UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year endedDecember 31, 20162019

OR

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

For the transition period from _______________ to _________________________.

 

Commission file number: 0-16084

 

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA23-2451943
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)

 

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

 

570-724-3411

(Registrant's telephone number including area code)

 

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

 

Title of Each Class Trading SymbolName of Each Exchange Whereon Which Registered
Common Stock Par Value $1.00 The CZNCNASDAQ StockCapital Market LLC

 

Securities registered pursuant to section 12(g) of the Act:None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ Nox

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨ Nox

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.         x

 

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

(Check one:)   

Large accelerated filer¨ Accelerated filerx Non-accelerated filer¨ Smaller reporting companyx Emerging growth company¨

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

 

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

Yes¨ Nox

 

The aggregate market value of the registrant's common stock held by non-affiliates at June 30, 2016,2019, the registrant’s most recently completed second fiscal quarter, was $237,079,156.$348,405,379.

 

The number of shares of common stock outstanding at February 9, 201713, 2020 was 12,143,776.13,762,993.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 20, 201716, 2020 are incorporated by reference into Parts III and IV of this report.

 

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TABLE OF CONTENTS

 

 Page(s)
Part I: 
Item 1. Business3-4
Item 1A. Risk Factors4-74-6
Item 1B. Unresolved Staff Comments76
Item 2. Properties7-87
Item 3. Legal Proceedings87
Item 4. Mine Safety Disclosure87
  
Part II. 
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities8-118-10
Item 6. Selected Financial Data12-1311-12
Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operations14-3913-36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk39-40
Item 8. Financial Statements and Supplementary Data41-8737-86
Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure8887
Item 9A. Controls and Procedures88-9087-88
Item 9B. Other Information9188
  
Part III: 
Item 10. Directors, Executive Officers and Corporate Governance9188
Item 11. Executive Compensation9188
Item 12. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters9188
Item 13. Certain Relationships and Related Transactions, andDirector Independence9188
Item 14. Principal Accountant Fees and Services9188
  
Part IV: 
Item 15. Exhibits and Financial Statement Schedules92-9489-92
Signatures9593

 

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PART I

 

ITEM 1. BUSINESS

 

Citizens & Northern Corporation (“Corporation”) is a holding company whose principal activity is community banking. The Corporation’s principal office is located in Wellsboro, Pennsylvania. The largest subsidiary is Citizens & Northern Bank (“C&N Bank” or the “Bank”). The Corporation’s other wholly-owned subsidiaries are Citizens & Northern Investment Corporation and Bucktail Life Insurance Company (“Bucktail”). Citizens & Northern Investment Corporation was formed in 1999 to engage in investment activities. Bucktail reinsures credit and mortgage life and accident and health insurance on behalf of C&N Bank.

The Corporation’s acquisition of Monument Bancorp, Inc. (“Monument”) was completed April 1, 2019. 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. Monument merged with and into the Corporation and Monument Bank merged with and into C&N Bank. Total purchase consideration was $42.7 million, including 1,279,825 shares of the Corporation’s common stock issued with a value of $33.1 million and cash paid totaling $9.6 million. Holders of Monument common stock prior to the consummation of the merger held approximately 9.4% of the Corporation’s common stock outstanding immediately following the merger.

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 at December 31, 2019. Pursuant to the plan of merger, Covenant will merge with and into the Corporation and Covenant Bank will merge with and into C&N Bank 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.

 

C&N Bank is a Pennsylvania banking institution that was formed by the consolidation of Northern National Bank of Wellsboro and Citizens National Bank of Towanda on October 1, 1971. Subsequent mergers included: First National Bank of Ralston in May 1972; Sullivan County National Bank in October 1977; Farmers National Bank of Athens in January 1984; and First National Bank of East Smithfield in May 1990. In 2005, the Corporation acquired Canisteo Valley Corporation and its subsidiary, First State Bank, a New York State chartered commercial bank with offices in Canisteo and South Hornell, NY. In 2010, the First State Bank operations were merged into C&N Bank and Canisteo Valley Corporation was merged into the Corporation. On May 1, 2007, the Corporation acquired Citizens Bancorp, Inc. (“Citizens”), with banking offices in Coudersport, Emporium and Port Allegany, Pennsylvania. Citizens Trust Company, the banking subsidiary of Citizens, was merged with and into C&N Bank as part of the transaction. C&N Bank has held its current name since May 6, 1975, at which time C&N Bank changed its charter from a national bank to a Pennsylvania bank.

 

C&N Bank provides an extensive range of banking services, including deposit and loan products for personal and commercial customers. The Bank also maintains a trust division that provides a wide range of financial services, such as 401(k) plans, retirement planning, estate planning, estate settlements and asset management. In January 2000, C&N Bank formed a subsidiary, C&N Financial Services Corporation (“C&NFSC”). C&NFSC is a licensed insurance agency that provides insurance products to individuals and businesses. In 2001, C&NFSC added a broker-dealer division, which offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. C&NFSC’s operations are not significant in relation to the total operations of the Corporation.

 

In December 2017, C&N Bank established Northern Tier Holding LLC, to acquire, hold and dispose of real property acquired by the Bank. C&N Bank is the sole member of Northern Tier Holding LLC.

Over the past few years, the Corporation has begun to execute on a growth strategy. Presently, a majority of C&N Bank’s operations are conducted in its legacy markets in the northern tier of Pennsylvania and southern tier of New York. In 2019, with the acquisition of Monument and the opening of a lending office in York, Pennsylvania, the Bank expanded into new markets in Southeastern and southcentral Pennsylvania. Management expects the acquisition of Covenant to be completed in 2020, which will further increase the volume of activity in southeastern Pennsylvania.

All phases of the Bank’s business are competitive. The Bank primarily competes in Tioga, Bradford, Sullivan, Lycoming, Potter, Cameron and McKean counties in Pennsylvania, and Steuben and Allegany counties in New York. The Bank competes with online financial institutions, local commercial banks headquartered in our market area as well asareas and other commercial banks with branches in our market area. SomeMany of the online financial institutions and some of the banks that have branches in our market areaareas are larger in overall size. With respect to lending activities and attracting deposits, the Bank also competes with savings banks, savings and loan associations, insurance companies, regulated small loan companies and credit unions. Also, the Bank competes with mutual funds for deposits. C&N Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management, brokerage and insurance services. The Bank is generally competitive with all financial institutions in our service areaareas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The Bank serves a diverse customer base and is not economically dependent on any small group of customers or on any individual industry.


 

Major initiatives within the last 5 years included the following:

·in April 2012, re-opened the Athens, PA, facility, which was damaged by flooding in September 2011;

·in 2013, worked with consultants on projects which resulted in ongoing increases in revenues from service charges on deposit accounts, starting primarily in the fourth quarter 2013, and ongoing reductions in electronic funds processing expenses;

·in 2014, approved a treasury stock repurchase program for repurchase up to 622,500 shares of the Corporation’s common stock, or approximately 5% of the Corporation’s outstanding shares at July 16, 2014. In the first four months of 2016, the Corporation repurchased the remainder of the shares authorized under the program. In total, 622,500 shares were repurchased for a total cost of $12,140,000, at an average price of $19.50 per share;

·in 2015, began an organization-wide effort to enhance customer relationships, growth and profitability, including working with consultants on enhanced employee engagement and customer service training, and hiring additional lending personnel to provide more access to commercial and mortgage lending opportunities;

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·in April 2016, approved a new treasury stock repurchase program authorizing repurchase of up to 600,000 shares of the Corporation's common stock or slightly less than 5% of the Corporation's issued and outstanding shares at April 19, 2016; and

·in 2016, submitted application for regulatory approval to establish a loan production office in Elmira, New York. Formal approval has been received, and the office is scheduled to open in the first quarter 2017.

Virtually all of the Corporation’s banking offices are located in the “Marcellus Shale,” an area extending across portions of New York State, Pennsylvania, Ohio, Maryland, West Virginia and Virginia. In recent years, most of the Pennsylvania counties in which the Corporation operates were significantly affected by an upsurge in natural gas exploration, as technological developments made exploration of the Marcellus Shale commercially feasible. After a surge of activity in 2009 through most of 2011, the market price of natural gas declined, causing Marcellus Shale natural gas exploration activity to slow, though some activity has continued to occur throughout the Corporation’s market area. Through December 31, 2016, the Corporation has not experienced significant credit issues as a result of the expansion and subsequent reduction in Marcellus Shale-related activity.

At December 31, 2016,2019, C&N Bank had total assets of $1,228,026,000,$1,638,285,000, total deposits of $990,241,000,$1,259,440,000, net loans outstanding of $743,362,000$1,172,386,000 and 291336 full-time equivalent employees.

 

Most activities of the Corporation and its subsidiaries are regulated by federal or state agencies. The primary regulatory relationships are described as follows:

 

·The Corporation is a bank holding company formed under the provisions of Section 3 of the Federal Reserve Act. The Corporation is under the direct supervision of the Federal Reserve and must comply with the reporting requirements of the Federal Bank Holding Company Act.

 

·C&N Bank is a state-chartered, nonmember bank, supervised by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Securities.

 

·C&NFSC is a Pennsylvania corporation. The Pennsylvania Department of Insurance regulates C&NFSC’s insurance activities. Brokerage products are offered through third party networking agreements.

 

·Bucktail is incorporated in the state of Arizona and supervised by the Arizona Department of Insurance.

 

A copy of the Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current events reports on Form 8-K, and amendments to these reports, will be furnished without charge upon written request to the Corporation’s Treasurer at P.O. Box 58, Wellsboro, PA 16901. Copies of these reports will be furnished as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission. The information is also available through the Corporation’s web site at www.cnbankpa.com.

 

ITEM 1A. RISK FACTORS

 

The Corporation is subject to the many risks and uncertainties applicable to all banking companies, as well as risks specific to the Corporation’s geographic locations. Although the Corporation seeks to effectively manage risks, and maintains a level of equity that exceeds the banking regulatory agencies’ thresholds for being considered “well capitalized” (see Note 18 to the consolidated financial statements), management cannot predict the future and cannot eliminate the possibility of credit, operational or other losses. Accordingly, actual results may differ materially from management's expectations. Some of the Corporation’s significant risks and uncertainties are discussed below.

 

Credit Risk from Lending Activities -A significant source of risk is the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most of the Corporation’s loans are secured, but some loans are unsecured. With respect to secured loans, the collateral securing the repayment of these loans may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when it is not. The Corporation has adopted underwriting and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss. Also, as discussed further in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis, the Corporation attempts to estimate the amount of losses that may be inherent in the portfolio through a quarterly evaluation process that includes several members of management and that addresses specifically identified problem loans, as well as other quantitative data and qualitative factors. Such risk management and accounting policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

 

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Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. For

Limited Geographic Diversification -The Corporation grants commercial, residential and personal loans to customers primarily in the Corporation’s legacy markets of the northern tier of Pennsylvania and southern tier of New York and, effective with the acquisition of Monument and opening of the York lending office in 2019, in southeastern 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 these regions. Deterioration in economic conditions could adversely affect the quality of the Corporation's loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.


Competition -All phases of the Corporation’s business are competitive. Some competitors are much larger in total assets and capitalization than the Corporation, have greater access to capital markets and can offer a broader array of financial services. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.

Growth Strategy–As described in Item 1, in 2019, the Corporation acquired Monument and opened a lending office in York, Pennsylvania. Also, in December 2019, the Corporation entered into an agreement to acquire Covenant. Further, management intends to continue to pursue additional information regarding interest rate risk, see Part II, Item 7A, "Quantitativeacquisition opportunities. The Corporation’s future financial performance will depend on its ability to execute its strategic plan and Qualitative Disclosures About Market Risk."manage its future growth. Failure to execute these plans could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

 

Breach of Information Security and Technology Dependence -The Corporation relies on software, communication, and information exchange on a variety of computing platforms and networks and over the Internet. Despite numerous safeguards, the Corporation cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted, and the Corporation could be exposed to claims from customers. Any of these results could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

 

Limited Geographic Diversification -The Corporation grants commercial, residential and personal loans to customers primarily in the Pennsylvania counties of Tioga, Bradford, Sullivan, Lycoming, Potter, Cameron and McKean, and in Steuben and Allegany Counties in New York State. 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. Deterioration in economic conditions could adversely affect the quality of the Corporation's loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.

Competition -All phases of the Corporation’s business are competitive. Some competitors are much larger in total assets and capitalization than the Corporation, have greater access to capital markets and can offer a broader array of financial services. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.

Government Regulation and Monetary Policy -The Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the manner in whichway the Corporation conducts its business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit the Corporation's shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects short-term interest rates and credit conditions, and any unfavorable change in these conditions could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.

 

Bank Secrecy Act and Related Laws and Regulations -These laws and regulations have significant implications for all financial institutions. In recent years, they have increased due diligence requirements and reporting obligations for financial institutions, created new crimes and penalties, and required the federal banking agencies, in reviewing merger and other acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering activities. Even innocent noncompliance and inconsequential failure to follow the regulations could result in significant fines or other penalties, which could have a material adverse impact on the Corporation's financial condition, results of operations or liquidity.

The Federal Home Loan Bank of Pittsburgh- Through its subsidiary (C&N Bank), the Corporation is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. The Corporation has a line of credit with the FHLB-Pittsburgh that is secured by a blanket lien on its loan portfolio. Access to this line of credit is critical if a funding need arises. However, there can be no assurance that the FHLB-Pittsburgh will be able to provide funding when needed, nor can there be assurance that the FHLB-Pittsburgh will provide funds specifically to the Corporation should its financial condition deteriorate and/or regulators prevent that access. The inability to access this source of funds could have a materially adverse effect on the Corporation’s financial flexibility if alternate financing is not available at acceptable interest rates. The failure of the FHLB-Pittsburgh or the FHLB system in general, may materially impair the Corporation’s ability to meet short- and long-term liquidity needs or to meet growth plans.

The Corporation owns common stock of the FHLB-Pittsburgh to qualify for membership in the FHLB system and access services from the FHLB-Pittsburgh. The FHLB-Pittsburgh faces a variety of risks in its operations including interest rate risk, counterparty credit risk, and adverse changes in its regulatory framework. In addition, the 11 Federal Home Loan Banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB cannot meet its obligations, other FHLBs can be called upon to make required payments. Such risks affecting the FHLB-Pittsburgh could adversely impact the value of the Corporation’s investment in the common stock of the FHLB-Pittsburgh and/or affect its access to credit.

Soundness of Other Financial Institutions- In addition to the FHLB-Pittsburgh, the Corporation maintains other credit facilities that provide it with additional liquidity. These facilities include secured and unsecured borrowings from the Federal Reserve Bank and third-party commercial banks. The Corporation believes that it maintains a strong liquidity position and that it is well positioned to withstand foreseeable market conditions. However, legal agreements with counterparties typically include provisions allowing them to restrict or terminate the Corporation’s access to these credit facilities with or without advance notice and at their sole discretion.


Financial institutions are interconnected because of trading, clearing, counterparty, and other relationships. Financial market conditions have been negatively impacted in the past and such disruptions or adverse changes in the Corporation's results of operations or financial condition could, in the future, have a negative impact on available sources of liquidity. Such a situation may arise due to circumstances that are outside the Corporation’s control, such as general market disruptions or operational problems affecting the Corporation or third parties. The Corporation’s efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in available liquidity. In such events, the Corporation’s cost of funds may increase, thereby reducing net interest income, or the Corporation may need to sell a portion of its securities and/or loan portfolio, which, depending upon market conditions, could necessitate realizing a loss.

Securities Markets– The fair value of the Corporation's available-for-sale debt securities, as well as the revenues the Corporation earns from its Trust and Financial Management and brokerage services, are sensitive to price fluctuations and market events.

Declines in the values of the Corporation’s securities holdings, combined with adverse changes in the expected cash flows from these investments, could result in other-than-temporary impairment charges. For additional information regarding debt securities, see the “Securities” section of Management’s Discussion and Analysis and Note 7 to the consolidated financial statements.

The Corporation's Trust and Financial Management revenue is determined, in part, from the value of the underlying investment portfolios. Accordingly, if the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation's revenue could be negatively impacted. In addition, the Corporation's ability to sell its brokerage services is dependent, in part, upon consumers' level of confidence in securities markets.

Mortgage Banking – In SeptemberSince 2009, the Corporation entered into an agreement to originatehas originated and sellsold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation’s mortgage sales activity under this program was not significant in 2009, but has subsequently increased. Inprogram. Since 2014, the Corporation entered into an agreementhas also originated and in June 2014 began to originate and sellsold residential mortgage loans to the secondary market through the MPFXMPF Original program, which is alsoprogram. Both of these programs are administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, 2016,2019, the total outstanding balance of residential mortgages sold and serviced through the two programs amounted to $163,296,000.$178,446,000. The Corporation must strictly adhere to the MPF Xtra and MPFXMPF Original program guidelines for origination, underwriting and servicing loans, and failure to do so may result in the Corporation being forced to repurchase loans or being dropped from the program. As of December 31, 2016,2019, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,852,000.$1,770,000. If the volume of such forced repurchases of loans were to increase significantly, or if the Corporation were to be dropped from the programs, it could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

 

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Securities Markets– The fair value of the Corporation's available-for-sale securities, as well as the revenues the Corporation earns from its Trust and Financial Management and brokerage services, are sensitive to price fluctuations and market events.

Declines in the values of the Corporation’s securities holdings, combined with adverse changes in the expected cash flows from these investments, could result in other-than-temporary impairment charges.

A portion of the Corporation's securities portfolio consists of obligations of states and political subdivisions (also known as municipal bonds). As discussed in more detail in the “Income Taxes” section of Management’s Discussion and Analysis, the Trump Administration and the U.S. Congress have recently been discussing the possibility of lowering corporate income tax rates. If corporate income tax rates were lowered, fully taxable-equivalent yields on tax-exempt securities (municipal bonds) would decrease from their recent levels, which may result in a reduction in the fair value of such securities held at December 31, 2016.

For additional information regarding debt securities, see the “Securities” section of Management’s Discussion and Analysis and Note 7 to the consolidated financial statements.

The Corporation's Trust and Financial Management revenue is determined, in part, from the value of the underlying investment portfolios. Accordingly, if the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation's revenue could be negatively impacted. In addition, the Corporation's ability to sell its brokerage services is dependent, in part, upon consumers' level of confidence in securities markets.

The Federal Home Loan Bank of Pittsburgh- Through its subsidiary (C&N Bank), the Corporation is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. The Corporation has a line of credit with the FHLB-Pittsburgh that is secured by a blanket lien on its loan portfolio. Access to this line of credit is critical if a funding need arises. However, there can be no assurance that the FHLB-Pittsburgh will be able to provide funding when needed, nor can there be assurance that the FHLB-Pittsburgh will provide funds specifically to the Corporation should its financial condition deteriorate and/or regulators prevent that access. The inability to access this source of funds could have a materially adverse effect on the Corporation’s financial flexibility if alternate financing is not available at acceptable interest rates. The failure of the FHLB-Pittsburgh or the FHLB system in general, may materially impair the Corporation’s ability to meet short- and long-term liquidity needs or to meet growth plans.

The Corporation owns common stock of the FHLB-Pittsburgh in order to qualify for membership in the FHLB system and access services from the FHLB-Pittsburgh. The FHLB-Pittsburgh faces a variety of risks in its operations including interest rate risk, counterparty credit risk, and adverse changes in its regulatory framework. In addition, the 11 Federal Home Loan Banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB cannot meet its obligations, other FHLBs can be called upon to make required payments. Such risks affecting the FHLB-Pittsburgh could adversely impact the value of the Corporation’s investment in the common stock of the FHLB-Pittsburgh and/or affect its access to credit.

Soundness of Other Financial Institutions- In addition to the FHLB-Pittsburgh, the Corporation maintains other credit facilities that provide it with additional liquidity. These facilities include secured and unsecured borrowings from the Federal Reserve Bank and third-party commercial banks. The Corporation believes that it maintains a strong liquidity position and that it is well positioned to withstand foreseeable market conditions. However, legal agreements with counterparties typically include provisions allowing them to restrict or terminate the Corporation’s access to these credit facilities with or without advance notice and at their sole discretion.

Financial institutions are interconnected as a result of trading, clearing, counterparty, and other relationships. Financial market conditions have been negatively impacted in the past and such disruptions or adverse changes in the Corporation's results of operations or financial condition could, in the future, have a negative impact on available sources of liquidity. Such a situation may arise due to circumstances that are outside the Corporation’s control, such as general market disruptions or operational problems affecting the Corporation or third parties. The Corporation’s efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in available liquidity. In such events, the Corporation’s cost of funds may increase, thereby reducing net interest income, or the Corporation may need to sell a portion of its securities and/or loan portfolio, which, depending upon market conditions, could necessitate realizing a loss.

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FDIC Insurance Assessments -In 2008 and 2009, higher levels of bank failures dramatically increased the resolution costs of the Federal Deposit Insurance Corporation, or the FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress increased federal deposit insurance coverage, placing additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, in 2009 the FDIC increased assessment rates. As a result of lowering assessment levels for the Corporation and other US banks, the Corporation’s 2016 FDIC assessment expense decreased to $488,000 from $603,000 in 2015. Although the Corporation’s total expenses from FDIC assessments have steadily decreased from $2,092,000 in 2009, the Corporation is generally unable to control the cost of the premiums. If a significant number of bank or financial institution failures occur, the Corporation may be required to pay higher FDIC premiums. Future increases in FDIC insurance premiums or additional special assessments may materially adversely affect the Corporation’s results of operations.

Bank Secrecy Act and Related Laws and Regulations -These laws and regulations have significant implications for all financial institutions. They increase due diligence requirements and reporting obligations for financial institutions, create new crimes and penalties, and require the federal banking agencies, in reviewing merger and other acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering activities. Even innocent noncompliance and inconsequential failure to follow the regulations could result in significant fines or other penalties, which could have a material adverse impact on the Corporation's financial condition, results of operations or liquidity.

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.


 

ITEM 2. PROPERTIES

 

TheExcept as noted below, the Bank owns each of its properties, except for the branch facilities located at 130 Court Street, Williamsport, PA, and at 2 East Mountain Avenue, South Williamsport, PA, which are leased.operating properties. All of the properties are in good condition. None of the owned properties are subject to encumbrance.

 

A listing of properties is as follows:

 

Main administrative offices:

90-92 Main Streetor10 Nichols Street
Wellsboro, PA 16901 Wellsboro, PA 16901

 

Branch offices –- Citizens & Northern Bank:

428 S. Main Street 514 Main Street 2 East Mountain Avenue **41 Main Street
Athens, PA  18810 Laporte, PA  18626Tioga, PA  16946
10 North Main Street4534 Williamson Trail428 Main Street**
Coudersport, PA  16915Liberty, PA  16930Towanda, PA  18848
465 North Main Street1085 S. Main Street64 Elmira Street
Doylestown, PA 18901Mansfield, PA  16933Troy, PA  16947
111 W. Main Street612 James Monroe Avenue90-92 Main Street
Dushore, PA  18614Monroeton, PA  18832Wellsboro, PA  16901
563 Main Street3461 Route 405 Highway1510 Dewey Avenue
East Smithfield, PA  18817Muncy, PA  17756Williamsport, PA  17701
104 W. Main Street33 Swamp Road, Unit 7**130 Court Street**
Elkland, PA  16920Newtown, PA 18940Williamsport, PA  17701
135 East Fourth Street100 Maple Street1467 Golden Mile Road
Emporium, PA  15834Port Allegany, PA  16743Wysox, PA  18854
230 Railroad Street1827 Elmira Street2 East Mountain Avenue**
Jersey Shore, PA  17740Sayre, PA  18840 South Williamsport, PA 17702
     
10 North Main Street 4534 Williamson Trail41 Main Street
Coudersport, PA  16915Liberty, PA  16930Tioga, PA  16946
 
111 W. Main Street1085 S. Main Street428 Main Street
Dushore, PA  18614Mansfield, PA  16933Towanda, PA  18848
563 Main Street612 James Monroe Avenue64 Elmira Street
East Smithfield, PA 18817Monroeton, PA  18832Troy, PA  16947
104 W. Main Street3461 Route 405 Highway90-92 Main Street
Elkland, PA  16920Muncy, PA  17756Wellsboro, PA  16901
135 East Fourth Street100 Maple Street1510 Dewey Avenue
Emporium, PA  15834Port Allegany, PA  16743Williamsport, PA  17701
230 Railroad Street24 Thompson Street130 Court Street **
Jersey Shore, PA  17740Ralston, PA  17763Williamsport, PA  17701
102 E. Main Street 1827 Elmira Street1467 Golden Mile Road
Knoxville, PA  16928Sayre, PA  18840Wysox, PA  18854
3 Main Street 6250 County Rte 64
 Knoxville, PA  17740
Canisteo, NY 14823 Hornell, NY 14843

7

 

Loan production officeoffices of Citizens & Northern Bank (opening first quarter 2017):Bank:

250 East Water Street

Elmira, NY 14901

250 East Water Street2951 Whiteford Road Suite 102**65 West Street Road Suite A201**
Elmira, NY 14901York, PA 17402Warminster, PA 18974

 

Facilities management office:

13 Water Street

13 Water Street
Wellsboro, PA 16901

** designates leased branch facility

 

ITEM 3. LEGAL PROCEEDINGS

 

The Corporation and the Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material adverse effect on the Corporation’s financial condition or results of operations.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.


 

PART II

 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

QUARTERLY SHARE DATA

Trades of the Corporation’s stock are executed through various brokers who maintain a market in the Corporation’s stock. The Corporation’s stock is listed on the NASDAQ Capital Market with the trading symbol CZNC. As of December 31, 2016,2019, there were 2,2602,094 shareholders of record of the Corporation’s common stock.

 

The following table sets forth the high and low sales prices of the common stock and dividends declared per quarter during 20162019 and 2015.2018.

 

    2016       2015     2019  2018 
      Dividend       Dividend       Dividend       Dividend 
      Declared       Declared       Declared       Declared 
      per       per       per       per 
 High Low Quarter High Low Quarter  High  Low  Quarter  High  Low  Quarter 
First quarter $20.99  $19.26  $0.26  $21.50  $19.01  $0.26  $27.07  $23.60  $0.37  $25.41  $22.00  $0.27 
Second quarter  21.00   19.40   0.26   21.17   19.16   0.26   29.25   25.02   0.27   27.72   22.64   0.27 
Third quarter  22.67   20.00   0.26   20.73   19.25   0.26   27.00   22.52   0.27   28.99   25.42   0.27 
Fourth quarter  26.57   20.54   0.26   21.45   19.07   0.26   28.58   24.23   0.27   28.48   23.72   0.27 

 

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.

 

Effective July 17, 2014, the Corporation established a treasury stock repurchase program authorizing repurchase of up to 622,500 shares of the Corporation’s common stock, or approximately 5% of the Corporation’s issued and outstanding shares at July 16, 2014. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases under the program could be made from time to time in the open market at prevailing prices, or through privately negotiated transactions. In the first four months of 2016, the Corporation repurchased the remainder of the shares authorized under the program. In total, 622,500 shares were repurchased for a total cost of $12,140,000, at an average price of $19.50 per share.

Effective April 21, 2016, the Corporation’s Board of Directors approved a new treasury stock repurchase program. Under the newly approved stock repurchasethis program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation's common stock or slightly less than 5% of the Corporation's issued and outstanding shares at April 19, 2016. Consistent with the previous program, theThe Board of Directors’ April 21, 2016 authorization provides that: (1) the new treasury stock repurchase program shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. To date, no purchases have been made under this repurchase program.

 

8

The following table sets forth a summary of purchases by the Corporation, in the open market, of its equity securities during the fourth quarter 2016:2019:

 

Period Total Number
 of Shares
Purchased		  Average Price
Paid per Share		  Total Number of
Shares Purchased as
 Part of Publicly
Announced Plans or
Programs		  Maximum Number of
Shares that May Yet be
 Purchased Under the Plans
or Programs		 
October 1 - 31, 2016  0  $-   0   600,000 
November 1 - 30, 2016  0  $-   0   600,000 
December 1 - 31, 2016  0  $-   0   600,000 
Period  Total Number of Shares
Purchased		  Average Price Paid per
Share		  Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs		  Maximum Number of
Shares that May Yet be
Purchased Under the
Plans or Programs		 
October 1 - 31, 2019  0  $-  0  600,000 
November 1 - 30, 2019  0  $-  0  600,000 
December 1 - 31, 2019  0  $-  0  600,000 

 

9

PERFORMANCE GRAPH

 

Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the Russell 2000 and a Peer Group Index of similar banking organizations selected by the Corporation for the five-year period commencing December 31, 20112014 and ended December 31, 2016.2019. The index values are market-weighted dividend-reinvestment numbers, which measure the total return for investing $100.00 five years ago. This meets Securities & Exchange Commission requirements for showing dividend reinvestment share performance over a five-year period and measures the return to an investor for placing $100.00 into a group of bank stocks and reinvesting any and all dividends into the purchase of more of the same stock for which dividends were paid.

 

 

 

     Period Ending    
Index 12/31/11  12/31/12  12/31/13  12/31/14  12/31/15  12/31/16 
Citizens & Northern Corporation  100.00   106.83   122.52   129.48   138.55   181.75 
Russell 2000  100.00   116.35   161.52   169.43   161.95   196.45 
CZNC Peer Group Index*  100.00   124.14   157.02   172.35   180.02   253.70 

  Period Ending 
Index 12/31/14  12/31/15  12/31/16  12/31/17  12/31/18  12/31/19 
Citizens & Northern Corporation  100.00  107.01  140.37  134.19  154.24  172.49 
Russell 2000 Index  100.00  95.59  115.95  132.94  118.30  148.49 
Peer Group  100.00  106.24  145.30  171.70  158.94  186.98 

 

The Corporation’s peer group consists ofPeer Group includes all publicly traded (who file financial statementsSEC filing Commercial Banks & Thrifts within NJ, NY, OH and PA with the Securities & Exchange Commission) commercial banks and thrifts within New Jersey, New York, Ohio and Pennsylvania with total assets between $750 million$750M and $3.5 billion$3.5B as of September 30, 2016.9/30/2019

 

The data for this graph was obtained from SNL Financial LC, Charlottesville, VA.Source: S&P Global Market Intelligence

© 2020

 

10

9

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table sets forth information concerning the Stock Incentive Plan and Independent Directors Stock Incentive Plan, both of which have been approved by the Corporation’s shareholders. The figures shown in the table below are as of December 31, 2016.2019.

 

        Number of 
  Number of  Weighted-  Securities 
  Securities to be  average  Remaining 
  Issued Upon  Exercise  for Future 
  Exercise of  Price of  Issuance Under 
  Outstanding  Outstanding  Equity Compen- 
  Options  Options  sation Plans 
Equity compensation plans  approved by shareholders  202,037  $18.58   302,550 
             
Equity compensation plans  not approved by shareholders  0   N/A   0 
        Number of 
  Number of  Weighted-  Securities 
  Securities to be  average  Remaining 
  Issued Upon  Exercise  for Future 
  Exercise of  Price of  Issuance Under 
  Outstanding  Outstanding  Equity Compen- 
  Options  Options  sation Plans 
Equity compensation plans approved by shareholders  75,897  $18.69   333,832 
             
Equity compensation plans not approved by shareholders  0   N/A   0 

 

More details related to the Corporation’s equity compensation plans are provided in Notes 1 and 13 to the consolidated financial statements.

 

11


ITEM 6. SELECTED FINANCIAL DATA

 

  As of or for the Year Ended December 31,   
INCOME STATEMENT (In Thousands) 2016  2015  2014  2013  2012 
Interest and fee income $44,098  $44,519  $46,009  $48,914  $56,632 
Interest expense  3,693   4,602   5,122   5,765   9,031 
Net interest income  40,405   39,917   40,887   43,149   47,601 
Provision for loan losses  1,221   845   476   2,047   288 
Net interest income after provision for loan losses  39,184   39,072   40,411   41,102   47,313 
Noninterest income excluding securities gains  15,511   15,478   15,420   16,451   16,383 
Net impairment losses recognized in earnings from                    
 available-for-sale securities  0   0   0   (25)  (67)
Net realized gains on available-for-sale securities  1,158   2,861   1,104   1,743   2,749 
Loss on prepayment of debt  0   2,573   0   1,023   2,333 
Noninterest expense excluding loss on prepayment of debt  34,744   33,030   34,157   33,471   32,914 
Income before income tax provision  21,109   21,808   22,778   24,777   31,131 
Income tax provision  5,347   5,337   5,692   6,183   8,426 
Net income $15,762  $16,471  $17,086  $18,594  $22,705 
                     
PER COMMON SHARE:                    
Basic earnings per share $1.30  $1.35  $1.38  $1.51  $1.86 
Diluted earnings per share $1.30  $1.35  $1.38  $1.50  $1.85 
Cash dividends declared per share $1.04  $1.04  $1.04  $1.00  $0.84 
Book value per common share at period-end $15.36  $15.39  $15.34  $14.49  $14.89 
Tangible book value per common share at period-end $14.37  $14.41  $14.36  $13.51  $13.91 
Weighted average common shares outstanding - basic  12,098,129   12,211,941   12,390,067   12,352,383   12,235,748 
Weighted average common shares outstanding - diluted  12,128,364   12,233,773   12,412,050   12,382,790   12,260,208 
END OF PERIOD BALANCES (Dollars In Thousands)                    
Available-for-sale securities $395,077  $420,290  $516,807  $482,658  $472,577 
Gross loans  751,835   704,880   630,545   644,303   683,910 
Allowance for loan losses  8,473   7,889   7,336   8,663   6,857 
Total assets  1,242,292   1,223,417   1,241,963   1,237,695   1,286,907 
Deposits  983,843   935,615   967,989   954,516   1,006,106 
Borrowings  64,629   92,263   78,597   96,723   89,379 
Stockholders' equity  186,008   187,487   188,362   179,472   182,786 
Common shares outstanding  12,113,228   12,180,623   12,279,980   12,390,063   12,274,035 
AVERAGE BALANCES (In Thousands)                    
Total assets  1,229,866   1,243,209   1,239,897   1,237,096   1,305,163 
Earning assets  1,147,549   1,159,298   1,155,401   1,145,340   1,199,538 
Gross loans  723,076   657,727   627,753   656,495   700,241 
Deposits  970,447   968,201   965,418   964,031   1,008,469 
Stockholders' equity  188,373   188,905   185,469   181,412   175,822 

 12As of or for the Year Ended December 31,
INCOME STATEMENT (In Thousands) 2019  2018  2017  2016  2015 
Interest and dividend income $64,771  $50,328  $45,863  $44,098  $44,519 
Interest expense  10,283   4,625   3,915   3,693   4,602 
Net interest income  54,488   45,703   41,948   40,405   39,917 
Provision for loan losses  849   584   801   1,221   845 
Net interest income after provision for loan losses  53,639   45,119   41,147   39,184   39,072 
Noninterest income excluding securities gains  19,284   18,597   16,153   15,511   15,478 
Net gains on securities  23   2,033   257   1,158   2,861 
Loss on prepayment of debt  0   0   0   0   2,573 
Merger-related expenses  4,099   328   0   0   0 
Noninterest expense excluding loss on prepayment of debt and merger-related expenses  45,438   39,158   36,967   34,744   33,030 
Income before income tax provision  23,409   26,263   20,590   21,109   21,808 
Income tax provision  3,905   4,250   7,156   5,347   5,337 
Net income $19,504  $22,013  $13,434  $15,762  $16,471 
Net income attributable to common shares $19,404  $21,903  $13,365  $15,677  $16,387 

PER COMMON SHARE:               
Basic earnings per share $1.46  $1.79  $1.10  $1.30  $1.35 
Diluted earnings per share $1.46  $1.79  $1.10  $1.30  $1.35 
Cash dividends declared per share $1.18  $1.08  $1.04  $1.04  $1.04 
Book value per common share at period-end $17.82  $16.02  $15.43  $15.36  $15.39 
Tangible book value per common share at period-end $15.66  $15.05  $14.45  $14.37  $14.41 
Weighted average common shares outstanding - basic  13,298,736   12,219,209   12,115,840   12,032,820   12,149,252 
Weighted average common shares outstanding - diluted  13,321,559   12,257,368   12,155,136   12,063,055   12,171,084 
END OF PERIOD BALANCES (Dollars In Thousands)                    
Available-for-sale debt securities $346,723  $363,273  $355,937  $394,106  $417,904 
Gross loans  1,182,222   827,563   815,713   751,835   704,880 
Allowance for loan losses  9,836   9,309   8,856   8,473   7,889 
Total assets  1,654,145   1,290,893   1,276,959   1,242,292   1,223,417 
Deposits  1,252,660   1,033,772   1,008,449   983,843   935,615 
Borrowings and subordinated debt  144,847   48,768   70,955   64,629   92,263 
Stockholders' equity  244,452   197,368   188,443   186,008   187,487 
Common shares outstanding  13,716,445   12,319,330   12,214,525   12,113,228   12,180,623 
AVERAGE BALANCES (In Thousands)                    
Total assets  1,540,469   1,276,140   1,247,759   1,229,866   1,243,209 
Earning assets  1,437,993   1,205,429   1,169,569   1,147,549   1,159,298 
Gross loans  1,057,559   822,346   780,640   723,076   657,727 
Deposits  1,213,687   1,027,831   990,917   970,447   968,201 
Stockholders' equity  229,446   187,895   188,958   188,373   188,905 

11

 

 

ITEM 6. SELECTED FINANCIAL DATA (Continued)

 

  As of or for the Year Ended December 31, 
  2016  2015  2014  2013  2012 
KEY RATIOS                    
Return on average assets  1.28%  1.32%  1.38%  1.50%  1.74%
Return on average equity  8.37%  8.72%  9.21%  10.25%  12.91%
Average equity to average assets  15.32%  15.19%  14.96%  14.66%  13.47%
Net interest margin (1)  3.76%  3.69%  3.80%  4.05%  4.26%
Efficiency (2)  59.22%  56.66%  57.59%  53.27%  48.82%
Cash dividends as a % of diluted earnings per share  80.00%  77.04%  75.36%  66.67%  45.41%
Tier 1 leverage  14.27%  14.31%  13.89%  13.78%  12.53%
Tier 1 risk-based capital  22.48%  23.29%  26.26%  25.15%  22.86%
Total risk-based capital  23.60%  24.40%  27.60%  26.60%  24.01%
Tangible common equity/tangible assets  14.15%  14.49%  14.34%  13.66%  13.39%
Nonperforming assets/total assets  1.43%  1.31%  1.34%  1.53%  0.82%
Nonperforming loans/total loans  2.07%  2.09%  2.45%  2.80%  1.41%
Allowance for loan losses/total loans  1.13%  1.12%  1.16%  1.34%  1.00%
Net charge-offs/average loans  0.09%  0.04%  0.29%  0.04%  0.16%

(1) Rates of return on tax-exempt securities and loans are calculated on a fully-taxable equivalent basis.

As of or for the Year Ended December 31,
KEY RATIOS 2019  2018  2017  2016  2015 
Return on average assets  1.27%  1.72%  1.08%  1.28%  1.32%
Return on average equity  8.50%  11.72%  7.11%  8.37%  8.72%
Average equity to average assets  14.89%  14.72%  15.14%  15.32%  15.19%
Net interest margin (1)  3.86%  3.90%  3.82%  3.76%  3.69%
Efficiency (2)  60.73%  59.69%  60.74%  59.22%  56.66%
Cash dividends as a % of diluted earnings per share  80.82%  60.34%  94.55%  80.00%  77.04%
Tier 1 leverage  13.10%  14.78%  14.23%  14.27%  14.31%
Tier 1 risk-based capital  19.19%  23.24%  21.95%  22.48%  23.29%
Total risk-based capital  20.70%  24.42%  23.07%  23.60%  24.40%
Tangible common equity/tangible assets  13.22%  14.50%  13.95%  14.15%  14.49%
Nonperforming assets/total assets  0.80%  1.37%  1.47%  1.43%  1.31%
Nonperforming loans/total loans  0.88%  1.94%  2.10%  2.07%  2.09%
Allowance for loan losses/total loans  0.83%  1.12%  1.09%  1.13%  1.12%
Net charge-offs/average loans  0.03%  0.02%  0.05%  0.09%  0.04%
                     
(1) Rates of return on tax-exempt securities and loans are calculated on a fully-taxable equivalent basis.                    
                     
(2) The efficiency ratio is calculated by dividing: (a) total noninterest expense excluding merger-related expenses and losses from prepayment of debt, by (b) the sum of net interest income (including income from tax-exempt securities and loans on a fully-taxable equivalent basis) and noninterest income excluding securities gains or losses.                    

 

(2) The efficiency ratio is calculated by dividing: (a) total noninterest expense excluding losses from prepayment of debt, by (b) the sum of net interest income (including income from tax-exempt securities and loans on a fully-taxable equivalent basis) and noninterest income excluding securities gains or losses.

13


 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements in this section and elsewhere in this Annual Report on Form 10-K are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:

 

·changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
·changes in general economic conditions
·legislative or regulatory changes
·downturn in demand for loan, deposit and other financial services in the Corporation’s market area
·increased competition from other banks and non-bank providers of financial services
·technological changes and increased technology-related costs
·changes in accounting principles, or the application of generally accepted accounting principles.principles
·failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

EARNINGS OVERVIEWCOMPLETED AND PENDING ACQUISITIONS

The Corporation’s acquisition of Monument Bancorp, Inc. (“Monument”) was completed April 1, 2019. 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. Total purchase consideration was $42.7 million, including 1,279,825 shares of the Corporation’s common stock issued with a value of $33.1 million and cash paid totaling $9.6 million. Holders of Monument common stock prior to the consummation of the merger held approximately 9.4% of the Corporation’s common stock outstanding immediately following the merger.

 

In 2016,connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with no realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately no realized gain or loss. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition. In the fourth quarter 2019, the Corporation recorded adjustments to various assets acquired and liabilities assumed from the merger, resulting in a net incomereduction in goodwill of $230,000.

Merger-related expenses associated with the Monument transaction totaled $15,762,000, or $1.30 per$3.8 million for the year ended December 31, 2019, including 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.

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 share - basicstock. Covenant is the holding company for Covenant Bank, which operates banking offices in Bucks and diluted, as compared to $1.35 per share – basic and diluted in 2015 and $1.38 per share - basic and diluted in 2014. The results for 2016 represented a return on averageChester Counties of PA. Covenant had total assets of 1.28%$516 million at December 31, 2019. The merger is subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and a return on average equityapproval of 8.37%.Covenant’s shareholders. The merger is expected to close in the third quarter 2020. In the fourth quarter 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.

 

2016 vs. 2015

13

EARNINGS OVERVIEW

 

Net income for the year ended December 31, 2019 was $19,504,000, or $1.46 per share – diluted for 2016 was 3.7% lower than in 2015. Some of the more significant highlights related to annual earnings in 2016share as compared to 2015 are2018 net income of $22,013,000 or $1.79 per share. Earnings for the year ended December 31, 2019 were significantly impacted by the Monument acquisition, including the effects of merger-related expenses described earlier. Earnings for the year ended December 31, 2018 included the benefit of a realized gain on a restricted equity security (Visa Inc. Class B stock) partially offset by the impact of a loss on available-for-sale debt securities. In 2018, pre-tax realized gains on Visa Class B stock totaled $2.3 million while pre-tax realized losses on available-for-sale securities totaled $288,000. Excluding the impact of merger-related expenses and net securities gains, adjusted (non-U.S. GAAP) earnings for 2019 would be $22,756,000 or $1.70 per share as compared to similarly adjusted (non-GAAP) earnings of $20,712,000 or $1.68 per share for 2018.

The following table provides a reconciliation of the Corporation’s 2019 earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses and realized gains and losses on securities. Management believes disclosure of 2019 and 2018 earnings results, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes.

RECONCILIATION OF NET INCOME AND

DILUTED EARNINGS PER SHARE TO NON-U.S.

GAAP MEASURE 

  Year Ended Dec. 31, 2019  Year Ended Dec. 31, 2018 
  Income        Diluted  Income        Diluted 
  Before  Income     Earnings  Before  Income     Earnings 
  Income  Tax     per  Income  Tax     per 
  Tax  Provision  Net  Common  Tax  Provision  Net  Common 
(Dollars In Thousands, Except Per Share Data) Provision  (1)  Income  Share  Provision  (1)  Income  Share 
Results as Presented Under U.S. GAAP $23,409  $3,905  $19,504  $1.46  $26,263  $4,250  $22,013  $1.79 
Add: Merger-Related Expenses  4,099   829   3,270       328   23   305     
Less: Gain on Restricted Equity Security                  (2,321)  (487)  (1,834)    
Net (Gains) Losses on Available-for-sale Debt                                
Securities  (23)  (5)  (18)      288   60   228     
Adjusted Earnings, Excluding Effect of Merger-                                
Related Expenses, Gain on Restricted Equity                                
Security and Net Gains and Losses on                                
Available-for-Sale Debt Securities                                
(Non-U.S. GAAP) $27,485  $4,729  $22,756  $1.70  $24,558  $3,846  $20,712  $1.68 

(1)Income tax has been allocated based on an income tax rate of 21%. The tax benefit associated with merger-related expenses has been adjusted to reflect the estimated nondeductible portion of the expenses.

In 2019, interest income on loans acquired from Monument, partially offset by interest expense on deposits, borrowings and subordinated debt assumed, contributed to growth in net interest income, while costs associated with the expansion contributed to an increase in noninterest expenses.

Other significant variances were as follows:

 

·Net interest income was $488,000 (1.2%up $8,785,000 (19.2%) higher thanin 2019 over 2018, reflecting the comparable total for 2015.benefits of growth, particularly from the Monument acquisition as well as loan growth from the York office (opened in March 2019) and organic loan and deposit growth from the Corporation’s legacy markets. The net interest margin was 3.76%,3.86% for 2019, down from 3.90% in 2018. In 2019, the net interest margin included a net positive impact from accretion and amortization of purchase accounting adjustments of 0.04%. The average yield on earning assets in 2019 was up 0.30% over 2018, while the average rate paid on interest-bearing liabilities was up 0.46% between periods. The Monument acquisition and other factors contributed to growth in average noninterest-bearing demand deposits of $39.4 million and average stockholders’ equity (excluding accumulated other comprehensive income) of $33.8 million, which was 0.07% higher thanhelped to offset some of the impact on the margin for 2015, reflectingof compression in the benefits of a lower cost of borrowed funds and a more favorable mix of earning assets. The average balance of total borrowed funds was $62,516,000 at an average interest rate of 2.57% in 2016, down from average borrowings of $77,642,000 at an average interest rate of 3.45% in 2015. Average total loans outstanding were higher by $65.3 million (9.9%) in 2016 as compared to 2015, while average total available-for-sale securities were lower by $74.2 million. Average total deposits increased $2.2 million (0.2%).spread.

 

·The provision for loan losses was $1,221,000 in 2016, an increase of $376,000 over 2015. In 2016, the provision included the impact of increasing the allowance for loan losses for the effects of loan growth and slight increases in net charge-off experience and qualitative factors used in determining the collectively evaluated portion of the allowance. In comparison, in 2015 the provision also reflected the effects of loan growth, but the qualitative factors used in determining a portion of the collectively determined allowance decreased slightly during the period. Also in 2016, the provision included an increase of $148,000 as compared to 2015 from changes in specific allowances on loans individually identified as impaired, adjusted for the impact of net charge-offs.

·Total noninterest revenue for 2016 increased $33,000 (0.2%) over 2015. Net gains from sales of loans increased $294,000 (40.0%), reflecting higher volume of sales, and Trust and Financial Management revenue increased $134,000 (2.9%). Other operating income increased $35,000 (2.1%), including an increase of $148,000 from redemptions of tax credits and increases in lending-related fees of $80,000, while this category included a gain of $212,000 from a split-dollar life insurance policy in 2015. Service charges on deposit accounts decreased $169,000 (3.5%) in 2016, reflecting a reduction in consumer overdraft volume. The fair value of mortgage servicing rights decreased $282,000 in 2016, which was a larger decrease by $120,000 as compared to 2015. Brokerage revenue decreased $83,000 (9.9%), as the volume of sales of annuities declined.

 14 

 

 

·In 2016, realized gains from securities totaled $1,158,000, including gains from sales of bank stocks of $1,125,000. In 2015, the Corporation generated gains from sales of securities totaling $2,861,000, including gains from sales of bank stocks of $2,220,000, and also incurredThe provision for loan losses of $2,573,000$849,000 for 2019 was higher than the 2018 provision by $265,000. The higher provision in 2019 resulted mainly from prepaymentssignificant loan growth. The 2019 provision included a net reduction in expense of $232,000 related to specific loans (net decrease in specific allowances on loans of $554,000 and net charge-offs of $322,000), a borrowingnet $1,193,000 charge attributable to loan growth and a net reduction in expense of $112,000 related to changes in historical loss and qualitative factors and the secondunallocated portion of the allowance. In comparison, the 2018 provision included $457,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, a charge of $178,000 due to loan growth and fourth quarters totaling $34 million. In the fourth quarter 2016, the Corporation completed its programa net reduction in expense of bank stock sales that had begun$51,000 related to decreases in 2015,historical loss and had no remaining investments in bank stocks at December 31, 2016.qualitative factors.

 

·Noninterest expenses, excluding losses on prepayment of borrowings,income increased $687,000, or 3.7%, in 2016 exceeded the amount for 2015 by $1,714,000 (5.2%). Salaries2019 over 2018. Total trust and wages expensebrokerage revenue increased $729,000 (5.0%). Several$516,000 as trust revenue reflected growth in assets under management from market value appreciation as well as new positions were established in the latter portion of 2015business and early 2016, including new positions established for lending, lending support, information technology, training, human resources and marketing functions. Professional fees expensebrokerage revenue increased $488,000, including increases related to employee sales and service training, information technology and marketing. Other operating expense increased $399,000 (7.8%), including increases in other real estate expenses of $123,000, donations and public relations-related expenses of $94,000 and education and training-related expenses of $60,000. Also, other operating expense was reduced in 2015 by $69,000 as a result of a recovery of sales tax previously paid.

·The provision for income tax totaled $5,347,000 in 2016, or an effective tax rate of 25.3% of pre-tax income. In comparison, the provision for income tax of $5,337,000 in 2015 represented a 24.5% effective rate. The higher effective tax rate in 2016 included the impact of a $300,000 reduction in tax-exempt interest income and an increase in the provision for state income taxvolume. Increases in volume also led to increases in net gains from sales of $64,000 that resulted mainlymortgage loans of $242,000, interchange revenue from a catch-up adjustment to increase New York State taxes for the effectdebit card transactions of changes in the tax methodology that first became effective in 2015.

2015 vs. 2014

Basic$208,000 and diluted net income of $1.35 per share for 2015 was 2.2% lower than in 2014. Some of the more significant highlights related to annual earnings in 2015 as compared to 2014 are as follows:

·Net interest income totaled $39,917,000 in 2015, down $970,000 (2.4%) from 2014. In 2015, yields earned on securities and loans fell by more than the corresponding drop in interest rates paid on deposits and borrowings. The net interest margin was 3.69% in 2015, down from 3.80% in 2014.

·The provision for loan losses was $845,000 in 2015, up from $476,000 in 2014. The higher 2015 provision for loan losses reflected an increase in outstanding loans in the year which resulted in an increase in the collectively determined portion of the allowance for loan losses. Gross loans at December 31, 2015 were $74.3 million, or 11.8%, higher than the balance a year earlier.

·In 2015, noninterest revenue, excluding net realized gains on available-for-sale securities, totaled $15,478,000, which was up slightly from $15,420,000 in 2014 The most significant changes in components of noninterest revenue for the year ended December 31, 2015 as compared to the corresponding period in 2014 included the following: (1) decrease of $161,000 (3.2%) in service charges on deposit accounts primarily as a result of lower overdraft fees; (2) reduction of $135,000$187,000. Other noninterest income decreased $278,000, as the fair value of servicing rights declined $162,000 in 2015 as compared to $27,000 in 2014; (3) net increase in revenues from Trust and brokerage services of $74,000 (1.4%); and (4) an increase in other operatingtotal for 2018 included income of $380,000, including a gain of $212,000$438,000 from a life insurance arrangement in which benefits were split between the Corporation and the heirs of a former employee. Loan servicing fees, net, decreased $247,000, as the fair value of servicing rights decreased $331,000 in 2019 as compared to a decrease of $83,000 in 2018. The reduction in valuation of servicing fees at December 31, 2019 reflected the impact of higher assumed mortgage prepayments from lower interest rates.

 

·Realized gains from available-for-sale securities totaled $2,861,000 and losses from prepayment of borrowings totaled $2,573,000Noninterest expense, excluding merger-related expenses, increased $6,280,000 in 2015, while in 2014 realized gains from securities totaled $1,104,000 and there were no losses from prepayment of borrowings. In 2015,2019 over 2018. Significant variances included the Corporation sold a significant portion of its marketable equity securities portfolio, which was made up of bank stocks, generating realized gains of $2,220,000. Losses from prepayment of borrowings stemmed from pay-downs made in May and December 2015 totaling $34,000,000 on a long-term repurchase agreement with an interest rate of 4.265%.following:

15

 

·ØIn 2015, noninterest expenses, excluding losses on prepayment of borrowings; totaled $33,030,000, which was $1,127,000 (3.3%) lower than total 2014 noninterest expenses. The reduction in noninterest expenses for the year ended December 31, 2015 as comparedSalaries and wages expense increased $3,453,000, including $2,707,000 related to the corresponding periodCorporation’s new ventures in 2014 included the following: (1) a reduction in salariessoutheastern and wages expenses of $439,000,southcentral Pennsylvania.

ØPensions and other employee benefits increased $578,000, mainly due to severancethe increased number of employees resulting from expansion into new markets.

ØOther noninterest expense increased $1,454,000. Within other noninterest expense, expenses in 2014; (2) a reduction in employee benefit-related expenses of $349,000 due to lower employee health insurance expense as a result of lower claims; (3) a reduction in professional fees expense of $161,000, as 2014 included expenses associated with an executive search; (4) a reduction in Pennsylvania shares tax expense of $102,000; and (5) a reduction in other expenses of $282,000, including reductions in expenses from loan collections andnet losses on other real estate properties.properties increased $385,000, mainly due to significant costs incurred related to one commercial workout situation. Other increases within this category included increases in advertising expense of $327,000, loan collection expenses of $264,000, amortization of core deposit intangibles of $220,000, consulting related to the overdraft privilege program of $145,000 and credit card operating costs of $111,000. Also, within other noninterest expense, donations expense decreased $249,000 reflecting a 2018 donation of real estate that resulted in expense of $250,000 with no similar item in 2019.

ØData processing expenses increased $653,000, including significant increases in software licensing costs associated with lending, Trust and other functions. Other expense increases within this category included consulting expenses related to renegotiation of an interchange processing contract, costs related to product development efforts in connection with a fintech organization and costs from operating two core processing systems for most of the second quarter 2019.

ØAutomated teller machine and interchange expense decreased $201,000, reflecting cost reductions pursuant to a renegotiated service contract.

 

More detailed information concerning fluctuations in the Corporation’s earnings results are provided in other sections of Management’s Discussion and Analysis.

 

CRITICAL ACCOUNTING POLICIES

 

The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimatesestimates.

 

A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. 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.

15

 

Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.

 

As described in Note 7 to the consolidated financial statements, management evaluates securities for other-than-temporary impairment (“OTTI”). In making that 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. Management’s assessments of the likelihood and potential for recovery in value of securities are subjective and based on sensitive assumptions.

 

NET INTEREST INCOME

 

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables I, II and III include information regarding the Corporation’s net interest income in 2016, 2015,2019 and 2014.2018. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.

 

The calculations of fully taxable-equivalent yields on tax-exempt loans and securities in Tables I, II and III reflect inherent tax benefit based on the Corporation’s marginal federal income tax rate of 35% for all periods presented. As discussed in more detail in the “Income Taxes” section of Management’s Discussion and Analysis, the Trump Administration and the U.S. Congress have recently been discussing the possibility of lowering corporate income tax rates. If corporate income tax rates were lowered, fully taxable-equivalent yields on tax-exempt loans and securities held at December 31, 2016 would decrease from their recent levels.

16

2016 vs. 2015

Fully taxable equivalent net interest income was $43,157,000$55,532,000 in 2016, which was $338,000 (0.8%2019, $8,528,000 (18.1%) higher than in 2015. As shown2018. Interest income was $14,186,000 higher in Table III, in 20162019 as compared to 2015, net changes in volume had the effect of increasing net interest income $2,754,000, and interest rate changes had the effect of decreasing net interest income $2,416,000. The most significant components of the volume-related increase in net interest income in 2016 was an increase in interest income of $3,255,000 attributable to an increase in the balance of loans receivable and a decrease in2018; interest expense of $991,000 attributable to a reductionwas also higher by $5,658,000 in comparing the balance of borrowed funds, partially offset by a volume-related decrease in interest income on available-for-securities of $1,542,000. The most significant components of the rate-related change in net interest income in 2016 were a decrease in interest income of $1,560,000 attributable to lower rates earned on loans receivable and a decrease of $758,000 in interest income on available-for-sale securities.same periods. As presented in Table II, the Net Interest Margin was 3.86% in 2019 as compared to 3.90% in 2018, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.56% in 2019 from 3.72% in 2018.

Accretion and amortization of purchase accounting-related adjustments had a positive effect on net interest income of $560,000, including an increase in income on loans of $1,100,000 partially offset by increases in interest expense on time deposits of $407,000 and on short-term borrowings of $133,000. The net positive impact to the net interest margin from accretion and amortization of purchase accounting adjustments was 3.63% in 2016 as compared to 3.54% in 2015.0.04%.

 

INTEREST INCOME AND EARNING ASSETS

 

Interest income totaled $46,850,000$65,815,000 in 2016, a decrease2019, an increase of 1.2%27.5% from 2015. Although yields on securities and loans fell, overall yield on earning assets dropped only 0.01% due to a change in mix of earning assets to increase loans and decrease securities.2018. Interest and fees on loans receivable increased $1,695,000,$14,234,000, or 5.0%34.3%, whileto $55,725,000 in 2019 from $41,491,000 in 2018. Table III shows the increase in interest on available-for-sale securities decreased $2,300,000, or 17.1%.loans includes $12,696,000 attributable to an increase in volume and $1,538,000 related to an increase in average rate. The average balance of gross loans receivable increased 9.9%$235,213,000 (28.6%) to $723,076,000$1,057,559,000 in 20162019 from $657,727,000$822,346,000 in 2015.2018. The Corporation experiencedincrease in average balance reflects the Corporation’s purchase of Monument on April 1, 2019 as well as significant commercial loan growth in all loan categories, particularly in participation loans purchased of $19,664,000, residential mortgages of $16,405,000, commercial real estate loans of $13,452,000, and tax free municipal loans of $6,351,000.throughout 2019. The Corporation’s average rate of returnyield on loans receivable declinedin 2019 was 5.27% compared to 4.92%5.05% in 2016 from 5.15% in 2015 as average interest rates on new loans are lower, reflecting recent market conditions.2018.

 

Interest income on available-for-sale debt securities totaled $9,531,000 in 2019, a reduction of $156,000 from the total for 2018. As indicated in Table II, average available-for-sale debt securities (at amortized cost) totaled $404,979,000$357,284,000 in 2016,2019, a decrease of $74,169,000 (15.5%$2,839,000 (0.8%) from 2015. Funds generated from the net decrease in the Corporation’s available-for-sale securities portfolio were used, in part, to fund the loan growth described above.2018. The Corporation’saverage yield on available-for-sale debt securities was lowerdecreased to 2.67% in 2016 than2019 from 2.69% in 2015, primarily due to higher-yielding securities maturing as the portfolio size was reduced. The average rate of return on available-for-sale securities was 2.75% in 2016 and 2.81% in 2015.2018.

 

Interest income from interest-bearing deposits in banks totaled $514,000 in 2019, an increase of $99,000 over the total for 2018. The average balancemost significant categories of assets within this category include interest-bearing due from banks decreased to $19,022,000 in 2016 from $22,201,000 in 2015. This has consisted primarily of balances held bywith the Federal Reserve and also includes other overnight deposits and FDIC-insuredinvestments in certificates of deposit issued by other financial institutions.banks. The increase in interest income from interest-bearing deposits with banks includes the effects of an increase in yield to 2.37% in 2019 from 1.90% in 2018, consistent with market increases in short-term interest rates over the course of 2018 that had a positive impact on short-term asset yields in the earlier months of 2019.

 

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

 

Interest expense fell $909,000,increased $5,658,000, or 19.8%122.3%, to $3,693,000$10,283,000 in 20162019 from $4,602,000$4,625,000 in 2015.2018. Table II shows that the overall cost of funds on interest-bearing liabilities fellincreased to 0.45%1.02% in 20162019 from 0.55%0.56% in 2015.2018.

 

Total average depositsdeposit balances (interest-bearing and noninterest-bearing) increased slightly (0.2%)18.1%, to $970,447,000$1,213,687,000 in 20162019 from $968,201,000$1,027,831,000 in 2015. Decreases2018, mainly as a result of the Monument acquisition.

16

Interest expense on deposits increased $4,488,000 in the average balances of certificates of deposit and Individual Retirement Accounts were offset by increases in average balances of interest checking, money market accounts, savings accounts and noninterest-bearing demand deposits.2019 over 2018. The average rate paid on interest-bearing deposits increased slightly to 0.28%0.89% in 20162019 from 0.26%0.48% in 2015.2018. Interest expense on time deposits increased $3,777,000 in 2019 of which $2,373,000 is from an increase in average rate and $1,404,000 due to an increase in volume. The increase in average rate on deposits reflects comparatively higher rates on deposits assumed from Monument, including significant growth in higher-cost time deposits. Amortization of purchase accounting-related adjustments added 0.05% to the average rate on total interest-bearing deposits.

 

Interest expense on borrowed funds increased $1,170,000 in 2019 as compared to 2018. Total average borrowed funds decreased $15,126,000increased $32,277,000 to $62,516,000$82,712,000 in 20162019 from $77,642,000$50,435,000 in 2015.2018. The average rate on total borrowed funds was 2.53% in 2019 compared to 1.83% in 2018. The increase in the average rate on borrowed funds was 2.57% in 2016 compared to 3.45%2019 reflects the impact of increases in 2015, reflecting a $27,604,000 reduction in the average balance of higher-rate, long-term borrowings resulting from prepayment in the second and fourth quarters of 2015 of a long-term repurchase agreement borrowing with an interest rate of 4.265%. The average balance of short-term borrowings increased $12,478,000 in 2016 over 2015, as average overnight borrowings were higher in 2016 and the Corporation funded the pay-off of the long-term repurchase agreement with a series of short-term advances from the FHLB-Pittsburgh that maturedmarket rates over the course of 2016.2018 and the first quarter 2019 and the impact of higher-cost subordinated debt assumed from Monument.

 

 17 

 

 

2015 vs. 2014

Fully taxable equivalent net interest income was $42,819,000 in 2015, which was $1,074,000 (2.4%) lower than in 2014. As shown in Table III, in 2015 compared to 2014, interest rate changes had the effect of decreasing net interest income $2,283,000, and net changes in volume had the effect of increasing net interest income $1,209,000. The most significant components of the rate-related change in net interest income in 2015 were a decrease in interest income of $1,957,000 attributable to lower rates earned on loans receivable and a decrease of $468,000 in interest income on available-for-sale securities. The most significant components of the volume-related increase in net interest income in 2015 was an increase in interest income of $1,544,000 attributable to an increase in the balance of loans receivable, a decrease in interest expense of $270,000 attributable to a reduction in the balance of borrowed funds, and a decrease in interest expense of $117,000 attributable to a reduction in the balance of interest-bearing deposits (primarily certificates of deposit), partially offset by a volume-related decrease in interest income on available-for-securities of $681,000. As presented in Table II, the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.54% in 2015 as compared to 3.63% in 2014.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $47,421,000 in 2015, a decrease of 3.2% from 2014. Interest and fees on loans receivable decreased $413,000, or 1.2%. As indicated in Table II, average available-for-sale securities (at amortized cost) totaled $479,148,000 in 2015, a decrease of $15,786,000 (3.2%) from 2014. The net decrease in the Corporation’s available-for-sale securities portfolio consisted of decreases in tax-exempt municipal securities, U.S. Government mortgage-backed securities, U.S. Government agency bonds, and equity securities. These decreases were partially offset by increases in the balances of collateralized mortgage obligations and taxable municipal securities. The Corporation’s yield on securities was lower in 2015 than in 2014, primarily because of low market interest rates on new investments combined with higher-yielding securities maturing. The average rate of return on available-for-sale securities was 2.81% for 2015 and 2.95% in 2014.

The average balance of gross loans receivable increased 4.8% to $657,727,000 in 2015 from $627,753,000 in 2014. The Corporation experienced growth in the balances of tax free municipal loans, residential mortgages and participation loans purchased. These increases were partially offset by decreases in balances of commercial real estate loans. The Corporation’s average rate of return on loans receivable declined to 5.15% in 2015 from 5.46% in 2014.

The average balance of interest-bearing due from banks decreased to $22,201,000 in 2015 from $32,510,000 in 2014. This has consisted primarily of balances held by the Federal Reserve and also includes other overnight deposits and FDIC-insured certificates of deposit issued by other financial institutions.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense fell $520,000, or 10.2%, to $4,602,000 in 2015 from $5,122,000 in 2014. Table II shows that the overall cost of funds on interest-bearing liabilities fell to 0.55% in 2015 from 0.61% in 2014.

Total average deposits (interest-bearing and noninterest-bearing) increased 0.3%, to $968,201,000 in 2015 from $965,418,000 in 2014. Decreases in the average balances of certificates of deposit, Individual Retirement Accounts, and money market accounts were partially offset by increases in average balances of interest checking, savings accounts and non-interest bearing demand deposits. The average rate paid on interest-bearing deposits fell slightly to 0.26% in 2015 from 0.28% in 2014.

Total average borrowed funds decreased $2,298,000 to $77,642,000 in 2015 from $79,940,000 in 2014. The average rate on borrowed funds was 3.45% in 2015 compared to 3.70% in 2014, reflecting a $6,982,000 reduction in the average balance of higher-rate, long-term borrowings resulting from pre-payment of a long-term repurchase agreement borrowing with an interest rate of 4.265%. The Corporation paid off $10 million of principal on this borrowing in May 2015, and $24 million in December 2015, leaving no remaining balance outstanding at December 31, 2015. (The pre-payment of long-term borrowings is described in the Earnings Overview section.) The average balance of short-term borrowings increased $4,684,000 in 2015 over 2014, as average overnight borrowings were higher in 2015 and the Corporation funded the pay-off of the long-term repurchase agreement in December 2015 with funds from a series of short-term advances from the FHLB-Pittsburgh totaling $25,072,000 at an average rate of 0.86%.

18

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

   
       
 Years Ended December 31, Increase/(Decrease)  Years Ended December 31, Increase/ 
(In Thousands) 2016 2015 2014 2016/2015 2015/2014  2019 2018 (Decrease) 
           
INTEREST INCOME                                
Available-for-sale securities:                    
Interest-bearing due from banks $514  $415  $99 
Available-for-sale securities            
Taxable $5,916  $7,587  $8,028  $(1,671) $(441)  7,008   6,189   819 
Tax-exempt  5,240   5,869   6,577   (629)  (708)  2,523   3,498   (975)
Total available-for-sale securities  11,156   13,456   14,605   (2,300)  (1,149)  9,531   9,687   (156)
Interest-bearing due from banks  116   93   125   23   (32)
Loans held for sale  27   16   16   11   0 
Loans receivable:                                
Taxable  32,827   31,311   32,127   1,516   (816)  53,086   38,667   14,419 
Tax-exempt  2,724   2,545   2,142   179   403   2,639   2,824   (185)
Total loans receivable  35,551   33,856   34,269   1,695   (413)  55,725   41,491   14,234 
Other earning assets  45   36   9 
Total Interest Income  46,850   47,421   49,015   (571)  (1,594)  65,815   51,629   14,186 
                                
INTEREST EXPENSE                                
Interest-bearing deposits:                                
Interest checking  293   214   216   79   (2)  1,155   950   205 
Money market  342   299   286   43   13   962   549   413 
Savings  133   128   121   5   7   246   153   93 
Certificates of deposit  882   831   1,069   51   (238)
Individual Retirement Accounts  434   451   470   (17)  (19)
Other time deposits  1   1   1   0   0 
Time deposits  5,827   2,050   3,777 
Total interest-bearing deposits  2,085   1,924   2,163   161   (239)  8,190   3,702   4,488 
Borrowed funds:                                
Short-term  155   32   9   123   23   733   366   367 
Long-term  1,453   2,646   2,950   (1,193)  (304)  1,013   557   456 
Subordinated debt  347   0   347 
Total borrowed funds  1,608   2,678   2,959   (1,070)  (281)  2,093   923   1,170 
Total Interest Expense  3,693   4,602   5,122   (909)  (520)  10,283   4,625   5,658 
                                
Net Interest Income $43,157  $42,819  $43,893  $338  $(1,074) $55,532  $47,004  $8,528 

 

(1)Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 35%21%.

(2)Fees on loans are included with interest on loans and amounted to $1,000,000$919,000 in 2016, $1,004,0002019 and $912,000 in 2015, and $1,013,000 in 2014.2018.

 1918 

 

 

TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES

(Dollars in Thousands)

 Year     Year     Year             
 Ended Rate of Ended Rate of Ended Rate of  Year     Year    
 12/31/2016 Return/ 12/31/2015 Return/ 12/31/2014 Return/  Ended Rate of Ended Rate of 
 Average Cost of Average Cost of Average Cost of  12/31/2019 Return/ 12/31/2018 Return/ 
 Balance Funds % Balance Funds % Balance Funds %  Average Cost of Average Cost of 
(Dollars in Thousands) Balance Funds % Balance Funds % 
EARNING ASSETS                                        
Available-for-sale securities, at amortized cost:                        
Interest-bearing due from banks $21,711   2.37% $21,800   1.90%
Available-for-sale securities,                
at amortized cost:                
Taxable $293,636   2.01% $366,448   2.07% $371,125   2.16%  284,072   2.47%  262,461   2.36%
Tax-exempt  111,343   4.71%  112,700   5.21%  123,809   5.31%  73,212   3.45%  97,662   3.58%
Total available-for-sale securities  404,979   2.75%  479,148   2.81%  494,934   2.95%  357,284   2.67%  360,123   2.69%
Interest-bearing due from banks  19,022   0.61%  22,201   0.42%  32,510   0.38%
Federal funds sold  0   0.00%  0   0.00%  0   0.00%
Loans held for sale  472   5.72%  222   7.21%  204   7.84%
Loans receivable:                                        
Taxable  662,769   4.95%  603,771   5.19%  589,120   5.45%  988,560   5.37%  746,309   5.18%
Tax-exempt  60,307   4.52%  53,956   4.72%  38,633   5.54%  68,999   3.82%  76,037   3.71%
Total loans receivable  723,076   4.92%  657,727   5.15%  627,753   5.46%  1,057,559   5.27%  822,346   5.05%
Other earning assets  1,439   3.13%  1,160   3.10%
Total Earning Assets  1,147,549   4.08%  1,159,298   4.09%  1,155,401   4.24%  1,437,993   4.58%  1,205,429   4.28%
Cash  16,570       16,639       16,865       19,906       17,674     
Unrealized gain/loss on securities  7,166       8,871       6,350       1,347       (8,343)    
Allowance for loan losses  (8,082)      (7,380)      (7,992)      (8,876)      (9,033)    
Bank premises and equipment  15,413       15,911       16,789       15,914       15,156     
Intangible Asset - Core Deposit Intangible  24       41       70     
Intangible Asset – Goodwill  11,942       11,942       11,942     
Intangible Assets  25,531       11,952     
Other assets  39,284       37,887       40,472       48,654       43,305     
Total Assets $1,229,866      $1,243,209      $1,239,897      $1,540,469      $1,276,140     
                                        
INTEREST-BEARING LIABILITIES                                        
Interest-bearing deposits:                                        
Interest checking $201,357   0.15% $195,940   0.11% $183,874   0.12% $217,910   0.53% $217,638   0.44%
Money market  199,405   0.17%  196,585   0.15%  198,990   0.14%  194,849   0.49%  180,835   0.30%
Savings  132,679   0.10%  128,355   0.10%  121,685   0.10%  167,677   0.15%  152,889   0.10%
Certificates of deposit  117,130   0.75%  121,803   0.68%  134,732   0.79%
Individual Retirement Accounts  103,467   0.42%  110,659   0.41%  120,016   0.39%
Other time deposits  1,036   0.10%  1,031   0.10%  1,039   0.10%
Time deposits  344,446   1.69%  227,060   0.90%
Total interest-bearing deposits  755,074   0.28%  754,373   0.26%  760,336   0.28%  924,882   0.89%  778,422   0.48%
Borrowed funds:                                        
Short-term  23,906   0.65%  11,428   0.28%  6,744   0.13%  33,521   2.19%  25,226   1.45%
Long-term  38,610   3.76%  66,214   4.00%  73,196   4.03%  43,917   2.31%  25,209   2.21%
Subordinated debt  5,274   6.58%  0   0.00%
Total borrowed funds  62,516   2.57%  77,642   3.45%  79,940   3.70%  82,712   2.53%  50,435   1.83%
Total Interest-bearing Liabilities  817,590   0.45%  832,015   0.55%  840,276   0.61%  1,007,594   1.02%  828,857   0.56%
Demand deposits  215,373       213,828       205,082       288,805       249,409     
Other liabilities  8,530       8,461       9,070       14,624       9,979     
Total Liabilities  1,041,493       1,054,304       1,054,428       1,311,023       1,088,245     
Stockholders' equity, excluding accumulated other comprehensive income  183,671       183,125       181,271     
Accumulated other comprehensive income  4,702       5,780       4,198     
Stockholders' equity, excluding                
other comprehensive income/loss  228,103       194,333     
Other comprehensive income/loss  1,343       (6,438)    
Total Stockholders' Equity  188,373       188,905       185,469       229,446       187,895     
Total Liabilities and Stockholders' Equity $1,229,866      $1,243,209      $1,239,897      $1,540,469      $1,276,140     
Interest Rate Spread      3.63%      3.54%      3.63%      3.56%      3.72%
Net Interest Income/Earning Assets      3.76%      3.69%      3.80%      3.86%      3.90%
                                        
Total Deposits (Interest-bearing and Demand) $970,447      $968,201      $965,418     
Total Deposits (Interest-bearing                
and Demand) $1,213,687      $1,027,831     

 

(1)Annualized ratesRates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 35%.

using the Corporation’s marginal federal income tax rate of 21%.

(2)Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
(3)Rates of return on earning assets and costs of funds are presented on an annualized basis.

 

 2019 

 

 

TABLE III -  ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands)  

 

 Year Ended 12/31/16 vs. 12/31/15  Year Ended 12/31/15 vs. 12/31/14  Year Ended 12/31/19 vs. 12/31/18 
 Change in Change in Total  Change in Change in Total  Change in Change in Total 
 Volume Rate Change  Volume Rate Change 
(In Thousands) Volume Rate Change 
EARNING ASSETS                                    
Interest-bearing due from banks $(2) $101  $99 
Available-for-sale securities:                                    
Taxable $(1,472) $(199) $(1,671) $(100) $(341) $(441)  525   294   819 
Tax-exempt  (70)  (559)  (629)  (581)  (127)  (708)  (847)  (128)  (975)
Total available-for-sale securities  (1,542)  (758)  (2,300)  (681)  (468)  (1,149)  (322)  166   (156)
Interest-bearing due from banks  (14)  37   23   (42)  10   (32)
Loans held for sale  15   (4)  11   1   (1)  0 
Loans receivable:                                    
Taxable  2,965   (1,449)  1,516   786   (1,602)  (816)  12,963   1,456   14,419 
Tax-exempt  290   (111)  179  758   (355)  403   (267)  82   (185)
Total loans receivable  3,255   (1,560)  1,695  1,544   (1,957)  (413)  12,696   1,538   14,234 
Other earning assets  9   0   9 
Total Interest Income  1,714   (2,285)  (571)  822   (2,416)  (1,594)  12,381   1,805   14,186 
                                    
INTEREST-BEARING LIABILITIES                                    
Interest-bearing deposits:                                    
Interest checking  6   73   79   14   (16)  (2)  1   204   205 
Money market  4   39   43   (3)  16   13   46   367   413 
Savings  4   1   5   7   0   7   16   77   93 
Certificates of deposit  (33)  84   51   (97)  (141)  (238)
Individual Retirement Accounts  (30)  13   (17)  (38)  19   (19)
Other time deposits  0   0   0   0   0   0 
Time deposits  1,404   2,373   3,777 
Total interest-bearing deposits  (49)  210   161   (117)  (122)  (239)  1,467   3,021   4,488 
Borrowed funds:                                    
Short-term  56   67   123   9   14   23   144   223   367 
Long-term  (1,047)  (146)  (1,193)  (279)  (25)  (304)  431   25   456 
Subordinated debt  347   0   347 
Total borrowed funds  (991)  (79)  (1,070)  (270)  (11)  (281)  922   248   1,170 
Total Interest Expense  (1,040)  131   (909)  (387)  (133)  (520)  2,389   3,269   5,658 
                                    
Net Interest Income $2,754  $(2,416) $338  $1,209  $(2,283) $(1,074) $9,992  $(1,464) $8,528 

 

(1)Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 35%21%.

(2)The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

 

 2120 

 

 

NONINTEREST INCOME

Years Ended December 31, 2016, 2015 and 2014

 

The table below presents a comparison of noninterest income, and excludes realized gains and losses on available-for-sale securities which(which are discussed in the “Earnings Overview”Earnings Overview section of Management’s Discussion and Analysis.Analysis), and the gain on a restricted equity security (Visa Class B stock) in 2018.

 

TABLE IV - COMPARISON OF NONINTEREST INCOME

(In Thousands)

  Years Ended       
  December 31,  $  % 
  2016  2015  Change  Change 
Service charges on deposit accounts $4,695  $4,864  $(169)  (3.5)
Service charges and fees  439   494   (55)  (11.1)
Trust and financial management revenue  4,760   4,626   134   2.9 
Brokerage revenue  756   839   (83)  (9.9)
Insurance commissions, fees and premiums  102   109   (7)  (6.4)
Interchange revenue from debit card transactions  1,943   1,935   8   0.4 
Net gains from sales of loans  1,029   735   294   40.0 
Decrease in fair value of servicing rights  (282)  (162)  (120)  74.1 
Increase in cash surrender value of life insurance  382   386   (4)  (1.0)
Other operating income  1,687   1,652   35   2.1 
 Total other operating income before realized gains   on available-for-sale securities, net $15,511  $15,478  $33   0.2 

 Years Ended               
 December 31, $ %  Years Ended      
 2015 2014 Change Change  December 31, $ % 
Service charges on deposit accounts $4,864  $5,025  $(161)  (3.2)
Service charges and fees  494   538   (44)  (8.2)
(Dollars in Thousands) 2019 2018 Change Change 
Trust and financial management revenue  4,626   4,490   136   3.0  $6,106  $5,838  $268   4.6 
Brokerage revenue  839   901   (62)  (6.9)  1,266   1,018   248   24.4 
Insurance commissions, fees and premiums  109   118   (9)  (7.6)  167   105   62   59.0 
Service charges on deposit accounts  5,358   5,171   187   3.6 
Service charges and fees  332   343   (11)  (3.2)
Interchange revenue from debit card transactions  1,935   1,959   (24)  (1.2)  2,754   2,546   208   8.2 
Net gains from sales of loans  735   768   (33)  (4.3)  924   682   242   35.5 
Decrease in fair value of servicing rights  (162)  (27)  (135)  500.0 
Loan servicing fees, net  100   347   (247)  (71.2)
Increase in cash surrender value of life insurance  386   376   10   2.7   402   394   8   2.0 
Other operating income  1,652   1,272   380   29.9 
Total other operating income before realized gains on available-for-sale securities, net $15,478  $15,420  $58   0.4 
Other noninterest income  1,875   2,153   (278)  (12.9)
Total noninterest income, excluding realized gains                
(losses) on securities, net $19,284  $18,597  $687   3.7 

 

Total noninterest income, excluding realized gains and losses on available-for-sale securities, increased $33,000$687,000 (3.7%) in 20162019 compared to 2015. In 2015, total noninterest income increased $58,000 from 2014.2018. Changes of significance are discussed in the narrative that follows.

 

·Trust and financial management revenue increased $268,000 (4.6%), reflecting growth in the value of trust assets under management attributable to market appreciation, particularly in the latter portion of 2019, as well as new business. At December 31, 2019, the value of trust assets under management was $1,007,113,000, an increase of 16.8% from $862,517,000 at December 31, 2018.

2016 vs. 2015

·Brokerage revenue increased $248,000 (24.4%), mainly due to increased volume of brokerage transactions compared to 2018.

·Service charges on deposit accounts increased $187,000 (3.6%), which includes $52,000 attributable to the assumption of former Monument deposit accounts.

·Interchange revenue from debit card transactions increased $208,000 (8.2%), reflecting an increase in transaction volume.

·Net gains from sales of loans increased $242,000 (35.5%) due to increased volume of residential mortgage loans sold. The increased sales volume in 2019 reflected a decision to retain fewer mortgage loans on the balance sheet to accommodate funding for increased commercial lending opportunities in southeastern and southcentral Pennsylvania. The increased sales volume was also attributable, in part, to increased refinancing activity consistent with falling interest rates in the latter portion of the year. Gains on sales of loans totaled 3.1% of the origination cost of loans sold in 2019 as compared to 3.2% in 2018.

·Loan servicing fees, net, decreased $247,000, as the fair value of mortgage loan servicing rights decreased $331,000 in 2019 as compared to a decrease of $83,000 in 2018. At December 31, 2019, the value of mortgage servicing rights (included in other assets in the consolidated balance sheets) was $1,277,000, or 0.72% of the outstanding balance of loans sold and serviced, down from $1,404,000 or 0.82% of the outstanding balance of loans sold and serviced at December 31, 2018. The reduction in valuation of servicing fees at December 31,2019 reflected the impact of higher assumed mortgage prepayments from lower interest rates.

·Other noninterest income decreased $278,000, as the 2018 total included $438,000 from a life insurance arrangement in which benefits were split between the Corporation and heirs of a former employee. Income from tax credits decreased $167,000 to $155,000 in 2019 from $322,000 in 2018 as the 2018 total included $154,000 from a donation of real estate. Dividends on FHLB-Pittsburgh stock increased $167,000 to $487,000 in 2019 from $320,000 in 2018. Interchange revenue from credit card transactions increased $87,000 to $213,000 in 2019 from $126,000 in 2018 and revenue from merchant services increased $50,000 to $424,000 in 2019 from $374,000 in 2018.

21

NONINTEREST EXPENSE

 

Net gains from sales of loansTABLE V - COMPARISON OF NONINTEREST EXPENSE

          
  Years Ended       
  December 31,  $  % 
(Dollars In Thousands)  2019  2018  Change  Change 
Salaries and wages $20,644  $17,191  $3,453   20.1 
Pensions and other employee benefits  5,837   5,259   578   11.0 
Occupancy expense, net  2,629   2,497   132   5.3 
Furniture and equipment expense  1,289   1,196   93   7.8 
Data processing expenses  3,403   2,750   653   23.7 
Automated teller machine and interchange expense  1,103   1,304   (201)  (15.4)
Pennsylvania shares tax  1,380   1,318   62   4.7 
Professional fees  1,069   976   93   9.5 
Telecommunications  744   748   (4)  (0.5)
Directors' fees  673   706   (33)  (4.7)
Other noninterest expense  6,667   5,213   1,454   27.9 
Total noninterest expense, excluding merger-                
related expenses  45,438   39,158   6,280   16.0 
Merger-related expenses  4,099   328   3,771   1,149.7 
Total noninterest expense $49,537  $39,486  $10,051   25.5 

Total noninterest expenses increased $294,000 (40.0%$10,051,000 (25.5%), reflecting higher volume of sales. The increase in volume in 2016 included the impact of employing one additional mortgage lender in a dedicated, full-time capacity throughout most of 20162019 as compared to 2015.2018. Total noninterest expenses excluding merger-related expenses increased $6,280,000 (16.0%) in 2019 as compared to 2018. Merger-related expenses are discussed in the Completed and Pending Acquisitions section of Management’s Discussion and Analysis. Other changes of significance are discussed in the narrative that follows.

 

·Salaries and wages expense increased $3,453,000 (20.1%), including $2,707,000 related to new operations in southeastern Pennsylvania (former Monument locations) and the southcentral Pennsylvania (York) location, as well as costs arising from increased staffing for credit administration and other lending support functions. At December 31, 2019, the Corporation had 336 full-time equivalent employees as compared to 299 at December 31, 2018.

Trust and Financial Management revenue increased $134,000 (2.9%). The increase in Trust revenue in 2016 reflected, in part, the effect of higher value of U.S. equity markets in the latter portion of the year.

·Pensions and other employee benefits expense increased $578,000 (11.0%), mainly due to the additional staffing related to the new ventures. Within this category, employee health insurance expense totaled $1,964,000 in 2019, an increase of $48,000 (2.5%) over 2018. In 2019, health insurance expense was reduced by the effect of a credit of $201,000 resulting from prior overpayment of claims on the partially self-insured plan.

·Occupancy expense increased $132,000 (5.3%), reflecting the addition of the locations in southeastern and southcentral Pennsylvania.

·Data processing expenses increased $653,000 (23.7%), including the impact of increases in software licensing costs associated with lending, trust and other functions. Other expense increases within this category included consulting expenses related to renegotiation of an interchange processing contract, costs related to product development efforts in connection with a fintech organization and costs from operating two core processing systems for most of the second quarter 2019.

·Automated teller machine and interchange expense decreased $201,000 from 2018 to 2019 reflecting cost reductions pursuant to a renegotiated service contract.

·Other noninterest expense increased $1,454,000. Within this category, significant changes were as follows:

ØExpenses and net losses on other real estate properties increased $385,000 and loan collection expenses increased $264,000, including significant costs incurred related to one commercial workout situation.

ØAdvertising expense increased $327,000, reflecting costs associated with re-branding and targeted marketing efforts.

ØAmortization of core deposit intangibles increased $220,000, reflecting expense associated with the Monument acquisition.

 

Other operating income increased $35,000 (2.1%), including an increase of $148,000 from redemptions of tax credits and increases in lending-related fees of $80,000, while this category included a gain of $212,000 from a split-dollar life insurance policy in 2015.

 22 

 

 

Service charges on deposit accounts decreased $169,000 (3.5%) in 2016, including a $131,000 reduction in consumer overdraft fees due to a lower volume of overdrafts.

ØConsulting expense related to the overdraft privilege program increased $145,000 to $263,000 in 2019 from $118,000 in 2018, reflecting an increase in amounts payable based on enhancements to the program, including the impact of an under-accrual of $41,000 in 2018.

 

The fair value of mortgage servicing rights decreased $282,000 in 2016, as their valuation was negatively impacted by a reduction in demand by banks for purchasing servicing rights resulting from regulatory changes that have generally increased their risk-based capital weighting. In comparison, the fair value of mortgage servicing rights decreased $162,000 in 2015.

ØWithin this category, credit card operating costs totaled $257,000 in 2019, an increase of $111,000 over 2018.

 

Brokerage revenue decreased $83,000 (9.9%), as the volume of sales of annuities declined.

ØDonations expense decreased $249,000 reflecting a 2018 donation of real estate that resulted in expense of $250,000 with no similar item in 2019.

 

2015 vs. 2014

Service charges on deposit accounts were $161,000 lower in 2015 than 2014. Total consumer and business overdraft and uncollected funds fees decreased $387,000 in 2015 as compared to 2014. These decreases were partially offset by revenues resulting from adjustments to the existing fee structure of certain checking products in April 2015.

The fair value of servicing rights decreased $162,000 in 2015 as compared to a decrease of $27,000 in 2014. The greater decline in fair value in 2015 reflected the impact of a reduction in the outstanding balance of mortgage loans sold and serviced in 2015, as compared to an increase in the balance of loans serviced in 2014 over 2013.

Included in the $380,000 increase in other operating revenue in 2015 is the effect of a $212,000 gain recognized from a life insurance arrangement in which the benefits were split between Corporation and the heirs of the former employee. In addition, dividend income from Federal Home Loan Bank of Pittsburgh stock increased $36,000, and revenue from merchant services increased $28,000, in 2015 as compared to 2014.

In 2015, Trust and financial management revenue increased $136,000, or 3.0%. This increase was primarily in retirement services revenue.

NONINTEREST EXPENSE

Years Ended December 31, 2016, 2015 and 2014

Total noninterest expense decreased $859,000, or 2.4%, in 2016 as compared to 2015; however, excluding losses from prepayment of borrowings in 2015, noninterest expense was $1,714,000 (5.2%) higher in 2016 as compared to 2015. Excluding losses from prepayment of debt in 2015, total noninterest expense decreased $1,127,000 (3.3%) in 2015 as compared to 2014. In 2015, the Corporation incurred losses totaling $2,573,000 from prepayment of borrowings (repurchase agreements). There were no losses from prepayment of borrowings incurred in 2016 or 2014. Changes of significance (other than the previously discussed losses on prepayment of debt) are discussed in the narrative that follows.

TABLE V - COMPARISON OF NONINTEREST EXPENSE

(In Thousands)

  Years Ended       
  December 31,  $  % 
  2016  2015  Change  Change 
Salaries and wages $15,411  $14,682  $729   5.0 
Pensions and other employee benefits  4,717   4,420   297   6.7 
Occupancy expense, net  2,340   2,574   (234)  (9.1)
Furniture and equipment expense  1,730   1,860   (130)  (7.0)
FDIC Assessments  488   603   (115)  (19.1)
Pennsylvania shares tax  1,274   1,248   26   2.1 
Professional fees  1,126   638   488   76.5 
Automated teller machine and interchange expense  1,137   988   149   15.1 
Software subscriptions  981   876   105   12.0 
Loss on prepayment of borrowings  0   2,573   (2,573)  (100.0)
Other operating expense  5,540   5,141   399   7.8 
Total Other Expense $34,744  $35,603  $(859)  (2.4)

23

  Years Ended       
  December 31,  $  % 
  2015  2014  Change  Change 
Salaries and wages $14,682  $15,121  $(439)  (2.9)
Pensions and other employee benefits  4,420   4,769   (349)  (7.3)
Occupancy expense, net  2,574   2,628   (54)  (2.1)
Furniture and equipment expense  1,860   1,859   1   0.1 
FDIC Assessments  603   600   3   0.5 
Pennsylvania shares tax  1,248   1,350   (102)  (7.6)
Professional fees  638   699   (61)  (8.7)
Automated teller machine and interchange expense  988   924   64   6.9 
Software subscriptions  876   784   92   11.7 
Loss on prepayment of borrowings  2,573   0   2,573   100.0 
Other operating expense  5,141   5,423   (282)  (5.2)
Total Other Expense $35,603  $34,157  $1,446   4.2 

2016 vs 2015

Salaries and wages expense increased $729,000 (5.0%), reflecting an increase in number of employees. The average number of full-time equivalent employees was 287 in 2016, up from 281 in 2015, including new positions established for lending, lending support, information technology, training and marketing functions.

Pension and other employee benefits expense increased $297,000 (6.7%). The increase resulted mainly from an increase of $214,000 in healthcare expense as a result of increased healthcare claims. The Corporation is self-insured for health insurance, up to a cap for catastrophic levels of losses, which are insured by a third party. Payroll taxes and other expenses within this category increased in 2016, as well, due to the increase in number of employees described above.

Professional fees expense increased $488,000, including increases related to employee sales and service training, information technology and marketing.

Automated teller machine and interchange expense increased $149,000, including the costs of purchasing new debit cards with EMV functionality.

Software subscriptions increased $105,000 as a result of enhancements and new applications initiated in 2015 and continuing into 2016 including costs associated with the network operating system, automated document signatures and marketing-related functionality.

Other operating expense increased $399,000 (7.8%), including increases in other real estate expenses of $123,000, donations and public relations-related expenses of $94,000 and education and training-related expenses of $60,000. Also, other operating expense was reduced in 2015 by $69,000 as a result of a recovery of sales tax previously paid.

Occupancy expenses in 2016 were $234,000 under 2015 primarily as a result lower depreciation costs as well as lower winter-related expenses such as snow removal and fuel costs.

Furniture and equipment expenses in 2016 were $130,000 under 2015 primarily as a result lower depreciation costs.

FDIC insurance decreased $115,000 in 2016 reflecting lower assessment levels beginning in the third quarter of 2016.

24

2015 vs 2014

Salaries and wages decreased $439,000 (2.9%). As noted in the Earnings Overview section, this decrease is primarily the result of severance benefits incurred and paid in 2014. The decrease from severance benefits was partially offset by annual merit-based pay increases, an increase in incentive and other bonuses of $168,000 and the addition of new lending and other personnel.

Pensions and other employee benefits decreased $349,000 (7.3%). Health care expense decreased $342,000 as the amount of claims incurred during 2015 was lower than in 2014. In addition, pension expense decreased $111,000 as the result of a charge in 2014 related to a distribution from a defined benefit plan. These decreases were partially offset by annual increases in other benefit and administrative costs.

Other operating expense decreased $282,000 (5.2%). The reduction included a $191,000 decrease in loan collection expenses and an $86,000 decrease in other real estate expenses.

INCOME TAXES

 

The effective income tax rate was 25.3%16.7% of pre-tax income in 2016, 24.5%2019, up from 16.2% in 2015 and 25.0% in 2014. The2018.The Corporation’s effective tax rates differdiffered from the statutory rate of 35% principally21% mainly because of the effects of tax-exempt interest income. The higher effective income tax rate in 2019 as compared to 2018 reflected the impact of a reduction in tax-exempt interest income, as the Corporation’s average total investment in tax-exempt securities (at amortized cost) and tax-exempt loans was $31.5 million lower in 2019 than in 2018, as proceeds from maturities and calls of tax-exempt assets were reinvested mainly in taxable securities and loans.

 

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At December 31, 2016,2019, the net deferred tax asset was $5,117,000, an increase$2,618,000, down from the balance at December 31, 20152018 of $3,115,000.$4,110,000. The largestmost significant change in temporary difference components was a changenet decrease of $2,079,000 related to a deferred tax asset of $512,000 on the aggregate unrealized lossgains or losses on available-for-sale securities atsecurities. At December 31, 2016 from a deferred tax liability of $1,342,000 on the aggregate unrealized gain on available-for-sale securities at December 31, 2015. The decline in fair values of available-for-sale securities was mainly due to an increase in interest rates in the last few months of 2016.

The Corporation uses currently enacted tax rates to value deferred tax assets and liabilities. The Trump Administration and the U.S. Congress are in the process of evaluating possible tax changes which may include a reduction in U.S. corporate income tax rates. If corporate tax rates were reduced, management expects the Corporation would record an initial charge against earnings to lower the carrying amount of2019, the net deferred tax asset, and then would record a lower tax provision going forward on an ongoing basis.

The following schedule estimatesliability associated with the amount of initial reduction inunrealized gain was $934,000, while at December 31, 2018, the net deferred tax asset that would be recognized, at varying marginal federal income tax rates, based onassociated with the Corporation’s temporary difference components at December 31, 2016. The schedule also shows the pro forma impact on the 2016 provision for income taxes, assuming the alternative tax rates presented had been in effect throughout the year, without adjustment for reinvestment of additional funds and assuming no other changes in the composition of the Corporation’s assets and liabilities.unrealized loss was $1,145,000.

(Dollars in Thousands)            
  Valuation at Marginal Federal Tax Rate of: 
  35%  25%  20%  15% 
  (Actual)    
Carrying Value of Deferred Tax Asset at 12/31/16:                
Accumulated Other Comprehensive Items, Net $485  $347  $278  $207 
Other Items, Net  4,632   3,309   2,647   1,985 
Total $5,117  $3,656  $2,925  $2,192 
                 
Pro Forma Reduction in Carrying Value of Deferred Tax Asset from 12/31/16:                
Accumulated Other Comprehensive Items, Net     $(138) $(207) $(278)
Other Items, Net (Initial Charge to Earnings)      (1,323)  (1,985)  (2,647)
Total     $(1,461) $(2,192) $(2,925)

25

  For the Year Ended 12/31/16 at Marginal 
  Federal Tax Rate of:       
  35%  25%  20%  15% 
  (Actual)          
Income Tax Provision $5,347  $3,797  $3,025  $2,250 
Income Tax Provision as % of Pre-tax Income  25.3%  18.0%  14.3%  10.7%
                 
Pro Forma Reduction in 2016 Annual Income Tax Provision if Alternative Rate Were in Effect Throughout 2016     $(1,550) $(2,322) $(3,097)

 

The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. Further, as discussed above,the value of the benefit from realization of deferred tax assets would be impacted if income tax rates are loweredwere changed from currently enacted levels.

 

Management believes the recorded net deferred tax asset at December 31, 20162019 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

 

Additional information related to income taxes is presented in Note 14 to the consolidated financial statements.

 

SECURITIES

The objectives of the Corporation’s available-for-sale debt securities (investment) portfolio are to maintain high credit quality, achieve good portfolio balance, support liquidity needs, maximize return on earning assets within reasonable risk parameters, provide an adequate amount of pledgeable securities, support local communities by purchasing securities they issue for public projects and programs, provide a means to hedge the Corporation’s interest rate risk exposure, and minimize taxes. Management continually evaluates the size and mix of securities held in the available-for-sale debt securities portfolio while considering these objectives.

 

Table VI shows the composition of the investmentavailable-for-sale debt securities portfolio at December 31, 2016, 20152019 and 2014.2018. Comparison of the amortized cost totals of available-for-sale debt securities at each year-end presented reflects a decrease of $92,227,000$26,447,000 to $416,455,000$342,278,000 at December 31, 20152019 from December 31, 2014. This change was followed by a decrease of $19,917,000 to $396,538,000$368,725,000 at December 31, 2016.2018. The continued decreasereduction in securities in 2016 reflectsresulted from opportunities for loan growth, as management identified opportunities to reinvest proceeds from maturities and sales of securities into loans. Within the use of cash generated from the investmentsecurities portfolio, to help fund the increase in loans outstanding. The Corporation’s holdings of mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies haveand tax-exempt obligations of states and political subdivisions (municipal bonds) decreased, to $237,654,000 at December 31, 2016 from $266,372,000 at December 31, 2015while investments in taxable municipal bonds and $322,099,000 at December 31, 2014. Within that overall category,U.S. Government agency bonds increased. These changes in 2016, the Corporation added some commercial mortgage-backed securitiesportfolio mix were based on changes in liquidity and interest rate risk management needs and current market yields for which the underlying collateral consistsvarious categories of multi-family properties. The total amortized cost of commercial mortgage-backed securities held at December 31, 2016 was $30,817,000.securities.

 

As reflected in Table VI, the fair value of available-for-sale securities as of December 31, 20162019 was $1,461,000,$4,445,000, or 0.37%1.3%, lessgreater than the total amortized cost basis. TheIn comparison, the aggregate unrealized loss position at December 31, 20162018 was down$5,452,000, or 1.5% of the total amortized cost basis. The unrealized appreciation in the portfolio in 2019 resulted mainly from an unrealized gain of $3,835,000 at December 31, 2015, partly due to an increasea decrease in interest rates in the last few months of 2016. Changes in intermediate-term and long-term interest rates have a significant impact on changes in fair values of debt securities. The fair values of tax-exempt municipal bonds at December 31, 2016 may have been negatively impacted, as well, by the market’s perception that U.S. corporate income tax rates may be reduced within the next 1-2 years. The aggregate unrealized gain on tax-exempt municipal bonds was $897,000, or 0.8% of amortized cost, at December 31, 2016. In comparison, the aggregate unrealized gain on tax-exempt municipal bonds held at December 31, 2015 was $4,343,000, or 4.2%. The aggregate unrealized loss on debt securities at December 31, 2016 was 0.36% of the amortized cost basis, down from net unrealized gains on debt securities of 0.75% at December 31, 2015 and 1.01% at December 31, 2014. Also contributing to the reduction in aggregate unrealized gain (loss) was the liquidation of the bank stock portfolio in 2015 and 2016 as the Corporation realized gains from the sale of bank stocks. As discussed in more detail in Note 7 to the consolidated financial statements, the Corporation reported net realized gains from available-for-sale securities of $1,158,000 in 2016, including realized gains from sales of equity securities (bank stocks) of $1,125,000. In comparison, net realized gains from available-for-sale securities totaled $2,861,000 in 2015 and $1,104,000 in 2014.rates.

 

Management has reviewed the Corporation’s holdings as of December 31, 20162019 and concluded that unrealized losses on all of the securities in an unrealized loss position are considered temporary. Notes 6 andNote 7 to the consolidated financial statements provideprovides more detail concerning the Corporation’s processes for evaluating securities for other-than-temporary impairment. Management will continue to closely monitor the status of impaired securities in 2017.2020.

 

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TABLE VI - INVESTMENT SECURITIES

 

      As of December 31,      
TABLE VI - INVESTMENT SECURITIES         
 2016 2015 2014  2019 2018 
 Amortized Fair Amortized Fair Amortized Fair  Amortized Fair Amortized Fair 
(In Thousands) Cost Value Cost Value Cost Value  Cost Value Cost Value 
             
AVAILABLE-FOR-SALE SECURITIES:                        
AVAILABLE-FOR-SALE DEBT SECURITIES:                
Obligations of U.S. Government agencies $9,671  $9,541  $10,663  $10,483  $27,221  $26,676  $16,380  $17,000  $12,331  $12,500 
Obligations of states and political subdivisions:                                        
Tax-exempt  118,140   119,037   103,414   107,757   120,086   124,839   68,787   70,760   84,204   83,952 
Taxable  30,073   30,297   34,317   34,597   33,637   33,878   35,446   36,303   27,618   27,699 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                                        
Residential pass-through securities  58,922   58,404   73,227   73,343   82,479   83,903   58,875   59,210   54,827   53,445 
Residential collateralized mortgage obligations  147,915   146,608   193,145   191,715   239,620   238,823   115,025   114,723   148,964   145,912 
Commercial mortgage-backed securities  30,817   30,219   0   0   0   0   47,765   48,727   40,781   39,765 
Other collateralized debt obligations  0   0   9   9   34   34 
Total debt securities  395,538   394,106   414,775   417,904   503,077   508,153 
Marketable equity securities  1,000   971   1,680   2,386   5,605   8,654 
Total $396,538  $395,077  $416,455  $420,290  $508,682  $516,807 
Total Available-for-Sale Debt Securities $342,278  $346,723  $368,725  $363,273 

 

The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2016.2019. Yields on tax-exempt securities are presented on a nominal basis, that is, the yields are not presented on a fully taxable-equivalent basis. For callable securities, yields on securities purchased at a discount are based on yield-to-maturity, while yields on securities purchased at a premium are based on yield to the first call date. Yields on mortgage-backed securities are estimated and include the effects of prepayment assumptions. 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.

 

(In Thousands, Except for Percentages) Within     One-     Five-     After         Within
One
Year		  Yield  One-
Five
Years		  Yield  Five-
Ten
Years		  Yield  After
Ten
Years		  Yield  Total  Yield 
 One     Five     Ten     Ten        
 Year Yield Years Yield Years Yield Years Yield Total Yield 
                     
AVAILABLE-FOR-SALE SECURITIES:                                        
AVAILABLE-FOR-SALE DEBT SECURITIES:                                        
Obligations of U.S. Government agencies $1,637   1.36% $8,034   1.42% $0   0.00% $0   0.00% $9,671   1.41% $0   0.00% $0   0.00% $7,513   3.16% $8,867   3.43% $16,380   3.30%
Obligations of states and political subdivisions:                                                                                
Tax-exempt  13,429   3.13%  43,417   2.80%  36,175   2.22%  25,119   3.77%  118,140   2.86%  2,777   3.36%  16,230   3.03%  27,900   2.90%  21,880   3.48%  68,787   3.13%
Taxable  3,613   1.81%  18,108   2.25%  8,352   3.07%  0   0.00%  30,073   2.43%  4,439   2.62%  15,396   2.94%  7,296   3.40%  8,315   3.17%  35,446   3.05%
Sub-total $18,679   2.72% $69,559   2.50% $44,527   2.38% $25,119   3.77%  157,884   2.69% $7,216   2.90% $31,626   2.99% $42,709   3.03% $39,062   3.40% $120,613   3.13%
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                                                                                
Residential pass-through securities                                  58,922   2.07%                                  58,875   2.41%
Residential collateralized mortgage obligations                                  147,915   1.96%                                  115,025   1.84%
Commercial mortgage-backed securities                                  30,817   2.34%                                  47,765   2.61%
Total                                 $395,538   2.12%                                 $342,278   2.50%

 

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. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period.

 

FINANCIAL CONDITION

This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at December 31, 2019, and management does not expect the amount of purchases of bank premises and equipment or the Covenant acquisition to have a material, detrimental effect on the Corporation’s financial condition in 2020.

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FINANCIAL CONDITION

GrossTable VII shows the composition of the loan portfolio as of the end of the years 2015 through 2019. From December 31, 2015 through December 31, 2018, total loans outstanding (excludingincreased $122.7 million (17.4%) and the overall mix by segment remained fairly constant, with residential mortgage loans held for sale) were $751,835,000of approximately 55% to 56% of the portfolio at each year-end, and commercial loans of 43% to 44% of the portfolio. At December 31, 2019, gross loans outstanding totaled $1,182,222,000, an increase of $354.7 million (42.9%) from December 31, 2018. As previously noted, a significant portion of the Corporation’s loan growth in 2019 is attributable to the Monument acquisition and to new loans originated in the southeastern and southcentral Pennsylvania markets. In comparing gross outstanding balances at December 31, 2016, up 6.7% from $704,880,0002019 and 2018, total commercial loans increased $225.3 million (63.7%) and total residential mortgage loans increased $129.8 million (28.4%). The overall mix of the loan portfolio at December 31, 2015. The total outstanding balances of2019 was slightly less than 50% residential mortgage segment loans at December 31, 2016 increased $34,683,000 (9.0%) as compared to December 31, 2015, and the total outstanding balances of49% commercial segment loans at December 31, 2016 increased $9,206,000 (3.0%) as compared to December 31, 2015. The 2016 loan growth followed significant growth in loans outstanding in 2015, as gross loans outstanding at December 31, 2015 were up 11.8% from December 31, 2014. Total outstanding commercial loans were higher by $54,239,000 (21.4%), and residential mortgage segment loans were up $19,674,000 (5.4%), at December 31, 2015 as compared to December 31, 2014.loans.

 

The increasesWhile the Corporation’s lending activities are primarily concentrated in loans outstanding in 2015 and 2016 included increases inits market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and “Political subdivisions”“Other commercial” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to $47,508,000$64,633,000 at December 31, 2016, up2019, down from $44,456,000$67,340,000 at December 31, 2015.2018. At December 31, 2016,2019, the balance of participation loans outstanding includes a total of $34,890,000$46,206,000 to businesses located outside of the Corporation’s market area, including $11,967,000 from participations in loans originated through the Corporation’s membership in a network that originates loans throughout the U.S. The Corporation’sareas. Also, included within participation loans originated through the network consist ofare “leveraged loans,” meaning loans to businesses that are larger than the Corporation’s typical commercial customer base. The loans originated through the network are considered “leveraged loans,” meaning the businesses typically havewith minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. AtLeveraged participation loans totaled $9,947,000 at December 31, 2016, total leveraged participation loans, including loans originated through the network2019 and two loans to one borrower originated through another lead institution, totaled $15,207,000.$13,315,000 at December 31, 2018.

 

Table VIII presents loan maturity data as of December 31, 2016.2019. The interest rate simulation model used to prepare Table VIII classifies certain loans under different categories from the categories that appear in Table VII. Fixed-rate loans are shown in Table VIII based on their contractually scheduled principal repayments, and variable-rate loans are shown based on the date of the next change in rate. Table VIII shows that fixed-rate loans are approximately 38%30% of the loan portfolio. Of the 62%portfolio and approximately 48% of the portfolio made up ofare variable-rate loans a significant portion (36%) willthat re-price after more than one year. Variable-rate loans re-pricing after more than one year include residential and commercial real estate secured loans. The Corporation’s substantial investment in long-term, fixed-rate loans and variable-rate loans with extended periods until re-pricing is one of the concerns management attempts to address through interest rate risk management practices. See Part II, Item 7A for a more detailed discussion of the Corporation’s interest rate risk.

Other significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the “Net Interest Income” section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis.

Total purchases of bank premises and equipment in 2017 are estimated at approximately $2.5 million. Management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2017.

 

Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation will not retain servicing rights for loans sold under the MPF Direct Program. In 2019, the Corporation’s activity under the MPF Direct Program was minimal.

 

For loan sales originated under the MPF Xtra and Original programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases, or reimbursements generally result from an underwriting or documentation deficiency. At December 31, 2016,2019, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,852,000,$1,770,000, and the corresponding total outstanding balance of repurchased loans at December 31, 20152018 was $1,968,000.$2,146,000.

28

 

At December 31, 2016,2019, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $178,446,000, including loans sold through the MPF Xtra program of $104,707,000 and loans sold through the Original program of $73,739,000. At December 31, 2018, outstanding balances of loans sold and serviced through the two programs totaled $163,296,000,$171,742,000, including loans sold through the MPF Xtra program of $116,978,000 and loans sold through the Original program of $46,318,000. At December 31, 2015, outstanding balances of loans sold and serviced through the two programs totaled $152,448,000, including loans sold through the MPF Xtra program of $125,571,000$96,841,000 and loans sold through the Original Program of $26,877,000.$74,901,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 20162019 and December 31, 2015.2018.

 

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At December 31, 2016,2019, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,664,000,$4,618,000, and the Corporation has recorded a related allowance for credit losses in the amount of $196,000$333,000 which is included in “AccruedAccrued interest and other liabilities”liabilities in the accompanying consolidated balance sheets. There was no allowance recorded atAt December 31, 2015.2018, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,157,000, and the related allowance for credit losses was $328,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

 

Table VII – Summary of Loans by Type
(In Thousands)
 
  2016  %  2015  %  2014  %  2013  %  2012  % 
Residential mortgage:                                        
Residential mortgage loans - first liens $334,102   44.4  $304,783   43.2  $291,882   46.3  $299,831   46.5  $311,627   45.6 
Residential mortgage loans - junior liens  23,706   3.2   21,146   3.0   21,166   3.4   23,040   3.6   26,748   3.9 
Home equity lines of credit  38,057   5.1   39,040   5.5   36,629   5.8   34,530   5.4   33,017   4.8 
1-4 Family residential construction  24,908   3.3   21,121   3.0   16,739   2.7   13,909   2.2   12,842   1.9 
Total residential mortgage  420,773   56.0   386,090   54.8   366,416   58.1   371,310   57.6   384,234   56.2 
Commercial:                                        
Commercial loans secured by real estate  150,468   20.0   154,779   22.0   145,878   23.1   147,215   22.8   158,413   23.2 
Commercial and industrial  83,854   11.2   75,196   10.7   50,157   8.0   42,387   6.6   48,442   7.1 
Political subdivisions  38,068   5.1   40,007   5.7   17,534   2.8   16,291   2.5   31,789   4.6 
Commercial construction  14,287   1.9   5,122   0.7   6,938   1.1   17,003   2.6   28,200   4.1 
Loans secured by farmland  7,294   1.0   7,019   1.0   7,916   1.3   10,468   1.6   11,403   1.7 
Multi-family (5 or more) residential  7,896   1.1   9,188   1.3   8,917   1.4   10,985   1.7   6,745   1.0 
Agricultural loans  3,998   0.5   4,671   0.7   3,221   0.5   3,251   0.5   3,053   0.4 
Other commercial loans  11,475   1.5   12,152   1.7   13,334   2.1   14,631   2.3   362   0.1 
Total commercial  317,340   42.2   308,134   43.7   253,895   40.3   262,231   40.7   288,407   42.2 
Consumer  13,722   1.8   10,656   1.5   10,234   1.6   10,762   1.7   11,269   1.6 
Total  751,835   100.0   704,880   100.0   630,545   100.0   644,303   100.0   683,910   100.0 
Less: allowance for loan losses  (8,473)      (7,889)      (7,336)      (8,663)      (6,857)    
Loans, net $743,362      $696,991      $623,209      $635,640      $677,053     

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TABLE VII - Five-year Summary of Loans by Type

(Dollars In Thousands)  2019  %  2018  %  2017  %  2016  %  2015  % 
Residential mortgage:                                        
Residential mortgage loans - first liens $510,641   43.2  $372,339   45.0  $359,987   44.1  $334,102   44.4  $304,783   43.2 
Residential mortgage loans - junior liens  27,503   2.3   25,450   3.1   25,325   3.1   23,706   3.2��  21,146   3.0 
Home equity lines of credit  33,638   2.8   34,319   4.1   35,758   4.4   38,057   5.1   39,040   5.5 
1-4 Family residential construction  14,798   1.3   24,698   3.0   26,216   3.2   24,908   3.3   21,121   3.0 
Total residential mortgage  586,580   49.6   456,806   55.2   447,286   54.8   420,773   56.0   386,090   54.8 
Commercial:                                        
Commercial loans secured by real estate  301,227   25.5   162,611   19.6   159,266   19.5   150,468   20.0   154,779   22.0 
Commercial and industrial  126,374   10.7   91,856   11.1   88,276   10.8   83,854   11.2   75,196   10.7 
Political subdivisions  53,570   4.5   53,263   6.4   59,287   7.3   38,068   5.1   40,007   5.7 
Commercial construction and land  33,555   2.8   11,962   1.4   14,527   1.8   14,287   1.9   5,122   0.7 
Loans secured by farmland  12,251   1.0   7,146   0.9   7,255   0.9   7,294   1.0   7,019   1.0 
Multi-family (5 or more) residential  31,070   2.6   7,180   0.9   7,713   0.9   7,896   1.1   9,188   1.3 
Agricultural loans  4,319   0.4   5,659   0.7   6,178   0.8   3,998   0.5   4,671   0.7 
Other commercial loans  16,535   1.4   13,950   1.7   10,986   1.3   11,475   1.5   12,152   1.7 
Total commercial  578,901   49.0   353,627   42.7   353,488   43.3   317,340   42.2   308,134   43.7 
Consumer  16,741   1.4   17,130   2.1   14,939   1.8   13,722   1.8   10,656   1.5 
Total  1,182,222   100.0   827,563   100.0   815,713   100.0   751,835   100.0   704,880   100.0 
Less: allowance for loan losses  (9,836)      (9,309)      (8,856)      (8,473)      (7,889)    
Loans, net $1,172,386      $818,254      $806,857      $743,362      $696,991     

 

TABLE VIII – LOAN MATURITY DISTRIBUTION

(In Thousands) As of December 31, 2016

  Fixed-Rate Loans  Variable- or Adjustable-Rate Loans 
  1 Year  1-5  >5     1 Year  1-5  >5    
  or Less  Years  Years  Total  or Less  Years  Years  Total 
Real Estate $4,027  $22,376  $170,014  $196,417  $144,585  $152,883  $94,394  $391,862 
Commercial  8,814   39,959   23,926   72,699   54,631   21,798   985   77,414 
Consumer  1,733   8,432   3,218   13,383   60   0   0   60 
Total $14,574  $70,767  $197,158  $282,499  $199,276  $174,681  $95,379  $469,336 

29

  As of December 31, 2019 
    
  Fixed-Rate Loans  Variable- or Adjustable-Rate Loans 
  1 Year  1-5  >5     1 Year  1-5  >5    
(In Thousands) or Less  Years  Years  Total  or Less  Years  Years  Total 
Real Estate $3,988  $67,529  $187,706  $259,223  $167,318  $320,011  $180,631  $667,959 
Commercial  18,277   24,801   33,266   76,344   99,643   43,483   18,154   161,280 
Consumer  3,768   9,833   3,786   17,387   29   0   0   29 
Total $26,033  $102,163  $224,758  $352,954  $266,990  $363,494  $198,785  $829,268 

 

PROVISION AND ALLOWANCE FOR LOAN LOSSES

 

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses.

 

While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. 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.

 

The allowance for loan losses was $8,473,000$9,836,000 at December 31, 2016,2019, up from $7,889,000$9,309,000 at December 31, 2015. As shown2018. Table X shows that the collectively determined portion of the allowance increased $1,081,000 across all loan classes, including an increase in the collectively determined portion of the allowance related to commercial loans of $811,000. This increase was primarily due to loan growth in 2019.

26

Table X shows total specific allowances on impaired loans totaled $674,000decreased $554,000 to $1,051,000 at December 31, 2016, which was $146,000 lower than2019 from $1,605,000 at December 31, 2018. This net decrease included the totalimpact of specific allowances on impaired loanstotaling $1,365,000 at December 31, 2015. Table X shows2018 on two commercial loans being eliminated in the collectively determinedfirst quarter 2019. These two loans were no longer considered impaired at March 31, 2019, were returned to full accrual status in the first quarter 2019 and remained in full accrual status at December 31, 2019. Partially offsetting this reduction, in the third quarter 2019 the Corporation recorded a specific allowance of $678,000 on a commercial construction loan with an outstanding balance of $1,261,000 at December 31, 2019.

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. The calculation of the fair value of performing loans at acquisition included a discount for credit losses of $1,914,000, reflecting an estimate of the present value of credit losses based on market expectations. In the last nine months of 2019, the Corporation recognized accretion of the discount of $698,000, with a remaining discount for credit losses of $1,216,000 at December 31, 2019. None of the performing loans purchased were found to be impaired at December 31, 2019, and the purchased performing loans were excluded from the loan pools for which the general component of the allowance for residential mortgagesloan losses was $473,000 highercalculated. Accordingly, there was no allowance for loan losses at December 31, 2016 than2019 on loans purchased from Monument, which was the main reason the allowance dropped to 0.83% of total outstanding loans at December 31, 2015, reflecting growth in outstanding loans and use of slightly higher qualitative factors to estimate the required allowance. Also, the collectively determined component of the allowance for commercial loans was $270,000 higher2019 from 1.12% at December 31, 2016 than at December 31, 2015, reflecting the effects of growth in outstanding loans and increases in the average net charge-offs experience and qualitative factors used to estimate the required allowance.2018.

 

The provision for loan losses by segment for 2016, 20152019 and 20142018 is as follows:

     
(In Thousands)        2019 2018 
 2016 2015 2014 
Residential mortgage $542  $(19) $250  $374  $173 
Commercial  687   816   227   197   204 
Consumer  21   16   2   192   207 
Unallocated  (29)  32   (3)  86   0 
Total  $1,221  $845  $476  $849  $584 

 

As shown in Table XII, the averageThe provision for loan losses is further detailed as follows:

Residential mortgage segment      
(In thousands) 2019  2018 
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs $238  $144 
         
Increase (decrease) in collectively determined portion of the allowance attributable to:        
Loan growth  171   94 
Changes in historical loss experience factors  47   (65)
Changes in qualitative factors  (82)  0 
Total provision for loan losses -        
Residential mortgage segment $374  $173 
         

Commercial segment        
(In thousands)  2019   2018 
(Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs $(614) $180 
         
Increase (decrease) in collectively determined portion of the allowance attributable to:        
Loan growth  1,025   45 
Changes in historical loss experience factors  (371)  (21)
Changes in qualitative factors  157   0 
Total provision for loan losses -        
Commercial segment $197  $204 

27

Consumer segment        
(In thousands)  2019   2018 
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs $144  $133 
         
Increase (decrease) in collectively determined portion of the allowance attributable to:        
Loan (reduction) growth  (3)  39 
Changes in historical loss experience factors  31   34 
Changes in qualitative factors  20   1 
Total provision for loan losses -        
Consumer segment $192  $207 
         

Total - All segments        
(In thousands)  2019   2018 
(Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs $(232) $457 
         
Increase (decrease) in collectively determined portion of the allowance attributable to:        
Loan growth  1,193   178 
Changes in historical loss experience factors  (293)  (52)
Changes in qualitative factors  95   1 
Sub-total  763   584 
Unallocated  86   0 
Total provision for loan losses -        
All segments $849  $584 

For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off.

In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase in loans outstanding (excluding loans specifically evaluated for impairment) for the period.

The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment).

In 2019, net charge-offs were $322,000, including charge-offs of $379,000 and recoveries of $57,000. The Corporation’s overall net charge-off experience in 2019 was consistent with results over the past several years. Table XII shows the average rate of net charge-offs as a percentage of loans was 0.03% in 2019, with an annual average over the five-year period ended December 31, 2016 was $975,000. The total amount2019 of the provision for loan losses for each period is determined based on the amount required to maintain an appropriate allowance.

The $542,000 provision for the residential mortgage segment0.04%, and annual average rates ranging from a high of 0.09% in 2016 included the $473,000 increaseto a low of 0.02% in the collectively determined allowance, as noted above, and a net charge of $69,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period. In 2015, the $19,000 credit for loan losses in the residential mortgage segment resulted mainly from a reduction in the specific allowance related to one loan relationship, partially offset by the effects of an increase of $122,000 in the collectively determined allowance due to loan growth. The provision for the residential segment of $250,000 in 2014 included the effects of an increase in the collectively determined allowance of $139,000, mainly due to loan growth.2018.

In 2016, the $687,000 provision for loan losses for the commercial segment included $417,000 from the net change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, and $270,000 from the net increase in the collectively determined allowance as described above. In comparison, the $816,000 provision for the commercial segment in 2015 included $445,000 from the net change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, and $371,000 from the net increase in the collectively determined allowance, with growth in the collectively determined allowance in 2015 caused by growth in outstanding loans. The provision for the commercial segment of $227,000 in 2014 included the effects of an increase in the collectively determined allowance of $149,000, reflecting loan growth and a slight increase in qualitative factors used to estimate the required allowance.

30

 

Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 2.07%0.88% at December 31, 2016,2019, down slightly from 2.09%1.94% at December 31, 2015,2018, and nonperforming assets as a percentage of total assets was 1.43%0.80% at December 31, 2016, up2019, down from 1.31%1.37% at December 31, 2015.2018. Table XI presents data at the end of each of the years ended December 31, 20122015 through 2016. For the range of dates presented in2019. Table XI shows that total nonperforming loans as a percentage of loans has ranged from a low of 1.41%0.88% at December 31, 2012 to a high of 2.80% at2019 was lower than the corresponding year-end ratio from 2015 through 2018. Similarly, the December 31, 2013, and2019 ratio of total nonperforming assets as a percentage of assets has rangedof 0.80% was lower than the corresponding ratio from 2015 through 2018. These improved credit-related ratios reflect the impact of acquired loans from Monument and significant additional loan growth in 2019, with a lowminimal amount of 0.82% at December 31, 2012 toloans purchased or originated in 2019 classified as nonperforming, as well as a high of 1.53% at December 31, 2013.reduction in total nonperforming assets.

28

 

Total impaired loans of $10,860,000$5,486,000 at December 31, 2016,2019 are up $886,000down $4,288,000 from the corresponding amount at December 31, 20152018 of $9,974,000, including an increase in$9,774,000. In 2019, the two commercial loans referred to above for which specific allowances were eliminated were not considered to be impaired loans with a valuation allowance of $1,439,000. In 2016, the Corporation recorded an allowance of $528,000 related to one real estate secured commercial loan relationship with an outstanding balance of $2,773,000 that was classified as impaired with a valuation allowance at December 31, 2016.2019 but were considered impaired at December 31, 2018. Total outstanding balances of these loans were $3,781,000 at December 31, 2018. Table XI shows that over the period 2012-2016, the year-end total outstanding balance of impaired loans hasat December 31, 2019 was lower than the year-end amounts over the period 2015-2018, which ranged from a low of $7,429,000$9,511,000 in 20122017 to a high of $16,321,000$10,860,000 in 2013.2016.

 

Total nonperforming assets of $17,754,000$13,311,000 at December 31, 20162019 are up $1,748,000 from$4,411,000 lower than the corresponding amount at December 31, 2015. A summary of changes in the components of nonperforming assets at December 31, 2016 as compared to December 31, 2015 is2018, summarized as follows:

 

·NonaccrualTotal nonaccrual loans totaled $8,736,000 at December 31, 2016, down from $11,517,000 at2019 of $9,218,000 was $3,895,000 lower than the corresponding December 31, 2015. As described in more detail below, the net reduction in nonaccrual loans included the effect2018 total of moving loans to one commercial borrower with recorded investments totaling $4,786,000 to full accrual status in the fourth quarter 2016. The net change in nonaccrual loans also included the effect of classifying the real estate secured commercial loan noted above with an outstanding balance at December 31, 2016 of $2,773,000 as nonaccrual in 2016.$13,113,000.

 

·Total loans past due 90 days or more and still accruing interest amounted to $6,838,000$1,207,000 at December 31, 2016, an increase2019, a decrease of $3,609,000$1,699,000 from $3,229,000the total at December 31, 2015. The increase in 2016 in the balance of loans past due 90 days or more and still accruing interest included a commercial loan with a balance of $2,677,000 at December 31, 2016 that was deemed by management to be well secured and in the process of collection. At December 31, 2016, in addition to this commercial loan, total residential mortgage loans that were more than 90 days past due but deemed to be well secured and in the process of collection amounted to $3,022,000, up from $2,381,000 at December 31, 2015. The Corporation reviews the status of loans past due 90 days or more each quarter to determine if it is appropriate to continue to accrue interest, and has determined the loans included in this category are well secured and that ultimate collection of all principal and interest is probable.2018.

 

·Foreclosed assets held for sale consisted of real estate, and totaled $2,180,000$2,886,000 at December 31, 2016,2019, an increase of $920,000$1,173,000 from $1,260,000$1,703,000 at December 31, 2015.2018. Of this increase, $871,000 related to a property acquired through the Monument acquisition. At December 31, 2016,2019, the Corporation held 19ten such properties for sale, with total carrying values of $1,102,000$292,000 related to residential real estate, $650,000$70,000 of land and $428,000$2,524,000 related to commercial real estate. At December 31, 2015,2018, the Corporation held 12six such properties for sale, with total carrying values of $556,000$64,000 related to residential real estate, $110,000 of land and $704,000 of land.$1,529,000 related to commercial real estate. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property.

 

As shownreflected in Table XI, total loans classified as TDRs increasedpast due 30-89 days and still accruing interest amounted to $8,677,000$8,889,000 at December 31, 20162019, up from $6,364,000$7,142,000 at December 31, 2015. The increase resulted primarily from a concession granted to one commercial customer with a loan balance of $2,773,0002018 but lower than the amount at December 31, 2016. The Corporation entered into a forbearance agreement with this customer2017 of $9,449,000. These variances include the effect of fluctuations in 30-89 day past due residential mortgage loans, which includes extending the period to twelve months for which required monthly payments will include interest only. Table XI shows that over the period 2012-2016, the year-end total outstanding balance of TDRs has ranged from a low of $2,061,000 in 2012 to a high of $8,677,000 in 2016.

31

Recorded investments in impaired loans without a valuation allowance and performing TDRstotaled $7,249,000 at December 31, 2016 include $4,786,0002019, up from loans to one commercial entity. In 2014, the Corporation entered into a forbearance agreement with this commercial borrower which included a reduction in monthly payment amounts over a fifteen-month period. At the end of the fifteen-month period, the monthly payment amounts would revert to the original amounts, unless the forbearance agreement was extended or the payment requirements otherwise modified. The forbearance agreement was extended for two additional twelve-month periods, most recently in July 2016. The Corporation recorded a charge-off of $1,486,000 in 2014 as a result of these modifications, as the payment amounts based on the forbearance agreement were not sufficient to fully amortize the contractual amount of principal outstanding on the loans. In December 2016, the Corporation and the borrower entered into a modification agreement, terminating the forbearance agreement and establishing loan terms with essentially the same interest rate and monthly payment amounts as had been in effect under the forbearance agreement. The weighted average maturity of the loan contracts has been extended under the modification agreement as compared to the maturities provided for in the original loan contracts. At December 31, 2016, the outstanding contractual balances of these loans total $6,529,000, and the recorded investments total $4,786,000. These loans are still classified as TDRs$5,835,000 at December 31, 2016. The borrower made all required payments on2018 but slightly lower than the loans in accordance with the terms of the forbearance agreement, as extended, and (as noted above), the loans were restored to full accrual statusamount at December 31, 2016.2017 of $7,236,000. Management monitors the status of delinquent residential mortgage loans on an ongoing basis and has considered delinquency trends, which were generally favorable throughout most of 2019, in evaluating the allowance for loan losses at December 31, 2019.

 

Over the period 2012-2016,2015-2019, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.

 

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of December 31, 2016.2019. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

 

Tables IX through XII present historical data related to the allowance for loan losses.

 

 3229 

 

 

TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

 

 Years Ended December 31, 
(Dollars In Thousands) Years Ended December 31,  2019 2018 2017 2016 2015 
 2016 2015 2014 2013 2012 
Balance, beginning of year $7,889  $7,336  $8,663  $6,857  $7,705  $9,309  $8,856  $8,473  $7,889  $7,336 
Charge-offs:                                        
Residential mortgage  (73)  (217)  (327)  (95)  (552)  (190)  (158)  (197)  (73)  (217)
Commercial  (597)  (251)  (1,715)  (459)  (498)  (6)  (165)  (132)  (597)  (251)
Consumer  (87)  (94)  (97)  (117)  (171)  (183)  (174)  (150)  (87)  (94)
Total charge-offs  (757)  (562)  (2,139)  (671)  (1,221)  (379)  (497)  (479)  (757)  (562)
Recoveries:                                        
Residential mortgage  3   1   25   24   18   12   8   19   3   1 
Commercial  35   214   264   348   8   6   317   4   35   214 
Consumer  82   55   47   58   59   39   41   38   82   55 
Total recoveries  120   270   336   430   85   57   366   61   120   270 
Net charge-offs  (637)  (292)  (1,803)  (241)  (1,136)  (322)  (131)  (418)  (637)  (292)
Provision for loan losses  1,221   845   476   2,047   288   849   584   801   1,221   845 
Balance, end of period $8,473  $7,889  $7,336  $8,663  $6,857  $9,836  $9,309  $8,856  $8,473  $7,889 
Net charge-offs as a % of average loans  0.09%  0.04%  0.29%  0.04%  0.16%  0.03%  0.02%  0.05%  0.09%  0.04%

 

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands)

 

  As of December 31, 
  2016  2015  2014  2013  2012 
ASC 310 - Impaired loans $674  $820  $769  $2,333  $623 
ASC 450 - Collective segments:                    
Commercial  3,373   3,103   2,732   2,583   2,594 
Residential mortgage  3,890   3,417   3,295   3,156   3,011 
Consumer  138   122   145   193   188 
Unallocated  398   427   395   398   441 
Total Allowance $8,473  $7,889  $7,336  $8,663  $6,857 

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

    
  As of December 31, 
(In Thousands) 2019  2018  2017  2016  2015 
ASC 310 - Impaired loans $1,051  $1,605  $1,279  $674  $820 
ASC 450 - Collective segments:                    
Commercial  3,913   3,102   3,078   3,373   3,103 
Residential mortgage  4,006   3,870   3,841   3,890   3,417 
Consumer  281   233   159   138   122 
Unallocated  585   499   499   398   427 
Total Allowance $9,836  $9,309  $8,856  $8,473  $7,889 

 

 3330 

 

 

TABLE XI  - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(Dollars In Thousands)

TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETSAND TROUBLED DEBT RESTRUCTURINGS (TDRs)

 

 As of December 31,  As of December 31, 
 2016 2015 2014 2013 2012 
(Dollars In Thousands) 2019 2018 2017 2016 2015 
Impaired loans with a valuation allowance $3,372  $1,933  $3,241  $9,889  $2,710  $3,375  $4,851  $4,100  $3,372  $1,933 
Impaired loans without a valuation allowance  7,488   8,041   9,075   6,432   4,719   2,111   4,923   5,411   7,488   8,041 
Total impaired loans $10,860  $9,974  $12,316  $16,321  $7,429  $5,486  $9,774  $9,511  $10,860  $9,974 
                    
Total loans past due 30-89 days and still accruing $7,735  $7,057  $7,121  $8,305  $7,756  $8,889  $7,142  $9,449  $7,735  $7,057 
                                        
Nonperforming assets:                                        
Total nonaccrual loans $8,736  $11,517  $12,610  $14,934  $7,353  $9,218  $13,113  $13,404  $8,736  $11,517 
Total loans past due 90 days or more and still accruing  6,838   3,229   2,843   3,131   2,311   1,207   2,906   3,724   6,838   3,229 
Total nonperforming loans  15,574   14,746   15,453   18,065   9,664   10,425   16,019   17,128   15,574   14,746 
Foreclosed assets held for sale (real estate)  2,180   1,260   1,189   892   879   2,886   1,703   1,598   2,180   1,260 
Total nonperforming assets $17,754  $16,006  $16,642  $18,957  $10,543  $13,311  $17,722  $18,726  $17,754  $16,006 
                                        
Loans subject to troubled debt restructurings (TDRs):                                        
Performing $5,803  $1,186  $1,807  $3,267  $906  $889  $655  $636  $5,803  $1,186 
Nonperforming  2,874   5,178   5,388   908   1,155   1,737   2,884   3,027   2,874   5,178 
Total TDRs $8,677  $6,364  $7,195  $4,175  $2,061  $2,626  $3,539  $3,663  $8,677  $6,364 
                                        
Total nonperforming loans as a % of loans  2.07%  2.09%  2.45%  2.80%  1.41%  0.88%  1.94%  2.10%  2.07%  2.09%
Total nonperforming assets as a % of assets  1.43%  1.31%  1.34%  1.53%  0.82%  0.80%  1.37%  1.47%  1.43%  1.31%
Allowance for loan losses as a % of total loans  1.13%  1.12%  1.16%  1.34%  1.00%  0.83%  1.12%  1.09%  1.13%  1.12%
Allowance for loan losses as a % of nonperforming loans  54.40%  53.50%  47.47%  47.95%  70.95%  94.35%  58.11%  51.70%  54.40%  53.50%

 

TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES
(Dollars In Thousands)

TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES

 

 2016 2015 2014 2013 2012 Average 
(Dollars In Thousands) 2019 2018 2017 2016 2015 Average 
Average gross loans $723,076  $657,727  $627,753  $656,495  $700,241  $673,058  $1,057,559  $822,346  $780,640  $723,076  $657,727  $808,270 
Year-end gross loans  751,835   704,880   630,545   644,303   683,910   683,095   1,182,222   827,563   815,713   751,835   704,880  $856,443 
Year-end allowance for loan losses  8,473   7,889   7,336   8,663   6,857   7,844   9,836   9,309   8,856   8,473   7,889  $8,873 
Year-end nonaccrual loans  8,736   11,517   12,610   14,934   7,353   11,030   9,218   13,113   13,404   8,736   11,517  $11,198 
Year-end loans 90 days or more past due and still accruing  6,838   3,229   2,843   3,131   2,311   3,670   1,207   2,906   3,724   6,838   3,229   3,581 
Net charge-offs  637   292   1,803   241   1,136   822   322   131   418   637   292   360 
Provision for loan losses  1,221   845   476   2,047   288   975   849   584   801   1,221   845   860 
Earnings coverage of charge-offs  37x  85x  14x  116x  30x  33x  76x  210x  56x  37x  85x  93x
Allowance coverage of charge-offs  13x  27x  4x  36x  6x  10x  31x  71x  21x  13x  27x  33x
Net charge-offs as a % of provision for loan losses  52.17%  34.56%  378.78%  11.77%  394.44%  84.31%  37.93%  22.43%  52.18%  52.17%  34.56%  41.86%
Net charge-offs as a % of average gross loans  0.09%  0.04%  0.29%  0.04%  0.16%  0.12%  0.03%  0.02%  0.05%  0.09%  0.04%  0.04%
Income before income taxes on a fully taxable equivalent basis  23,861   24,710   25,784   28,012   34,571   27,388   24,453   27,564   23,350   23,861   24,710   24,788 

 

 3431 

 

 

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

 

Table XIII presents theThe Corporation’s significant fixed and determinable contractual obligations as of December 31, 2016 by payment date. The payment amounts represent the principal amounts2019 include repayment obligations related to time deposits and borrowed funds. Information related to maturities of time deposits and borrowings and do not include interest.

TABLE XIII – CONTRACTUAL OBLIGATIONS

(In Thousands)

  1 Year  1-3  3-5  Over 5    
  or Less  Years  Years  Years  Total 
Time deposits $113,974  $76,828  $21,168  $248  $212,218 
Short-term borrowings:                    
Federal Home Loan Bank of Pittsburgh  21,000   0   0   0   21,000 
Customer repurchase agreements  5,175   0   0   0   5,175 
Long-term borrowings:                    
Federal Home Loan Bank of Pittsburgh  10,004   0   646   804   11,454 
Repurchase agreements  27,000   0   0   0   27,000 
Total $177,153  $76,828  $21,814  $1,052  $276,847 

In additionis provided in Note 11 to the amounts described in Table XIII, the Corporation has obligationsconsolidated financial statements. Information related to deposits without a stated maturity with outstanding principal balances totaling $771,625,000 at December 31, 2016.

maturities of borrowed funds is provided in Note 12 to the consolidated financial statements. The Corporation’s operating lease and other commitments at December 31, 20162019 are immaterial. Information concerning operating lease commitments is provided in Note 17 to the consolidated financial statements. The Corporation’s significant off-balance sheet arrangements include commitments to extend credit and standby letters of credit. Off-balance sheet arrangements are described in Note 16 to the consolidated financial statements.

 

As described in more detail in the “Financial Condition”Financial Condition section of Management’s Discussion and Analysis, the Corporation sells residential mortgage loans for which the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. At December 31, 2016,2019, outstanding balances of such loans sold totaled $163,296,000.$178,446,000.

 

Also, for loans sold under the MPF Original program, the Corporation provides a credit enhancement. At December 31, 2016,2019, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,664,000,$4,618,000, and the Corporation has recorded a related allowance for credit losses in the amount of $196,000$333,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets.

 

LIQUIDITY

 

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At December 31, 2016,2019, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $11,070,000.$13,455,000.

 

The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.

 

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale securities with a carrying value of $17,690,000$14,728,000 at December 31, 2016.2019.

35

 

The Corporation’s outstanding, available, and total credit facilities at December 31, 20162019 and December 31, 20152018 are as follows:

 

 Outstanding Available Total Credit 
 Outstanding Available Total Credit  Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 
(In Thousands) Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,  2019 2018 2019 2018 2019 2018 
 2016 2015 2016 2015 2016 2015 
Federal Home Loan Bank of Pittsburgh $32,454  $60,348  $306,767  $262,361  $339,221  $322,709  $136,424  $42,915  $416,122  $318,699  $552,546  $361,614 
Federal Reserve Bank Discount Window  0   0   15,636   19,606   15,636   19,606   0   0   14,244   15,262   14,244   15,262 
Other correspondent banks  0   0   45,000   45,000   45,000   45,000   0   0   45,000   45,000   45,000   45,000 
Total credit facilities $32,454  $60,348  $367,403  $326,967  $399,857  $387,315  $136,424  $42,915  $475,366  $378,961  $611,790  $421,876 

 

The significant increase in credit available from the Federal Home Loan Bank of Pittsburgh in 2019 resulted from an increase in the borrowing base created by the acquisition of real estate secured loans from Monument. At December 31, 2016,2019, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $21,000,000$64,000,000, short-term borrowings of $20,297,000 and long-term borrowings with a total amount of $11,454,000.$52,127,000. At December 31, 2015,2018, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $23,500,000, short-term borrowings of $25,081,000,$7,000,000 and long-term borrowings with a total amount of $11,767,000.$35,915,000. Additional information regarding borrowed funds is included in Note 12 to the consolidated financial statements.

 

Additionally, the Corporation uses repurchase agreements placed with brokers to borrow funds secured by investment assets and “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale debt securities to meet its obligations. At December 31, 2016,2019, the carrying value of available-for-sale debt securities in excess of amounts required to meet pledging or repurchase agreement obligations was $199,364,000.$170,948,000.

 

Management believes the Corporation is well-positioned to meet its short-term and long-term obligations.

 

32

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

 

As required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (discussed further in the Recent Legislative Developments section of Management’s Discussion and Analysis), 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 areremains subject to various regulatory capital requirements administered by the federal banking agencies.

Details concerning regulatory capital amountsratios at December 31, 2019 and ratiosDecember 31, 2018 are presented below and in Note 18 to the consolidated financial statements. As reflected in Note 18, atManagement believes, as of December 31, 2016 and 2015, the Corporation and2019, that C&N Bank meetmeets all capital adequacy requirements to which they areit is subject and maintainmaintains a capital conservation buffersbuffer (described in more detail below) that allowallows the Corporation and C&N Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to certain executive officers. Further, 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 torisk-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 torisk-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% 

33

Capital ratios presented in the table above were slightly lower at December 31, 2019 as compared to December 31, 2018 but remain at levels well in excess of regulatory requirements. Management expects C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions and the applicable capital conservation buffer, including the impact of the pending acquisition of Covenant, for the next 12 months and for the foreseeable future.

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold sufficient capital commensurate with its overall risk profile.

 

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). The Corporation and C&N Bank were subject to the new rule on January 1, 2015. Generally, the new rule implements higher minimum capital requirements, revises the definition of regulatory capital components and related calculations, adds a new common equity tier 1 capital ratio, implements a new capital conservation buffer, increases the risk weighting for past due loans and provides a transition period for several aspects of the new rule.

36

The newThis capital rule provides that, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization 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. Phase-in ofassets and is added to the minimum required risk-based capital conservation buffer requirements began Januaryratios (as defined) for common equity tier 1 2016. The transition schedule for newcapital, tier 1 capital and total capital. In 2019, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, isare as follows:

 

  As of January 1:          
  2015  2016  2017  2018  2019 
Minimum common equity tier 1 capital ratio  4.5%  4.5%  4.5%  4.5%  4.5%
Common equity tier 1 capital conservation buffer  N/A   0.625%  1.25%  1.875%  2.5%
Minimum common equity tier 1 capital ratio plus capital conservation buffer  4.5%  5.125%  5.75%  6.375%  7.0%
Phase-in of most deductions from common equity tier 1 capital  40%  60%  80%  100%  100%
Minimum tier 1 capital ratio  6.0%  6.0%  6.0%  6.0%  6.0%
Minimum tier 1 capital ratio plus capital conservation buffer   N/A   6.625%  7.25%  7.875%  8.5%
Minimum total capital ratio  8.0%  8.0%  8.0%  8.0%  8.0%
Minimum total capital ratio plus capital conservation buffer   N/A   8.625%  9.25%  9.875%  10.5%
Minimum common equity tier 1 capital ratio4.5%
Minimum common equity tier 1 capital ratio plus
capital conservation buffer7.0%
Minimum tier 1 capital ratio6.0%
Minimum tier 1 capital ratio plus capital
conservation buffer8.5%
Minimum total capital ratio8.0%
Minimum total capital ratio plus capital
conservation buffer10.5%

 

As fully phased in, aA banking organization with a buffer greater than 2.5% 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. The new rule also prohibits a banking organization 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)

 

Maximum Payout

(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 31, 2016, the Corporation’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 15.60%.2019, C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 13.03%10.75%.

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.

Management expects the Corporation and C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future. Planned capital expenditures are not expected to have a significantly detrimental effect on capital ratios.

37

 

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income (Loss) within stockholders’ equity. The balance in Accumulated Other Comprehensive Income (Loss) related to unrealized gains (losses) on available-for-sale debt securities, net of deferred income tax, amounted to ($949,000)$3,511,000 at December 31, 2016, $2,493,0002019 and ($4,307,000) at December 31, 2015 and $5,281,000 at December 31, 2014.2018. Changes in accumulated other comprehensive income (loss) are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 7 to the consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at December 31, 2016.2019.

 


Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income (Loss) related to defined benefit plans, net of deferred income tax, was $51,000$180,000 at December 31, 2016, $35,0002019 and $137,000 at December 31, 2015 and $79,000 at December 31, 2014.2018.

 

COMPREHENSIVE INCOME

 

Comprehensive Income 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. Changes in the components of Accumulated Other Comprehensive Income (Loss) are included in Other Comprehensive Income, and for the Corporation, consist of changes in unrealized gains or losses on available-for-sale securities and changes in underfunded or overfunded defined benefit plans.

 

Comprehensive Income totaled $12,336,000$27,365,000 in 20162019 as compared to $13,639,000$19,627,000 in 2015 and $23,439,000 in 2014.2018. In 2016,2019, Comprehensive Income included: (1) Net Income of $15,762,000,$19,504,000, which was $709,000 lower$2,509,000 less than in 2015 and $1,324,000 lower than in 2014;2018; (2) Other Comprehensive LossIncome from unrealized lossesgains on available-for-sale securities, net of deferred income tax, of ($3,442,000)$7,818,000 as compared to Other Comprehensive Loss of ($2,788,000)2,452,000) in 2015 and Other Comprehensive Income of $6,285,000 in 2014;2018; and (3) Other Comprehensive Income from defined benefit plans of $16,000$43,000 in 20162019 as compared to Other Comprehensive Loss of ($44,000) in 2015 and Other Comprehensive Income of $68,000$66,000 in 2014.2018. Fluctuations in interest rates significantly affected fair values of available-for-sale securities in 2014 through 2016,2019 and 2018, and accordingly had an effect on Other Comprehensive Income (Loss) in each year.

 

INFLATIONRECENT LEGISLATIVE DEVELOPMENTS

 

The Corporation is significantly affectedOn May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Most of the changes made by the new Act can be grouped into five general areas: mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified as systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation.

As noted in the Stockholders’ Equity and Capital Adequacy section of Management’s Discussion and Analysis, as required by the Act, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s effortssmall bank holding company policy statement, raising the policy statement’s asset threshold from $1 billion to control inflation through changes$3 billion in short-term interest rates. Beginning in September 2007, in responsetotal consolidated assets for a bank holding company or savings and loan holding company, subject to concerns about weakness inother conditions. Management believes the U.S. economy,Corporation meets the conditions of the Federal Reserve loweredReserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at December 31, 2019. Further, qualification as a small bank holding company allows the fed funds target rate numerous times; in December 2008, it established a target range of 0%Corporation to 0.25%, which it maintained through mid-December 2015. On December 16, 2015,file more abbreviated, and less frequent, consolidated and holding company reports with the Federal Reserve raised their target for the federal funds rate to 0.25% to 0.50%. The Federal Reserve then raised the target rate to 0.50% to 0.75% on December 14, 2016. The most recent decision was based on data available that suggested economic activity had been expanding at a moderate pace and the labor market had continued to strengthen since mid-year. The Fed noted that the data indicated an increase in household spending, though business fixed investments had remained soft. While inflation increased from the beginning of 2016, it is still below the Federal Open Market Committee’s (FOMC) 2.00% longer run objective. This was partly due to declines in energy prices and in prices of non-energy imports. The FOMC expects to continue gradual adjustments in the stance of monetary policy, which will allow economic activity to expand at a moderate pace with inflation reaching the forecasted 2.00% over the medium term.Reserve.

 

Also, throughoutas required by the period of low interest rates,Act, in October 2019 the Federal Reserve Board, FDIC and Office of the Comptroller of the Currency finalized a rule that would provide qualifying community banking organizations an option to calculate a simple leverage ratio, rather than multiple measures of capital adequacy. Under the rule, a community banking organization would be eligible to elect the community bank leverage ratio framework if it has injected massiveless than $10 billion in total consolidated assets, limited amounts of liquidity intocertain assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9%. A qualifying community banking organization that has chosen the nation’s monetary system throughproposed framework would not be required to calculate the existing risk-based and leverage capital requirements.  Such a varietycommunity banking organization would be considered to have satisfied the risk-based and leverage capital requirements in the agencies’ generally applicable capital rule and be considered well capitalized for the agencies’ prompt corrective action rules provided it has a community bank leverage ratio greater than 9 percent. The Corporation is in the process of programs. The Federal Reserve has purchased large amounts of securities in an effort to keep interest rates low and stimulate economic growth. Beginning in late 2013,evaluating whether it will adopt the Federal Reserve began reducing the amount of securities purchased under its asset purchase program and then ended the program in October 2014, though still reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and continued to roll over maturing Treasury securities at auction. The Federal Reserve maintained their commitment to this policy in their December 14, 2016 statement and anticipates doing so until normalizationoptional community bank leverage ratio framework.

Some of the levelother key provisions of the federal funds rate is well under way.

DespiteAct as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets from Volcker Rule requirements relating to proprietary trading; (iii) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (iv) raising the current low short-term rate environment, inflation statistics indicateeligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (v) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that the overall rate of inflation is unlikelyonly loans with increased risk are subject to significantly affect the Corporation’s operations within the near future. Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including any indicators of inflationary pressures, in managing interest rate and other financial risks.higher risk weightings.

 

38

RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 2 to the consolidated financial statements for a description of recent accounting pronouncements and their recent or potential future effects on the Corporation’s financial statements.


ITEM 8. FINANCIAL STATEMENTS      
CONSOLIDATED BALANCE SHEETS      
 December 31,  December 31, 
(In Thousands, Except Share and Per Share Data) 2019  2018 
ASSETS        
Cash and due from banks:        
Noninterest-bearing $17,667  $20,970 
Interest-bearing  17,535   16,517 
Total cash and due from banks  35,202   37,487 
Available-for-sale debt securities, at fair value  346,723   363,273 
Marketable equity security  979   950 
Loans held for sale  767   213 
         
Loans receivable  1,182,222   827,563 
Allowance for loan losses  (9,836)  (9,309)
Loans, net  1,172,386   818,254 
         
Bank-owned life insurance  18,641   19,035 
Accrued interest receivable  5,001   3,968 
Bank premises and equipment, net  17,170   14,592 
Foreclosed assets held for sale  2,886   1,703 
Deferred tax asset, net  2,618   4,110 
Goodwill  28,388   11,942 
Core deposit intangibles  1,247   9 
Other assets  22,137   15,357 
TOTAL ASSETS $1,654,145  $1,290,893 
         
LIABILITIES        
Deposits:        
Noninterest-bearing $285,904  $272,520 
Interest-bearing  966,756   761,252 
Total deposits  1,252,660   1,033,772 
Short-term borrowings  86,220   12,853 
Long-term borrowings  52,127   35,915 
Subordinated debt  6,500   0 
Accrued interest and other liabilities  12,186   10,985 
TOTAL LIABILITIES  1,409,693   1,093,525 
         
STOCKHOLDERS' EQUITY        
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued  0   0 
Common stock, par value $1.00 per share; authorized 20,000,000 shares; issued 13,934,996 and outstanding 13,716,445 at December 31, 2019; issued 12,655,171 and outstanding 12,319,330 at December 31, 2018  13,935   12,655 
Paid-in capital  104,519   72,602 
Retained earnings  126,480   122,643 
Treasury stock, at cost; 218,551 shares at December 31, 2019 and 335,841 shares at December 31, 2018  (4,173)  (6,362)
Accumulated other comprehensive income (loss)  3,691   (4,170)
TOTAL STOCKHOLDERS' EQUITY  244,452   197,368 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,654,145  $1,290,893 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The accompanying notes are an integral part of the consolidated financial statements.


 

MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices of the Corporation’s financial instruments. In addition to the effects of interest rates, the market prices of the Corporation’s debt securities within the available-for-sale securities portfolio are affected by fluctuations in the risk premiums (amounts of spread over risk-free rates) demanded by investors. Management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).

      
Consolidated Statements of Income Years Ended December 31, 
(In Thousands Except Per Share Data) 2019  2018 
INTEREST INCOME        
Interest and fees on loans:        
Taxable $53,086  $38,667 
Tax-exempt  2,104   2,242 
Interest on loans held for sale  22   14 
Interest on balances with depository institutions  514   415 
Income from available-for-sale debt securities:        
Taxable  7,008   6,189 
Tax-exempt  2,014   2,779 
Dividends on marketable equity security  23   22 
Total interest and dividend income  64,771   50,328 
INTEREST EXPENSE        
Interest on deposits  8,190   3,702 
Interest on short-term borrowings  733   366 
Interest on long-term borrowings  1,013   557 
Interest on subordinated debt  347   0 
Total interest expense  10,283   4,625 
Net interest income  54,488   45,703 
Provision for loan losses  849   584 
Net interest income after provision for loan losses  53,639   45,119 
NONINTEREST INCOME        
Trust and financial management revenue  6,106   5,838 
Brokerage revenue  1,266   1,018 
Insurance commissions, fees and premiums  167   105 
Service charges on deposit accounts  5,358   5,171 
Service charges and fees  332   343 
Interchange revenue from debit card transactions  2,754   2,546 
Net gains from sale of loans  924   682 
Loan servicing fees, net  100   347 
Increase in cash surrender value of bank-owned life insurance  402   394 
Other noninterest income  1,875   2,153 
Sub-total  19,284   18,597 
Gain on restricted equity security  0   2,321 
Realized gains (losses) on available-for-sale debt securities, net  23   (288)
Total noninterest income  19,307   20,630 
NONINTEREST EXPENSE        
Salaries and wages  20,644   17,191 
Pensions and other employee benefits  5,837   5,259 
Occupancy expense, net  2,629   2,497 
Furniture and equipment expense  1,289   1,196 
Data processing expenses  3,403   2,750 
Automated teller machine and interchange expense  1,103   1,304 
Pennsylvania shares tax  1,380   1,318 
Professional fees  1,069   976 
Telecommunications  744   748 
Directors' fees  673   706 
Merger-related expenses  4,099   328 
Other noninterest expense  6,667   5,213 
Total noninterest expense  49,537   39,486 
Income before income tax provision  23,409   26,263 
Income tax provision  3,905   4,250 
NET INCOME $19,504  $22,013 
EARNINGS PER COMMON SHARE - BASIC $1.46  $1.79 
EARNINGS PER COMMON SHARE - DILUTED $1.46  $1.79 

 

The Corporation’s major categoryaccompanying notes are an integral part of market risk, interest rate risk, is discussed inconsolidated financial statements.


   
Consolidated Statements of Comprehensive Income Years Ended December 31, 
(In Thousands) 2019  2018 
Net income $19,504  $22,013 
         
Unrealized gains (losses) on available-for-sale debt securities:        
Unrealized holding gains (losses) on available-for-sale debt securities  9,920   (3,392)
Reclassification adjustment for (gains) losses realized in income  (23)  288 
Other comprehensive gain (loss) on available-for-sale debt securities  9,897   (3,104)
         
Unfunded pension and postretirement obligations:        
Changes from plan amendments and actuarial gains and losses  87   101 
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost  (32)  (17)
Other comprehensive gain on unfunded retirement obligations  55   84 
         
Other comprehensive income (loss) before income tax  9,952   (3,020)
Income tax related to other comprehensive (income) loss  (2,091)  634 
         
Net other comprehensive income (loss)  7,861   (2,386)
         
Comprehensive income $27,365  $19,627 

The accompanying notes are an integral part of the following section.consolidated financial statements.


 

INTEREST RATE RISK

Consolidated Statements of Changes in Stockholders' Equity             
(In Thousands Except Share and Per Share Data)               
            Accumulated      
            Other      
  Common Treasury Common Paid-in Retained Comprehensive Treasury    
  Shares Shares Stock Capital Earnings (Loss) Income Stock  Total 
Balance, January 1, 2018  12,655,171  440,646 $12,655 $72,035 $113,608 $(1,507)$(8,348) $188,443 
Impact of change in enacted income tax rate (a)              325  (325)    0 
Impact of change in method of premium amortization of callable debt securities (b)              (26) 26     0 
Impact of change in method of accounting for marketable equity security (c)              (22) 22     0 
Net income              22,013        22,013 
Other comprehensive loss, net                 (2,386)    (2,386)
Cash dividends declared on common stock, $1.08 per share              (13,255)       (13,255)
Shares issued for dividend reinvestment plan     (59,330)    385        1,124  1,509 
Shares issued from treasury and redeemed related to exercise of stock options     (18,862)    (166)       355  189 
Restricted stock granted     (34,552)    (655)       655  0 
Forfeiture of restricted stock     7,939     148        (148) 0 
Stock-based compensation expense           855           855 
Balance, December 31, 2018  12,655,171  335,841  12,655  72,602  122,643  (4,170) (6,362) 197,368 
Net income              19,504        19,504 
Other comprehensive income, net                 7,861     7,861 
Cash dividends declared on common stock, $1.18 per share              (15,667)       (15,667)
Shares issued for dividend reinvestment plan     (62,232)    439        1,187  1,626 
Shares issued from treasury and redeemed related to exercise of stock options     (18,071)    (146)       344  198 
Restricted stock granted     (48,137)    (918)       918  0 
Forfeiture of restricted stock     3,758     71        (71) 0 
Stock-based compensation expense           798           798 
Purchase of restricted stock for tax withholding     7,392              (189) (189)
Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs  1,279,825     1,280  31,673           32,953 
Balance, December 31, 2019  13,934,996  218,551 $13,935 $104,519 $126,480 $3,691 $(4,173) $244,452 

 

Business risk arising from changes in interest rates is an inherent factor in operating a bank. A significant portion of the Corporation’s assets are long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change.

(a)As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 2, this reclassification resulted from adoption of Accounting Standards Update (ASU) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, effective January 1, 2018.

(b)As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 2, this reclassification resulted from adoption of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), effective January 1, 2018.

(c)As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 2, this reclassification resulted from adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, effective January 1, 2018.

 

The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the market value of portfolio equity. For purposes of these calculations, the market value of portfolio equity includes the fair values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assumingaccompanying notes are an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.

The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and market value of portfolio equity. Also, the model does not make estimates related to changes in the compositionintegral part of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.

The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in the market value of portfolio equity from the baseline values based on current rates.

Table XIV, which follows this discussion, is based on the results of calculations performed using the simulation model as of December 31, 2016 and December 31, 2015. The table shows that as of the respective dates, the changes in net interest income and changes in market value were within the policy limits in all scenarios.consolidated financial statements. 

 

39


TABLE XIV - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

December 31, 2016 Data

(In Thousands)

Period Ending December 31, 2017

Basis Point Interest  Interest  Net Interest  NII  NII 
Change in Rates Income  Expense  Income (NII)  % Change  Risk Limit 
+400 $53,712  $22,315  $31,397   -20.5%  25.0%
+300  51,128   17,545   33,583   -15.0%  20.0%
+200  48,500   12,809   35,691   -9.6%  15.0%
+100  45,845   8,102   37,743   -4.4%  10.0%
0  43,132   3,643   39,489   0.0%  0.0%
-100  40,581   2,978   37,603   -4.8%  10.0%
-200  38,881   2,949   35,932   -9.0%  15.0%
-300  38,269   2,936   35,333   -10.5%  20.0%
-400  38,104   2,936   35,168   -10.9%  25.0%

Market Value of Portfolio Equity at December 31, 2016

  Present  Present  Present 
Basis Point Value  Value  Value 
Change in Rates Equity  % Change  Risk Limit 
+400 $168,600   -24.6%  50.0%
+300  180,500   -19.3%  45.0%
+200  194,471   -13.1%  35.0%
+100  208,830   -6.7%  25.0%
0  223,744   0.0%  0.0%
-100  227,806   1.8%  25.0%
-200  229,602   2.6%  35.0%
-300  252,118   12.7%  45.0%
-400  290,792   30.0%  50.0%

December 31, 2015 Data

(In Thousands)

Period Ending December 31, 2016

Basis Point Interest  Interest  Net Interest  NII  NII 
Change in Rates Income  Expense  Income (NII)  % Change  Risk Limit 
+400 $52,181  $21,985  $30,196   -20.8%  25.0%
+300  49,687   17,282   32,405   -15.0%  20.0%
+200  47,136   12,659   34,477   -9.6%  15.0%
+100  44,546   8,109   36,437   -4.4%  10.0%
0  41,835   3,715   38,120   0.0%  0.0%
-100  39,116   3,171   35,945   -5.7%  10.0%
-200  37,417   3,168   34,249   -10.2%  15.0%
-300  36,838   3,168   33,670   -11.7%  20.0%
-400  36,689   3,168   33,521   -12.1%  25.0%

Market Value of Portfolio Equity at December 31, 2015

  Present  Present  Present 
Basis Point Value  Value  Value 
Change in Rates Equity  % Change  Risk Limit 
+400 $167,741   -24.4%  50.0%
+300  179,772   -18.9%  45.0%
+200  193,823   -12.6%  35.0%
+100  207,803   -6.3%  25.0%
0  221,750   0.0%  0.0%
-100  223,517   0.8%  25.0%
-200  225,185   1.5%  35.0%
-300  250,353   12.9%  45.0%
-400  286,210   29.1%  50.0%

40

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data) December 31,  December 31, 
  2016  2015 
ASSETS      
Cash and due from banks:        
Noninterest-bearing $17,551  $14,710 
Interest-bearing  14,558   21,351 
Total cash and due from banks  32,109   36,061 
Available-for-sale securities, at fair value  395,077   420,290 
Loans held for sale  142   280 
         
Loans receivable  751,835   704,880 
Allowance for loan losses  (8,473)  (7,889)
Loans, net  743,362   696,991 
         
Bank-owned life insurance  19,704   20,764 
Accrued interest receivable  3,963   3,768 
Bank premises and equipment, net  15,397   15,406 
Foreclosed assets held for sale  2,180   1,260 
Deferred tax asset, net  5,117   3,115 
Intangible assets - Goodwill and core deposit intangibles  11,959   11,972 
Other assets  13,282   13,510 
TOTAL ASSETS $1,242,292  $1,223,417 
         
LIABILITIES        
Deposits:        
Noninterest-bearing $224,175  $211,041 
Interest-bearing  759,668   724,574 
Total deposits  983,843   935,615 
Short-term borrowings  26,175   53,496 
Long-term borrowings  38,454   38,767 
Accrued interest and other liabilities  7,812   8,052 
TOTAL LIABILITIES  1,056,284   1,035,930 
         
STOCKHOLDERS' EQUITY        
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued  0   0 
Common stock, par value $1.00 per share; authorized 20,000,000 shares; issued 12,655,171; outstanding 12,113,228 at December 31, 2016 and 12,180,623 December 31, 2015  12,655   12,655 
Paid-in capital  71,730   71,654 
Retained earnings  112,790   109,454 
Treasury stock, at cost; 541,943 shares at December 31, 2016 and 474,548 shares at December 31, 2015  (10,269)  (8,804)
Accumulated other comprehensive (loss) income  (898)  2,528 
TOTAL STOCKHOLDERS' EQUITY  186,008   187,487 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,242,292  $1,223,417 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

   
 Years Ended December 31, 
(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:        
Provision for loan losses  849   584 
Realized (gains) losses on available-for-sale debt securities, net  (23)  288 
Gain on restricted equity security  0   (2,321)
Accretion and amortization on securities, net  1,341   1,044 
Increase in cash surrender value of bank-owned life insurance  (402)  (394)
Depreciation and amortization of bank premises and equipment  1,749   1,754 
Other accretion and amortization, net  (375)  (6)
Stock-based compensation  798   855 
Deferred income taxes  172   (187)
Decrease in fair value of servicing rights  331   83 
Gains on sales of loans, net  (924)  (682)
Origination of loans held for sale  (29,978)  (21,014)
Proceeds from sales of loans held for sale  30,144   22,060 
Decrease (increase) in accrued interest receivable and other assets  1,188   (413)
(Decrease) increase in accrued interest payable and other liabilities  (2,068)  1,957 
Other  155   271 
Net Cash Provided by Operating Activities  22,461   25,892 
CASH FLOWS FROM INVESTING ACTIVITIES:        
Net cash and cash equivalents used in business combination  (1,778)  0 
Proceeds from maturities of certificates of deposit  580   2,280 
Purchase of certificates of deposit  0   (3,700)
Proceeds from sales of available-for-sale debt securities  96,148   25,860 
Proceeds from calls and maturities of available-for-sale debt securities  81,204   52,383 
Purchase of available-for-sale debt securities  (57,655)  (90,015)
Redemption of Federal Home Loan Bank of Pittsburgh stock  10,137   6,145 
Purchase of Federal Home Loan Bank of Pittsburgh stock  (9,208)  (5,301)
Net increase in loans  (96,628)  (14,492)
Proceeds from sale of restricted equity security  0   2,321 
Proceeds from bank owned life insurance  796   1,442 
Purchase of premises and equipment  (2,870)  (1,167)
Proceeds from sale of foreclosed assets  1,768   2,418 
Other  174   178 
Net Cash Provided by (Used in) Investing Activities  22,668   (21,648)
CASH FLOWS FROM FINANCING ACTIVITIES:        
Net (decrease) increase in deposits  (4,822)  25,323 
Net decrease in short-term borrowings  (38,307)  (48,913)
Proceeds from long-term borrowings  48,500   33,000 
Repayments of long-term borrowings and subordinated debt  (38,173)  (6,274)
Sale of treasury stock  198   189 
Purchase of vested restricted stock  (189)  0 
Common dividends paid  (14,041)  (11,746)
Net Cash Used in Financing Activities  (46,834)  (8,421)
DECREASE IN CASH AND CASH EQUIVALENTS  (1,705)  (4,177)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR  32,827   37,004 
CASH AND CASH EQUIVALENTS, END OF YEAR $31,122  $32,827 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:        
Right-of-use assets recognized at adoption of ASU 2016-02 $1,132  $0 
Leased assets obtained in exchange for new operating lease liabilities $745  $0 
Assets acquired through foreclosure of real estate loans $2,053  $2,520 
Interest paid $9,601  $4,529 
Income taxes paid $3,234  $4,277 

 

The accompanying notes are an integral part of the consolidated financial statements.

41


 

Consolidated Statements of Income

(In Thousands Except Per Share Data)

  Years Ended December 31, 
  2016  2015  2014 
INTEREST INCOME         
Interest and fees on loans:            
Taxable $32,827  $31,311  $32,127 
Tax-exempt  1,783   1,668   1,403 
Interest on mortgages held for sale  27   16   16 
Interest on balances with depository institutions  116   93   125 
Income from available-for-sale securities:            
Taxable  5,846   7,303   7,721 
Tax-exempt  3,429   3,844   4,310 
Dividends  70   284   307 
Total interest and dividend income  44,098   44,519   46,009 
INTEREST EXPENSE            
Interest on deposits  2,085   1,924   2,163 
Interest on short-term borrowings  155   32   9 
Interest on long-term borrowings  1,453   2,646   2,950 
Total interest expense  3,693   4,602   5,122 
Net interest income  40,405   39,917   40,887 
Provision for loan losses  1,221   845   476 
Net interest income after provision for loan losses  39,184   39,072   40,411 
OTHER INCOME            
Service charges on deposit accounts  4,695   4,864   5,025 
Service charges and fees  439   494   538 
Trust and financial management revenue  4,760   4,626   4,490 
Brokerage revenue  756   839   901 
Insurance commissions, fees and premiums  102   109   118 
Interchange revenue from debit card transactions  1,943   1,935   1,959 
Net gains from sale of loans  1,029   735   768 
Decrease in fair value of servicing rights  (282)  (162)  (27)
Increase in cash surrender value of life insurance  382   386   376 
Other operating income  1,687   1,652   1,272 
Sub-total  15,511   15,478   15,420 
Realized gains on available-for-sale securities, net  1,158   2,861   1,104 
Total other income  16,669   18,339   16,524 
OTHER EXPENSES            
Salaries and wages  15,411   14,682   15,121 
Pensions and other employee benefits  4,717   4,420   4,769 
Occupancy expense, net  2,340   2,574   2,628 
Furniture and equipment expense  1,730   1,860   1,859 
FDIC assessments  488   603   600 
Pennsylvania shares tax  1,274   1,248   1,350 
Professional fees  1,126   638   699 
Automated teller machine and interchange expense  1,137   988   924 
Software subscriptions  981   876   784 
Loss on prepayment of debt  0   2,573   0 
Other operating expense  5,540   5,141   5,423 
Total other expenses  34,744   35,603   34,157 
Income before income tax provision  21,109   21,808   22,778 
Income tax provision  5,347   5,337   5,692 
NET INCOME $15,762  $16,471  $17,086 
NET INCOME PER SHARE - BASIC $1.30  $1.35  $1.38 
NET INCOME PER SHARE - DILUTED $1.30  $1.35  $1.38 

The accompanying notes are an integral part of the consolidated financial statements.

42

Consolidated Statements of Comprehensive Income

(In Thousands)

  Years Ended December 31, 
  2016  2015  2014 
Net income $15,762  $16,471  $17,086 
             
Unrealized (losses) gains on available-for-sale securities:            
Unrealized holding (losses) gains on available-for-sale securities  (4,138)  (1,429)  10,774 
Reclassification adjustment for gains realized in income  (1,158)  (2,861)  (1,104)
Other comprehensive (loss) gain on available-for-sale securities  (5,296)  (4,290)  9,670 
             
Unfunded pension and postretirement obligations:            
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain (loss)  46   (135)  (79)
Amortization of net transition obligation, prior service cost, net actuarial (gain) loss, and loss on settlement included in net periodic benefit cost  (22)  67   184 
Other comprehensive gain (loss) on unfunded retirement obligations  24   (68)  105 
             
Other comprehensive (loss) income before income tax  (5,272)  (4,358)  9,775 
Income tax related to other comprehensive loss (income)  1,846   1,526   (3,422)
             
Net other comprehensive (loss) income  (3,426)  (2,832)  6,353 
             
Comprehensive income $12,336  $13,639  $23,439 

The accompanying notes are an integral part of the consolidated financial statements.

43

Consolidated Statements of Changes in Stockholders' Equity

(In Thousands Except Share and Per Share Data)

                 Accumulated       
                 Other       
                 Comprehensive       
  Common  Treasury  Common  Paid-in  Retained  Income  Treasury    
  Shares  Shares  Stock  Capital  Earnings  (Loss)  Stock  Total 
                         
Balance, January 1, 2014  12,596,540   206,477  $12,596  $70,105  $101,216  $(993) $(3,452) $179,472 
Net income                  17,086           17,086 
Other comprehensive income, net                      6,353       6,353 
Cash dividends declared on common stock, $1.04 per share                  (12,889)          (12,889)
Shares issued for dividend reinvestment Plan  59,498   (18,473)  60   1,069           368   1,497 
Treasury stock purchased      208,300                   (4,002)  (4,002)
Shares issued from treasury related to exercise of stock options  (867)  (11,860)  (1)  (64)          188   123 
Restricted stock granted      (16,711)      (279)          279   0 
Forfeiture of restricted stock      7,458       125           (125)  0 
Stock-based compensation expense              565               565 
Tax benefit from compensation plans              20   137           157 
Balance, December 31, 2014  12,655,171   375,191   12,655   71,541   105,550   5,360   (6,744)  188,362 
Net income                  16,471           16,471 
Other comprehensive loss, net                      (2,832)      (2,832)
Cash dividends declared on common stock, $1.04 per share                  (12,710)          (12,710)
Shares issued for dividend reinvestment Plan      (73,810)      86           1,379   1,465 
Treasury stock purchased      226,900                   (4,415)  (4,415)
Shares issued from treasury related to exercise of stock options      (22,435)      (27)          408   381 
Restricted stock granted      (34,800)      (627)          627   0 
Forfeiture of restricted stock      3,502       59           (59)  0 
Stock-based compensation expense              606               606 
Tax benefit from compensation plans              16   143           159 
Balance, December 31, 2015  12,655,171   474,548   12,655   71,654   109,454   2,528   (8,804)  187,487 
Net income                  15,762           15,762 
Other comprehensive loss, net                      (3,426)      (3,426)
Cash dividends declared on common stock, $1.04 per share                  (12,578)          (12,578)
Shares issued for dividend reinvestment Plan      (68,571)      170           1,296   1,466 
Treasury stock purchased      187,300                   (3,723)  (3,723)
Shares issued from treasury related to exercise of stock options      (19,113)      (98)          361   263 
Restricted stock granted      (35,427)      (658)          658   0 
Forfeiture of restricted stock      3,431       61           (61)  0 
Stock-based compensation expense              578               578 
Other stock-based expense      (225)                  4   4 
Tax benefit from compensation plans              23   152           175 
Balance, December 31, 2016  12,655,171   541,943  $12,655  $71,730  $112,790  $(898) $(10,269) $186,008 

The accompanying notes are an integral part of the consolidated financial statements.

44

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

  Years Ended December 31, 
  2016  2015  2014 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income $15,762  $16,471  $17,086 
Adjustments to reconcile net income to net cash provided by operating activities:            
Provision for loan losses  1,221   845   476 
Realized gains on available-for-sale securities, net  (1,158)  (2,861)  (1,104)
Loss on prepayment of debt  0   2,573   0 
Realized loss (gain) on foreclosed assets  49   (84)  (136)
(Gain) loss on disposition of premises and equipment  (3)  1   (8)
Depreciation expense  1,589   1,888   1,940 
Accretion and amortization on securities, net  1,462   1,562   1,375 
Accretion and amortization on loans and deposits, net  (15)  (21)  (27)
Decrease in fair value of servicing rights  282   162   27 
Increase in cash surrender value of life insurance  (382)  (386)  (376)
Gain on life insurance benefits  0   (212)  0 
Stock-based compensation and other expense  582   606   565 
Amortization of core deposit intangibles  13   22   35 
Deferred income taxes  (156)  79   1,254 
Gains on sales of loans, net  (1,029)  (735)  (768)
Origination of loans for sale  (29,296)  (21,823)  (21,680)
Proceeds from sales of loans  30,215   22,101   22,317 
(Increase) decrease in accrued interest receivable and other assets  (410)  (1,697)  1,395 
(Decrease) increase in accrued interest payable and other liabilities  (216)  1,195   (90)
Net Cash Provided by Operating Activities  18,510   19,686   22,281 
CASH FLOWS FROM INVESTING ACTIVITIES:            
Proceeds from maturities of certificates of deposit  1,540   1,780   2,560 
Purchase of certificates of deposit  (2,280)  (100)  (960)
Proceeds from sales of available-for-sale securities  37,032   44,504   56,269 
Proceeds from calls and maturities of available-for-sale securities  74,477   89,159   78,101 
Purchase of available-for-sale securities  (91,896)  (40,363)  (158,894)
Redemption of Federal Home Loan Bank of Pittsburgh stock  5,277   5,029   2,804 
Purchase of Federal Home Loan Bank of Pittsburgh stock  (5,046)  (8,102)  (602)
Net (increase) decrease in loans  (49,085)  (77,129)  10,317 
Proceeds from bank owned life insurance  1,442   1,953   0 
Purchase of premises and equipment  (1,580)  (1,039)  (801)
Proceeds from disposition of premises and equipment  3   0   43 
Return of principal on limited liability entity investments  178   181   173 
Proceeds from sale of foreclosed assets  539   2,536   1,504 
Net Cash (Used in) Provided by Investing Activities  (29,399)  18,409   (9,486)
CASH FLOWS FROM FINANCING ACTIVITIES:            
Net increase (decrease) in deposits  48,228   (32,374)  13,473 
Net (decrease) increase in short-term borrowings  (27,321)  47,959   (17,848)
Repayments of long-term borrowings  (313)  (36,866)  (278)
Purchase of treasury stock  (3,723)  (4,415)  (4,002)
Sale of treasury stock  263   381   123 
Tax benefit from compensation plans  175   159   157 
Common dividends paid  (11,112)  (11,245)  (11,392)
Net Cash Provided by (Used in) Financing Activities  6,197   (36,401)  (19,767)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  (4,692)  1,694   (6,972)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR  33,313   31,619   38,591 
CASH AND CASH EQUIVALENTS, END OF YEAR $28,621  $33,313  $31,619 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:            
Accrued purchase of available-for-sale securities $0  $0  $226 
Assets acquired through foreclosure of real estate loans $1,508  $2,523  $1,665 
Interest paid $3,698  $4,636  $5,138 
Income taxes paid $5,129  $4,827  $4,432 

The accompanying notes are an integral part of the consolidated financial statements.

45

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 is primarily engaged in providing a full range ofprovides banking and mortgagerelated services to individual and corporate customers in North Central Pennsylvania and Southern New York State.customers. Lending products include mortgage loans, commercial, loansmortgage 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. TheAs 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 offers non-insured “RepoSweep” accounts.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, (4) valuation of deferred tax assets and (5) valuation of obligations from defined benefit plans.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, and unrestricted equity securities.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. Amortization of premiums and accretion ofPremiums on non-amortizing available-for-sale debt securities are amortized using the level yield method to the earliest call date, while discounts on available-for-salenon-amortizing securities are recordedamortized 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- Declines– 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.

 

 4642 

 

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- Mortgage loans held for sale are reported at the lower of cost or market, determined in the aggregate.

 

LOANS RECEIVABLE -Loans receivableoriginated 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- 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, 20162019 and 2015,2018, management determined that no allowance for credit losses related to unfunded loan commitments was required.

43

 

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.

 

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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 loans area loan: (1) is subject to a restructuring agreement.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, (currently thirty-six months), 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. Further, the residential mortgage segment is significantly affected by the values of residential real estate that provide collateral for the loans. The majority of the Corporation’s commercial segment loans (approximately 57% at December 31, 2016) are secured by real estate, and accordingly, the Corporation’s risk for the commercial segment is significantly affected by commercial real estate values. The consumer segment includes a wide mix of loans for different purposes, primarily secured loans, including loans secured by motor vehicles, manufactured housing and other types of collateral.

 

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.

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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. Non-accrualNonaccrual troubled debt restructurings may be restored to accrual status if the ultimatelyultimate 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.

 

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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 AND CORE DEPOSIT INTANGIBLE ASSETS -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. CoreThe 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 are being amortizedis 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 periodsthe life of timethe asset. That percentage is multiplied by the initial carrying amount of the asset to arrive at amortization expense for that representperiod. If the expected lives using a method ofCorporation’s cash flow patterns differ significantly from the initial estimates, the amortization that reflects the pattern of economic benefit. Core deposit intangibles are subject to impairment testing whenever events or changes in circumstances indicate their carrying amounts may notschedule would be recoverable.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 Other IncomeLoan 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.

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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.

 

TRUST ASSETS AND INCOMEREVENUE 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 by the Corporation in a fiduciary or agency capacity for its customersby 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 since such items are not assets of the Corporation. income.

Trust incomerevenue 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.

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2. RECENT ACCOUNTING PRONOUNCEMENTS

 

The Financial Accounting Standards Board (“FASB”)(FASB) issues Accounting Standards Updates (ASUs)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 nearforeseeable future.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a principles-based framework for revenue recognition that supersedes virtually all previously issued revenue recognition guidance under U.S. GAAP. Additionally, the ASU requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The core principle of the five-step revenue recognition framework is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In April 2016, the FASB issued ASU 2016-10, which provides clarifying information related to identifying performance obligations and licensing. In May 2016, the FASB issued ASU 2016-12 and inRecent Accounting Pronouncements - Adopted

Effective December 2016, the FASB issued ASU 2016-20, which provide clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. In August 2015 the FASB issued ASU 2015-14, which deferred the effective date of the revenue recognition standard by a year, making it applicable for31, 2019, the Corporation in the first quarter 2018 and for the annual period ending December 31, 2018. The amendments should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. Initial adoption of this ASU is not expected to have a significant impact on the Corporation, as recognition of interest income and the larger sources of noninterest income in the Corporation’s current business model would not be impacted by the ASU. The Corporation is in the process of evaluating whether there will be any impact as a result of adopting the amendments.

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In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. This makes significant changes in U.S. GAAP related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes provided for in this Update that are applicable to the Corporation are as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; however, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) for equity investments without readily determinable fair values, require a qualitative assessment to identify impairment, and if a qualitative assessment indicates that impairment exists, requiring an entity to measure the investment at fair value; (3) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (at December 31, 2016 and 2015, the Corporation has no liabilities for which the fair value measurement option has been elected); (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update will become effective for the Corporation for annual and interim periods beginning in the first quarter 2018. With limited exceptions, early adoption of the amendments in this Update is not permitted. Amendments are to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively. Initial adoption of this ASU is not expected to have a significant impact on the Corporation’s financial position; however, the method for determining the fair value of loans and other financial instruments for disclosure purposes will be affected.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. Specifically, a lessee should recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. Topic 842 would not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP; however, the principal change from current GAAP is that lease assets and liabilities arising from operating leases would be recognized on the balance sheet. Topic 842 provides several other changes or clarifications to existing GAAP, and will require qualitative disclosures, along with quantitative disclosures, so that financial statement users can understand more about the nature of an entity’s leasing activities. In transition, Topic 842 provides that lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including optional practical expedients. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees will be required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. Topic 842 will become effective for the Corporation for annual and interim periods beginning in the first quarter 2019. The Corporation is in the early stages of evaluating the potential impact of adopting this amendment.

In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures. This ASU eliminates the requirement that when an investment qualifies for the equity method as a result of an increase in the level of ownership interest or influence, an investor must adjust the investment, results of operations and retained earnings retroactively as if the equity method had been in effect during all previous periods the investment had been held. The ASU requires the equity method investor to add the cost of acquiring an additional interest in the investee to the basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method. The ASU further requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method recognize through earnings the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2017. The amendments should be applied prospectively upon their effective date. Initial adoption of this ASU in 2017 did not have a significant impact on the Corporation.

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In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. This ASU changes several aspects of accounting for share-based payment transactions, and includes some changes that apply only to nonpublic companies. This Update includes amendments that currently apply, or may apply in the future, to the Corporation related to the following: (1) accounting for the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2017, with earlier adoption permitted. The ASU provides separate transition provisions for each of the amendments. Initial adoption of this ASU in 2017 did not have a significant impact on the Corporation.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This ASU will result in significant changes in the Corporation’s accounting for credit losses related to loans receivable and investment securities. A summary of significant provisions of this ASU is as follows:

·The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. GAAP in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.

·The amendments in the Update retain many of the disclosure requirements related to credit quality in current U.S. GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the Update requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.

·This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased available-for-sale securities with a more-than-insignificant amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other available-for-sale debt securities; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition.

·This ASU will be effective for the Corporation for interim and annual periods beginning in the first quarter of 2020. Earlier adoption is permitted beginning in the first quarter of 2019. The entity will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

The Corporation is in the early stages of evaluating the potential impact of adopting this amendment.

In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) –Classification of Certain Cash Receipts and Cash Payments. This Update provides clarification regarding eight specific cash flow issues with the objective of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For the Corporation, the amendments in this Update are effective beginning in the first quarter 2018. The amendments in this Update should be applied using a retroactive transition method to each period presented. The Corporation anticipates there will be no adjustments to the Consolidated Statements of Cash Flows, as previously reported, as a result of the clarifications provided in the Update.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the, which simplified accounting for goodwill impairment. This guidance, among other things, removesimpairment 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 will beis the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in moreAdoption 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, impairment being recognized thanthe 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 guidance.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.

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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 UpdateASU 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’s annual and interim goodwill impairment testsCorporation 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.

48

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.

49

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.

50

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.

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3. COMPREHENSIVE INCOME

Comprehensive income isDiluted earnings per common share are calculated under the totalmore dilutive of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive (loss) income. The components of other comprehensive (loss) income, andeither the related tax effects, are as follows:

(In Thousands) Before-Tax  Income Tax  Net-of-Tax 
  Amount  Effect  Amount 
2016            
Unrealized losses on available-for-sale securities:            
  Unrealized holding losses on available-for-sale securities $(4,138) $1,448  $(2,690)
  Reclassification adjustment for (gains) realized in income  (1,158)  406   (752)
Other comprehensive loss on available-for-sale securities  (5,296)  1,854   (3,442)
             
Unfunded pension and postretirement obligations:            
Changes from plan amendments and actuarial gains and losses included in other comprehensive income  46   (16)  30 
Amortization of net transition obligation, prior service cost and net actuarial gain included in net periodic benefit cost  (22)  8   (14)
Other comprehensive income on unfunded retirement obligations  24   (8)  16 
             
Total other comprehensive loss $(5,272) $1,846  $(3,426)

(In Thousands) Before-Tax  Income Tax  Net-of-Tax 
  Amount  Effect  Amount 
2015            
Unrealized losses on available-for-sale securities:            
Unrealized holding losses on available-for-sale securities $(1,429) $500  $(929)
Reclassification adjustment for (gains) realized in income  (2,861)  1,002   (1,859)
Other comprehensive loss on available-for-sale securities  (4,290)  1,502   (2,788)
             
Unfunded pension and postretirement obligations:            
Changes from plan amendments and actuarial gains and losses included in other comprehensive loss  (135)  47   (88)
Amortization of net transition obligation, prior service cost, net actuarial loss and loss on settlement included in net periodic benefit cost  67   (23)  44 
Other comprehensive loss on unfunded retirement obligations  (68)  24   (44)
             
Total other comprehensive loss $(4,358) $1,526  $(2,832)

(In Thousands) Before-Tax  Income Tax  Net-of-Tax 
  Amount  Effect  Amount 
2014            
Unrealized gains on available-for-sale securities:            
Unrealized holding gains on available-for-sale securities $10,774  $(3,771) $7,003 
Reclassification adjustment for (gains) realized in income  (1,104)  386   (718)
Other comprehensive income on available-for-sale securities  9,670   (3,385)  6,285 
             
Unfunded pension and postretirement obligations:            
Changes from plan amendments and actuarial gains and losses included in other comprehensive income  (79)  28   (51)
Amortization of net transition obligation, prior service cost, net actuarial loss and loss on settlement included in net periodic benefit cost  184   (65)  119 
Other comprehensive income on unfunded retirement obligations  105   (37)  68 
             
Total other comprehensive income $9,775  $(3,422) $6,353 

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Changes intreasury method or the components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:

(In Thousands) Unrealized  Unfunded  Accumulated 
  Holding Gains  Pension and  Other 
  (Losses)  Postretirement  Comprehensive 
  on Securities  Obligations  Income (Loss) 
2016            
Balance, beginning of period $2,493  $35  $2,528 
Other comprehensive loss before reclassifications  (2,690)  30   (2,660)
Amounts reclassified from accumulated other comprehensive (loss) income  (752)  (14)  (766)
Other comprehensive (loss) income  (3,442)  16   (3,426)
Balance, end of period $(949) $51  $(898)
             
2015            
Balance, beginning of period $5,281  $79  $5,360 
Other comprehensive loss before reclassifications  (929)  (88)  (1,017)
Amounts reclassified from accumulated other comprehensive income  (1,859)  44   (1,815)
Other comprehensive loss  (2,788)  (44)  (2,832)
Balance, end of period $2,493  $35  $2,528 
             
2014            
Balance, beginning of period $(1,004) $11  $(993)
Other comprehensive income before reclassifications  7,003   (51)  6,952 
Amounts reclassified from accumulated other comprehensive income  (718)  119   (599)
Other comprehensive income  6,285   68   6,353 
Balance, end of period $5,281  $79  $5,360 

Items reclassified out of each component of other comprehensive income are as follows:

For the Year Ended December 31, 2016     
(In Thousands)     
  Reclassified from   
Details about Accumulated Other Accumulated Other  Affected Line Item in the Consolidated
Comprehensive Income Components Comprehensive Income  Statements of Income
Unrealized gains and losses on available-for-sale securities $(1,158) Realized gains on available-for-sale securities, net
   406  Income tax provision
   (752) Net of tax
Amortization of defined benefit pension and postretirement items:      
Prior service cost  (31) Pensions and other employee benefits
Actuarial loss  9  Pensions and other employee benefits
   (22) Total before tax
   8  Income tax provision
   (14) Net of tax
Total reclassifications for the period $(766)  

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For the Year Ended December 31, 2015     
(In Thousands)     
  Reclassified from   
Details about Accumulated Other Accumulated Other  Affected Line Item in the Consolidated
Comprehensive Income Components Comprehensive Income  Statements of Income
Unrealized gains and losses on available-for-sale Securities $(2,861) Realized gains on available-for-sale securities, net
   1,002  Income tax provision
   (1,859) Net of tax
Amortization of defined benefit pension and postretirement items:      
Prior service cost  (31) Pensions and other employee benefits
Actuarial loss  11  Pensions and other employee benefits
Loss on settlement  87  Pensions and other employee benefits
   67  Total before tax
   (23) Income tax provision
   44  Net of tax
Total reclassifications for the period $(1,815)  

For the Year Ended December 31, 2014     
(In Thousands)     
  Reclassified from   
Details about Accumulated Other Accumulated Other  Affected Line Item in the Consolidated
Comprehensive Income Components Comprehensive Income  Statements of Income
Unrealized gains and losses on available-for-sale Securities $(1,104) Realized gains on available-for-sale securities, net
   386  Income tax provision
   (718) Net of tax
Amortization of defined benefit pension and postretirement items:      
Prior service cost  (31) Pensions and other employee benefits
Actuarial loss  19  Pensions and other employee benefits
Loss on settlement  196  Pensions and other employee benefits
   184  Total before tax
   (65) Income tax provision
   119  Net of tax
Total reclassifications for the period $(599)  

4. PER SHARE DATA

Net incometwo-class method. Diluted earnings per share is based on the weighted-average number of shares of common stock outstanding. The following data show the amounts used in computing basic and diluted net income per share. As shown in the table that follows, diluted earnings per share is computed using weighted averageweighted-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.

 

     Weighted-    
     Average  Earnings 
  Net  Common  Per 
  Income  Shares  Share 
2016            
Earnings per share – basic $15,762,000   12,098,129  $1.30 
Dilutive effect of potential common stock            
  arising from stock options:            
  Exercise of outstanding stock options      215,581     
  Hypothetical share repurchase at $21.23      (185,346)    
Earnings per share – diluted $15,762,000   12,128,364  $1.30 
  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 

 

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(a) Basic and diluted earnings per share under the two-class method are determined onnet income reported on the income statement less earnings allocated to nonvestedrestricted 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.

     Weighted-    
     Average  Earnings 
  Net  Common  Per 
  Income  Shares  Share 
2015            
Earnings per share – basic $16,471,000   12,211,941  $1.35 
Dilutive effect of potential common stock arising from stock options:            
Exercise of outstanding stock options      210,402     
Hypothetical share repurchase at $20.04      (188,570)    
Earnings per share – diluted $16,471,000   12,233,773  $1.35 
             
2014            
Earnings per share – basic $17,086,000   12,390,067  $1.38 
Dilutive effect of potential common stock arising from stock options:            
Exercise of outstanding stock options      224,015     
Hypothetical share repurchase at $19.41      (202,032)    
Earnings per share – diluted $17,086,000   12,412,050  $1.38 

 

Stock options that wereare anti-dilutive wereare excluded from net income per share calculations. Weighted-average common shares available fromThere were no anti-dilutive instruments totaled 31,153 shares in 2016, 61,590 shares in 2015 and 151,310 shares in 2014.2019 or 2018.

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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)  

54 

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, 20162019 and 20152018 include the following:

 

 Dec. 31, Dec. 31, 
(In thousands) Dec. 31, Dec. 31,  2019 2018 
 2016 2015 
Cash and cash equivalents $28,621  $33,313  $31,122  $32,827 
Certificates of deposit  3,488   2,748   4,080   4,660 
Total cash and due from banks $32,109  $36,061  $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 $16,654,000$20,148,000 at December 31, 20162019 and $15,327,000$18,141,000 at December 31, 2015.2018.

6. 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.

55

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, 2016 and 2015, assets measured at fair value and the valuation methods used are as follows:

     December 31, 2016    
  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 SECURITIES:                
Obligations of U.S. Government agencies $0  $9,541  $0  $9,541 
Obligations of states and political subdivisions:                
Tax-exempt  0   119,037   0   119,037 
Taxable  0   30,297   0   30,297 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                
Residential pass-through securities  0   58,404   0   58,404 
Residential collateralized mortgage obligations  0   146,608   0   146,608 
Commercial mortgage-backed securities  0   30,219   0   30,219 
Total debt securities  0   394,106   0   394,106 
Marketable equity securities  971   0   0   971 
Total available-for-sale securities  971   394,106   0   395,077 
Servicing rights  0   0   1,262   1,262 
Total recurring fair value measurements $971  $394,106  $1,262  $396,339 
                 
Nonrecurring fair value measurements                
Impaired loans with a valuation allowance $0  $0  $3,372  $3,372 
Valuation allowance  0   0   (674)  (674)
Impaired loans, net  0   0   2,698   2,698 
Foreclosed assets held for sale  0   0   2,180   2,180 
Total nonrecurring fair value measurements $0  $0  $4,878  $4,878 

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     December 31, 2015    
  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 SECURITIES:                
Obligations of U.S. Government agencies $0  $10,483  $0  $10,483 
Obligations of states and political subdivisions:                
Tax-exempt  0   107,757   0   107,757 
Taxable  0   34,597   0   34,597 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                
Residential pass-through securities  0   73,343   0   73,343 
Residential collateralized mortgage obligations  0   191,715   0   191,715 
Collateralized debt obligations  0   9   0   9 
Total debt securities  0   417,904   0   417,904 
Marketable equity securities  2,386   0   0   2,386 
Total available-for-sale securities  2,386   417,904   0   420,290 
Servicing rights  0   0   1,296   1,296 
Total recurring fair value measurements $2,386  $417,904  $1,296  $421,586 
                 
Nonrecurring fair value measurements                
Impaired loans with a valuation allowance $0  $0  $1,933  $1,933 
Valuation allowance  0   0   (820)  (820)
Impaired loans, net  0   0   1,113   1,113 
Foreclosed assets held for sale  0   0   1,260   1,260 
Total nonrecurring fair value measurements $0  $0  $2,373  $2,373 

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 less estimated selling costs.

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, 2016 and 2015 for servicing rights assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:

  Fair Value at          
  12/31/16  Valuation Unobservable Method or Value As of
Asset (In Thousands)  Technique Input(s) 12/31/16
Servicing rights $1,262  Discounted cash flow Discount rate  13.00% Rate used through modeling period
        Loan prepayment speeds  138.00% Weighted-average PSA
        Servicing fees  0.25% of loan balances
           4.00% of payments are late
           5.00% late fees assessed
          $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
           1.50% of loans more than 30 days delinquent
           3.00% annual increase in servicing costs

57

  Fair Value at        
  12/31/15  Valuation Unobservable Method or Value As of
Asset (In Thousands)  Technique Input(s) 12/31/15
Servicing rights $1,296  Discounted cash flow Discount rate  10.00% Rate used through modeling period
        Loan prepayment speeds  146.00% Weighted-average PSA
        Servicing fees  0.25% of loan balances
           4.00% of payments are late
           5.00% late fees assessed
          $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
           1.50% of loans more than 30 days delinquent
           3.00% annual increase in servicing costs

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:

(In Thousands) Years Ended December 31, 
  2016  2015  2014 
Balance, beginning of period $1,296  $1,281  $1,123 
Issuances of servicing rights  248   177   185 
Unrealized losses included in earnings  (282)  (162)  (27)
Balance, end of period $1,262  $1,296  $1,281 

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, 2016 and 2015, 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              Value at 
Percentages)    Valuation         12/31/16 
  Balance at  Allowance at  Fair Value at  Valuation Unobservable (Weighted 
Asset 12/31/16  12/31/16  12/31/16  Technique Inputs Average) 
                 
Impaired loans:                    
Commercial:                    
Commercial loans secured by real estate $2,773  $528  $2,245  Sales comparison Discount to appraised value  7%
Commercial and industrial  95   95   0  Sales comparison Discount to appraised value  100%
Loans secured by farmland  504   51   453  Sales comparison Discount to appraised value  55%
Total impaired loans $3,372  $674  $2,698         
Foreclosed assets held for sale - real estate:                    
Residential (1-4 family) $1,102  $0  $1,102  Sales comparison Discount to appraised value  35%
Land  650   0   650  Sales comparison Discount to appraised value  33%
Commercial real estate  428   0   428  Sales comparison Discount to appraised value  50%
Total foreclosed assets held for sale $2,180  $0  $2,180         

58

(In Thousands, Except              Value at 
Percentages)    Valuation         12/31/15 
  Balance at  Allowance at  Fair Value at  Valuation Unobservable (Weighted 
Asset 12/31/15  12/31/15  12/31/15  Technique Inputs Average) 
                 
Impaired loans:                    
Residential mortgage loans - first liens $42  $1  $41  Sales comparison Discount to appraised value  31%
Commercial:                    
Commercial loans secured by real estate  317   97   220  Sales comparison Discount to appraised value  46%
Commercial and industrial  75   75   0  Sales comparison Discount to appraised value  31%
Loans secured by farmland  512   52   460  Sales comparison Discount to appraised value  49%
Multi-family (5 or more) residential  987   595   392  Sales comparison Discount to appraised value  41%
Total impaired loans $1,933  $820  $1,113         
Foreclosed assets held for sale - real estate:                    
Residential (1-4 family) $556  $0  $556  Sales comparison Discount to appraised value  32%
Land  704   0   704  Sales comparison Discount to appraised value  29%
Total foreclosed assets held for sale $1,260  $0  $1,260         

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 Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term instruments approximate fair values.

CERTIFICATES OF DEPOSIT - Fair values for certificates of deposit, included in cash and due from banks in the consolidated balance sheets, are based on quoted market prices for certificates of similar remaining maturities.

SECURITIES - Fair values for securities, excluding restricted equity securities, are based on quoted market prices or other methods as described above. The carrying value of restricted equity securities approximates fair value based on applicable redemption provisions.

LOANS HELD FOR SALE - Fair values of loans held for sale are determined based on applicable sale prices available under the Federal Home Loan Banks’ MPF Original or Xtra program.

LOANS - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed-rate and adjustable-rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for estimated prepayments based on historical experience, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. Fair value of nonperforming loans is based on recent appraisals or estimates prepared by the Corporation’s lending officers.

SERVICING RIGHTS - The fair value of servicing rights, included in other assets in the consolidated balance sheet, is determined through a discounted cash flow valuation. Significant inputs include expected net servicing income, the discount rate and the expected prepayment speeds of the underlying loans.

DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable at December 31, 2016 and 2015. The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

BORROWED FUNDS - The fair value of borrowings is estimated using discounted cash flow analyses based on rates currently available to the Corporation for similar types of borrowing arrangements.

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ACCRUED INTEREST - The carrying amounts of accrued interest receivable and payable approximate fair values.

OFF-BALANCE SHEET COMMITMENTS - The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments are as follows:

(In Thousands) Valuation December 31, 2016  December 31, 2015 
  Method(s) Carrying  Fair  Carrying  Fair 
  Used Amount  Value  Amount  Value 
Financial assets:                  
Cash and cash equivalents Level 1 $28,621  $28,621  $33,313  $33,313 
Certificates of deposit Level 2  3,488   3,481   2,748   2,752 
Available-for-sale securities See Above  395,077   395,077   420,290   420,290 
Restricted equity securities (included in Other Assets) Level 2  4,426   4,426   4,657   4,657 
Loans held for sale Level 2  142   142   280   280 
Loans, net Level 3  743,362   725,787   696,991   685,552 
Accrued interest receivable Level 2  3,963   3,963   3,768   3,768 
Servicing rights Level 3  1,262   1,262   1,296   1,296 
                   
Financial liabilities:                  
Deposits with no stated maturity Level 2  771,625   771,625   713,931   713,931 
Time deposits Level 2  212,218   212,274   221,684   221,891 
Short-term borrowings Level 2  26,175   26,024   53,496   53,398 
Long-term borrowings Level 2  38,454   39,062   38,767   40,166 
Accrued interest payable Level 2  65   65   70   70 

 

7. SECURITIES

 

Amortized cost and fair value of available-for-sale debt securities at December 31, 20162019 and 20152018 are summarized as follows:

 

 December 31, 2016     December 31, 2019    
    Gross Gross        Gross Gross    
    Unrealized Unrealized        Unrealized Unrealized    
 Amortized Holding Holding Fair  Amortized Holding Holding Fair 
(In Thousands) Cost Gains Losses Value  Cost Gains Losses Value 
         
Obligations of U.S. Government agencies $9,671  $5  $(135) $9,541  $16,380  $620  $0  $17,000 
Obligations of states and political subdivisions:                                
Tax-exempt  118,140   2,592   (1,695)  119,037   68,787   2,011   (38)  70,760 
Taxable  30,073   303   (79)  30,297   35,446   927   (70)  36,303 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                                                                
Residential pass-through securities  58,922   306   (824)  58,404   58,875   472   (137)  59,210 
Residential collateralized mortgage obligations  147,915   408   (1,715)  146,608   115,025   308   (610)  114,723 
Commercial mortgage-backed securities  30,817   0   (598)  30,219   47,765   1,069   (107)  48,727 
Total debt securities  395,538   3,614   (5,046)  394,106 
Marketable equity securities  1,000   0   (29)  971 
Total $396,538  $3,614  $(5,075) $395,077  $342,278  $5,407  ($962) $346,723 

 

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    December 31, 2015        

December 31, 2018

    
    Gross Gross        Gross Gross    
    Unrealized Unrealized        Unrealized Unrealized    
 Amortized Holding Holding Fair  Amortized Holding Holding Fair 
(In Thousands) Cost Gains Losses Value  Cost Gains Losses Value 
         
Obligations of U.S. Government agencies $10,663  $12  $(192) $10,483  $12,331  $169  $0  $12,500 
Obligations of states and political subdivisions:                                
Tax-exempt  103,414   4,365   (22)  107,757   84,204   949   (1,201)  83,952 
Taxable  34,317   381   (101)  34,597   27,618   208   (127)  27,699 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                                                                
Residential pass-through securities  73,227   486   (370)  73,343   54,827   48   (1,430)  53,445 
Residential collateralized mortgage obligations  193,145   623   (2,053)  191,715   148,964   238   (3,290)  145,912 
Collateralized debt obligations:  9   0   0   9 
Total debt securities  414,775   5,867   (2,738)  417,904 
Marketable equity securities  1,680   706   0   2,386 
Commercial mortgage-backed securities  40,781   166   (1,182)  39,765 
Total $416,455  $6,573  $(2,738) $420,290  $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, 20162019 and 2015:2018:

 

December 31, 2016 Less Than 12 Months 12 Months or More Total 
 Less Than 12 Months 12 Months or More Total 
December 31, 2019 Fair Unrealized Fair Unrealized Fair Unrealized 
(In Thousands) Fair Unrealized Fair Unrealized Fair Unrealized  Value Losses Value Losses Value Losses 
 Value Losses Value Losses Value Losses 
             
Obligations of U.S. Government agencies $7,899  $(135) $0  $0  $7,899  $(135)
Obligations of states and political subdivisions:                                                
Tax-exempt  54,479   (1,676)  1,278   (19)  55,757   (1,695) $6,429  ($38) $0  $0  $6,429  ($38)
Taxable  9,594   (79)  0   0   9,594   (79)  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  48,674   (824)  0   0   48,674   (824)  9,771   (35)  14,787   (102)  24,558   (137)
Residential collateralized mortgage obligations  85,198   (1,124)  16,073   (591)  101,271   (1,715)  31,409   (195)  30,535   (415)  61,944   (610)
Commercial mortgage-backed securities  30,219   (598)  0   0   30,219   (598)  0   0   8,507   (107)  8,507   (107)
Total debt securities  236,063   (4,436)  17,351   (610)  253,414   (5,046)
Marketable equity securities  1,000   (29)  0   0   1,000   (29)
Total temporarily impaired available-for-sale securities $237,063  $(4,465) $17,351  $(610) $254,414  $(5,075)
Total $53,233  ($336) $53,990  ($626) $107,223  ($962)

 

December 31, 2015 Less Than 12 Months 12 Months or More Total 
 Less Than 12 Months 12 Months or More Total 
December 31, 2018 Fair Unrealized Fair Unrealized Fair Unrealized 
(In Thousands) Fair Unrealized Fair Unrealized Fair Unrealized  Value Losses Value Losses Value Losses 
 Value Losses Value Losses Value Losses 
             
Obligations of U.S. Government agencies $0  $0  $7,850  $(192) $7,850  $(192)
Obligations of states and political subdivisions:                                                
Tax-exempt  5,200   (19)  216   (3)  5,416   (22) $5,084  ($11) $32,684  ($1,190) $37,768  ($1,201)
Taxable  10,605   (60)  2,910   (41)  13,515   (101)  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  38,764   (295)  3,503   (75)  42,267   (370)  5,592   (4)  42,309   (1,426)  47,901   (1,430)
Residential collateralized mortgage obligations  88,355   (648)  49,273   (1,405)  137,628   (2,053)  1,892   (8)  101,662   (3,282)  103,554   (3,290)
Total temporarily impaired available-for-sale securities $142,924  $(1,022) $63,752  $(1,716) $206,676  $(2,738)
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)

 

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Gross realized gains and losses from available-for-sale securities and the related income tax provision were as follows:

 

(In Thousands)        2019 2018 
 2016 2015 2014 
Gross realized gains from sales $1,392  $2,972  $1,328  $24  $259 
Gross realized losses from sales  (234)  (111)  (224)  (1)  (547)
Net realized gains $1,158  $2,861  $1,104 
Income tax provision related to net realized gains $406  $1,002  $386 
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, 2016.2019. 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, 2016  December 31, 2019 
 Amortized Fair  Amortized Fair 
(In Thousands) Cost Value  Cost Value 
     
Due in one year or less $18,678  $18,832  $7,216  $7,247 
Due from one year through five years  69,558   70,657   31,627   32,408 
Due from five years through ten years  44,527   43,979   42,709   43,845 
Due after ten years  25,121   25,407   39,061   40,563 
Sub-total  157,884   158,875   120,613   124,063 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:        
Residential pass-through securities  58,922   58,404   58,875   59,210 
Residential collateralized mortgage obligations  147,915   146,608   115,025   114,723 
Commercial mortgage-backed securities  30,817   30,219   47,765   48,727 
Total $395,538  $394,106  $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 $230,803,000$215,270,000 at December 31, 20162019 and $228,616,000$229,418,000 at December 31, 20152018 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.

 

The Corporation recognized no net impairment losses in earnings for the years ended December 31, 2016, 2015 and 2014.

A summary of information management considered in evaluating debt and equity securities for OTTI at December 31, 20162019 and 2018 is provided below.

 

Debt Securities

 

At December 31, 20162019 and 2015,2018, 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, 20162019 and 2018 to be temporary.

 

62

57 

 

 

Equity Securities

The Corporation’s marketable equity securities at December 31, 2016 consisted exclusively of one mutual fund. At December 31, 2015, the Corporation’s marketable equity securities consisted of stocks of banking companies. The Corporation recognized no other-than-temporary impairment losses related to equities in 2016, 2015 or 2014. At December 31, 2016, the mutual fund held by the Corporation had an unrealized loss of $29,000 for which management determined an OTTI charge was not required.

Realized gains from sales of equity securities (bank stocks) totaled $1,125,000 in 2016, $2,220,000 in 2015 and $363,000 in 2014.

 

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 $4,296,000$10,131,000 at December 31, 20162019 and $4,527,000$5,582,000 at December 31, 2015.2018. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at December 31, 20162019 and December 31, 2015.2018. 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 period0(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, 20162019 and 20152018 are summarized as follows:

 

Summary of Loans by Type      Dec. 31, Dec. 31, 
(In Thousands) Dec. 31, Dec. 31,  2019 2018 
 2016 2015 
Residential mortgage:                
Residential mortgage loans - first liens $334,102  $304,783  $510,641  $372,339 
Residential mortgage loans - junior liens  23,706   21,146   27,503   25,450 
Home equity lines of credit  38,057   39,040   33,638   34,319 
1-4 Family residential construction  24,908   21,121   14,798   24,698 
Total residential mortgage  420,773   386,090   586,580   456,806 
Commercial:                
Commercial loans secured by real estate  150,468   154,779   301,227   162,611 
Commercial and industrial  83,854   75,196   126,374   91,856 
Political subdivisions  38,068   40,007   53,570   53,263 
Commercial construction and land  14,287   5,122   33,555   11,962 
Loans secured by farmland  7,294   7,019   12,251   7,146 
Multi-family (5 or more) residential  7,896   9,188   31,070   7,180 
Agricultural loans  3,998   4,671   4,319   5,659 
Other commercial loans  11,475   12,152   16,535   13,950 
Total commercial  317,340   308,134   578,901   353,627 
Consumer  13,722   10,656   16,741   17,130 
Total  751,835   704,880   1,182,222   827,563 
Less: allowance for loan losses  (8,473)  (7,889)  (9,836)  (9,309)
Loans, net $743,362  $696,991  $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 New York counties that make up the market serviced by Citizens & Northern Bank.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, 2016.2019.

 

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Transactions within the allowance for loan losses, summarized by segment and class, were as follows:

 

Year Ended December 31, 2016 Dec. 31         Dec. 31 
Year Ended December 31, 2019 Dec. 31,        Dec. 31, 
(In Thousands) 2015
Balance		 Charge-
offs		 Recoveries Provision
(Credit)		 2016
Balance		  2018
Balance		  Charge-offs Recoveries Provision (Credit) 2019
Balance		 
Allowance for Loan Losses:                               
Residential mortgage:                                        
Residential mortgage loans - first liens $2,645  $(73) $3  $458  $3,033  $3,156  $(166) $4  $411  $3,405 
Residential mortgage loans - junior liens  219   0   0   39   258   325   (24)  2   81   384 
Home equity lines of credit  347   0   0   3   350   302   0   5   (31)  276 
1-4 Family residential construction  207   0   0   42   249   203   0   1   (87)  117 
Total residential mortgage  3,418   (73)  3   542   3,890   3,986   (190)  12   374   4,182 
Commercial:                                        
Commercial loans secured by real estate  1,939   0   2   439   2,380   2,538   0   0   (617)  1,921 
Commercial and industrial  981   (2)  3   17   999   1,553   (6)  6   (162)  1,391 
Political subdivisions  0   0   0   0   0 
Commercial construction and land  58   0   30   74   162   110   0   0   856   966 
Loans secured by farmland  106   0   0   4   110   102   0   0   56   158 
Multi-family (5 or more) residential  675   (595)  0   161   241   114   0   0   42   156 
Agricultural loans  45   0   0   (5)  40   46   0   0   (5)  41 
Other commercial loans  118   0   0   (3)  115   128   0   0   27   155 
Total commercial  3,922   (597)  35   687   4,047   4,591   (6)  6   197   4,788 
Consumer  122   (87)  82   21   138   233   (183)  39   192   281 
Unallocated  427   0   0   (29)  398   499   0   0   86   585 
Total Allowance for Loan Losses $7,889  $(757) $120  $1,221  $8,473  $9,309  $(379) $57  $849  $9,836 

 

Year Ended December 31, 2015 Dec. 31,           Dec. 31, 
(In Thousands) 2014
Balance		  Charge-
offs		  Recoveries  Provision
(Credit)		  2015
Balance		 
Allowance for Loan Losses:               
Residential mortgage:                    
Residential mortgage loans - first liens $2,941  $(175) $1  $(122) $2,645 
Residential mortgage loans - junior liens  176   (42)  0   85   219 
Home equity lines of credit  322   0   0   25   347 
1-4 Family residential construction  214   0   0   (7)  207 
Total residential mortgage  3,653   (217)  1   (19)  3,418 
Commercial:                    
Commercial loans secured by real estate  1,758   (115)  208   88   1,939 
Commercial and industrial  688   (21)  6   308   981 
Political subdivisions  0   0   0   0   0 
Commercial construction and land  283   (115)  0   (110)  58 
Loans secured by farmland  165   0   0   (59)  106 
Multi-family (5 or more) residential  87   0   0   588   675 
Agricultural loans  31   0   0   14   45 
Other commercial loans  131   0   0   (13)  118 
Total commercial  3,143   (251)  214   816   3,922 
Consumer  145   (94)  55   16   122 
Unallocated  395   0   0   32   427 
Total Allowance for Loan Losses $7,336  $(562) $270  $845  $7,889 

 

64

Year Ended December 31, 2014 Dec. 31,         Dec. 31, 
Year Ended December 31, 2018 Dec. 31,         Dec. 31, 
(In Thousands) 2013
Balance		 Charge-
offs		 Recoveries Provision
(Credit)		 2014
Balance		  2017
Balance		 Charge-offs Recoveries Provision (Credit) 2018
Balance		 
Allowance for Loan Losses:                               
Residential mortgage:                                        
Residential mortgage loans - first liens $2,974  $(164) $25  $106  $2,941  $3,200  $(108) $4  $60  $3,156 
Residential mortgage loans - junior liens  294   (101)  0   (17)  176   224   0   4   97   325 
Home equity lines of credit  269   (62)  0   115   322   296   (50)  0   56   302 
1-4 Family residential construction  168   0   0   46   214   243   0   0   (40)  203 
Total residential mortgage  3,705   (327)  25   250   3,653   3,963   (158)  8   173   3,986 
Commercial:                                        
Commercial loans secured by real estate  3,123   (1,521)  250   (94)  1,758   2,584   (21)  0   (25)  2,538 
Commercial and industrial  591   (24)  9   112   688   1,065   (144)  6   626   1,553 
Political subdivisions  0   0   0   0   0 
Commercial construction and land  267   (170)  5   181   283   150   0   0��  (40)  110 
Loans secured by farmland  115   0   0   50   165   105   0   0   (3)  102 
Multi-family (5 or more) residential  103   0   0   (16)  87   172   0   311   (369)  114 
Agricultural loans  30   0   0   1   31   57   0   0   (11)  46 
Other commercial loans  138   0   0   (7)  131   102   0   0   26   128 
Total commercial  4,367   (1,715)  264   227   3,143   4,235   (165)  317   204   4,591 
Consumer  193   (97)  47   2   145   159   (174)  41   207   233 
Unallocated  398   0   0   (3)  395   499   0   0   0   499 
Total Allowance for Loan Losses $8,663  $(2,139) $336  $476  $7,336  $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. 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. 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.

 

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The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of December 31, 20162019 and 2015:2018:

 

December 31, 2016               
(In Thousands)    Special          
  Pass  Mention  Substandard  Doubtful  Total 
Residential Mortgage:                    
Residential mortgage loans - first liens $324,377  $408  $9,258  $59  $334,102 
Residential mortgage loans - junior liens  23,274   132   300   0   23,706 
Home equity lines of credit  37,360   123   574   0   38,057 
1-4 Family residential construction  24,820   0   88   0   24,908 
Total residential mortgage  409,831   663   10,220   59   420,773 
Commercial:                    
Commercial loans secured by real estate  139,358   3,092   8,018   0   150,468 
Commercial and Industrial  79,202   4,180   461   11   83,854 
Political subdivisions  38,068   0   0   0   38,068 
Commercial construction and land  14,136   70   81   0   14,287 
Loans secured by farmland  5,745   129   1,404   16   7,294 
Multi-family (5 or more) residential  7,277   0   619   0   7,896 
Agricultural loans  3,208   0   790   0   3,998 
Other commercial loans  11,401   0   74   0   11,475 
Total commercial  298,395   7,471   11,447   27   317,340 
Consumer  13,546   0   176   0   13,722 
Totals $721,772  $8,134  $21,843  $86  $751,835 

December 31, 2015           
          Purchased    
December 31, 2019    Special       Credit    
(In Thousands)    Special         Pass  Mention  Substandard  Doubtful  Impaired  Total 
 Pass  Mention  Substandard  Doubtful  Total 
Residential Mortgage:                                            
Residential mortgage loans - first liens $295,302  $407  $9,007  $67  $304,783 
Residential mortgage loans - junior liens  20,558   185   403   0   21,146 
Home equity lines of credit  38,071   543   426   0   39,040 
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  21,104   17   0   0   21,121   14,798   0   0   0   0   14,798 
Total residential mortgage  375,035   1,152   9,836   67   386,090   575,884   331   10,204   84   77   586,580 
Commercial:                                            
Commercial loans secured by real estate  140,381   5,862   8,536   0   154,779   294,397   4,773   1,693   0   364   301,227 
Commercial and Industrial  71,225   2,106   1,737   128   75,196   114,293   9,538   2,543   0   0   126,374 
Political subdivisions  40,007   0   0   0   40,007   53,570   0   0   0   0   53,570 
Commercial construction and land  4,957   60   105   0   5,122   32,224   0   1,331   0   0   33,555 
Loans secured by farmland  5,084   483   1,432   20   7,019   6,528   4,681   1,042   0   0   12,251 
Multi-family (5 or more) residential  7,943   0   1,245   0   9,188   30,160   0   910   0   0   31,070 
Agricultural loans  4,655   0   16   0   4,671   3,343   335   641   0   0   4,319 
Other commercial loans  12,073   0   79   0   12,152   16,416   0   119   0   0   16,535 
Total commercial  286,325   8,511   13,150   148   308,134   550,931   19,327   8,279   0   364   578,901 
Consumer  10,490   21   145   0   10,656   16,720   0   21   0   0   16,741 
Totals $671,850  $9,684  $23,131  $215  $704,880  $1,143,535  $19,658  $18,504  $84  $441  $1,182,222 

 

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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 

 

The scopeAs 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 reviewed individually each quarter to determine if they are impaired include all loan relationships greater than $200,000 for which there isclassified as special mention, with an average balance of $140,000. Of the total balance of special mention loans at least one extensionDecember 31, 2019, loans of credit graded Special Mention, Substandard$500,000 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 componentmore totaled $15,357,000, or 78% of the allowance. Thetotal. Special mention loans that have been individually reviewed, but which have been determinedwith balances of $500,000 or more at December 31, 2019 included 9 commercial loans to not be impaired, are included in7 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 “Collectively Evaluated” column2 loans in the table summarizing the allowance and associated loan balances as ofabove that were upgraded from substandard at December 31, 20162018 to special mention at December 31, 2019. These loans were no longer considered impaired in 2019 and 2015. Allthe 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 troubled debt restructurings (discussed in more detail below) and all loan relationships less than $200,000 in the aggregate, butsubstandard 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 estimated lossaverage balance of $100,000$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 are individually evaluatedtotaled $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 impairment.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, 20162019 and 2015:2018:

 

December 31, 2016 Loans: Allowance for Loan Losses: 
(In Thousands)             
 Individually Collectively     Individually Collectively     Loans:  Allowance for Loan Losses: 
 Evaluated Evaluated Totals Evaluated Evaluated Totals       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 $753  $333,349  $334,102  $0  $3,033  $3,033  $1,023  $405,186  $104,432  $510,641  $0  $3,405  $3,405 
Residential mortgage loans - junior liens  68   23,638   23,706   0   258   258   368   24,730   2,405   27,503   176   208   384 
Home equity lines of credit  0   38,057   38,057   0   350   350   0   32,147   1,491   33,638   0   276   276 
1-4 Family residential construction  0   24,908   24,908   0   249   249   0   14,640   158   14,798   0   117   117 
Total residential mortgage  821   419,952   420,773   0   3,890   3,890   1,391   476,703   108,486   586,580   176   4,006   4,182 
Commercial:                                                    
Commercial loans secured by real estate  8,005   142,463   150,468   528   1,852   2,380   684   198,532   102,011   301,227   0   1,921   1,921 
Commercial and industrial  212   83,642   83,854   95   904   999   1,467   122,313   2,594   126,374   149   1,242   1,391 
Political subdivisions  0   38,068   38,068   0   0   0   0   53,570   0   53,570   0   0   0 
Commercial construction and land  0   14,287   14,287   0   162   162   1,261   29,710   2,584   33,555   678   288   966 
Loans secured by farmland  1,394   5,900   7,294   51   59   110   607   11,386   258   12,251   48   110   158 
Multi-family (5 or more) residential  392   7,504   7,896   0   241   241   0   10,617   20,453   31,070   0   156   156 
Agricultural loans  13   3,985   3,998   0   40   40   76   4,243   0   4,319   0   41   41 
Other commercial loans  0   11,475   11,475   0   115   115   0   15,947   588   16,535   0   155   155 
Total commercial  10,016   307,324   317,340   674   3,373   4,047   4,095   446,318   128,488   578,901   875   3,913   4,788 
Consumer  23   13,699   13,722   0   138   138   0   16,741   0   16,741   0   281   281 
Unallocated                      398                           585 
                                                    
Total $10,860  $740,975  $751,835  $674  $7,401  $8,473  $5,486  $939,762  $236,974  $1,182,222  $1,051  $8,200  $9,836 

 

67
 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 

 


 

December 31, 2015 Loans:  Allowance for Loan Losses: 
(In Thousands)                  
  Individually  Collectively     Individually  Collectively    
  Evaluated  Evaluated  Totals  Evaluated  Evaluated  Totals 
Residential mortgage:                        
Residential mortgage loans - first liens $884  $303,899  $304,783  $1  $2,644  $2,645 
Residential mortgage loans - junior liens  74   21,072   21,146   0   219   219 
Home equity lines of credit  0   39,040   39,040   0   347   347 
1-4 Family residential construction  0   21,121   21,121   0   207   207 
Total residential mortgage  958   385,132   386,090   1   3,417   3,418 
Commercial:                        
Commercial loans secured by real estate  6,262   148,517   154,779   97   1,842   1,939 
Commercial and industrial  324   74,872   75,196   75   906   981 
Political subdivisions  0   40,007   40,007   0   0   0 
Commercial construction and land  0   5,122   5,122   0   58   58 
Loans secured by farmland  1,427   5,592   7,019   52   54   106 
Multi-family (5 or more) residential  987   8,201   9,188   595   80   675 
Agricultural loans  16   4,655   4,671   0   45   45 
Other commercial loans  0   12,152   12,152   0   118   118 
Total commercial  9,016   299,118   308,134   819   3,103   3,922 
Consumer  0   10,656   10,656   0   122   122 
Unallocated                      427 
                         
Total $9,974  $694,906  $704,880  $820  $6,642  $7,889 

Summary information related to impaired loans as of December 31, 20162019 and 20152018 is as follows:

 

(In Thousands) December 31, 2016  December 31, 2015 
 Unpaid       Unpaid       December 31, 2019  December 31, 2018 
 Principal Recorded Related Principal Recorded Related  Unpaid       Unpaid      
 Balance Investment Allowance Balance Investment Allowance  Principal Recorded Related Principal Recorded Related 
(In Thousands) Balance Investment Allowance Balance Investment Allowance 
With no related allowance recorded:                                                
Residential mortgage loans - first liens $783  $753  $0  $842  $842  $0  $645  $617  $0  $750  $721  $0 
Residential mortgage loans - junior liens  68   68   0   74   74   0   42   42   0   54   54   0 
Commercial loans secured by real estate  6,975   5,232   0   7,580   5,945   0   684   684   0   1,787   1,787   0 
Commercial and industrial  117   117   0   249   249   0   563   563   0   817   817   0 
Loans secured by farmland  890   890   0   915   915   0   129   129   0   862   862   0 
Multi-family (5 or more) residential  987   392   0   0   0   0 
Agricultural loans  13   13   0   16   16   0   76   76   0   665   665   0 
Consumer  23   23   0   0   0   0   0   0   0   17   17   0 
Total with no related allowance recorded  9,856   7,488   0   9,676   8,041   0   2,139   2,111   0   4,952   4,923   0 
                                                
With a related allowance recorded:                                                
Residential mortgage loans - first liens  0   0   0   42   42   1   406   406   0   270   270   0 
Residential mortgage loans - junior liens  326   326   176   239   239   116 
Commercial loans secured by real estate  2,773   2,773   528   317   317   97   0   0   0   2,515   2,515   781 
Commercial and industrial  95   95   95   75   75   75   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  504   504   51   512   512   52   478   478   48   487   487   49 
Multi-family (5 or more) residential  0   0   0   987   987   595 
Total with a related allowance recorded  3,372   3,372   674   1,933   1,933   820   3,375   3,375   1,051   4,851   4,851   1,605 
Total $13,228  $10,860  $674  $11,609  $9,974  $820  $5,514  $5,486  $1,051  $9,803  $9,774  $1,605 

 

68

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 
        Interest Income Recognized on  Impaired Loans on a Cash Basis 
 Average Investment in Impaired Loans Impaired Loans on a Cash Basis  Year Ended December 31, Year Ended December 31, 
(In Thousands) Year Ended December 31, Year Ended December 31,  2019 2018 2019 2018 
 2016 2015 2014 2016 2015 2014 
Residential mortgage:                                        
Residential mortgage loans - first lien $806  $2,206  $4,272  $43  $86  $81  $1,440  $980  $87  $52 
Residential mortgage loans - junior lien  71   64   168   3   4   3   288   297   12   11 
Home equity lines of credit  26   0   4   0 
Total residential mortgage  877   2,270   4,440   46   90   84   1,754   1,277   103   63 
Commercial:                                        
Commercial loans secured by real estate  6,806   6,357   7,192   495   380   469   1,562   4,897   19   141 
Commercial and industrial  547   438   877   20   20   37   1,186   708   25   47 
Commercial construction and land  0   40   395   0   0   9   556   0   71   0 
Loans secured by farmland  1,409   1,459   1,413   94   103   101   1,276   1,357   49   35 
Multi-family (5 or more) residential  511   790   0   0   0   0   0   314   0   0 
Agricultural loans  14   21   41   1   3   3   399   542   31   46 
Other commercial loans  20   0   4   0 
Total commercial  9,287   9,105   9,918   610   506   619   4,999   7,818   199   269 
Consumer  21   0   1   1   0   0   3   18   0   1 
Total $10,185  $11,375  $14,359  $657  $596  $703  $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:

 

(In Thousands) December 31, 2016  December 31, 2015 
 Past Due     Past Due     December 31, 2019  December 31, 2018 
 90+ Days and     90+ Days and     Past Due     Past Due    
 Accruing Nonaccrual Accruing Nonaccrual  90+ Days and     90+ Days and    
(In Thousands) Accruing Nonaccrual Accruing Nonaccrual 
Residential mortgage:                                
Residential mortgage loans - first liens $3,022  $3,770  $2,381  $3,044  $878  $4,679  $1,633  $4,750 
Residential mortgage loans - junior liens  114   0   79   0   53   326   151   239 
Home equity lines of credit  320   11   130   0   71   73   219   27 
Total residential mortgage  3,456   3,781   2,590   3,044   1,002   5,078   2,003   5,016 
Commercial:                                
Commercial loans secured by real estate  2,774   3,080   503   5,730   107   1,148   394   3,958 
Commercial and industrial  286   119   65   313   15   1,051   18   2,111 
Commercial construction and land  0   1,311   0   52 
Loans secured by farmland  219   1,331   0   1,427   43   565   459   1,297 
Multi-family (5 or more) residential  0   392   0   987 
Agricultural loans  0   13   0   16   0   0   0   665 
Other commercial  0   49   0   0 
Total commercial  3,279   4,935   568   8,473   165   4,124   871   8,083 
Consumer  103   20   71   0   40   16   32   14 
                                
Totals $6,838  $8,736  $3,229  $11,517  $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.

 

69

The tables below present a summary of the contractual aging of loans as of December 31, 20162019 and 2015:2018:

 

 As of December 31, 2019 As of December 31, 2018 
 Current &         Current &        
 As of December 31, 2016  As of December 31, 2015  Past Due Past Due Past Due     Past Due Past Due Past Due    
 Current &         Current &         Less than 30-89 90+     Less than 30-89 90+    
(In Thousands) Past Due Past Due Past Due     Past Due Past Due Past Due     30 Days Days Days Total 30 Days Days Days Total 
 Less than 30-89 90+     Less than 30-89 90+    
 30 Days Days Days Total 30 Days Days Days Total 
Residential mortgage:                                                              
Residential mortgage loans - first liens $321,670  $6,695  $5,737  $334,102  $294,703  $6,156  $3,924  $304,783  $499,024  $7,839  $3,778  $510,641  $361,362  $6,414 $4,563  $372,339 
Residential mortgage loans - junior liens  23,268   324   114   23,706   20,816   251   79   21,146   27,041   83   379   27,503   24,876   184 390   25,450 
Home equity lines of credit  37,603   134   320   38,057   38,581   329   130   39,040   33,115   452   71   33,638   33,611   480 228   34,319 
1-4 Family residential construction  24,567   341   0   24,908   21,121   0   0   21,121   14,758   40   0   14,798   24,531   167  0   24,698 
Total residential mortgage  407,108   7,494   6,171   420,773   375,221   6,736   4,133   386,090   573,938   8,414   4,228   586,580   444,380   7,245  5,181   456,806 
                                                              
Commercial:                                                              
Commercial loans secured by real estate  147,464   82   2,922   150,468   153,427   108   1,244   154,779   299,640   737   850   301,227   160,668   226 1,717   162,611 
Commercial and industrial  83,364   185   305   83,854   75,002   118   76   75,196   126,221   16   137   126,374   90,915   152 789   91,856 
Political subdivisions  38,068   0   0   38,068   40,007   0   0   40,007   53,570   0   0   53,570   53,263   0 0   53,263 
Commercial construction and land  14,199   88   0   14,287   5,018   104   0   5,122   33,505   0   50   33,555   11,910   0 52   11,962 
Loans secured by farmland  6,181   83   1,030   7,294   5,970   223   826   7,019   11,455   666   130   12,251   5,390   487 1,269   7,146 
Multi-family (5 or more) residential  7,439   65   392   7,896   8,201   0   987   9,188   31,070   0   0   31,070   7,104   76 0   7,180 
Agricultural loans  3,981   4   13   3,998   4,642   13   16   4,671   4,318   1   0   4,319   5,624   29 6   5,659 
Other commercial loans  11,475   0   0   11,475   12,152   0   0   12,152   16,535   0   0   16,535   13,950   0  0   13,950 
Total commercial  312,171   507   4,662   317,340   304,419   566   3,149   308,134   576,314   1,420   1,167   578,901   348,824   970  3,833   353,627 
Consumer  13,446   153   123   13,722   10,537   48   71   10,656   16,496   189   56   16,741   16,991   93  46   17,130 
                                                              
Totals $732,725  $8,154  $10,956  $751,835  $690,177  $7,350  $7,353  $704,880  $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, 20162019 and 20152018 is as follows:

 

  Current &          
(In Thousands) Past Due  Past Due  Past Due    
  Less than  30-89  90+    
  30 Days  Days  Days  Total 
December 31, 2016 Nonaccrual Totals $4,199  $419  $4,118  $8,736 
December 31, 2015 Nonaccrual Totals $7,100  $293  $4,124  $11,517 
  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, 20162019 and 20152018 is as follows:

 

Troubled Debt Restructurings (TDRs):               
                
  Current &             
(In Thousands) Past Due  Past Due  Past Due       
  Less than  30-89  90+       
  30 Days  Days  Days  Nonaccrual  Total 
December 31, 2016 Totals $5,453  $350  $0  $2,874  $8,677 
December 31, 2015 Totals $1,186  $0  $81  $5,097  $6,364 

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, 20162019 and 2015,2018, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

 

70

A summary of TDRs that occurred during 2016, 20152019 and 20142018 is as follows:

 

(Balances in Thousands)   
  2016  2015  2014 
     Post-     Post-     Post- 
  Number  Modification  Number  Modification  Number  Modification 
  of  Recorded  of  Recorded  Of  Recorded 
  Loans  Investment  Loans  Investment  Loans  Investment 
Residential mortgage - first liens:                        
Extended maturity with interest rate reduction  1  $71   1  $56   1  $83 
Extended maturity with reduced monthly payments  1   26   0   0   0   0 
Interest only payments for a period of one year  0   0   0   0   1   34 
Reduced monthly payments for a six-month period  0   0   1   242   1   33 
Residential mortgage - junior liens,                        
Interest rate and monthly payment reduction  0   0   1   32   0   0 
Commercial loans secured by real estate:                        
Interest only payments for a period of one year  1   2,773   0   0   0   0 
Reduced monthly payments  0   0   0   0   5   5,193 
Commercial and industrial:                        
Extended maturity  1   5   0   0   0   0 
Reduced monthly payments  0   0   0   0   1   80 
Consumer:                        
Interest rate and monthly payment reduction  0   0   1   30   0   0 
New unsecured loan after short-fall from sale   of property  1   24   0   0   0   0 
Total  5  $2,899   4  $360   9  $5,423 

(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 

 

In 2014, the TDRs for commercial loans relate to six contracts associated with one relationship. The Corporation entered into a forbearance agreement with this commercial borrower which included a reduction in monthly payment amounts over a fifteen-month period. At the end of the fifteen-month period, the monthly payment amounts would revert to the original amounts, unless the forbearance agreement was extended or the payment requirements otherwise modified. The forbearance agreement was extended for two additional twelve-month periods, most recently in July 2016. The Corporation recorded a charge-off of $1,486,000 in 2014 as a result of these modifications, as the payment amounts based on the forbearance agreement were not sufficient to fully amortize the contractual amount of principal outstanding on the loans. The amount of the charge-off was determined based on the excess of the contractual principal due over the present value of the payment amounts provided for in the forbearance agreement, assuming the revised payment amounts would continue until maturity, at the contractual interest rates. In December 2016, the Corporation and the borrower entered into a modification agreement, terminating the forbearance agreement and establishing loan terms with essentially the same interest rate and monthly payment amounts as had been in effect under the forbearance agreement. The weighted average maturity of the loan contracts has been extended under the modification agreement as compared to the maturities provided for in the original loan contracts. At December 31, 2016, the outstanding contractual balances of these loans total $6,529,000, and the recorded investments total $4,786,000. These loans are still classified as TDRs at December 31, 2016.

Except for the 2014 TDRs described in the immediately preceding paragraph, thereThere were no differences between the outstanding contractual amounts and the recorded investments in receivables resulting from TDRs occurringthat occurred in 2016, 20152019 and 2014.2018. 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.

 

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For 2016, 2015In 2019 and 2014,2018, 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 

(Balances

All of the TDRs for which payment defaults occurred in Thousands)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.

  2016  2015  2014 
  Number     Number     Number    
  of  Recorded  of  Recorded  of  Recorded 
  Loans  Investment  Loans  Investment  Loans  Investment 
Residential mortgage - first liens  2  $294   1  $32   3  $257 
Residential mortgage - junior liens  1   29   0   0   1   62 
Commercial loans secured by real estate  0   0   0   0   1   429 
Commercial and industrial  1   5   0   0   0   0 
Commercial construction and land  0   0   0   0   1   25 
Loans secured by farmland  0   0   0   0   4   490 
Agricultural loans  0   0   0   0   1   13 
Consumer  1   27   0   0   0   0 
Total  5  $355   1  $32   11  $1,276 

 

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) Dec. 31, Dec. 31,  2019 2018 
 2016 2015 
Foreclosed residential real estate $1,102  $555  $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) Dec. 31, Dec. 31,  2019 2018 
 2016 2015 
Residential real estate in process of foreclosure $2,738  $1,173  $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 

Bank premises and equipment are summarized

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 

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10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Information related to the core deposit intangibles is as follows:

 

(In Thousands) December 31, 
  2016  2015 
Land $2,818  $2,818 
Buildings and improvements  27,619   27,092 
Furniture and equipment  18,741   17,922 
Construction in progress  392   243 
Total  49,570   48,075 
Less: accumulated depreciation  (34,173)  (32,669)
Net $15,397  $15,406 
  December 31, 
(In Thousands) 2019  2018 
Gross amount $3,495  $2,034 
Accumulated amortization  (2,248)  (2,025)
Net $1,247  $9 

 

DepreciationAmortization expense includedwas $223,000 in occupancy2019, including $214,000 related to the Monument transaction described in Note 3, and $3,000 in 2018. The amount of amortization expense and furniture and equipment expense wasto be recognized in each of the ensuing five years is as follows:

 

(In Thousands) 2016  2015  2014 
Occupancy expense $804  $954  $998 
Furniture and equipment expense  785   934   942 
Total $1,589  $1,888  $1,940 
(In Thousands)   
2020 $249 
2021  193 
2022  160 
2023  133 
2024  125 

 

10. INTANGIBLE ASSETS

There were no changesChanges in the carrying amount of goodwill are summarized in 2016 and 2015. The balance in goodwill was $11,942,000 at December 31, 2016 and 2015. The Corporation did not complete any acquisitions in 2016 or 2015.the following table:

 

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  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, 2016,2019, the Corporation assessedby-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 iswas more likely than not that the fair value of its only reporting unit, its community banking operation iswas 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 iswas not more likely than not that the fair value of the community banking operation hashad fallen below its carrying value, and therefore, the Corporation did not perform thea more detailed, two-step goodwill impairment test described in Topic 350. Accordingly,and concluded there was no goodwill impairment as of December 31, 2016.

Information related to the core deposit intangibles is as follows:

  December 31, 
(In Thousands) 2016  2015 
Gross amount $2,034  $2,034 
Less: accumulated amortization  (2,017)  (2,004)
Net $17  $30 

Amortization expense was $13,000 in 2016, $22,000 in 2015 and $35,000 in 2014. The amount of amortization expense to be recognized each of the ensuing five years is not significant.2018.

 

11. DEPOSITS

 

At December 31, 2016,2019, the scheduled maturities of time deposits are as follows:

 

(In Thousands)    
 2017  $113,974 
 2018   51,526 
 2019   25,302 
 2020   14,458 
 2021   6,710 
 Thereafter   248 
 Total    $212,218 
(In Thousands)   
2020 $238,887 
2021  83,197 
2022  28,968 
2023  12,003 
2024  11,610 
2025  30 
Total $374,695 

 

Included in interest-bearingTime deposits are time deposits in the amount of $100,000 or more.more than $250,000 totaled $84,476,000 at December 31, 2019 and $36,094,000 at December 31, 2018. As of December 31, 2016,2019, the remaining maturities or time to next re-pricing of time deposits of $100,000 or more arethan $250,000 was as follows:

 

(In Thousands)      
Three months or less $32,987  $19,176 
Over 3 months through 12 months  11,663   52,093 
Over 1 year through 3 years  11,508   6,601 
Over 3 years  7,605   6,606 
Total $63,763  $84,476 

 

Interest expense from time deposits of $100,000 or more amounted to $524,000 in 2016, $482,000 in 2015 and $563,000 in 2014.

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Time deposits of more than $250,000 totaled $7,929,000 at December 31, 2016 and $6,531,000 at December 31, 2015.

 

12. BORROWED FUNDS AND SUBORDINATED DEBT

 

Short-term borrowings (initial maturity within one year) include the following:

 

(In Thousands) Dec. 31,  Dec. 31, 
  2016  2015 
FHLB-Pittsburgh borrowings $21,000  $48,581 
Customer repurchase agreements  5,175   4,915 
Total short-term borrowings $26,175  $53,496 

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 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) Dec. 31, Dec. 31  2019 2018 
 2016 2015 
Overnight borrowing $21,000  $23,500  $64,000  $7,000 
Other short-term advances  0   25,081   20,292   0 
Total short-term FHLB-Pittsburgh borrowings $21,000  $48,581  $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 0.61%1.88% at December 31, 20162019 and 0.60%1.47% at December 31, 2015.2018. The maximum amount of total short-term borrowings outstanding at any month-end was $47,005,000$86,220,000 in 2016, $53,496,0002019 and $74,646,000 in 2015 and $7,919,000 in 2014.2018.

 

The Corporation had available credit with other correspondent banks totaling $45,000,000 at December 31, 20162019 and 2015.2018. These lines of credit are primarily unsecured. No amounts were outstanding at December 31, 20162019 or 2015.2018.

 

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At December 31, 2016,2019, the Corporation had available credit in the amount of $15,636,000$14,244,000 on this line with no outstanding advances. At December 31, 2015,2018, the Corporation had available credit in the amount of $19,606,000$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 $17,690,000$14,728,000 at December 31, 20162019 and $20,039,000$15,710,000 at December 31, 2015.2018.

 

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $471,454,000$778,877,000 at December 31, 20162019 and $450,883,000$495,143,000 at December 31, 2015.2018. 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 $4,296,000$10,131,000 at December 31, 20162019 and $4,527,000$5,582,000 at December 31, 2015.2018. The Corporation’s total credit facility with FHLB-Pittsburgh was $339,221,000$552,546,000 at December 31, 2016,2019, including an unused (available) amount of $306,767,000.$416,127,000. At December 31, 2015,2018, the Corporation’s total credit facility with FHLB-Pittsburgh was $322,709,000,$361,614,000, including an unused (available) amount of $262,361,000.

At December 31, 2016, the overnight borrowing from FHLB-Pittsburgh of $21,000,000 had an interest rate of 0.74%. At December 31, 2015, the overnight borrowing from FHLB-Pittsburgh of $23,500,000 had an interest rate of 0.43%, and the other short-term advances included 12 advances of $2,090,000 each maturing monthly throughout 2016, with a weighted average interest rate of 0.86% and rates ranging from 0.54% to 1.052%.$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, 20162019 and December 31, 2015.2017. The carrying value of the underlying securities was $15,019,000$1,951,000 at December 31, 20162019 and $12,613,000$5,890,000 at December 31, 2015.2018.

 

LONG-TERM BORROWINGS      
       
Long-term borrowings (initial maturity of greater than one year) are as follows:        
(In Thousands)  Dec. 31,   Dec. 31, 
   2016   2015 
FHLB-Pittsburgh borrowings $11,454  $11,767 
Repurchase agreements  27,000   27,000 
Total long-term borrowings $38,454  $38,767 
         
Long-term borrowings from FHLB - Pittsburgh are as follows:        
(In Thousands)  Dec. 31,   Dec. 31, 
   2016   2015 
Loan maturing in 2016 with a rate of 6.86% $0  $57 
Loan maturing in 2017 with a rate of 6.83%  4   10 
Loan maturing in 2017 with a rate of 3.81%  10,000   10,000 
Loan maturing in 2020 with a rate of 4.79%  646   821 
Loan maturing in 2025 with a rate of 4.91%  804   879 
Total long-term FHLB-Pittsburgh borrowings $11,454  $11,767 

LONG-TERM BORROWINGS

 

The repurchase agreement included in long-term

Long-term borrowings has an interest rate of 3.595% and an effective maturity date in December 2017.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 

 

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In 2015,connection with the Monument acquisition, the Corporation incurred lossesassumed subordinated debt agreements with par values totaling $2,573,000 on prepayment$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 $34,000,0006.50%. 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 repurchase agreement with an interest rateloss of 4.265%.

“The Repurchase Date,” as defined$10,000 (included in other noninterest expense in the Master Repurchase Agreement betweenconsolidated statements of income). At December 31, 2019, the Corporation and the broker-dealer, occurs quarterly on or about the 20thof each March, June, September and December until the “Final Repurchase Date” (as defined) on December 20, 2017. The Corporation pays interest, and the borrowing is putable by the issuer, on each Repurchase Date. The Final Repurchase Date is the effective maturity date of the borrowing.

Securities sold under repurchase agreements were delivered to the broker-dealer who is the counter-party to the transactions. The broker-dealer may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and has agreed to resell to the Corporation substantially identical securities at the maturities of the agreements. The Master Repurchase Agreement between the Corporation and the broker-dealer provides that the Agreement constitutes a “netting contract,” as defined; however, the Corporation and the broker-dealer have no other obligations to one another and accordingly, no netting has occurred.

The carrying value of the underlying securities was $31,494,000 at December 31, 2016 and $33,780,000 at December 31, 2015, as detailed insubordinated debt on the following table:consolidated balance sheet is $6,500,000.

 

(In Thousands) Dec. 31,  Dec. 31, 
  2016  2015 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:        
Residential pass-through securities $18,181  $15,772 
Residential collateralized mortgage obligations  13,313   18,008 
Total $31,494  $33,780 

Two of the more significant risks associated with the repurchase agreement with the broker-dealer are as follows:

·The borrowing is putable at quarterly intervals by the issuer. Accordingly, if interest rates were to rise to a sufficient level, the issuer would be expected to require the Corporation to pay off the borrowing. In this circumstance, the Corporation would be required to obtain new borrowing at a higher interest rate than the existing repurchase agreement or utilize cash from other sources to pay off the borrowing. If sales of available-for-sale securities were used to generate cash to pay off the borrowings, the value of such securities would be expected to have fallen, which could result in the Corporation recognizing a loss.

·As principal pay-downs of mortgage backed securities and CMOs occur, the Corporation must have available, unencumbered assets or purchase a sufficient amount of assets with credit quality suitable to the broker-dealer to replace the amounts being paid off. Since pre-payments of mortgages typically increase as interest rates fall, the Corporation may be required to purchase additional assets at times when market rates are lower than the rates paid on the borrowings.

Average daily repurchase agreement borrowings amounted to $27,000,000 in 2016, $54,304,000 in 2015 and $61,000,000 in 2014. The maximum amounts of outstanding borrowings under repurchase agreements with broker-dealers were $27,000,000 in 2016 and $61,000,000 in 2015 and in 2014. The weighted average interest rate on repurchase agreements was 3.60% in 2016, 3.99% in 2015 and 4.02% in 2014.

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, 20162019 and December 31, 2015,2018 and are not expected to significantly affect the Corporation's future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.

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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:

(In Thousands)

 Pension  Postretirement  Pension  Postretirement 
 2016 2015 2016 2015 
(In Thousands) 2019  2018  2019  2018 
CHANGE IN BENEFIT OBLIGATION:                                
Benefit obligation at beginning of year $722  $1,085  $1,539  $1,378  $870  $850  $1,349  $1,497 
Service cost  0   0   37   38   0   0   33   40 
Interest cost  26   36   62   57   28   25   50   51 
Plan participants' contributions  0   0   215   203   0   0   184   206 
Actuarial loss (gain)  3   (46)  (30)  120 
Actuarial (gain) loss  91   11   (63)  (192)
Benefits paid  (38)  (16)  (268)  (257)  (13)  (16)  (227)  (253)
Settlement of plan obligation  0   (337)  0   0 
Benefit obligation at end of year $713  $722  $1,555  $1,539  $976  $870  $1,326  $1,349 
                                
CHANGE IN PLAN ASSETS:                                
Fair value of plan assets at beginning of year $839  $1,208  $0  $0  $847  $923  $0  $0 
Actual return on plan assets  45   (16)  0   0   137   (60)  0   0 
Employer contribution  0   0   53   54   0   0   43   47 
Plan participants' contributions  0   0   215   203   0   0   184   206 
Benefits paid  (38)  (16)  (268)  (257)  (13)  (16)  (227)  (253)
Settlement of plan obligation  0   (337)  0   0 
Fair value of plan assets at end of year $846  $839  $0  $0  $971  $847  $0  $0 
                                
Funded status at end of year $133  $117  ($1,555) ($1,539) $(5) $(23) $(1,326) $(1,349)

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At December 31, 20162019 and 2015,2018, the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance sheets:

 

Assets and liabilities:         
 Pension Postretirement 
(In Thousands) Pension  Postretirement  2019 2018 2019 2018 
 2016 2015 2016 2015 
Other assets $133  $117       
Accrued interest and other liabilities         $1,555  $1,539  $5  $23  $1,326  $1,349 

 

At December 31, 20162019 and 2015,2018, 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:            
(In Thousands) Pension  Postretirement 
  2016  2015  2016  2015 
Prior service cost $0  $0  $(340) $(371)
Net actuarial loss  161   186   101   131 
Total $161  $186  $(239) $(240)

Items not yet recognized as a componentof 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 $7,000$16,000 in 2017.2020. 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 20172020 is a reduction in expense of $31,000, and no net actuarial lossgain of $7,000 is expected to be amortized in 2017.2020.

 

The accumulated benefit obligation for the defined benefit pension plan was $713,000$976,000 at December 31, 20162019 and $722,000$870,000 at December 31, 2015.2018.

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The components of net periodic benefit costs from defined benefit plans are as follows:

 

(In Thousands) Pension  Postretirement 
  2016  2015  2014  2016  2015  2014 
Service cost $0  $0  $0  $37  $38  $34 
Interest cost  26   36   73   62   57   57 
Expected return on plan assets  (26)  (45)  (88)  0   0   0 
Amortization of prior service cost  0   0   0   (31)  (31)  (31)
Recognized net actuarial loss  9   11   19   0   0   0 
Loss on settlement  0   87   196   0   0   0 
Total net periodic benefit cost $9  $89  $200  $68  $64  $60 

In 2015, there was a distribution from the pension plan of $337,000, or 32% of the plan’s total accumulated benefit obligation prior to the distribution. The Corporation recognized a loss of $87,000 (included in net periodic benefit cost) in 2015 as a result of this settlement. In 2014, there was a distribution from the pension plan of $781,000, or 42% of the plan’s total accumulated benefit obligation prior to the distribution. The Corporation recognized a loss of $196,000 (included in net periodic benefit cost) in 2014 as a result of this settlement.

 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  Pension  Postretirement 
 2016 2015 2014 2016 2015 2014  2019 2018 2019 2018 
Citizens Trust Company Retirement Plan and postretirement plan:                
Discount rate  4.30%  3.75%  4.50%  4.25%  4.00%  4.00%  4.10%  3.55%  4.50%  3.75%
Expected return on plan assets ��5.00%  5.31%  5.31%  N/A   N/A   N/A   4.68%  4.32%  N/A   N/A 
Rate of compensation increase  N/A   N/A   N/A   N/A   N/A   N/A   N/A   N/A   N/A   N/A 

 

The weighted-average assumptions used to determine benefit obligations as of December 31, 20162019 and 20152018 are as follows:

 

 Pension  Postretirement  Pension  Postretirement 
 2016 2015 2016 2015  2019 2018 2019 2018 
Discount rate  4.05%  4.30%  4.25%  4.25%  3.55%  4.10%  3.25%  4.50%
Rate of compensation increase  N/A   N/A   N/A   N/A   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 
 2017  $222  $99 
 2018   15   103 
 2019   39   108 
 2020   12   114 
 2021   12   114 
 2022-2026   220   563 
(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 2017,2020, 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.

 

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The fair values of pension plan assets at December 31, 20162019 and 20152018 are as follows:

 

 2016 2015  2019 2018 
Mutual funds invested principally in:                
Cash and cash equivalents  2%  2%  3%  3%
Debt securities  38%  38%  38%  40%
Equity securities  44%  46%  49%  45%
Alternative funds  16%  14%  10%  12%
Total  100%  100%  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 6)21). At December 31, 2016, the targeted asset allocation of mutual funds for the pension plan was 44% equity securities, 38% debt securities, 16% alternative assets, and 2% cash. At December 31, 2015, the targeted asset allocation of mutual funds for the pension plan was 46% equity securities, 38% debt securities, 14% alternative assets and 2% cash. The pension plan’sPlan’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 $646,000$891,000 in 2016, $609,0002019 and $717,000 in 2015 and $595,000 in 2014.2018.

 

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 back to the ESOP over a period of 6 years. As of December 31, 20162019, and 2015,2018, 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 417,753473,171 shares of Corporation stock at December 31, 20162019 and 410,004444,843 shares at December 31, 2015,2018, all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled $549,000$718,000 in 2016, $522,0002019 and $605,000 in 2015 and $512,000 in 2014.2018.

 

The Corporation has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were $184,000$251,000 in 2016, $167,0002019 and $242,000 in 2015 and $138,000 in 2014.2018.

 

In December 2015, theThe Corporation establishedalso has a nonqualified deferred compensation plan that allows selected officers beginning in 2016, 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, 2016,2019, 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 280,682223,867 shares available for issuance under the Stock Incentive Plan as of December 31, 2016.2019.

 

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 135,000235,000 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 21,868109,965 shares available for issuance under the Independent Directors Stock Incentive Plan as of December 31, 2016.2019.

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Total stock-based compensation expense is as follows:

 

(In Thousands) 2016 2015 2014  2019 2018 
Restricted stock $578  $606  $412  $798  $855 
Stock options  0   0   153   0   0 
Total $578  $606  $565  $798  $855 

 

The following summarizes non-vested restricted stock activity for the year ended December 31, 2016:2019:

 

    Weighted     Weighted 
    Average     Average 
 Number Grant Date  Number Grant Date 
 of Shares Fair Value  of Shares Fair Value 
Outstanding, December 31, 2015  62,212  $20.10 
Outstanding, December 31, 2018  60,345  $23.81 
Granted  35,427  $20.42   48,137  $24.47 
Vested  (30,846) $19.90   (36,524) $23.21 
Forfeited   (3,431) $20.41   (3,758) $25.08 
Outstanding, December 31, 2016  63,362  $20.35 
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, 2016,2019, there was $662,000$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 2016,2019 and 2018, the Corporation awarded a total of 27,593 shares of restricted stock under the Stock Incentive Plan. Restricted stock awards under the Stock Incentive Plan, in 2016 included the following: (1) a total of 17,289 shares to Executive Officers, vesting over a three-year term, with vesting for half of the shares dependent on satisfactory performance (time vesting) and vesting for half of the shares based on time vesting and upon the Corporation meeting an annual return on average equity (“ROAE”) performance ratio, as defined; and (2) a total of 10,304 shares to other employees, with time vesting over a three-year term. The Corporation did not meet the performance condition defined in the 2016 awards, as the Corporation’s return on average equity (“ROAE”) was in the 47thpercentile of the defined Peer Group’s results for the 12-month period ended September 30, 2016. The minimum level for satisfying the performance condition defined in the 2016 awards was an ROAE at the 50th percentile of the Peer Group’s results. For purposes of the 2016 awards, the Peer Group included all publicly traded commercial banks and bank holding companies with headquarters in Pennsylvania, New York, New Jersey and Ohio, and total assets ranging between $750 million and $3.5 billion as of the beginning of the applicable period.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 

Restricted stock awards in 2015 included the following: (1) a total of 20,298 shares to employees, vesting over a four-year term, with vesting of all of the applicable shares contingent upon the Corporation meeting an annual ROAE performance ratio, as defined; (2) a total of 2,198 shares to employees, with time vesting over a four-year term; and (3) an award to the Chief Executive Officer of 5,174 shares, with time vesting over a three-year term. Most of the

Time-based restricted stock awards issued under this Plan in 2015, 2014 and 2013 include a condition that the Corporation must meet an annual targeted ROAE performance ratio, as defined, in order for participants to vest. In 2016, 2015 and 2014, the Corporation met the ROAE target applicable to awards granted prior to 2016, which is based on the Corporation’s ROAE for 12-month periods ended September 30 of each year as compared to the applicable peer group of bank holding companies based in Pennsylvania and one local competitor based in New York with total assets of $750 million to $2 billion as of the beginning of each applicable period. For 2016, 2015 and 2014 restricted stock awards to individuals who are substantially involved in mortgage lending, vesting is not dependent on the Corporation’s ROAE.

In 2016, a total of 7,834 restricted shares were 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 timecontinued employment and satisfactory job performance. Performance-based restricted stock awards granted in 2019 and 2018 vest ratably over three-year terms, with vesting over a term of one year. In 2015, a total of 7,130 restricted shares were granted undercontingent upon meeting conditions based on the Independent Directors Stock Incentive Plan, also with time vesting over a term of one year.Corporation’s earnings as specified in the agreements.


There were no stock options granted in 20162019 or 2015. The Corporation recorded stock option expense in 2014 based on estimated fair value calculated using the Black-Scholes-Merton option-pricing model with the following assumptions:

2014
Volatility39%
Expected option lives 8 Years
Risk-free interest rate2.85%
Dividend yield4.33%

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Management estimated the lives for options based on the Corporation’s average historical experience with both plans. The Corporation utilized its historical volatility and dividend yield over the immediately prior 8-year period to estimate future levels of volatility and dividend yield for the 2014 awards. The risk-free interest rate was based on the published yield of zero-coupon U.S. Treasury strips as of the grant date, with a maturity coinciding with the estimated option lives.

2018. A summary of stock option activity is presented below:

 

 2016     2015     2014     2019 2018 
    Weighted     Weighted     Weighted     Weighted     Weighted 
    Average     Average     Average     Average     Average 
    Exercise     Exercise     Exercise     Exercise     Exercise 
 Shares Price Shares Price Shares Price  Shares Price Shares Price 
Outstanding, beginning of year  248,486  $18.59   316,157  $19.05   358,176  $19.03   115,714  $18.49   165,660  $18.49 
Granted  0       0       39,027  $20.45   0       0     
Exercised  (35,880) $18.86   (29,557) $17.56   (50,415) $17.57   (31,304) $17.65   (41,210) $18.69 
Forfeited  (10,569) $18.03   (20,211) $19.76   (16,424) $20.03   0       0     
Expired  0       (17,903) $27.00   (14,207) $26.59   (8,513) $19.88   (8,736) $17.50 
Outstanding, end of year  202,037  $18.58   248,486  $18.59   316,157  $19.05   75,897  $18.69   115,714  $18.49 
Options exercisable at year-end  202,037  $18.58   248,486  $18.59   316,157  $19.05   75,897  $18.69   115,714  $18.49 
Weighted-average fair value of options granted      N/A       N/A      $5.50 
Weighted-average fair value of options forfeited     $4.04      $4.86      $4.89       N/A       N/A 

 

The weighted-average remaining contractual term of outstanding stock options at December 31, 20162019 was 4.02.7 years. The aggregate intrinsic value of stock options outstanding was $1,540,000$726,000 at December 31, 2016.2019. The total intrinsic value of options exercised was $183,000$276,000 in 2016, $77,0002019 and $291,000 in 2015 and $90,000 in 2014.2018.

 

The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2016.2019. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2017.2020.

In January 2017,2020, the Corporation awarded 22,31230,381 shares of restricted stock under the Stock Incentive Plan and 8,4707,580 shares of restricted stock under the Independent Directors Stock Incentive Plans. The 2017January 2020 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and vesting for one-half of the 14,897 restricted shares awarded to Executive Officers depends on the Corporation meeting a ROAE target each year.years. The 20172020 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Total estimated stock-based compensation for 20172020 is $652,000.$920,000. The restricted stock awards made in January 20172020 are not included in the tables above.

 

14. INCOME TAXES

 

The net deferred tax asset at December 31, 20162019 and 20152018 represents the following temporary difference components:

 

  December 31,  December 31, 
(In Thousands) 2016  2015 
Deferred tax assets:        
Unrealized holding losses on securities $512  $0 
Net realized losses on securities  0   69 
Allowance for loan losses  2,998   2,761 
Other deferred tax assets  2,658   2,634 
Total deferred tax assets  6,168   5,464 
         
Deferred tax liabilities:        
Unrealized holding gains on securities  0   1,342 
Defined benefit plans - ASC 835  27   19 
Bank premises and equipment  913   869 
Core deposit intangibles  6   11 
Other deferred tax liabilities  105   108 
Total deferred tax liabilities  1,051   2,349 
Deferred tax asset, net $5,117  $3,115 

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  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) 2016 2015 2014  2019 2018 
Currently payable $5,328  $5,097  $4,280  $3,618  $4,350 
Tax expense resulting from allocations of certain tax benefits to equity or as a reduction in other assets  175   161   158   115   87 
Deferred  (156)  79   1,254   172   (187)
Total provision $5,347  $5,337  $5,692  $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):

 

(Amounts in thousands) 2016     2015     2014    
  Amount  %  Amount  %  Amount  % 
Expected provision $7,388   35.00  $7,633   35.00  $7,972   35.00 
Tax-exempt interest income  (1,801)  (8.53)  (1,914)  (8.78)  (1,982)  (8.70)
Nondeductible interest expense  40   0.19   51   0.23   56   0.25 
Dividends received deduction  (22)  (0.10)  (75)  (0.34)  (79)  (0.35)
Increase in cash surrender value of life insurance  (134)  (0.63)  (135)  (0.62)  (132)  (0.58)
Employee stock option compensation  0   0.00   0   0.00   41   0.18 
Tax benefit from limited partnership investment  (76)  (0.36)  (80)  (0.37)  (83)  (0.36)
Other, net  (48)  (0.23)  (143)  (0.66)  (101)  (0.44)
Effective income tax provision $5,347   25.33  $5,337   24.47  $5,692   24.99 
  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 

 

TheIn December 2017, the Corporation has investmentsrecognized an adjustment in three limited partnershipsthe 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 manage affordable housing projects that have qualifiedhad 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 federal low-income housing tax credit. The Corporation’s expected return from these investments is based on the receipt of tax credits and tax benefits from deductions of operating losses. The Corporation uses the effective yield method to account for these investments, with the benefits recognized as a reduction of the provision for income taxes. For two of the three limited partnership investments, the tax credits have been receivedsame amount (no net change in full in prior years, and the Corporation has fully realized the benefits of the credits and amortized its initial investments in the partnerships. The most recent affordable housing project was completed in 2013, and the Corporation received tax credits in 2013 through 2015 and expects to continue to receive tax credits annually through 2022. The carrying amount of the Corporation’s investment is $713,000 at December 31, 2016 and $812,000 at December 31, 2015 (included in Other Assets in the consolidated balance sheets)stockholders’ equity). For 2016, the estimated amount of tax credits and other tax benefits to be received is $158,000 and the amount recognized as a reduction of the provision for income taxes is $76,000. In 2015, the Corporation received tax credits and other tax benefits totaling $160,000, and recognized a reduction of the provision for income tax of $80,000. In 2014, the Corporation received tax credits and other tax benefits totaling $159,000, and recognized a reduction of the provision for income tax of $83,000.

 

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 2013.2016.

 

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:

(In Thousands) Beginning  New     Other  Ending 
  Balance  Loans  Repayments  Changes  Balance 
12 directors, 7 executive officers 2016 $10,246  $307  $(1,160) $2,021  $11,414 
11 directors, 7 executive officers 2015  12,023   52   (808)  (1,021)  10,246 
12 directors, 8 executive officers 2014  12,547   188   (1,358)  646   12,023 

  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 $2,899,000$8,828,000 at December 31, 20162019 and $3,194,000$9,622,000 at December 31, 2015.2018.

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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, 20162019 and 20152018 are as follows:

 

(In Thousands) 2016 2015  2019 2018 
Commitments to extend credit $180,768  $156,407  $256,896  $191,672 
Standby letters of credit  9,025   13,340   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, 20162019 and 2015.2018.

 

Standby letters of credit as of December 31, 20162019 expire as follows:

 

Year of Expiration  (In Thousands) 
 2017  $7,612 
 2018   387 
 2019   193 
 2020   64 
 2021   0 
 Thereafter   769 
 Total  $9,025 
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 (on ameets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated basis) andcapital requirements at December 31, 2019; however, C&N Bank areremains subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and C&N Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

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Quantitative measures established by regulation to ensureDetails concerning capital adequacy require the Corporationratios at December 31, 2019 and C&N Bank to maintain minimum amounts and ratios (set forth in the following table) of total capital, Tier I capital (as defined in the regulations) and Common equity Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined).December 31, 2018 are presented below. Management believes, as of December 31, 2016 and 2015,2019, that the Corporation and C&N Bank meetmeets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) to which they are subject and maintain capital conservation buffers that allowallows the Corporation and C&N Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to certain executive officers.

To be categorized Further, as well capitalized, an institution must maintain minimum total risk based, Tier I risk based, Common equity risk based and Tier I leverage ratios as set forthreflected in the following table. Thetable below, the Corporation’s and C&N Bank’s actual capital amountsratios at December 31, 2019 and ratios are also presented inDecember 31, 2018 exceed the following table:Corporation’s Board policy threshold levels.

 

(Dollars in Thousands)             Minimum To Be Well    
      Minimum  Minimum To Maintain  Capitalized Under Minimum To Meet               Minimum To Be Well      
      Capital  Capital Conservation  Prompt Corrective the Corporation's     Minimum Minimum To Maintain Capitalized Under Minimum To Meet 
 Actual Requirement  Buffer at Reporting Date  Action Provisions Policy Thresholds       Capital Capital Conservation Prompt Corrective the Corporation's 
  Amount   Ratio   Amount   Ratio   Amount   Ratio    Amount   Ratio    Amount   Ratio   Actual Requirement Buffer at Reporting Date Action Provisions Policy Thresholds 
December 31, 2016:                                        
(Dollars in Thousands) Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
December 31, 2019:                                        
Total capital to risk-weighted assets:                                                                                
Consolidated $183,597   23.60% $62,245   ³8%  $67,108   ³8.625%  $77,806   ³10%  $81,697   ³10.5%  $228,057   20.70%  N/A   N/A   N/A   N/A   N/A   N/A  $115,689   ³10.5% 
C&N Bank  162,705   21.03%  61,894   ³8%  66,730   ³8.625%  77,368  ³10%  81,236   ³10.5%  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  174,928   22.48%  31,122   ³6%  51,547   ³6.625%  62,245   ³8%  66,135   ³8.5%   211,388   19.19%  N/A   N/A   N/A   N/A   N/A   N/A   93,653   ³8.5% 
C&N Bank  154,036   19.91%  30,947   ³6%  51,256   ³6.625%  61,894   ³8%  65,762   ³8.5%   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  174,928   22.48%  31,122   ³4.5%  39,876   ³5.125%  50,574   ³6.5%   54,464   ³7%  211,388   19.19%  N/A   N/A   N/A   N/A   N/A   N/A   77,126   ³7% 
C&N Bank  154,036   19.91%  30,947   ³4.5%  39,651   ³5.125%  50,289   ³6.5%   54,157   ³7%   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  174,928   14.27%  49,026   ³4%  N/A   N/A   61,282   ³5%   61,282   ³5%   211,388   13.10%  N/A   N/A   N/A   N/A   N/A   N/A   129,126   ³8% 
C&N Bank  154,036   12.73%  48,404   ³4%  N/A   N/A   60,506   ³5%   60,506   ³5%   195,694   12.24%  63,940   ³4%   N/A   N/A   79,925   ³5%   127,879   ³8% 
                                                                                
December 31, 2015:                                        
December 31, 2018:                                        
Total capital to risk-weighted assets:                                                                                
Consolidated $181,216   24.40% $59,424   ³8%  N/A   N/A  $74,281   ³10%  $77,995   ³10.5%  $199,226   24.42%  N/A   N/A   N/A   N/A   N/A   N/A  $85,653   ³10.5% 
C&N Bank  161,187   21.83%  59,058   ³8%  N/A   N/A   73,823   ³10%   77,514   ³10.5%   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  173,009   23.29%  29,712   ³6%  N/A   N/A   59,424   ³8%   63,139   ³8.5%   189,589   23.24%  N/A   N/A   N/A   N/A   N/A   N/A   69,338   ³8.5% 
C&N Bank  153,298   20.77%  29,529   ³6%  N/A   N/A   59,058   ³8%   62,749   ³8.5%   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  173,009   23.29%  29,712   ³4.5%  N/A   N/A   48,282   ³6.5%   51,996   ³7%   189,589   23.24%  N/A   N/A   N/A   N/A   N/A   N/A   57,102   ³7% 
C&N Bank  153,298   20.77%  29,529   ³4.5%  N/A   N/A   47,985   ³6.5%   51,676   ³7%   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  173,009   14.31%  48,355   ³4%  N/A   N/A   60,444   ³5%   60,444   ³5%   189,589   14.78%  N/A   N/A   N/A   N/A   N/A   N/A   102,634   ³8% 
C&N Bank  153,298   12.81%  47,861   ³4%  N/A   N/A   59,826   ³5%   59,826   ³5%   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). The Corporation and C&N Bank became subject to the new rule effective January 1, 2015. Generally, the new rule implements higher minimum capital requirements, revises the definition of regulatory capital components and related calculations, adds a new common equity tier 1 capital ratio, implements a new capital conservation buffer, increases the risk weighting for past due loans and provides a transition period for several aspects of the new rule.

The current (new)This capital rule provides that, in order 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. Phase-in ofIn 2019, the minimum risk-based capital conservation buffer requirements became effective January 1, 2016. The transition schedule for newratios, and the capital ratios including the capital conservation buffer, isare as follows:

 


Minimum common equity tier 1 capital ratio 834.5%
Minimum common equity tier 1 capital ratio plus capital conservation buffer 7.0%
Minimum tier 1 capital ratio6.0%
Minimum tier 1 capital ratio plus capital conservation buffer8.5%
Minimum total capital ratio8.0%
Minimum total capital ratio plus capital conservation buffer10.5%

  As of January 1:          
  2015  2016  2017  2018  2019 
Minimum common equity tier 1 capital ratio  4.5%  4.5%  4.5%  4.5%  4.5%
Common equity tier 1 capital conservation buffer  N/A   0.625%  1.25%  1.875%  2.5%
Minimum common equity tier 1 capital ratio plus  capital conservation buffer  4.5%  5.125%  5.75%  6.375%  7.0%
Phase-in of most deductions from common equity  tier 1 capital  40%  60%  80%  100%  100%
Minimum tier 1 capital ratio  6.0%  6.0%  6.0%  6.0%  6.0%
Minimum tier 1 capital ratio plus capital  conservation buffer   N/A   6.625%  7.25%  7.875%  8.5%
Minimum total capital ratio  8.0%  8.0%  8.0%  8.0%  8.0%
Minimum total capital ratio plus capital  conservation buffer   N/A   8.625%  9.25%  9.875%  10.5%

 

As fully phased in, aA 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. The new rule also prohibitsAlso, 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%  6060%%
≤1.875% and >1.25%  4040%%
≤1.25% and >0.625%  2020%%
≤0.625%  00%%

 

At December 31, 2016, the Corporation’s30, 2019, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 15.60%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 13.03%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 $87,631,000$94,628,000 at December 31, 2016,2019, 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 $15,404,000$19,543,000 at December 31, 2016.2019.

 

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19. PARENT COMPANY ONLY

 

The following is condensed financial information for Citizens & Northern Corporation:

CONDENSED BALANCE SHEET December 31, 
(In Thousands) 2016  2015 
ASSETS        
Cash $6,033  $5,847 
Investment in subsidiaries:        
Citizens & Northern Bank  165,397   167,277 
Citizens & Northern Investment Corporation  11,168   10,966 
Bucktail Life Insurance Company  3,419   3,392 
Other assets  4   24 
TOTAL ASSETS $186,021  $187,506 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Other liabilities $13  $19 
Stockholders' equity  186,008   187,487 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $186,021  $187,506 

 

CONDENSED INCOME STATEMENT         
(In Thousands) 2016  2015  2014 
Dividends from Citizens & Northern Bank $14,960  $11,569  $22,608 
Expenses  (367)  (234)  (112)
Income before equity in undistributed income of subsidiaries  14,593   11,335   22,496 
Equity in undistributed income of subsidiaries  1,169   5,136   (5,410)
NET INCOME $15,762  $16,471  $17,086 
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 STATEMENT OF CASH FLOWS         
(In Thousands)         
  2016  2015  2014 
CASH FLOWS FROM OPERATING ACTIVITIES:         
Net income $15,762  $16,471  $17,086 
Adjustments to reconcile net income to net cash provided by operating activities:            
Equity in undistributed net income of Subsidiaries  (1,169)  (5,136)  5,410 
Decrease (increase) in other assets  20   12   (36)
(Decrease) increase in other liabilities  (6)  12   1 
Net Cash Provided by Operating Activities  14,607   11,359   22,461 
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Proceeds from sale of treasury stock  263   381   123 
Tax benefit from compensation plans, net  151   143   137 
Purchase of treasury stock  (3,723)  (4,415)  (4,002)
Dividends paid  (11,112)  (11,245)  (11,392)
Net Cash Used in Financing Activities  (14,421)  (15,136)  (15,134)
             
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  186   (3,777)  7,327 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR  5,847   9,624   2,297 
CASH AND CASH EQUIVALENTS, END OF YEAR $6,033  $5,847  $9,624 
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 

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20. SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)

 

The following table presents summarized quarterly financial data for 20162019 and 2015:

(In Thousands Except Per Share Data) (Unaudited)2018:

 

  2016 Quarter Ended 
  Mar. 31,  June 30,  Sept. 30,  Dec. 31, 
Interest income $10,937  $10,924  $11,131  $11,106 
Interest expense  904   925   944   920 
Net interest income  10,033   9,999   10,187   10,186 
Provision (credit) for loan losses  368   318   538   (3)
Net interest income after provision (credit)  for loan losses  9,665   9,681   9,649   10,189 
Other income  3,690   3,906   3,884   4,031 
Net gains on available-for-sale securities  383   122   584   69 
Other expenses  9,072   8,535   8,579   8,558 
Income before income tax provision  4,666   5,174   5,538   5,731 
Income tax provision  1,093   1,303   1,451   1,500 
Net income $3,573  $3,871  $4,087  $4,231 
Net income per share – basic $0.29  $0.32  $0.34  $0.35 
Net income per share – diluted $0.29  $0.32  $0.34  $0.35 

SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA

 

 2015 Quarter Ended  2019 Quarter Ended 
 Mar. 31, June 30, Sept. 30, Dec. 31,  Mar. 31, June 30, Sept. 30, Dec. 31, 
(In Thousands Except Per Share Data) (Unaudited) 2019 2019 2019 2019 
Interest income $11,163  $11,186  $11,134  $11,036  $13,065  $17,139  $17,277  $17,290 
Interest expense  1,213   1,176   1,126   1,087   1,350   2,934   3,000   2,999 
Net interest income  9,950   10,010   10,008   9,949   11,715   14,205   14,277   14,291 
Provision for loan losses  3   221   302   319 
Net interest income after provision for loan losses  9,947   9,789   9,706   9,630 
(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  3,556   3,962   3,961   3,999   4,406   4,849   4,963   5,066 
Net gains on available-for-sale securities  74   932   79   1,776 
Loss on prepayment of borrowings  0   910   0   1,663 
Net gains on available-for-sale debt securities  0   7   13   3 
Merger-related expenses  311   3,301   206   281 
Other expenses  8,533   7,964   8,117   8,416   10,696   11,422   11,486   11,834 
Income before income tax provision  5,044   5,809   5,629   5,326   6,071   4,342   6,403   6,593 
Income tax provision  1,229   1,452   1,395   1,261   981   693   1,096   1,135 
Net income $3,815  $4,357  $4,234  $4,065  $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 $0.31  $0.36  $0.35  $0.33  $0.41  $0.27  $0.39  $0.40 
Net income per share – diluted $0.31  $0.36  $0.35  $0.33  $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 

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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 


Report of Independent Registered Public Accounting Firm

 

Stockholders and Board of Directors of
Citizens & Northern Corporation:Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries (collectively the "Corporation") as of December 31, 20162019 and 20152018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for eachthe years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established inInternal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the three-year period endedUnited States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016. Citizens & Northern Corporation and subsidiaries’2019, based on criteria established inInternal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Corporation’s management is responsible for these consolidated financial statements.statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on thesethe Corporation's consolidated financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.

 

In our opinion, the consolidated financial statements referred to above present fairly,As described in all material respects, the financial positionManagement’s Report on Internal Control over Financial Reporting, management excluded from its assessment of Citizens & Northern Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting Monument Bancorp, Inc., which was acquired on April 1, 2019, and whose financial statements constitute assets of approximately 19.8% of the Corporation’s consolidated total assets, and interest income and noninterest income of approximately 14.3% of the Corporation’s consolidated total interest income and noninterest income, as of and for the year ended December 31, 2016, based on criteria established2019. Accordingly, our audit did not include the internal control over financial reporting of Monument Bancorp, Inc.


Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inInternal Control-Integrated Framework (2013) issued by accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the Committeemaintenance of Sponsoring Organizationsrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Treadway Commission (COSO),assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and our report dated February 16, 2017 expressed an unqualified opinion.that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

/s/ Baker Tilly Virchow Krause, LLP

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have served as the Corporation’s auditor since 1979.

 

Williamsport, Pennsylvania



February 16, 201720, 2020

 

87

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

ITEM 9A. CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Corporation’s management, under the supervision of and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. This evaluation did not include an assessment of those disclosure controls and procedures that are involved in, and did not include an assessment of, internal control over financial reporting as it relates to Monument Bancorp, Inc. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensure that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

ThereExcept as described in the following paragraph, there were no significant changes in the Corporation’s internal control over financial reporting that occurred during the period covered by this report that hashave materially affected, or that isare reasonably likely to affect, our internal control over financial reporting.

The Monument Bancorp, Inc. acquisition was completed April 1, 2019, and during the last three quarters of 2019 the Corporation has been engaged in integrating processes and internal control over financial reporting for the former Monument locations into those of the Corporation. In late June 2019, the integration of Monument’s core customer data system into the Corporation’s system was completed. Though completion of the Monument core system conversion was a significant milestone, at December 31, 2019, the Corporation’s management had not yet completed changes to processes, information technology systems and other components of internal control over financial reporting as part of integration activities.

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The Corporation’s management is responsible for establishing and maintaining effective internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Corporation’s system of internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Corporation’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Corporation’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of the Corporation’s management and directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2016,2019, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control – Integrated Framework(2013). Based on that assessment, we concluded that, as of December 31, 2016,2019, the Corporation’s internal control over financial reporting is effective based on the criteria established inInternal Control – Integrated Framework(2013).

 

The Corporation acquired Monument Bancorp, Inc. (“Monument”) effective April 1, 2019. Management excluded from its assessment of the Corporation’s internal control over financial reporting, as of December 31, 2019, Monument’s internal control over financial reporting associated with assets of approximately 19.8% of the Corporation’s consolidated total assets, and interest income and noninterest income of approximately 14.3% of the Corporation’s consolidated total interest income and noninterest income, as of and for the year ended December 31, 2019.


Baker Tilly Virchow Krause, LLP, the independent registered public accounting firm that audited the Corporation’s consolidated financial statements, has issued an audit report on the Corporation’s internal control over financial reporting as of December 31, 2016.2019. That report appears below.immediately prior to this report.

 

February 16, 201720, 2020By:  /s//s/ J. Bradley Scovill
Date President and Chief Executive Officer
   
February 16, 201720, 2020By:  /s//s/ Mark A. Hughes
Date Treasurer and Chief Financial Officer

 

88

Report Of Independent Registered Public Accounting Firm

Stockholders and Board of Directors of Citizens & Northern Corporation:

We have audited Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Citizens & Northern Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

89

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Citizens & Northern Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows of Citizens & Northern Corporation and subsidiaries, and our report dated February 16, 2017 expressed an unqualified opinion.

/s/ Baker Tilly Virchow Krause, LLP

Williamsport, Pennsylvania

February 16, 2017

90

ITEM 9B. OTHER INFORMATION

 

There was no information the Corporation was required to disclose in a report on Form 8-K during the fourth quarter 20162019 that was not disclosed.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information concerning Directors and Executive Officers is incorporated herein by reference to disclosure under the captions “Proposal 1 - Election of Directors,” “Executive Officers,” “Information Concerning Security Ownership” and “Meetings and Committees of the Board of Directors” of the Corporation’s proxy statement dated March 10, 20176, 2020 for the annual meeting of stockholders to be held on April 20, 2017.16, 2020.

 

The Corporation’s Board of Directors has adopted a Code of Ethics, available on the Corporation’s web site atwww.cnbankpa.com for the Corporation’s employees, officers and directors. (The provisions of the Code of Ethics are also included in the Corporation’s employee handbook.)

 

ITEM 11. EXECUTIVE COMPENSATION

 

Information concerning executive compensation is incorporated herein by reference to disclosure under the captions “Compensation Discussion and Analysis” and “Executive Compensation Tables” of the Corporation’s proxy statement dated March 10, 20176, 2020 for the annual meeting of stockholders to be held on April 20, 2017.16, 2020.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to disclosure under the caption “Beneficial Ownership of Executive Officers and Directors” of the Corporation’s proxy statement dated March 10, 20176, 2020 for the annual meeting of stockholders to be held on April 20, 2017.16, 2020.

 

“Equity Compensation Plan Information” as required by Item 201(d) of Regulation S-K is incorporated by reference herein from Item 5 (Market for Registrant’s Common Equity and Related Stockholder Matters) of this Form 10-K.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Information concerning loans and deposit balances with Directors and Executive Officers is provided in Note 15 to the Consolidated Financial Statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K. Additional information, including information concerning director independence, is incorporated herein by reference to disclosure appearing under the captions “Director Independence” and "Related Person Transaction and Policies" of the Corporation's proxy statement dated March 10, 20176, 2020 for the annual meeting of stockholders to be held on April 20, 2017.16, 2020.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Information concerning services provided by the Corporation’s independent auditor Baker Tilly Virchow Krause, LLP, the audit committee’s pre-approval policies and procedures for such services, and fees paid by the Corporation to that firm, is incorporated herein by reference to disclosure under the caption “Fees of Independent Public Accountants” of the Corporation’s proxy statement dated March 10, 20176, 2020 for the annual meeting of stockholders to be held on April 20, 2017.16, 2020.

 

91


PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) (1). The following consolidated financial statements are set forth in Part II, Item 8:

 

 Page
Report of Independent Registered Public Accounting Firm8785-86
 
Financial Statements: 
Consolidated Balance Sheets - December 31, 20162019 and 201520184137
Consolidated Statements of Income - Years Ended December 31, 2016, 20152019 and 201420184238
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2016, 20152019 and 201420184339
Consolidated Statements of Changes in Stockholders' Equity -Years- Years Ended December 31, 2016, 20152019 and 20142018 4440
Consolidated Statements of Cash Flows - Years Ended December 31, 2016, 20152019 and 201420184541
Notes to Consolidated Financial Statements46-8642-84

 

(a)(2) Financial statement schedules are not applicable or included in the financial statements or related notes.

 

2. Plan of acquisition, reorganization, arrangement, liquidation or successionsuccession: Not applicable
   
2.1 Agreement and Plan of Merger dated September 27, 2018, between the Corporation and Monument Bancorp, Inc.Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018
2.2 Agreement and Plan of Merger dated December 18, 2019, between the Corporation and Covenant Financial, Inc.Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed December 18, 2019
3.(i) Articles of IncorporationIncorporated by reference to Exhibit 3.1 of 
the Corporation's Form 8-K filed
September 21, 2009
3.(ii) By-lawsIncorporated by reference to Exhibit 3.1 of the Corporation's Form 8-K filed September 21, 2009
  
3. (ii) By-lawsIncorporated by reference to Exhibit 3.1 of the Corporation's Form 8-K filed April 19, 2013
   

4. (i) through (v) Instruments defining the rights of Security

Of securities holders, including Indentures

indentures

Not applicable
 
4. (vi) Description of registrant’s securitiesFiled herewith
  
9. Voting trust agreementNot applicable
   
10. Material contracts:  

10.1 Form of Time-Based Restricted Stock agreement dated January 4, 201731, 2020 between the Corporation and Executive Officers pursuant to the Citizens & Northern Corporation Stock Incentive Plan

Filed herewith

 Filed herewith
   

10.2 Form of Restricted Stock agreement dated January 4, 2017 between the Corporation and certain non-executive officers pursuant to the Citizens & Northern Corporation Stock Incentive Plan

Filed herewith
10.3 Form of Restricted Stock agreement dated January 4, 201731, 2020 between the Corporation and its independent directors pursuant to the Citizens & Northern Corporation Independent Directors Stock Incentive Plan

Filed herewith

 
10.3 2020 Annual Performance Incentive Award PlanFiled herewith

10.4 2020 Annual Performance Incentive Award Plan - Mortgage Lenders

Filed herewith


10.5 Deferred Compensation Agreement dated December 17, 2015Incorporated by reference to Exhibit 10.8 filed with Corporation’s 10-K on February 15, 2018
   
10.4 2017 Annual Performance Incentive Award Plan10.6 Second Amendment to Employment Agreement dated August 24, 2018 between the Corporation and J. Bradley ScovillIncorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on August 24, 2018 
Filed herewith
   
10.510.7 First Amendment to Employment Agreement dated June 26, 2017 Annual Performance Incentive Award Plan - Mortgage Lendersbetween the Corporation and J. Bradley ScovillIncorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on June 27, 2017
 Filed herewith

92

10.610.8 Employment agreement dated March 2, 2015 between the Corporation and J. Bradley ScovillIncorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on February 9, 2015
   
10.7
10.9 Employment agreement dated September 19, 2013 Corporation’s Form 8-K on September 19, 2013 between the Corporation and Mark A. HughesIncorporated by reference to Exhibit 10.2 filed with Corporation’s Form 8-K on September 19, 2013
   
10.810.10 Employment agreement dated September 19, 2013 Corporation’s Form 8-K on September 19, 2013 between the Corporation and Harold F. Hoose, IIIIncorporated by reference to Exhibit 10.3 filed with Corporation’s Form 8-K on September 19, 2013
   
10.9

10.11 Employment agreement dated September 19, 2013 Corporation’s Form 8-K on September 19, 2013 between the Corporation and Deborah E. Scott

Incorporated by reference to Exhibit 10.4 filed with Corporation’s Form 8-K on September 19, 2013
   
10.10

10.12 Form of Indemnification Agreement dated September 20, 2018 between the Corporation and J. Bradley Scovill

Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on November 1, 2018

10.13 Form of Indemnification Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins

Incorporated by reference to Exhibit 10.6 filed with Corporation’s 10-K on February 15, 2018

10.14 Form of Indemnification Agreement dated February 11, 2015 between the Corporation and Stan R. Dunsmore

Incorporated by reference to Exhibit 10.9 filed with Corporation’s Form 10-K on February 26, 2015

   
10.11

10.15 Form of Indemnification Agreement dated January 2, 2013 between the Corporation and Shelley L. D'Haene

Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 10-K on February 21, 2013

   
10.12

10.16 Form of Indemnification Agreement dated January 19, 2011 between the Corporation and John M. Reber

Incorporated by reference to Exhibit 10.6 filed with Corporation's Form 10-K on Feb. 28, 2011

   
10.13

10.17 Form of Indemnification Agreements dated May 2004 between the Corporation and the Directors and certain officers

Incorporated by reference to Exhibit 10.1 filed with Corporation’s 10-K on March 14, 2005

   
10.14

10.18 Change in Control Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins

Incorporated by reference to Exhibit 10.7 filed with Corporation’s 10-K on February 15, 2018

10.19 Change in Control Agreement dated March 17, 2015 between the Corporation and Stan R. Dunsmore

Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on May 8, 2015

   
10.15

10.20 Change in Control Agreement dated January 2, 2013 between the Corporation and Shelley L. D'Haene

Incorporated by reference to Exhibit 10.7 filed with Corporation’s Form 10-K on February 21, 2013

   
10.16

10.21 Change in Control Agreement dated January 20, 2005 Betweenbetween the Corporation and John M. Reber

Incorporated by reference to Exhibit 10.18 filed with Corporation’s Form 10-K on February 18, 2016

 


10.17

10.22 Change in Control Agreement dated December 31, 2003 between the Corporation and Thomas L. Rudy, Jr.

Incorporated by reference to Exhibit 10.2 filed with the Corporation's Form 10-K on March 14, 2005

   
10.18

10.23 Executive Compensation Recoupment Policy dated September 19, 2013

Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 8-K on September 19, 2013

10.24 Fifth Amendment to Citizens & Northern Corporation Stock Incentive Plan

Incorporated by reference to Exhibit 10.1 filed with Form 8-K on December 21, 2018

10.25 Fourth Amendment to Citizens & Northern Corporation Stock Incentive Plan and Annual Incentive Plan

Incorporated by reference to Exhibit 10.6 filed with Corporation's Form 8-K on September 19, 2013

10.26 Third Amendment to Citizens & Northern Corporation Stock Incentive Plan

Incorporated by reference to Exhibit A to the Corporation's proxy statement dated March 18, 2008 for the annual meeting of stockholders held on April 15, 2008

   
10.19

10.27 Second Amendment to Citizens & Northern Corporation Stock Incentive Plan

Incorporated by reference to Exhibit 10.5 filed with the Corporation's Form 10-K on March 10, 2004

   
10.20

10.28 First Amendment to Citizens & Northern Corporation Stock Incentive Plan

Incorporated by reference to Exhibit 10.6 filed with the Corporation's Form 10-K on March 10, 2004

   
10.21

10.29 Citizens & Northern Corporation Stock Incentive Plan

Incorporated by reference to Exhibit 10.7 filed with the Corporation's Form 10-K on March 10, 2004

   
10.22

10.30 Second Amendment to Citizens & Northern Independent Directors Stock incentive Plan

Incorporated by reference to Exhibit 10.2 filed with Form 8-K on December 21, 2018

10.31 First Amendment to Citizens & Northern Corporation Independent Directors Stock Incentive Plan

Incorporated by reference to Exhibit B to the Corporation's proxy statement dated March 18, 2008 for the annual meeting of stockholders held on April 15, 2008

 93 

10.2310.32 Citizens & Northern Corporation Independent Directors Stock Incentive Plan

Incorporated by reference to Exhibit A to the Corporation's proxy statement dated March 19, 2001 for the annual meeting of stockholders held on April 17, 2001.

   
10.24

10.33 Citizens & Northern Corporation Supplemental Executive Retirement Plan (as amended and restated)

Incorporated by reference to Exhibit 10.21 filed with the Corporation's Form 10-K on March 6, 2009

   
10.34 Form of Indemnification Agreements dated May 24, 2018 between the Corporation and Directors Bobbi J. Kilmer, Terry L. Lehman, Frank G. Pellegrino and Aaron K. Singer

Incorporated by reference to Exhibit 10.1 of the Corporation’s Form 10-Q filed August 6, 2018

11. Statement re: computation of per share earnings

Information concerning the computation of earnings per share is provided in Note 4 to the Consolidated Financial Statements, which is included in Part II, Item 8 of Form 10-K

   
12. Statements re: computation of ratiosNot applicable
   

13. Annual report to security holders, Form 10-Q or quarterly report to security holders

Not applicable

 Not applicable
   

14. Code of ethics

The Code of Ethics is available through the Corporation's website at www.cnbankpa.com. To access the Code of Ethics, click on "Investor Relations," followed by “Pages within Investor“About,” “Investor Relations,” “Corporate Governance Policies,” and “Code of Ethics.”

 


16. Letter re: change in certifying accountantNot applicable
   
18. Letter re: change in accounting principlesNot applicable
   
21. Subsidiaries of the registrantFiled herewith
   

22. Published report regarding matters submitted to

vote of security holders

Not applicable    

 
Not applicable
   
23. Consent of Independent Registered Public Accounting FirmFiled herewith
   
24. Power of attorneyNot applicable
   
31. Rule 13a-14(a)/15d-14(a) certifications:  
31.1 Certification of Chief Executive OfficerFiled herewith
31.2 Certification of Chief Financial Officer Filed herewith
   
32. Section 1350 certifications31.2 Certification of Chief Financial OfficerFiled herewith
   
32. Section 1350 certificationsFiled herewith

33. Report on assessment of compliance with servicing criteria for

asset-backed securities

Not applicable

 Not applicable
   

34. Attestation report on assessment of compliance with servicing

criteria for asset-backed securities

Not applicable

 Not applicable
   
35. Service compliance statementNot applicable
   
99. Additional exhibits:  

99.1 Additional information mailed or made available online to

shareholders with proxy statement and Form 10-K on

March 10, 20176, 2020

Filed herewith

 Filed herewith
   
100. XBRL-related documentsNot applicable
   
101. Interactive data fileFiled herewith
104. Cover page interactive data fileNot applicable

 

94


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

 

By: /s//s/ J. Bradley Scovill 
President and Chief Executive Officer 
  
Date: February 16, 201720, 2020 
  
By: /s//s/ Mark A. Hughes 
Treasurer and Principal Accounting Officer 
  
Date: February 16, 201720, 2020
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

BOARD OF DIRECTORS

 

/s/Dennis F. Beardslee/s/Edward H. Owlett, IIIFrank G. Pellegrino
 Dennis F. Beardslee Edward H. Owlett, IIIFrank G. Pellegrino
 Date: February 16, 201720, 2020 Date: February 16, 201720, 2020
    
/s/Jan E. FisherClark S. Frame/s/J. Bradley ScovillTimothy E. Schoener
 Jan E. FisherClark S. Frame J. Bradley ScovillTimothy E. Schoener
 Date: February 16, 201720, 2020 Date: February 16, 2017
/s/R. Bruce Haner/s/Leonard Simpson
R. Bruce HanerLeonard Simpson
Date: February 16, 2017Date: February 16, 201720, 2020
    
/s/Susan E. Hartley/s/James E. TownerJ. Bradley Scovill
 Susan E. Hartley James E. TownerJ. Bradley Scovill
 Date: February 16, 201720, 2020 Date: February 16, 201720, 2020
    
/s/Leo F. LambertBobbi J. Kilmer/s/Ann M. TylerLeonard Simpson
 Leo F. LambertBobbi J. Kilmer Ann M. TylerLeonard Simpson
 Date: February 16, 201720, 2020 Date: February 16, 201720, 2020
    
/s/Terry L. LehmanLeo F. Lambert/s/Frank G. PellegrinoAaron K. Singer
Leo F. LambertAaron K. Singer
Date: February 20, 2020Date: February 20, 2020
/s/Terry L. Lehman
 Terry L. Lehman Frank G. Pellegrino
 Date: February 16, 201720, 2020 Date: February 16, 2017

 

95

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