|
³5%
|
|
|
|
101,430
|
|
|
|
³8%
|
|
In July 2013, the federal regulatory authorities
issued a new capital rule based, in part, on revisions developed by the Basel Committee on Banking Supervision to the Basel capital
framework (Basel III). This capital rule provides that, to avoid limitations on capital distributions, including dividend payments
and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital
conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured
relative to risk-weighted assets. In 2019, the minimum risk-based capital ratios, and the capital ratios including the capital
conservation buffer, are as follows:
Minimum common equity tier 1 capital ratio
|
|
|
4.5
|
%
|
Minimum common equity tier 1 capital ratio plus
capital conservation buffer
|
|
|
7.0
|
%
|
Minimum tier 1 capital ratio
|
|
|
6.0
|
%
|
Minimum tier 1 capital ratio plus capital
conservation buffer
|
|
|
8.5
|
%
|
Minimum total capital ratio
|
|
|
8.0
|
%
|
Minimum total capital ratio plus capital
conservation buffer
|
|
|
10.5
|
%
|
A banking organization with a buffer greater
than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary
bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations
as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus
payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5%
as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the
current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of
payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer
|
|
Maximum Payout
|
|
(as a % of risk-weighted assets)
|
|
(as a % of eligible retained income)
|
|
Greater than 2.5%
|
|
|
No payout limitation applies
|
|
≤2.5% and >1.875%
|
|
|
60%
|
|
≤1.875% and >1.25%
|
|
|
40%
|
|
≤1.25% and >0.625%
|
|
|
20%
|
|
≤0.625%
|
|
|
0%
|
|
At December 30, 2019, C&N Bank’s
Capital Conservation Buffer, determined based on the minimum total capital ratio, was 10.75%.
Banking regulators limit the amount of
dividends that may be paid by C&N Bank to the Corporation. Retained earnings against which dividends may be paid without prior
approval of the banking regulators amounted to approximately $94,628,000 at December 31, 2019, subject to the minimum capital ratio
requirements noted above.
Restrictions imposed by federal law prohibit
the Corporation from borrowing from C&N Bank unless the loans are secured in specific amounts. Such secured loans to the Corporation
are generally limited to 10% of C&N Bank’s tangible stockholder’s equity (excluding accumulated other comprehensive
income) or $19,543,000 at December 31, 2019.
19. PARENT COMPANY ONLY
The following is condensed financial information
for Citizens & Northern Corporation:
CONDENSED BALANCE SHEET
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,485
|
|
|
$
|
7,389
|
|
Investment in subsidiaries:
|
|
|
|
|
|
|
|
|
Citizens & Northern Bank
|
|
|
228,413
|
|
|
|
174,795
|
|
Citizens & Northern Investment Corporation
|
|
|
12,353
|
|
|
|
11,697
|
|
Bucktail Life Insurance Company
|
|
|
3,669
|
|
|
|
3,525
|
|
Other assets
|
|
|
109
|
|
|
|
6
|
|
TOTAL ASSETS
|
|
$
|
251,029
|
|
|
$
|
197,412
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
6,500
|
|
|
$
|
0
|
|
Other liabilities
|
|
|
77
|
|
|
|
44
|
|
Stockholders' equity
|
|
|
244,452
|
|
|
|
197,368
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
251,029
|
|
|
$
|
197,412
|
|
CONDENSED INCOME STATEMENT
|
|
|
|
|
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Dividends from Citizens & Northern Bank
|
|
$
|
24,600
|
|
|
$
|
12,800
|
|
Expenses
|
|
|
(1,086
|
)
|
|
|
(681
|
)
|
Income before equity in (excess
distributions)/undistributed income of subsidiaries
|
|
|
23,514
|
|
|
|
12,119
|
|
Equity in (excess
distributions)/undistributed income of subsidiaries
|
|
|
(4,010
|
)
|
|
|
9,894
|
|
NET INCOME
|
|
$
|
19,504
|
|
|
$
|
22,013
|
|
CONDENSED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,504
|
|
|
$
|
22,013
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Loss on repayment of subordinated debt
|
|
|
10
|
|
|
|
0
|
|
Equity in (excess distributions)/undistributed income
of subsidiaries
|
|
|
4,010
|
|
|
|
(9,894
|
)
|
(Increase) decrease in other assets
|
|
|
(107
|
)
|
|
|
7
|
|
(Decrease) increase in other liabilities
|
|
|
(81
|
)
|
|
|
30
|
|
Net Cash Provided by Operating Activities
|
|
|
23,336
|
|
|
|
12,156
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES,
|
|
|
|
|
|
|
|
|
Net cash used in business combination
|
|
|
(9,698
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayment of subordinated debt
|
|
|
(510
|
)
|
|
|
0
|
|
Proceeds from sale of treasury stock
|
|
|
198
|
|
|
|
189
|
|
Purchase of treasury stock
|
|
|
(189
|
)
|
|
|
0
|
|
Dividends paid
|
|
|
(14,041
|
)
|
|
|
(11,746
|
)
|
Net Cash Used in Financing Activities
|
|
|
(14,542
|
)
|
|
|
(11,557
|
)
|
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(904
|
)
|
|
|
599
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
7,389
|
|
|
|
6,790
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
6,485
|
|
|
$
|
7,389
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Investment of net assets
acquired in business combination in Citizens & Northern Bank
|
|
$
|
49,765
|
|
|
$
|
0
|
|
Common equity issued in business combination
|
|
$
|
32,953
|
|
|
$
|
0
|
|
Subordinated debt assumed in business combination
|
|
$
|
7,000
|
|
|
$
|
0
|
|
Other liabilities assumed in business combination
|
|
$
|
114
|
|
|
$
|
0
|
|
Interest paid
|
|
$
|
461
|
|
|
$
|
0
|
|
20. SUMMARY OF QUARTERLY CONSOLIDATED
FINANCIAL DATA (Unaudited)
The following table presents summarized
quarterly financial data for 2019 and 2018:
SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA
|
|
2019 Quarter Ended
|
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
(In Thousands Except Per Share Data) (Unaudited)
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
Interest income
|
|
$
|
13,065
|
|
|
$
|
17,139
|
|
|
$
|
17,277
|
|
|
$
|
17,290
|
|
Interest expense
|
|
|
1,350
|
|
|
|
2,934
|
|
|
|
3,000
|
|
|
|
2,999
|
|
Net interest income
|
|
|
11,715
|
|
|
|
14,205
|
|
|
|
14,277
|
|
|
|
14,291
|
|
(Credit) provision for loan losses
|
|
|
(957
|
)
|
|
|
(4
|
)
|
|
|
1,158
|
|
|
|
652
|
|
Net interest income after (credit) provision
for loan losses
|
|
|
12,672
|
|
|
|
14,209
|
|
|
|
13,119
|
|
|
|
13,639
|
|
Other income
|
|
|
4,406
|
|
|
|
4,849
|
|
|
|
4,963
|
|
|
|
5,066
|
|
Net gains on available-for-sale debt securities
|
|
|
0
|
|
|
|
7
|
|
|
|
13
|
|
|
|
3
|
|
Merger-related expenses
|
|
|
311
|
|
|
|
3,301
|
|
|
|
206
|
|
|
|
281
|
|
Other expenses
|
|
|
10,696
|
|
|
|
11,422
|
|
|
|
11,486
|
|
|
|
11,834
|
|
Income before income tax provision
|
|
|
6,071
|
|
|
|
4,342
|
|
|
|
6,403
|
|
|
|
6,593
|
|
Income tax provision
|
|
|
981
|
|
|
|
693
|
|
|
|
1,096
|
|
|
|
1,135
|
|
Net income
|
|
$
|
5,090
|
|
|
$
|
3,649
|
|
|
$
|
5,307
|
|
|
$
|
5,458
|
|
Net income attributable to common shares
|
|
$
|
5,063
|
|
|
$
|
3,630
|
|
|
$
|
5,281
|
|
|
$
|
5,431
|
|
Net income per share – basic
|
|
$
|
0.41
|
|
|
$
|
0.27
|
|
|
$
|
0.39
|
|
|
$
|
0.40
|
|
Net income per share – diluted
|
|
$
|
0.41
|
|
|
$
|
0.27
|
|
|
$
|
0.39
|
|
|
$
|
0.40
|
|
|
|
2018 Quarter Ended
|
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
Interest income
|
|
$
|
11,890
|
|
|
$
|
12,334
|
|
|
$
|
12,800
|
|
|
$
|
13,304
|
|
Interest expense
|
|
|
993
|
|
|
|
1,079
|
|
|
|
1,241
|
|
|
|
1,312
|
|
Net interest income
|
|
|
10,897
|
|
|
|
11,255
|
|
|
|
11,559
|
|
|
|
11,992
|
|
Provision (credit) for loan losses
|
|
|
292
|
|
|
|
(20
|
)
|
|
|
60
|
|
|
|
252
|
|
Net interest income after provision (credit) for loan
losses
|
|
|
10,605
|
|
|
|
11,275
|
|
|
|
11,499
|
|
|
|
11,740
|
|
Other income
|
|
|
4,406
|
|
|
|
4,689
|
|
|
|
4,462
|
|
|
|
5,040
|
|
Gain on restricted equity security
|
|
|
0
|
|
|
|
1,750
|
|
|
|
571
|
|
|
|
0
|
|
Net losses on available-for-sale debt securities
|
|
|
0
|
|
|
|
(282
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Merger-related expenses
|
|
|
0
|
|
|
|
0
|
|
|
|
200
|
|
|
|
128
|
|
Other expenses
|
|
|
9,895
|
|
|
|
9,684
|
|
|
|
9,633
|
|
|
|
9,946
|
|
Income before income tax provision
|
|
|
5,116
|
|
|
|
7,748
|
|
|
|
6,697
|
|
|
|
6,702
|
|
Income tax provision
|
|
|
741
|
|
|
|
1,377
|
|
|
|
1,111
|
|
|
|
1,021
|
|
Net income
|
|
$
|
4,375
|
|
|
$
|
6,371
|
|
|
$
|
5,586
|
|
|
$
|
5,681
|
|
Net income attributable to common shares
|
|
$
|
4,352
|
|
|
$
|
6,339
|
|
|
$
|
5,558
|
|
|
$
|
5,654
|
|
Net income per share – basic
|
|
$
|
0.36
|
|
|
$
|
0.52
|
|
|
$
|
0.45
|
|
|
$
|
0.46
|
|
Net income per share – diluted
|
|
$
|
0.36
|
|
|
$
|
0.52
|
|
|
$
|
0.45
|
|
|
$
|
0.46
|
|
21. FAIR VALUE MEASUREMENTS AND FAIR
VALUES OF FINANCIAL INSTRUMENTS
The Corporation measures certain assets
at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date. FASB ASC topic 820, “Fair Value Measurements and Disclosures” establishes a framework
for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes
the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value
measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of
the fair value hierarchy are as follows:
Level 1 – Fair value is based on
unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide
the most reliable evidence and are used to measure fair value whenever available.
Level 2 – Fair value is based on
significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term
of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for
similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.
Level 3 – Fair value is based on
significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option
pricing models, discounted cash flows and other similar techniques.
The Corporation monitors and evaluates
available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value
hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes
may include the market for a particular asset becoming active or inactive, changes in the availability of quoted prices, or changes
in the availability of other market data.
At December 31, 2019 and 2018, assets measured
at fair value and the valuation methods used are as follows:
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
(In Thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE DEBT SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government agencies
|
|
$
|
0
|
|
|
$
|
17,000
|
|
|
$
|
0
|
|
|
$
|
17,000
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
|
|
|
0
|
|
|
|
70,760
|
|
|
|
0
|
|
|
|
70,760
|
|
Taxable
|
|
|
0
|
|
|
|
36,303
|
|
|
|
0
|
|
|
|
36,303
|
|
Mortgage-backed securities issued or
guaranteed by U.S. Government agencies or sponsored agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities
|
|
|
0
|
|
|
|
59,210
|
|
|
|
0
|
|
|
|
59,210
|
|
Residential collateralized mortgage obligations
|
|
|
0
|
|
|
|
114,723
|
|
|
|
0
|
|
|
|
114,723
|
|
Commercial mortgage-backed securities
|
|
|
0
|
|
|
|
48,727
|
|
|
|
0
|
|
|
|
48,727
|
|
Total available-for-sale debt securities
|
|
|
0
|
|
|
|
346,723
|
|
|
|
0
|
|
|
|
346,723
|
|
Marketable equity security
|
|
|
979
|
|
|
|
0
|
|
|
|
0
|
|
|
|
979
|
|
Servicing rights
|
|
|
0
|
|
|
|
0
|
|
|
|
1,277
|
|
|
|
1,277
|
|
Total recurring fair value measurements
|
|
$
|
979
|
|
|
$
|
346,723
|
|
|
$
|
1,277
|
|
|
$
|
348,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,375
|
|
|
$
|
3,375
|
|
Valuation allowance
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,051
|
)
|
|
|
(1,051
|
)
|
Impaired loans, net
|
|
|
0
|
|
|
|
0
|
|
|
|
2,324
|
|
|
|
2,324
|
|
Foreclosed assets held for sale
|
|
|
0
|
|
|
|
0
|
|
|
|
2,886
|
|
|
|
2,886
|
|
Total nonrecurring fair value measurements
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,210
|
|
|
$
|
5,210
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
(In Thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE DEBT SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government agencies
|
|
$
|
0
|
|
|
$
|
12,500
|
|
|
$
|
0
|
|
|
$
|
15,500
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
|
|
|
0
|
|
|
|
83,952
|
|
|
|
0
|
|
|
|
83,952
|
|
Taxable
|
|
|
0
|
|
|
|
27,699
|
|
|
|
0
|
|
|
|
27,699
|
|
Mortgage-backed securities issued or
guaranteed by U.S. Government agencies or sponsored agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities
|
|
|
0
|
|
|
|
53,445
|
|
|
|
0
|
|
|
|
53,445
|
|
Residential collateralized mortgage obligations
|
|
|
0
|
|
|
|
145,912
|
|
|
|
0
|
|
|
|
145,912
|
|
Commercial mortgage-backed securities
|
|
|
0
|
|
|
|
39,765
|
|
|
|
0
|
|
|
|
39,765
|
|
Total available-for-sale debt securities
|
|
|
0
|
|
|
|
363,273
|
|
|
|
0
|
|
|
|
363,273
|
|
Marketable equity security
|
|
|
950
|
|
|
|
0
|
|
|
|
0
|
|
|
|
950
|
|
Servicing rights
|
|
|
0
|
|
|
|
0
|
|
|
|
1,404
|
|
|
|
1,404
|
|
Total recurring fair value measurements
|
|
$
|
950
|
|
|
$
|
363,273
|
|
|
$
|
1,404
|
|
|
$
|
365,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,851
|
|
|
$
|
4,851
|
|
Valuation allowance
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,605
|
)
|
|
|
(1,605
|
)
|
Impaired loans, net
|
|
|
0
|
|
|
|
0
|
|
|
|
3,246
|
|
|
|
3,246
|
|
Foreclosed assets held for sale
|
|
|
0
|
|
|
|
0
|
|
|
|
1,703
|
|
|
|
1,703
|
|
Total nonrecurring fair value measurements
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,949
|
|
|
$
|
4,949
|
|
Management’s evaluation and selection
of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies
include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations
of fair values that would be substantially different than the amount calculated by management. The following table shows quantitative
information regarding significant techniques and inputs used at December 31, 2019 and 2018 for servicing rights assets measured
using unobservable inputs (Level 3 methodologies) on a recurring basis:
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/19
|
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
Method or Value As of
|
Asset
|
|
(In Thousands)
|
|
|
Technique
|
|
Input(s)
|
|
|
|
|
12/31/19
|
Servicing rights
|
|
$
|
1,277
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
|
12.50
|
%
|
|
Rate used through modeling period
|
|
|
|
|
|
|
|
|
Loan prepayment speeds
|
|
|
183.00
|
%
|
|
Weighted-average PSA of loan balances of payments are
late late fees assessed
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
|
0.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.94
|
|
|
Miscellaneous fees per account per month
|
|
|
|
|
|
|
|
|
Servicing costs
|
|
$
|
6.00
|
|
|
Monthly servicing cost per account
|
|
|
|
|
|
|
|
|
|
|
$
|
24.00
|
|
|
Additional monthly servicing cost per loan on loans
more than 30 days delinquent of loans more than 30 days delinquent annual increase in servicing costs
|
|
|
|
|
|
|
|
|
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00
|
%
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/18
|
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
Method or Value As of
|
Asset
|
|
(In Thousands)
|
|
|
Technique
|
|
Input(s)
|
|
|
|
|
12/31/18
|
Servicing rights
|
|
$
|
1,404
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
|
12.50
|
%
|
|
Rate used through modeling period
|
|
|
|
|
|
|
|
|
Loan prepayment speeds
|
|
|
114.00
|
%
|
|
Weighted-average PSA of loan
balances of payments are late late fees assessed
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
|
0.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.94
|
|
|
Miscellaneous fees per account per month
|
|
|
|
|
|
|
|
|
Servicing costs
|
|
$
|
6.00
|
|
|
Monthly servicing cost per account
|
|
|
|
|
|
|
|
|
|
|
$
|
24.00
|
|
|
Additional monthly servicing cost
per loan on loans more than 30 days delinquent of loans more than 30 days delinquent annual increase in servicing costs
|
|
|
|
|
|
|
|
|
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.00
|
%
|
|
|
The fair value of servicing rights is affected
by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair
value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying
loans.
Following is a reconciliation of activity
for Level 3 assets (servicing rights) measured at fair value on a recurring basis:
|
|
Years Ended December 31,
|
|
(In Thousands)
|
|
2019
|
|
|
2018
|
|
Balance, beginning of period
|
|
$
|
1,404
|
|
|
$
|
1,299
|
|
Issuances of servicing rights
|
|
|
204
|
|
|
|
188
|
|
Unrealized losses included in earnings
|
|
|
(331
|
)
|
|
|
(83
|
)
|
Balance, end of period
|
|
$
|
1,277
|
|
|
$
|
1,404
|
|
Loans are classified as impaired when, based
on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real
estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated
fair values are determined primarily using values from third-party appraisals. Appraised values are 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.
At December 31, 2019 and 2018, quantitative
information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs
(Level 3 methodologies) are as follows:
(In
Thousands, Except Percentages)
Asset
|
|
Balance
at
12/31/19
|
|
|
Valuation
Allowance at
12/31/19
|
|
|
Fair
Value at
12/31/19
|
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Weighted-
Average
Discount at
12/31/19
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans - first and junior liens
|
|
$
|
732
|
|
|
$
|
176
|
|
|
$
|
556
|
|
|
Sales comparison
|
|
Discount to
appraised value
|
|
|
30
|
%
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
|
106
|
|
|
|
89
|
|
|
|
17
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
69
|
%
|
Commercial
and industrial
|
|
|
798
|
|
|
|
60
|
|
|
|
738
|
|
|
Liquidation of accounts
receivable
|
|
Discount to borrower's
financial statement value
|
|
|
15
|
%
|
Commercial
construction and land
|
|
|
1,261
|
|
|
|
678
|
|
|
|
583
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
47
|
%
|
Loans
secured by farmland
|
|
|
478
|
|
|
|
48
|
|
|
|
430
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
46
|
%
|
Total impaired loans
|
|
$
|
3,375
|
|
|
$
|
1,051
|
|
|
$
|
2,324
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets held for sale - real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1-4 family)
|
|
$
|
292
|
|
|
$
|
0
|
|
|
$
|
292
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
46
|
%
|
Land
|
|
|
70
|
|
|
|
0
|
|
|
|
70
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
53
|
%
|
Commercial real estate
|
|
|
2,524
|
|
|
|
0
|
|
|
|
2,524
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
39
|
%
|
Total
foreclosed assets held for sale
|
|
$
|
2,886
|
|
|
$
|
0
|
|
|
$
|
2,886
|
|
|
|
|
|
|
|
|
|
(In
Thousands, Except Percentages)
Asset
|
|
Balance
at
12/31/18
|
|
|
Valuation
Allowance at
12/31/18
|
|
|
Fair
Value at
12/31/18
|
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Weighted-
Average
Discount at
12/31/18
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans - first liens
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
509
|
|
|
$
|
116
|
|
|
$
|
393
|
|
|
Sales comparison
|
|
Discount to
appraised value
|
|
|
26
|
%
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans secured by real estate
|
|
|
2,515
|
|
|
|
781
|
|
|
|
1,734
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
16
|
%
|
Commercial
and industrial
|
|
|
75
|
|
|
|
75
|
|
|
|
0
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
100
|
%
|
Commercial
and industrial
|
|
|
1,265
|
|
|
|
584
|
|
|
|
681
|
|
|
Sales comparison
|
|
Discount to borrower's
financial statement value
|
|
|
36
|
%
|
Loans
secured by farmland
|
|
|
487
|
|
|
|
49
|
|
|
|
438
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
56
|
%
|
Total impaired loans
|
|
$
|
4,851
|
|
|
$
|
1,605
|
|
|
$
|
3,246
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets held for sale - real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1-4 family)
|
|
$
|
64
|
|
|
$
|
0
|
|
|
$
|
64
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
68
|
%
|
Land
|
|
|
110
|
|
|
|
0
|
|
|
|
110
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
61
|
%
|
Commercial real estate
|
|
|
1,529
|
|
|
|
0
|
|
|
|
1,529
|
|
|
Sales comparison
|
|
Discount to appraised
value
|
|
|
20
|
%
|
Total
foreclosed assets held for sale
|
|
$
|
1,703
|
|
|
$
|
0
|
|
|
$
|
1,703
|
|
|
|
|
|
|
|
|
|
Certain of the Corporation’s financial
instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates
may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments
are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying
fair value of the Corporation.
The estimated fair values, and related
carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:
|
|
Valuation
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Method(s)
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In Thousands)
|
|
Used
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
Level 1
|
|
|
$
|
31,122
|
|
|
$
|
31,122
|
|
|
$
|
32,827
|
|
|
$
|
32,827
|
|
Certificates of deposit
|
|
|
Level 2
|
|
|
|
4,080
|
|
|
|
4,227
|
|
|
|
4,660
|
|
|
|
4,634
|
|
Restricted equity securities (included in Other Assets)
|
|
|
Level 2
|
|
|
|
10,321
|
|
|
|
10,321
|
|
|
|
5,712
|
|
|
|
5,712
|
|
Loans, net
|
|
|
Level 3
|
|
|
|
1,172,386
|
|
|
|
1,181,000
|
|
|
|
818,254
|
|
|
|
825,809
|
|
Accrued interest receivable
|
|
|
Level 2
|
|
|
|
5,001
|
|
|
|
5,001
|
|
|
|
3,968
|
|
|
|
3,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated maturity
|
|
|
Level 2
|
|
|
|
877,965
|
|
|
|
877,965
|
|
|
|
804,207
|
|
|
|
804,207
|
|
Time deposits
|
|
|
Level 2
|
|
|
|
374,695
|
|
|
|
376,738
|
|
|
|
229,565
|
|
|
|
229,751
|
|
Short-term borrowings
|
|
|
Level 2
|
|
|
|
86,220
|
|
|
|
86,166
|
|
|
|
12,853
|
|
|
|
12,617
|
|
Long-term borrowings
|
|
|
Level 2
|
|
|
|
52,127
|
|
|
|
52,040
|
|
|
|
35,915
|
|
|
|
35,902
|
|
Accrued interest payable
|
|
|
Level 2
|
|
|
|
311
|
|
|
|
311
|
|
|
|
142
|
|
|
|
142
|
|