UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _______________
Commission File Number: 0-13222 |
Citizens Financial Services, Inc. |
(Exact Name of Registrant as Specified in its Charter) |
Pennsylvania | 23-2265045 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
15 South Main Street, Mansfield, Pennsylvania | 16933 | |
(Address of principal executive offices) | (Zip code) |
(570) 662-2121
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share |
(Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
☐ Yes ☒ No
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 reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter; $220,569,000 as of June 30, 2021.
As of April 26, 2022, there were 3,944,347 shares of the registrant’s common stock outstanding.
EXPLANATORY NOTE
On March 10, 2022, Citizens Financial Services, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Original Filing”). The sole purpose of this Form 10-K/A (Amendment No. 1) is to amend Part II, Item 8 (Financial Statements and Supplementary Data) of the Original Filing to correct an inadvertent error with respect to the date of the Report of Independent Registered Public Accounting Firm on the Company’s consolidated financial statements, and related notes, contained in the Original Filing. The correct date is March 10, 2022, rather than March 11, 2021.
2
PART II
ITEM 8. | Financial Statements and Supplementary Data. |
Citizens Financial Services, Inc.
Consolidated Balance Sheet
December 31, | ||||||||
(in thousands, except share data) | 2021 | 2020 | ||||||
ASSETS: | ||||||||
Cash and cash equivalents: | ||||||||
Noninterest-bearing | $ | 14,051 | $ | 16,374 | ||||
Interest-bearing | 158,782 | 52,333 | ||||||
Total cash and cash equivalents | 172,833 | 68,707 | ||||||
Interest bearing time deposits with other banks | 11,026 | 13,758 | ||||||
Equity securities | 2,270 | 1,931 | ||||||
Available-for-sale securities | 412,402 | 295,189 | ||||||
Loans held for sale | 4,554 | 14,640 | ||||||
Loans (net of allowance for loan losses: 2021, $17,304; 2020, $15,815) | 1,424,229 | 1,389,466 | ||||||
Premises and equipment | 17,016 | 16,948 | ||||||
Accrued interest receivable | 5,235 | 5,998 | ||||||
Goodwill | 31,376 | 31,376 | ||||||
Bank owned life insurance | 38,503 | 32,589 | ||||||
Other intangibles | 1,627 | 1,668 | ||||||
Other assets | 22,792 | 19,404 | ||||||
TOTAL ASSETS | $ | 2,143,863 | $ | 1,891,674 | ||||
LIABILITIES: | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 358,073 | $ | 303,762 | ||||
Interest-bearing | 1,478,078 | 1,285,096 | ||||||
Total deposits | 1,836,151 | 1,588,858 | ||||||
Borrowed funds | 73,977 | 88,838 | ||||||
Accrued interest payable | 711 | 1,017 | ||||||
Other liabilities | 20,532 | 18,702 | ||||||
TOTAL LIABILITIES | 1,931,371 | 1,697,415 | ||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred Stock $1.00 par value; authorized 3,000,000 shares 2021 and 2020; 0ne issued in 2021 or 2020 | 0 | 0 | ||||||
Common Stock $1.00 par value; authorized 25,000,000 shares 2021 and 2020; issued 4,388,901 and 4,350,342 shares in 2021 and 2020, respectively | 4,389 | 4,350 | ||||||
Additional paid-in capital | 78,395 | 75,908 | ||||||
Retained earnings | 146,010 | 126,627 | ||||||
Accumulated other comprehensive income (loss) | (155 | ) | 2,587 | |||||
Treasury stock, at cost: | ||||||||
444,481 and 428,492 shares for 2021 and 2020, respectively | (16,147 | ) | (15,213 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 212,492 | 194,259 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,143,863 | $ | 1,891,674 |
See accompanying notes to consolidated financial statements.
3
Citizens Financial Services, Inc.
Consolidated Statement of Income
Year Ended December 31,
(in thousands, except per share data) | 2021 | 2020 | 2019 | |||||||||
INTEREST AND DIVIDEND INCOME: | ||||||||||||
Interest and fees on loans | $ | 66,371 | $ | 63,538 | $ | 54,911 | ||||||
Interest-bearing deposits with banks | 447 | 401 | 407 | |||||||||
Investment securities: | ||||||||||||
Taxable | 3,820 | 4,090 | 4,673 | |||||||||
Nontaxable | 2,201 | 1,869 | 1,492 | |||||||||
Dividends | 378 | 398 | 497 | |||||||||
TOTAL INTEREST AND DIVIDEND INCOME | 73,217 | 70,296 | 61,980 | |||||||||
INTEREST EXPENSE: | ||||||||||||
Deposits | 5,837 | 6,851 | 9,219 | |||||||||
Borrowed funds | 1,268 | 1,254 | 2,821 | |||||||||
TOTAL INTEREST EXPENSE | 7,105 | 8,105 | 12,040 | |||||||||
NET INTEREST INCOME | 66,112 | 62,191 | 49,940 | |||||||||
Provision for loan losses | 1,550 | 2,400 | 1,675 | |||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 64,562 | 59,791 | 48,265 | |||||||||
NON-INTEREST INCOME: | ||||||||||||
Service charges | 4,755 | 4,221 | 4,687 | |||||||||
Trust | 865 | 803 | 750 | |||||||||
Brokerage and insurance | 1,625 | 1,297 | 1,141 | |||||||||
Equity security gains (losses), net | 339 | (41 | ) | 120 | ||||||||
Available for sale security gains, net | 212 | 305 | 24 | |||||||||
Gains on loans sold | 1,283 | 2,168 | 473 | |||||||||
Earnings on bank owned life insurance | 1,828 | 695 | 623 | |||||||||
Other | 1,398 | 1,974 | 568 | |||||||||
TOTAL NON-INTEREST INCOME | 12,305 | 11,422 | 8,386 | |||||||||
NON-INTEREST EXPENSES: | ||||||||||||
Salaries and employee benefits | 25,902 | 24,190 | 20,456 | |||||||||
Occupancy | 2,966 | 2,557 | 2,174 | |||||||||
Furniture and equipment | 519 | 757 | 674 | |||||||||
Professional fees | 1,526 | 1,517 | 1,423 | |||||||||
Federal depository insurance | 522 | 476 | 75 | |||||||||
Pennsylvania shares tax | 880 | 868 | 808 | |||||||||
Amortization of intangibles | 192 | 216 | 259 | |||||||||
Merger and acquisition | 0 | 2,179 | 466 | |||||||||
ORE expenses | 439 | 451 | 376 | |||||||||
Software expenses | 1,321 | 1,155 | 948 | |||||||||
Other | 7,283 | 6,481 | 5,682 | |||||||||
TOTAL NON-INTEREST EXPENSES | 41,550 | 40,847 | 33,341 | |||||||||
Income before provision for income taxes | 35,317 | 30,366 | 23,310 | |||||||||
Provision for income taxes | 6,199 | 5,263 | 3,820 | |||||||||
NET INCOME | $ | 29,118 | $ | 25,103 | $ | 19,490 | ||||||
PER COMMON SHARE DATA: | ||||||||||||
EARNINGS PER SHARE - BASIC | $ | 7.38 | $ | 6.53 | $ | 5.42 | ||||||
EARNINGS PER SHARE - DILUTED | $ | 7.38 | $ | 6.53 | $ | 5.41 | ||||||
CASH DIVIDENDS PER SHARE | $ | 1.86 | $ | 1.90 | $ | 1.74 | ||||||
Number of shares used in computation - basic | 3,945,299 | 3,844,241 | 3,597,709 | |||||||||
Number of shares used in computation - diluted | 3,945,299 | 3,846,082 | 3,599,805 |
See accompanying notes to consolidated financial statements.
4
Citizens Financial Services, Inc.
Consolidated Statement of Changes in Comprehensive Income
Year Ended December 31,
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Net Income | $ | 29,118 | $ | 25,103 | $ | 19,490 | ||||||
Other Comprehensive (loss) income | ||||||||||||
Securities available for sale | ||||||||||||
Unrealized holding (loss) gain during the period | (7,071 | ) | 5,074 | 4,156 | ||||||||
Income tax effect | (1,485 | ) | 1,066 | 873 | ||||||||
Subtotal | (5,586 | ) | 4,008 | 3,283 | ||||||||
Reclassification adjustment for gains | ||||||||||||
included in income | (212 | ) | (305 | ) | (24 | ) | ||||||
Income tax effect | (44 | ) | (65 | ) | (4 | ) | ||||||
Subtotal | (168 | ) | (240 | ) | (20 | ) | ||||||
Unrealized gain (loss) on interest rate swap | 1,920 | (11 | ) | 0 | ||||||||
Income tax effect | 402 | (2 | ) | 0 | ||||||||
Other comprehensive gain (loss) on interest rate swap | 1,518 | (9 | ) | 0 | ||||||||
Change in unrecognized pension costs | 1,892 | (688 | ) | 36 | ||||||||
Income tax effect | 398 | (145 | ) | 7 | ||||||||
Other comprehensive gain (loss) gain on unrecognized pension costs | 1,494 | (543 | ) | 29 | ||||||||
Net other comprehensive (loss) income | (2,742 | ) | 3,216 | 3,292 | ||||||||
Comprehensive income | $ | 26,376 | $ | 28,319 | $ | 22,782 |
See accompanying notes to consolidated financial statements.
5
Citizens Financial Services, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury Stock | ||||||||||||||||||||||||
(in thousands, except share data) | Shares | Amount | Capital | Earnings | Income (Loss) | Stock | Total | |||||||||||||||||||||
Balance, December 31, 2018 | 3,904,212 | $ | 3,904 | $ | 53,099 | $ | 99,727 | $ | (3,921 | ) | $ | (13,580 | ) | $ | 139,229 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 19,490 | 19,490 | ||||||||||||||||||||||||||
Net other comprehensive income | 3,292 | 3,292 | ||||||||||||||||||||||||||
Stock dividend (1%) | 34,456 | 35 | 2,067 | (2,102 | ) | 0 | ||||||||||||||||||||||
Purchase of treasury stock (21,551 shares) | (1,291 | ) | (1,291 | ) | ||||||||||||||||||||||||
Restricted stock, executive and Board of Director awards | (374 | ) | 489 | 115 | ||||||||||||||||||||||||
Restricted stock vesting | 254 | 254 | ||||||||||||||||||||||||||
Forfeited restricted stock | 43 | (43 | ) | 0 | ||||||||||||||||||||||||
Cash dividends, $1.743 per share | (6,315 | ) | (6,315 | ) | ||||||||||||||||||||||||
Balance, December 31, 2019 | 3,938,668 | $ | 3,939 | $ | 55,089 | $ | 110,800 | $ | (629 | ) | $ | (14,425 | ) | $ | 154,774 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 25,103 | 25,103 | ||||||||||||||||||||||||||
Net other comprehensive income | 3,216 | 3,216 | ||||||||||||||||||||||||||
Stock dividend (1%) | 38,318 | 38 | 1,878 | (1,916 | ) | 0 | ||||||||||||||||||||||
Stock issued for acquisition | 373,356 | 373 | 18,854 | 19,227 | ||||||||||||||||||||||||
Purchase of treasury stock (40,438 shares) | (2,122 | ) | (2,122 | ) | ||||||||||||||||||||||||
Restricted stock, executive and Board of Director awards | (260 | ) | 408 | 148 | ||||||||||||||||||||||||
Restricted stock vesting | 326 | 326 | ||||||||||||||||||||||||||
Sale of treasury stock | 1 | 125 | 126 | |||||||||||||||||||||||||
Forfeited restricted stock | 19 | (19 | ) | 0 | ||||||||||||||||||||||||
Cash dividend reinvestment paid from treasury stock | 1 | (821 | ) | 820 | 0 | |||||||||||||||||||||||
Cash dividends, $1.900 per share | (6,539 | ) | (6,539 | ) | ||||||||||||||||||||||||
Balance, December 31, 2020 | 4,350,342 | $ | 4,350 | $ | 75,908 | $ | 126,627 | $ | 2,587 | $ | (15,213 | ) | $ | 194,259 | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 29,118 | 29,118 | ||||||||||||||||||||||||||
Net other comprehensive loss | (2,742 | ) | (2,742 | ) | ||||||||||||||||||||||||
Stock dividend (1%) | 38,559 | 39 | 2,313 | (2,352 | ) | 0 | ||||||||||||||||||||||
Purchase of treasury stock (23,390 shares) | (1,374 | ) | (1,374 | ) | ||||||||||||||||||||||||
Restricted stock, executive and Board of Director awards | (273 | ) | 444 | 171 | ||||||||||||||||||||||||
Restricted stock vesting | 443 | 443 | ||||||||||||||||||||||||||
Forfeited restricted stock | 4 | (4 | ) | 0 | ||||||||||||||||||||||||
Cash dividends, $1.861 per share | (7,383 | ) | (7,383 | ) | ||||||||||||||||||||||||
Balance, December 31, 2021 | 4,388,901 | $ | 4,389 | $ | 78,395 | $ | 146,010 | $ | (155 | ) | $ | (16,147 | ) | $ | 212,492 |
See accompanying notes to consolidated financial statements.
6
Citizens Financial Services, Inc.
Consolidated Statement of Cash Flows
Year Ended December 31, | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income | $ | 29,118 | $ | 25,103 | $ | 19,490 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision for loan losses | 1,550 | 2,400 | 1,675 | |||||||||
Depreciation and amortization | 1,113 | 1,138 | 1,043 | |||||||||
Amortization and accretion of loans and other assets | (4,535 | ) | (3,960 | ) | (545 | ) | ||||||
Amortization and accretion on investment securities | 2,215 | 1,155 | 308 | |||||||||
Deferred income taxes | 689 | 367 | 317 | |||||||||
Equity security (gains) losses, net | (339 | ) | 41 | (120 | ) | |||||||
Available for sale security (gains) losses, net | (212 | ) | (305 | ) | (24 | ) | ||||||
Earnings on bank owned life insurance | (1,828 | ) | (695 | ) | (623 | ) | ||||||
Stock awards | 614 | 473 | 369 | |||||||||
Originations of loans held for sale | (44,668 | ) | (88,024 | ) | (21,157 | ) | ||||||
Proceeds from sales of loans held for sale | 55,621 | 75,809 | 21,780 | |||||||||
Realized gains on loans sold | (1,283 | ) | (2,168 | ) | (473 | ) | ||||||
(Increase) decrease in accrued interest receivable | 764 | (857 | ) | (103 | ) | |||||||
Increase (decrease) in accrued interest payable | (306 | ) | (235 | ) | 12 | |||||||
Other, net | 180 | 1,580 | (182 | ) | ||||||||
Net cash provided by operating activities | 38,693 | 11,822 | 21,767 | |||||||||
Cash Flows from Investing Activities: | ||||||||||||
Available-for-sale securities: | ||||||||||||
Proceeds from sales of available-for-sale securities | 29,198 | 23,415 | 10,489 | |||||||||
Proceeds from maturity and principal repayments of securities | 55,520 | 70,008 | 62,625 | |||||||||
Purchase of securities | (211,218 | ) | (143,987 | ) | (68,963 | ) | ||||||
Purchase of equity securities | 0 | (1,339 | ) | (65 | ) | |||||||
Proceeds from sale of equity securities | 0 | 168 | 0 | |||||||||
Proceeds from redemption of Regulatory Stock | 4,989 | 9,454 | 10,787 | |||||||||
Purchase of Regulatory Stock | (3,688 | ) | (7,396 | ) | (11,526 | ) | ||||||
Net increase in loans | (32,111 | ) | (63,440 | ) | (37,492 | ) | ||||||
Purchase of interest bearing time deposits | 0 | (350 | ) | (248 | ) | |||||||
Proceeds from matured interest-bearing time deposits with other banks | 2,732 | 848 | 1,490 | |||||||||
Purchase of bank owned life insurance | (7,800 | ) | 0 | 0 | ||||||||
Purchase of premises, equipment and software | (1,105 | ) | (942 | ) | (483 | ) | ||||||
Proceeds from sale of premises and equipment | 0 | 0 | 7 | |||||||||
Proceeds from life insurance | 3,714 | 0 | 0 | |||||||||
Proceeds from sale of foreclosed assets held for sale | 1,537 | 1,805 | 1,056 | |||||||||
Acquisition, net of cash paid | 0 | 1,022 | 0 | |||||||||
Net cash used in investing activities | (158,232 | ) | (110,734 | ) | (32,323 | ) | ||||||
Cash Flows from Financing Activities: | ||||||||||||
Net increase in deposits | 247,293 | 168,914 | 25,962 | |||||||||
Proceeds from long-term borrowings | 9,869 | 20,000 | 10,000 | |||||||||
Repayments of long-term borrowings | (26,800 | ) | (15,000 | ) | (3,123 | ) | ||||||
Net increase (decrease) in short-term borrowed funds | 2,060 | (16,280 | ) | (12,954 | ) | |||||||
Purchase of treasury stock | (1,374 | ) | (2,122 | ) | (1,291 | ) | ||||||
Sale of treasury stock to employee stock purchase plan | 0 | 126 | 0 | |||||||||
Dividends paid | (7,383 | ) | (6,539 | ) | (6,315 | ) | ||||||
Net cash provided by financing activities | 223,665 | 149,099 | 12,279 | |||||||||
Net increase in cash and cash equivalents | 104,126 | 50,187 | 1,723 | |||||||||
Cash and Cash Equivalents at Beginning of Year | 68,707 | 18,520 | 16,797 | |||||||||
Cash and Cash Equivalents at End of Year | $ | 172,833 | $ | 68,707 | $ | 18,520 | ||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||||||
Interest paid | $ | 7,411 | $ | 8,175 | $ | 12,028 | ||||||
Income taxes paid | $ | 5,500 | $ | 4,750 | $ | 3,300 | ||||||
Non-cash activities: | ||||||||||||
Stock dividend | $ | 2,352 | $ | 1,916 | $ | 2,102 | ||||||
Real estate acquired in settlement of loans | $ | 906 | $ | 281 | $ | 3,836 | ||||||
Right of use asset and liability | $ | 1,636 | $ | 636 | $ | 1,454 | ||||||
Acquisition of | Midcoast Community Bancorp Inc. | |||||||||||
Non-cash assets acquired | ||||||||||||
Available-for-sale securities | $ | 0 | $ | 0 | $ | 0 | ||||||
Interest bearing time deposits with other banks | 0 | 0 | 0 | |||||||||
Loans | 0 | 223,235 | 0 | |||||||||
Premises and equipment | 0 | 1,787 | 0 | |||||||||
Accrued interest receivable | 0 | 586 | 0 | |||||||||
Bank owned life insurance | 0 | 3,766 | 0 | |||||||||
Intangibles | 0 | 157 | 0 | |||||||||
Deferred tax asset | 0 | 3,402 | 0 | |||||||||
Other assets | 0 | 2,878 | 0 | |||||||||
Goodwill | 0 | 8,080 | 0 | |||||||||
0 | 243,891 | 0 | ||||||||||
Liabilities assumed | ||||||||||||
Noninterest-bearing deposits | 0 | 38,694 | 0 | |||||||||
Interest-bearing deposits | 0 | 170,132 | 0 | |||||||||
Accrued interest payable | 0 | 164 | 0 | |||||||||
Borrowed funds | 0 | 15,497 | ||||||||||
Other liabilities | 0 | 1,198 | 0 | |||||||||
0 | 225,685 | 0 | ||||||||||
Net non-cash liabilities acquired | 0 | 18,206 | 0 | |||||||||
Cash and cash equivalents acquired | $ | 0 | $ | 8,637 | $ | 0 |
See accompanying notes to consolidated financial statements.
7
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
Citizens Financial Services, Inc. (individually and collectively, the “Company”) is headquartered in Mansfield, Pennsylvania, and provides a full range of banking and related services through its wholly owned subsidiary, CZFS Acquisition Company, LLC (CZFS), and its wholly owned subsidiary, First Citizens Community Bank (the “Bank”), and its wholly owned subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1st Realty of PA, LLC (“Realty”). CZFS was formed in March 2020 as part of the merger with Midcoast Community Bancorp. Inc. (MidCoast). Realty was formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer. On December 11, 2015, the Company completed its acquisition of The First National Bank of Fredericksburg (FNB). On December 8, 2017, the Bank completed its acquisition of the S&T Bank branch in State College (State College). On April 17, 2020, the Company completed its acquisition of MidCoast. As of December 31, 2021, the Bank operates 30 full-service banking branches in Potter, Tioga, Bradford, Clinton, Lebanon, Lancaster, Berks, Schuylkill, Centre and Chester counties, Pennsylvania, Allegany County, New York, and the cities of Wilmington and Dover, Delaware, and a limited branch office in Union county, Pennsylvania. The Bank also provides trust services, including the administration of trusts and estates, retirement plans, and other employee benefit plans, along with a brokerage division that provides a comprehensive menu of investment services. The Bank serves individual and corporate customers and is subject to competition from other financial institutions and intermediaries with respect to these services. The Company and Bank are supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to additional regulation and supervision by the Pennsylvania Department of Banking.
A summary of significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:
Basis of Presentation
The financial statements are consolidated to include the accounts of the Company, and its subsidiary CZFS, and its subsidiary, First Citizens Community Bank, and its subsidiaries, First Citizens Insurance Agency, Inc. and 1st Realty of PA, LLC. These statements have been prepared in accordance with U.S. generally accepted accounting principles. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.
Use of Estimates
In preparing the financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, goodwill, derivatives, pension plans and deferred tax assets and liabilities.
Operating Segments
An operating segment is defined as a component of an enterprise that engages in business activities that generates revenue and incurs expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of resource allocation and performance. While the Company’s chief decision makers monitor the revenue streams of the various Company’s products, services and regions, operations are managed and financial performance is evaluated on a Company-wide basis. Consistent with our internal reporting, the Company’s business activities are reported as 1 segment, which is community banking.
8
Cash and Cash Equivalents
Cash equivalents include cash on hand, deposits in banks and interest-earning deposits. Interest-earning deposits with original maturities of 90 days or less are considered cash equivalents.
Interest bearing time deposits with other banks are not included with cash and cash equivalents as the original maturities were greater than 90 days.
Investment Securities
Investment securities at the time of purchase are classified as one of the 3 following types:
Held-to-Maturity Securities - Includes securities that the Company has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. The Company had 0 held-to-maturity securities as of December 31, 2021 and 2020.
Trading Securities - Includes debt and equity securities bought and held principally for the purpose of selling them in the near term. Such securities are reported at fair value with unrealized holding gains and losses included in earnings. The Company had 0 trading securities as of December 31, 2021 and 2020.
Available-for-Sale Securities – This category included debt securities not classified as held-to-maturity or trading securities that will be held for indefinite periods of time. These securities may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of the estimated income tax effect.
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security.
Debt securities are periodically reviewed for other-than-temporary impairment. Management considers whether the present value of future cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings.
The fair value of investments, except certain state and municipal securities, is based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value is based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.
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Equity Securities – This category includes common stocks of public companies. Such securities are reported at fair value with unrealized holding gains and losses included in earnings.
Restricted Stock - Common stock of the Federal Reserve Bank, Federal Home Loan Bank of Pittsburgh (FHLB) and correspondent banks represent ownership in institutions which are wholly owned by other financial institutions. These restricted equity securities are accounted for at cost and are classified as other assets.
Loans Held for Sale
Certain newly originated fixed-rate residential mortgage loans are classified as held for sale, because it is management’s intent to sell these residential mortgage loans. The residential mortgage loans held for sale are carried at the lower of aggregate cost or fair value.
Loans
Interest on all loans is recognized on the accrual basis based upon the principal amount outstanding. The accrual of interest income on loans is discontinued when, in the opinion of management, doubt exists as to the ability to collect such interest. Payments received on non-accrual loans are applied to the outstanding principal balance or recorded as interest income, depending upon our assessment of our ultimate ability to collect principal and interest. Loans are returned to the accrual status when factors indicating doubtful collectability cease to exist.
The Company recognizes nonrefundable loan origination fees, SBA fees and certain direct loan origination costs over the life of the related loan as an adjustment of loan yield using the interest method.
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in the Company’s loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based upon management’s periodic evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses are particularly susceptible to significant change in the near term.
Impaired loans are other commercial, other agricultural, municipal, agricultural real estate, commercial real estate loans and certain residential mortgages cross collateralized with commercial relationships for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Company may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial, agricultural, municipal or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value; or, as a practical expedient in the case of a collateral dependent loan, the difference between the fair value of the collateral and the recorded amount of the loans.
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Mortgage loans on one to four family properties and all consumer loans are large groups of smaller balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which is defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays 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 borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
The Company allocates the allowance based on the factors described below, which conform to the Company’s loan classification policy. In reviewing risk within the loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) residential real estate loans; (ii) commercial real estate (iii) agricultural real estate loans; (iv) construction; (v) consumer loans; (vi) other commercial loans (vii) other agricultural loans and (viii) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non classified loans. The following qualitative factors are analyzed:
• | Level of and trends in delinquencies, impaired/classified loans |
• | Change in volume and severity of past due loans |
• | Volume of non-accrual loans |
• | Volume and severity of classified, adversely or graded loans |
• | Level of and trends in charge-offs and recoveries |
• | Trends in volume, terms and nature of the loan portfolio |
• | Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices |
• | Changes in the quality of the Bank’s loan review system |
• | Experience, ability and depth of lending management and other relevant staff |
• | National, state, regional and local economic trends and business conditions |
• | General economic conditions |
• | Unemployment rates |
• | Inflation / CPI |
• | Changes in values of underlying collateral for collateral-dependent loans |
• | Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses. |
• | Existence and effect of any credit concentrations, and changes in the level of such concentrations |
• | Any change in the level of board oversight |
The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.
Loan Charge-off Policies
Consumer loans are generally fully or partially charged down to the fair value of collateral securing the asset when the loan is 180 days past due for open-end loans or 120 days past due for closed-end loans unless the loan is well secured and in the process of collection. All other loans are generally charged down to the net realizable value when the loan is 90 days past due.
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. In addition to the allowance for the pooled portfolios, management has developed a separate allowance for loans that are identified as impaired through a TDR. TDRs are excluded from pooled loss forecasts and a separate reserve is provided under the accounting guidance for loan impairment.
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Purchased Credit Impaired Loans
The Company purchased loans in connection with its acquisitions of FNB in 2015, the State College branch in 2017 and MidCoast in 2020, some of which showed evidence of credit deterioration as of the acquisition since origination. These purchased credit impaired (“PCI”) loans were recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Over the life of the loan, expected cash flows continue to be estimated. If this subsequent estimate indicated that the present value of expected cash flows is less than the carrying amount, a charge to the allowance for loan loss is made through a provision. If the estimate indicates that the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Such PCI loans are accounted for individually, and the Company estimates the amount and timing of expected cash flows for each loan. The expected cash flows in excess of the amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not amortized over the remaining life of the loan (nonaccretable difference).
For loans purchased that did not show evidence of credit deterioration, the difference between the fair value of the loan at the acquisition date and the loan’s face value is being amortized as a yield adjustment over the estimated remaining life of the loan using the effective interest method.
Foreclosed Assets Held For Sale
Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell. Prior to foreclosure, as the value of the underlying loan is written down to fair market value of the real estate or other assets to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on disposition, are included in other expenses and gains and losses are included in other non-interest income or other non-interest expense.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed on straight line and accelerated methods over the estimated useful lives of the assets, which range from 3 to 15 years for furniture, fixtures and equipment and 5 to 40 years for building premises. Repair and maintenance expenditures which extend the useful life of an asset are capitalized and other repair expenditures are expensed as incurred.
When premises or equipment are retired or sold, the remaining cost and accumulated depreciation are removed from the accounts and any gain or loss is credited to income or charged to expense, respectively.
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The Company has operating leases for several branch locations. Generally, the underlying lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company may also lease certain office equipment under operating leases. Many of our leases include both lease (e.g., minimum rent payments) and non-lease components (e.g., common-area or other maintenance costs). The Company accounts for each component separately based on the standalone price of each component. In addition, there are several operating leases with lease terms of less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our right of use (ROU) assets and lease liabilities.
Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management and is based on whether the extension options are reasonably certain to be exercised after giving proper consideration to all facts and circumstances of the lease. If management determines that the Company is reasonably certain to exercise the extension option(s), the additional term is included in the calculation of the lease liability.
As most of our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments
Intangible Assets
Intangible assets, other than goodwill, include core deposit intangibles and mortgage servicing rights (MSRs). Core deposit intangibles are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized over 10 years using the sum-of-the-years digits method of amortization, while the covenant not to compete was amortized over four years on a straight line basis.
MSRs arise from the Company originating certain loans for the express purpose of selling such loans in the secondary market. The Company maintains all servicing rights for these loans. The loans held for sale are carried at lower of cost or market. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio and measured annually for impairment.
The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.
Goodwill
The Company utilizes a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company may also perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Based on the fair value of the reporting unit, 0 impairment of goodwill was recognized in 2021, 2020 or 2019.
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain employees. Any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these agreements, the Bank receives the cash surrender value of the policy plus 50% of the benefit in excess of the cash surrender value and the remaining amount of the payout will be given to the beneficiary named by the insured person in the policy. The Company is the sole beneficiary of any death benefits received from non-active insured persons. Additionally, as a result of the MidCoast acquisition, the Company acquired life insurance policies on former MidCoast employees. The Company is owner and sole beneficiary of these policies. The Company acquired life insurance policies on former FNB employees and directors, as part of the acquisition of FNB. The policies obtained as part of the acquisition provide a fixed dollar benefit to the former employee or director beneficiaries, whether or not the insured person is affiliated with the Company at the time of his or her death. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as other non-interest income. The obligation of $696,000 and $687,000 under split-dollar benefit agreements to former employees and directors or their beneficiaries have been recognized as liabilities on the consolidated balance sheet at December 31, 2021 and 2020. The expenses associated with the split dollar benefit were $9,000, $3,000 and $36,000 for 2021, 2020 and 2019, respectively.
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Income Taxes
The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period.
Derivatives
Derivative financial instruments are recognized as assets or liabilities at fair value. The Company has interest rate swap agreements which are used as part of its asset liability management to help manage interest rate risk. The Company does not use derivatives for trading purposes.
At the inception of a derivative contract, the Company designates the derivative as one of 3 types based on the purpose of the contract and belief as to its effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions, at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
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When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
Employee Benefit Plans
The Company has noncontributory defined benefit pension plans covering employees hired before January 1, 2007 and employees acquired as part of the FNB acquisition. It is the Company’s policy to fund pension costs on a current basis to the extent deductible under existing tax regulations. Such contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The plan acquired as part of the FNB acquisition was terminated in 2019.
The Company has a defined contribution, 401(k) plan covering eligible employees. The employee may also contribute to the plan on a voluntary basis, up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k). Under the plan, the Company also makes contributions on behalf of eligible employees, which vest immediately. For employees hired after January 1, 2007, in lieu of the pension plan, an additional annual discretionary 401(k) plan contribution is made and is equal to a percentage of an employee’s base compensation.
The Company also has a profit-sharing plan for employees which provide tax-deferred salary savings to plan participants. The Company has a deferred compensation plan for directors who have elected to defer all or portions of their fees until their retirement or termination from service.
The Company has a restricted stock plan which covers eligible employees and non-employee corporate directors. Under the plan, awards are granted based upon performance related requirements and are subject to certain vesting criteria. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.
The Company has an employee stock purchase plan that allows employees to withhold money from their paychecks, which is then utilized to purchase shares of the Company’s stock on either the open market or through treasury stock, if shares are unavailable on the open market.
The Company maintains a non-qualified supplemental executive retirement plan (“SERP”) for certain executives to compensate those executive participants in the Company’s noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. The SERP is considered an unfunded plan for tax and ERISA purposes and all obligations arising under the SERP are payable from the general assets of the Company. Expenses under the SERP are recognized as earned over the expected years of service.
The Company maintains a non-tax qualified executive deferred compensation plan (“Deferred Compensation Plan”) for eligible employees designated by the board of directors. Each of the named executive officers are eligible to participate in the Deferred Compensation Plan. The Deferred Compensation Plan is considered an unfunded plan for tax and ERISA purposes and all obligations arising under the Deferred Compensation Plan are payable from the general assets of the Company. Expenses under the Deferred Compensation Plan are recognized as earned over the expected years of service.
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Advertising Costs
Advertising costs are generally expensed as incurred and amounted to $460,000, $470,000 and $466,000 for the years ended December 31, 2021, 2020 and 2019, respectively.
Comprehensive Income (Loss)
The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other comprehensive income (loss) is comprised of unrealized holding gains (losses) on the available-for-sale securities portfolio and unrecognized pension costs.
Recent Accounting Pronouncements – Not yet effective
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. In that regard, we have formed a cross-functional working group. The working group is comprised of individuals from various functional areas including credit, loan origination and finance. We are currently working through our implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other things. We are also in the process of implementing a third-party vendor solution to assist us in the application of the ASU 2016-13. The adoption of the ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.
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In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs .
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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.
In January 2020, the FASB issued ASU 2020-1, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option, in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial position or results of operations.
18
In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.
In August 2020, the FASB issued ASU 2020-6, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, which clarifies that, for each reporting period, an entity should reevaluate whether a callable debt security is within the scope of ASC 310-20-35-33. For public business entities, ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which makes minor technical corrections and clarifications to the ASC. The amendments in Sections B and C of the ASU are effective for annual periods beginning after December 15, 2020, for public business entities. For all other entities, the amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
19
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which requires an entity to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. An entity should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on the Company’s financial statements.
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update), to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU was effective upon issuance and did not have a significant impact on the Company’s financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which addresses how an acquirer should recognize and measure revenue contracts acquired in a business combination. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.
20
Treasury Stock
The purchase of the Company’s common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a last-in-first-out basis.
Cash Flows
The Company utilizes the net reporting of cash receipts and cash payments for deposit, short-term borrowing and lending activities.
Trust, Brokerage and Insurance Assets and Income
Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such assets are not assets of the Company. The majority 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. Trust fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. None of the contracts with trust customers provide for incentive-based fees. In addition, 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. Brokerage and insurance commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Other performance obligations (such as the delivery of account statements to customers) are generally considered immaterial to the overall transaction price.
Earnings Per Share
The following table sets forth the computation of earnings per share. Earnings per share calculations give retroactive effect to stock dividends declared by the Company.
2021 | 2020 | 2019 | ||||||||||
Basic earnings per share computation: | ||||||||||||
Net income applicable to common stock | $ | 29,118,000 | $ | 25,103,000 | $ | 19,490,000 | ||||||
Weighted average common shares outstanding | 3,945,299 | 3,844,241 | 3,597,709 | |||||||||
Earnings per share - basic | $ | 7.38 | $ | 6.53 | $ | 5.42 | ||||||
Diluted earnings per share computation: | ||||||||||||
Net income applicable to common stock | $ | 29,118,000 | $ | 25,103,000 | $ | 19,490,000 | ||||||
Weighted average common shares outstanding for basic earnings per share | 3,945,299 | 3,844,241 | 3,597,709 | |||||||||
Add: Dilutive effects of restricted stock | 0 | 1,841 | 2,096 | |||||||||
Weighted average common shares outstanding for dilutive earnings per share | 3,945,299 | 3,846,082 | 3,599,805 | |||||||||
Earnings per share - dilutive | $ | 7.38 | $ | 6.53 | $ | 5.41 |
Nonvested shares of restricted stock totaling 5,494, 4,302 and 3,576 were outstanding during 2021, 2020 and 2019, respectively, but were not included in the computation of diluted earnings per common share because to do so would be anti-dilutive. These anti-dilutive shares had per share prices ranging from $44.93-63.19, $58.37-$62.93 and $52.44-$62.93 for 2021, 2020 and 2019, respectively.
21
Reclassification
Certain of the prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no material effect on net income or stockholders’ equity.
2. REVENUE RECOGNITION
Under ASC Topic 606, management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold and earnings on bank owned life insurances are not within the scope of this topic. The main types of noninterest income within the scope of the standard are as follows:
• | Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction. |
• | Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction. |
• | Gains (losses) on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset. |
• | Brokerage and insurance – Fees include commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Fees for these services are billed monthly and are recorded as revenue at the end of the month for which the wealth management service has been performed. Other performance obligations (such as the delivery of account statements to customers) are generally considered immaterial to the overall transaction price. |
22
The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the years ended December 31, 2021, 2020 and 2019 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.
Revenue stream | ||||||||||||
Service charges on deposit accounts | 2021 | 2020 | 2019 | |||||||||
Overdraft fees | $ | 1,111 | $ | 1,171 | $ | 1,536 | ||||||
Statement fees | 225 | 207 | 206 | |||||||||
Interchange revenue | 2,801 | 2,287 | 2,294 | |||||||||
ATM income | 388 | 323 | 392 | |||||||||
Other service charges | 230 | 233 | 259 | |||||||||
Total Service Charges | 4,755 | 4,221 | 4,687 | |||||||||
Trust | 865 | 803 | 750 | |||||||||
Brokerage and insurance | 1,625 | 1,297 | 1,141 | |||||||||
Other | 492 | 339 | 348 | |||||||||
Total | $ | 7,737 | $ | 6,660 | $ | 6,926 |
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Effective, March 26, 2020, the Federal Reserve reduced reserve requirements to zero for all depository institutions. There were no required federal reserves included in “Cash and due from banks” at December 31, 2021 or December 31, 2020. The required reserves are used to facilitate the implementation of monetary policy by the Federal Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of vault cash and a depository amount held with the Federal Reserve Bank. Federal law prohibits the Company from borrowing from the Bank unless the loans are secured by specific collateral.
Non-retirement account deposits with one financial institution are insured up to $250,000. At times, the Company maintains cash and cash equivalents with other financial institutions in excess of the insured amount.
4. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of investment securities at December 31, 2021 and 2020 were as follows (in thousands):
December 31, 2021 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. Agency securities | $ | 73,803 | $ | 976 | $ | (834 | ) | $ | 73,945 | |||||||
U.S. Treasuries | 116,743 | 63 | (1,459 | ) | 115,347 | |||||||||||
Obligations of state and political subdivisions | 109,367 | 2,706 | (52 | ) | 112,021 | |||||||||||
Corporate obligations | 10,378 | 39 | (84 | ) | 10,333 | |||||||||||
Mortgage-backed securities in government sponsored entities | 101,727 | 597 | (1,568 | ) | 100,756 | |||||||||||
Total available-for-sale securities | $ | 412,018 | $ | 4,381 | $ | (3,997 | ) | $ | 412,402 | |||||||
December 31, 2020 | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. Agency securities | $ | 79,065 | $ | 2,403 | $ | (52 | ) | $ | 81,416 | |||||||
U.S. Treasuries | 27,442 | 601 | 0 | 28,043 | ||||||||||||
Obligations of state and political subdivisions | 100,089 | 2,938 | (55 | ) | 102,972 | |||||||||||
Corporate obligations | 6,413 | 96 | 0 | 6,509 | ||||||||||||
Mortgage-backed securities in government sponsored entities | 74,512 | 1,874 | (137 | ) | 76,249 | |||||||||||
Total available-for-sale securities | $ | 287,521 | $ | 7,912 | $ | (244 | ) | $ | 295,189 |
23
The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at December 31, 2021 and 2020 (in thousands). As of December 31, 2021, the Company owned 138 securities each of whose fair value was less than its cost basis.
Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
2021 | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
U.S. agency securities | $ | 26,754 | $ | (387 | ) | $ | 7,542 | $ | (447 | ) | $ | 34,296 | $ | (834 | ) | |||||||||
U.S. Treasuries | 106,794 | (1,459 | ) | 0 | 0 | 106,794 | (1,459 | ) | ||||||||||||||||
Obligations of states and political subdivisions | 10,744 | (26 | ) | 2,899 | (26 | ) | 13,643 | (52 | ) | |||||||||||||||
Corporate obligations | 6,922 | (84 | ) | 0 | 0 | 6,922 | (84 | ) | ||||||||||||||||
Mortgage-backed securities in government sponsored entities | 60,182 | (1,305 | ) | 7,975 | (263 | ) | 68,157 | (1,568 | ) | |||||||||||||||
Total securities | $ | 211,396 | $ | (3,261 | ) | $ | 18,416 | $ | (736 | ) | $ | 229,812 | $ | (3,997 | ) |
Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
2020 | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
U.S. agency securities | $ | 13,720 | $ | (52 | ) | $ | 0 | $ | 0 | $ | 13,720 | $ | (52 | ) | ||||||||||
Obligations of states and political subdivisions | 5,407 | (55 | ) | 0 | 0 | 5,407 | (55 | ) | ||||||||||||||||
Mortgage-backed securities in government sponsored entities | 14,600 | (99 | ) | 5,633 | (38 | ) | 20,233 | (137 | ) | |||||||||||||||
Total securities | $ | 33,727 | $ | (206 | ) | $ | 5,633 | $ | (38 | ) | $ | 39,360 | $ | (244 | ) |
As of December 31, 2021, the Company’s investment securities portfolio contained unrealized losses on U.S. Treasuries, agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, obligations of states and political subdivisions, corporate obligations and mortgage backed securities in government sponsored entities. For fixed maturity available for sale investments management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. As of December 31, 2021 and 2020, the Company had concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.
Proceeds from sales of securities available-for-sale during 2021, 2020 and 2019 were $29,198,000, $23,415,000, and $10,489,000, respectively. The gross gains realized during 2021 consisted of $177,000 and $125,000 from the sales of 6 treasury securities and 3 agency securities, respectively. The gross losses realized during 2021 consisted of $90,000 from the sale of 1 agency security. The gross gains realized during 2020 consisted of $344,000 from the sales of 17 mortgage backed securities. The gross losses realized during 2020 consisted of $39,000 from the sale of 2 mortgage backed securities. The gross gains realized during 2019 consisted of $1,000 and $24,000 from the sales of 2 agency securities and 4 treasury securities, respectively. The gross losses realized during 2019 consisted of $1,000 from the sale of 1 agency security. Gross gains and gross losses were realized as follows on available for sale securities (in thousands):
2021 | 2020 | 2019 | ||||||||||
Gross gains | $ | 302 | $ | 344 | $ | 25 | ||||||
Gross losses | (90 | ) | (39 | ) | (1 | ) | ||||||
Net gains | $ | 212 | $ | 305 | $ | 24 |
The following table presents the net gains (losses) on the Company’s equity investments recognized in earnings during 2021, 2020 and 2019 and the portion of unrealized gains for the period that relates to equity investments held at December 31, 2021, 2020 and 2019 (in thousands):
Equity Securities | 2021 | 2020 | 2019 | |||||||||
Net gains (losses) recognized in equity securities during the period | $ | 339 | $ | (109 | ) | $ | 120 | |||||
Less: Net gains realized on the sale of equity securities during the period | 0 | 68 | 0 | |||||||||
Net unrealized gains (losses) | $ | 339 | $ | (41 | ) | $ | 120 |
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Investment securities with an approximate carrying value of $295,028,000 and $245,351,000 at December 31, 2021 and 2020, respectively, were pledged to secure public funds and certain other deposits as provided by law and certain borrowing arrangements of the Company.
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and fair value of debt securities at December 31, 2021, by contractual maturity are shown below (in thousands). Municipal securities that have been refunded and will therefore pay-off on the call date are reflected in the table below utilizing the call date as the date of repayment as payment is guaranteed on that date:
Available-for-sale securities: | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 15,002 | $ | 15,175 | ||||
Due after one year through five years | 108,284 | 108,590 | ||||||
Due after five years through ten years | 133,646 | 132,786 | ||||||
Due after ten years | 155,086 | 155,851 | ||||||
Total | $ | 412,018 | $ | 412,402 |
5. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central and south central Pennsylvania, southern New York and Wilmington and Dover, Delaware. Although the Company had a diversified loan portfolio at December 31, 2021 and 2020, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio, as well as how those segments are analyzed within the allowance for loan losses as of December 31, 2021 and 2020 (in thousands):
2021 | Total Loans | Individually evaluated for impairment | Loans acquired with deteriorated credit quality | Collectively evaluated for impairment | ||||||||||||
Real estate loans: | ||||||||||||||||
Residential | $ | 201,097 | $ | 620 | $ | 14 | $ | 200,463 | ||||||||
Commercial | 687,338 | 8,381 | 2,145 | 676,812 | ||||||||||||
Agricultural | 312,011 | 5,355 | 1,643 | 305,013 | ||||||||||||
Construction | 55,036 | 0 | 0 | 55,036 | ||||||||||||
Consumer | 25,858 | 0 | 0 | 25,858 | ||||||||||||
Other commercial loans | 74,585 | 186 | 0 | 74,399 | ||||||||||||
Other agricultural loans | 39,852 | 991 | 0 | 38,861 | ||||||||||||
State and political subdivision loans | 45,756 | 0 | 0 | 45,756 | ||||||||||||
Total | 1,441,533 | 15,533 | 3,802 | 1,422,198 | ||||||||||||
Allowance for loan losses | 17,304 | 121 | 0 | 17,183 | ||||||||||||
Net loans | $ | 1,424,229 | $ | 15,412 | $ | 3,802 | $ | 1,405,015 |
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2020 | ||||||||||||||||
Real estate loans: | ||||||||||||||||
Residential | $ | 201,911 | $ | 990 | $ | 20 | $ | 200,901 | ||||||||
Commercial | 596,255 | 9,183 | 2,937 | 584,135 | ||||||||||||
Agricultural | 315,158 | 4,645 | 1,686 | 308,827 | ||||||||||||
Construction | 35,404 | 0 | 0 | 35,404 | ||||||||||||
Consumer | 30,277 | 2 | 0 | 30,275 | ||||||||||||
Other commercial loans | 114,169 | 1,335 | 232 | 112,602 | ||||||||||||
Other agricultural loans | 48,779 | 1,122 | 0 | 47,657 | ||||||||||||
State and political subdivision loans | 63,328 | 0 | 0 | 63,328 | ||||||||||||
Total | 1,405,281 | 17,277 | 4,875 | 1,383,129 | ||||||||||||
Allowance for loan losses | 15,815 | 510 | 0 | 15,305 | ||||||||||||
Net loans | $ | 1,389,466 | $ | 16,767 | $ | 4,875 | $ | 1,367,824 |
During 2021 the Company continued to participate in the Paycheck Protection Program (“PPP”), administered directly by the U.S. SBA. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of December 31, 2021 and 2020, the Company had outstanding principal balances of $6.8 million and $37.2 million, respectively, of PPP loans that are included in other commercial loans. During 2021, the Company originated $24.3 million of loans, of which $6.0 million remain outstanding as of December 31, 2021. During 2020, the Company originated $54.3 million of loans under this program of which $806,000 remain outstanding as of December 31, 2021. The PPP loans are fully guaranteed by the SBA, have an interest rate of 1.0% per annum, and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. The SBA has issued guidance for forgiveness with a streamlined approach for loans of $150,000 or less.
In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $3.8 million in fees associated with the processing of these loans in 2021 and 2020. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2. As of December 31, 2021, $270,000 of deferred fees remain to be amortized related to the PPP loans.
As of December 31, 2021 and 2020, net unamortized loan fees, including PPP fees, and costs of $2,038,000 and $2,344,000, respectively, were included in the carrying value of loans. Purchased loans acquired in connection with the FNB acquisition, the State College branch acquisition and the MidCoast acquisition were recorded at fair value on their acquisition date without a carryover of the related allowance for loan losses.
Upon acquisition, the Company evaluated whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans’ collateral. The carrying value of PCI loans was $3,802,000 and $4,875,000 at December 31, 2021 and 2020, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows.
On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the MidCoast acquisition was $8,005,000 and the estimated fair value of the loans was $4,869,000. Total contractually required payments on these loans, including interest, at the acquisition date was $8,801,000. However, the Company’s preliminary estimate of expected cash flows was $5,835,000 at the acquisition date. At the acquisition date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $2,966,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $966,000 on the acquisition date relating to these impaired loans.
26
The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the MidCoast Acquisition as of April 17, 2020 (in thousands):
April 17, 2020 | ||||
Contractually required principal and interest at acquisition | $ | 8,801 | ||
Non-accretable discount | (2,966 | ) | ||
Expected cash flows | 5,835 | |||
Accretable discount | (966 | ) | ||
Estimated fair value | $ | 4,869 |
Changes in the accretable discount for PCI loans were as follows for the years ended December 31, 2021 and 2020 (in thousands):
December 31, 2021 | December 31, 2020 | |||||||
Balance at beginning of period | $ | 788 | $ | 89 | ||||
Addition due to MidCoast Acquisition | 0 | 966 | ||||||
Accretion | (499 | ) | (267 | ) | ||||
Reclassification of non-accretable discount | 81 | 0 | ||||||
Balance at end of period | $ | 370 | $ | 788 |
The following table presents additional information regarding PCI loans (in thousands):
December 31, 2021 | December 31, 2020 | |||||||
Outstanding balance | $ | 6,159 | $ | 8,958 | ||||
Carrying amount | 3,802 | 4,875 |
Real estate loans serviced for Freddie Mac, Fannie Mae and the FHLB, which are not included in the Consolidated Balance Sheet, totaled $197,037,000 and $178,986,000 at December 31, 2021 and 2020, respectively. Loans sold to Freddie Mac and Fannie Mae were sold without recourse and total $184,897,000 and $162,050,000 at December 31, 2021 and 2020, respectively. Additionally, the Bank acquired a portfolio of loans sold to the FHLB during the acquisition of FNB, which were sold under the Mortgage Partnership Finance Program (“MPF”). The Bank was not an active participant in the MPF program in 2021 or 2020. The MPF portfolio balance was $12,140,000 and $16,936,000 at December 31, 2021 and 2020, respectively. The FHLB maintains a first-loss position for the MPF portfolio that totals $157,000. Should the FHLB exhaust its first-loss position, recourse to the Bank’s credit enhancement would be up to the next $590,000 of losses. The Bank did not experience any losses for the MPF portfolio during 2021, 2020 or 2019.
The segments of the Bank’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist of 15 to 30 year first mortgages on residential real estate, while residential real estate home equities are consumer purpose installment loans or lines of credit secured by a mortgage which is often a second lien on residential real estate with terms of 15 years or less. Commercial real estate are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate are loans secured by a mortgage on real estate used in agriculture production. Construction real estate are loans secured by residential or commercial real estate used during the construction phase of residential and commercial projects. Consumer loans are typically unsecured or primarily secured by collateral other than real estate and overdraft lines of credit connected with customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non real estate collateral. State and political subdivisions are loans for state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.
27
Management considers other commercial loans, other agricultural loans, commercial and agricultural real estate loans and state and political subdivision loans which are 90 days or more past due to be impaired. Certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships determined to be impaired may be classified as impaired as well. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance allocation or a charge-off to the allowance.
The following table includes the recorded investment and unpaid principal balances for impaired loans by class, with the associated allowance amount as of December 31, 2021 and 2020, if applicable (in thousands):
2021 | Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Total Recorded Investment | Related Allowance | |||||||||||||||
Real estate loans: | ||||||||||||||||||||
Mortgages | $ | 697 | $ | 495 | $ | 45 | $ | 540 | $ | 6 | ||||||||||
Home Equity | 97 | 37 | 43 | 80 | 6 | |||||||||||||||
Commercial | 9,330 | 8,096 | 285 | 8,381 | 61 | |||||||||||||||
Agricultural | 5,694 | 5,167 | 188 | 5,355 | 14 | |||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Other commercial loans | 813 | 92 | 94 | 186 | 34 | |||||||||||||||
Other agricultural loans | 1,274 | 991 | 0 | 991 | 0 | |||||||||||||||
Total | $ | 17,905 | $ | 14,878 | $ | 655 | $ | 15,533 | $ | 121 |
2020 | Unpaid Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Total Recorded Investment | Related Allowance | |||||||||||||||
Real estate loans: | ||||||||||||||||||||
Mortgages | $ | 1,070 | $ | 740 | $ | 123 | $ | 863 | $ | 9 | ||||||||||
Home Equity | 150 | 70 | 57 | 127 | 9 | |||||||||||||||
Commercial | 9,847 | 8,323 | 860 | 9,183 | 95 | |||||||||||||||
Agricultural | 4,811 | 2,799 | 1,846 | 4,645 | 83 | |||||||||||||||
Consumer | 2 | 2 | 0 | 2 | 0 | |||||||||||||||
Other commercial loans | 1,908 | 1,094 | 241 | 1,335 | 170 | |||||||||||||||
Other agricultural loans | 1,262 | 19 | 1,103 | 1,122 | 144 | |||||||||||||||
Total | $ | 19,050 | $ | 13,047 | $ | 4,230 | $ | 17,277 | $ | 510 |
The following table includes the average investment in impaired loans and the income recognized on impaired loans for 2021, 2020 and 2019 (in thousands):
Interest | ||||||||||||
Average | Interest | Income | ||||||||||
Recorded | Income | Recognized | ||||||||||
2021 | Investment | Recognized | Cash Basis | |||||||||
Real estate loans: | ||||||||||||
Mortgages | $ | 682 | $ | 16 | $ | 0 | ||||||
Home Equity | 99 | 4 | 0 | |||||||||
Commercial | 8,789 | 288 | 31 | |||||||||
Agricultural | 4,562 | 82 | 0 | |||||||||
Other commercial loans | 704 | 2 | 0 | |||||||||
Other agricultural loans | 1,044 | 3 | 0 | |||||||||
Total | $ | 15,880 | $ | 395 | $ | 31 |
28
2020 | ||||||||||||
Real estate loans: | ||||||||||||
Mortgages | $ | 956 | $ | 20 | $ | 0 | ||||||
Home Equity | 139 | 6 | 0 | |||||||||
Commercial | 10,354 | 358 | 27 | |||||||||
Agricultural | 3,918 | 75 | 0 | |||||||||
Consumer | 3 | 0 | 0 | |||||||||
Other commercial loans | 1,671 | 3 | 0 | |||||||||
Other agricultural loans | 1,237 | 6 | 0 | |||||||||
Total | $ | 18,278 | $ | 468 | $ | 27 |
2019 | ||||||||||||
Real estate loans: | ||||||||||||
Mortgages | $ | 1,062 | $ | 16 | $ | 0 | ||||||
Home Equity | 119 | 6 | 0 | |||||||||
Commercial | 11,756 | 453 | 24 | |||||||||
Agricultural | 4,899 | 78 | 0 | |||||||||
Consumer | 2 | 0 | 0 | |||||||||
Other commercial loans | 2,056 | 1 | 0 | |||||||||
Other agricultural loans | 1,400 | 4 | 0 | |||||||||
Total | $ | 21,294 | $ | 558 | $ | 24 |
Credit Quality Information
For commercial real estate loans, agricultural real estate loans, construction loans, other commercial loans, other agricultural loans and state and political subdivision loans, management uses a nine point internal risk rating system to monitor the credit quality. The first five categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:
• | Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. |
• | Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. |
• | Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. |
• | Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances. |
• | Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted. |
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To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial and agricultural loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated over $1.0 million in the last years, 3) review a majority of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.
The following tables represent credit exposures by internally assigned grades as of December 31, 2021 and 2020 (in thousands):
2021 | Pass | Special Mention | Substandard | Doubtful | Loss | Ending Balance | ||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Commercial | $ | 646,137 | $ | 35,332 | $ | 5,869 | $ | 0 | $ | 0 | $ | 687,338 | ||||||||||||
Agricultural | 291,537 | 15,105 | 5,369 | 0 | 0 | 312,011 | ||||||||||||||||||
Construction | 55,036 | 0 | 0 | 0 | 0 | 55,036 | ||||||||||||||||||
Other commercial loans | 70,932 | 3,289 | 316 | 48 | 0 | 74,585 | ||||||||||||||||||
Other agricultural loans | 37,800 | 1,351 | 701 | 0 | 0 | 39,852 | ||||||||||||||||||
State and political subdivision loans | 45,588 | 168 | 0 | 0 | 0 | 45,756 | ||||||||||||||||||
Total | $ | 1,147,030 | $ | 55,245 | $ | 12,255 | $ | 48 | $ | 0 | $ | 1,214,578 |
2020 | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Commercial | $ | 563,121 | $ | 24,329 | $ | 8,805 | $ | 0 | $ | 0 | $ | 596,255 | ||||||||||||
Agricultural | 289,216 | 14,307 | 11,635 | 0 | 0 | 315,158 | ||||||||||||||||||
Construction | 35,404 | 0 | 0 | 0 | 0 | 35,404 | ||||||||||||||||||
Other commercial loans | 106,604 | 3,808 | 3,672 | 85 | 0 | 114,169 | ||||||||||||||||||
Other agricultural loans | 45,758 | 1,431 | 1,590 | 0 | 0 | 48,779 | ||||||||||||||||||
State and political subdivision loans | 58,649 | 4,372 | 307 | 0 | 0 | 63,328 | ||||||||||||||||||
Total | $ | 1,098,752 | $ | 48,247 | $ | 26,009 | $ | 85 | $ | 0 | $ | 1,173,093 |
For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2021 and 2020 (in thousands):
2021 | Performing | Non-performing | PCI | Total | ||||||||||||
Real estate loans: | ||||||||||||||||
Mortgages | $ | 150,320 | $ | 608 | $ | 14 | $ | 150,942 | ||||||||
Home Equity | 50,122 | 33 | 0 | 50,155 | ||||||||||||
Consumer | 25,858 | 0 | 0 | 25,858 | ||||||||||||
Total | $ | 226,300 | $ | 641 | $ | 14 | $ | 226,955 |
2020 | Performing | Non-performing | PCI | Total | ||||||||||||
Real estate loans: | ||||||||||||||||
Mortgages | $ | 145,843 | $ | 1,039 | $ | 20 | $ | 146,902 | ||||||||
Home Equity | 54,961 | 48 | 0 | 55,009 | ||||||||||||
Consumer | 30,247 | 30 | 0 | 30,277 | ||||||||||||
Total | $ | 231,051 | $ | 1,117 | $ | 20 | $ | 232,188 |
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Aging Analysis of Past Due Loans by Class
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loans as of December 31, 2021 and 2020 (in thousands):
30-59 Days | 60-89 Days | 90 Days | Total Past | Total Financing | 90 Days and | |||||||||||||||||||||||||||
2021 | Past Due | Past Due | Or Greater | Due | Current | PCI | Receivables | Accruing | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||
Mortgages | $ | 220 | $ | 170 | $ | 209 | $ | 599 | $ | 150,329 | $ | 14 | $ | 150,942 | $ | 13 | ||||||||||||||||
Home Equity | 103 | 0 | 33 | 136 | 50,019 | 0 | 50,155 | 33 | ||||||||||||||||||||||||
Commercial | 127 | 115 | 1,969 | 2,211 | 682,982 | 2,145 | 687,338 | 0 | ||||||||||||||||||||||||
Agricultural | 31 | 0 | 1,367 | 1,398 | 308,970 | 1,643 | 312,011 | 0 | ||||||||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 55,036 | 0 | 55,036 | 0 | ||||||||||||||||||||||||
Consumer | 163 | 1 | 0 | 164 | 25,694 | 0 | 25,858 | 0 | ||||||||||||||||||||||||
Other commercial loans | 17 | 10 | 92 | 119 | 74,466 | 0 | 74,585 | 0 | ||||||||||||||||||||||||
Other agricultural loans | 10 | 0 | 0 | 10 | 39,842 | 0 | 39,852 | 0 | ||||||||||||||||||||||||
State and political | ||||||||||||||||||||||||||||||||
subdivision loans | 0 | 0 | 0 | 0 | 45,756 | 0 | 45,756 | 0 | ||||||||||||||||||||||||
Total | $ | 671 | $ | 296 | $ | 3,670 | $ | 4,637 | $ | 1,433,094 | $ | 3,802 | $ | 1,441,533 | $ | 46 | ||||||||||||||||
Loans considered non-accrual | $ | 0 | $ | 0 | $ | 3,624 | $ | 3,624 | $ | 3,992 | $ | 0 | $ | 7,616 | ||||||||||||||||||
Loans still accruing | 671 | 296 | 46 | 1,013 | 1,429,102 | 3,802 | 1,433,917 | |||||||||||||||||||||||||
Total | $ | 671 | $ | 296 | $ | 3,670 | $ | 4,637 | $ | 1,433,094 | $ | 3,802 | $ | 1,441,533 |
2020 | ||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||
Mortgages | $ | 864 | $ | 414 | $ | 518 | $ | 1,796 | $ | 145,086 | $ | 20 | $ | 146,902 | $ | 252 | ||||||||||||||||
Home Equity | 152 | 62 | 34 | 248 | 54,761 | 0 | 55,009 | 23 | ||||||||||||||||||||||||
Commercial | 836 | 439 | 1,822 | 3,097 | 590,221 | 2,937 | 596,255 | 70 | ||||||||||||||||||||||||
Agricultural | 2,283 | 0 | 1,329 | 3,612 | 309,860 | 1,686 | 315,158 | 150 | ||||||||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 35,404 | 0 | 35,404 | 0 | ||||||||||||||||||||||||
Consumer | 147 | 9 | 30 | 186 | 30,091 | 0 | 30,277 | 30 | ||||||||||||||||||||||||
Other commercial loans | 930 | 0 | 133 | 1,063 | 112,874 | 232 | 114,169 | 0 | ||||||||||||||||||||||||
Other agricultural loans | 1,044 | 0 | 0 | 1,044 | 47,735 | 0 | 48,779 | 0 | ||||||||||||||||||||||||
State and political | ||||||||||||||||||||||||||||||||
subdivision loans | 0 | 0 | 0 | 0 | 63,328 | 0 | 63,328 | 0 | ||||||||||||||||||||||||
Total | $ | 6,256 | $ | 924 | $ | 3,866 | $ | 11,046 | $ | 1,389,360 | $ | 4,875 | $ | 1,405,281 | $ | 525 | ||||||||||||||||
Loans considered non-accrual | $ | 3,032 | $ | 28 | $ | 3,341 | $ | 6,401 | $ | 4,331 | $ | 0 | $ | 10,732 | ||||||||||||||||||
Loans still accruing | 3,224 | 896 | 525 | 4,645 | 1,385,029 | 4,875 | 1,394,549 | |||||||||||||||||||||||||
Total | $ | 6,256 | $ | 924 | $ | 3,866 | $ | 11,046 | $ | 1,389,360 | $ | 4,875 | $ | 1,405,281 |
Nonaccrual Loans
Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected.
31
The following table reflects the loans on nonaccrual status as of December 31, 2021 and 2020, respectively. The balances are presented by class of loan (in thousands):
2021 | 2020 | |||||||
Real estate loans: | ||||||||
Mortgages | $ | 595 | $ | 787 | ||||
Home Equity | 0 | 25 | ||||||
Commercial | 2,945 | 4,529 | ||||||
Agricultural | 3,133 | 3,133 | ||||||
Other commercial loans | 140 | 1,284 | ||||||
Other agricultural loans | 803 | 974 | ||||||
$ | 7,616 | $ | 10,732 |
Interest income on loans would have increased by approximately $573,000, $756,000 and $647,000 during 2021, 2020 and 2019, respectively, if these loans had performed in accordance with their terms.
Loan Modifications Related to COVID-19
The Company has elected to follow the loan modification guidance under Section 4013 of the CARES Act with regard to COVID-19 modifications made between March 1, 2020 and the earlier of either January 1, 2022 or the 60th day after the end of the COVID-19 national emergency. Under section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. A modification of six months or less is considered to be a short-term loan modification. In response to the COVID-19 pandemic, the Company has prudently executed loan modifications for existing loan customers, which includes deferrals of interest and in certain cases deferrals of principal and interest. The following table presents information regarding loans which were subject to a loan modification related to COVID-19 during 2021, with balances as of December 31, 2020 and December 31, 2021, as well as the balance by modification type as of December 31, 2021 (dollars in thousands).
Number of loans | Balance as of December 31, 2020 | Number of loans | Balance as of December 31, 2021 | Principal and Interest Deferral | Principal Deferral | % of loans as of December 31, 2021 | ||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||
Mortgages | 1 | $ | 209 | 0 | $ | 0 | $ | 0 | $ | 0 | 0.00 | % | ||||||||||||||||
Home Equity | 1 | 49 | 0 | 0 | 0 | 0 | 0.00 | % | ||||||||||||||||||||
Commercial | 12 | 26,039 | 0 | 0 | 0 | 0 | 0.00 | % | ||||||||||||||||||||
Agricultural | 3 | 181 | 0 | 0 | 0 | 0 | 0.00 | % | ||||||||||||||||||||
Other commercial loans | 2 | 249 | 0 | 0 | 0 | 0 | 0.00 | % | ||||||||||||||||||||
Total | 19 | $ | 26,727 | 0 | $ | 0 | $ | 0 | $ | 0 | 0.00 | % |
Troubled Debt Restructurings (TDRs)
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company’s investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower’s ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of December 31, 2021, 2020 and 2019, included within the allowance for loan losses are reserves of $26,000, $257,000 and $345,000, respectively, that are associated with loans modified as TDRs.
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Loan modifications that are considered TDRs completed during the years ended December 31, 2021, 2020 and 2019 were as follows (dollars in thousands):
2021 | Number of contracts | Pre-modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||||
Interest Modification | Term Modification | Interest Modification | Term Modification | Interest Modification | Term Modification | |||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Commercial | 0 | 4 | $ | 0 | $ | 1,469 | $ | 0 | $ | 1,469 | ||||||||||||||
Agricultural | 0 | 4 | 0 | 2,090 | 0 | 2,090 | ||||||||||||||||||
Total | 0 | 8 | $ | 0 | $ | 3,559 | $ | 0 | $ | 3,559 |
2020 | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Mortgages | 0 | 1 | $ | 0 | $ | 2 | $ | 0 | $ | 2 | ||||||||||||||
Commercial | 0 | 10 | 0 | 2,456 | 0 | 2,456 | ||||||||||||||||||
Agricultural | 0 | 2 | 0 | 494 | 0 | 494 | ||||||||||||||||||
Consumer | 0 | 1 | 0 | 3 | 3 | |||||||||||||||||||
Other commercial loans | 0 | 2 | 0 | 1,094 | 1,094 | |||||||||||||||||||
Other agricultural loans | 0 | 1 | 0 | 19 | 0 | 19 | ||||||||||||||||||
Total | 0 | 17 | $ | 0 | $ | 4,068 | $ | 0 | $ | 4,068 |
2019 | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Mortgages | 0 | 1 | $ | 0 | $ | 4 | $ | 0 | $ | 4 | ||||||||||||||
Home Equity | 0 | 1 | 0 | 40 | 0 | 40 | ||||||||||||||||||
Commercial | 0 | 6 | 0 | 918 | 0 | 918 | ||||||||||||||||||
Agricultural | 0 | 5 | 0 | 1,731 | 0 | 1,731 | ||||||||||||||||||
Consumer | 0 | 1 | 0 | 3 | 3 | |||||||||||||||||||
Other commercial loans | 0 | 1 | 0 | 55 | 55 | |||||||||||||||||||
Other agricultural loans | 0 | 5 | 0 | 1,054 | 0 | 1,054 | ||||||||||||||||||
Total | 0 | 20 | $ | 0 | $ | 3,805 | $ | 0 | $ | 3,805 |
Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which begin January 1, 2021, 2020 and 2019, respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):
December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
Number of contracts | Recorded investment | Number of contracts | Recorded investment | Number of contracts | Recorded investment | |||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Commercial | 0 | $ | 0 | 1 | $ | 110 | 0 | $ | 0 | |||||||||||||||
Agricultural | 0 | 0 | 0 | 0 | 1 | 1,439 | ||||||||||||||||||
Other agricultural loans | 0 | 0 | 0 | 0 | 3 | 137 | ||||||||||||||||||
Total recidivism | 0 | $ | 0 | 1 | $ | 110 | 4 | $ | 1,576 |
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Foreclosed Assets Held For Sale
Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of December 31, 2021 and 2020 included with other assets are $1,180,000 and $1,836,000, respectively, of foreclosed assets. As of December 31, 2021, included within the foreclosed assets is $353,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2021, the Company has initiated formal foreclosure proceedings on $224,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.
Allowance for Loan Losses
The following tables roll forward the balance of the allowance for loan and lease losses for the years ended December 31, 2021, 2020 and 2019 and is segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2021, 2020 and 2019 (in thousands):
Balance at December 31, 2020 | Charge-offs | Recoveries | Provision | Balance at December 31, 2021 | Individually evaluated for impairment | Collectively evaluated for impairment | ||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||
Residential | $ | 1,174 | $ | 0 | $ | 0 | $ | (27 | ) | $ | 1,147 | $ | 12 | $ | 1,135 | |||||||||||||
Commercial | 6,216 | (54 | ) | 89 | 1,848 | 8,099 | 61 | 8,038 | ||||||||||||||||||||
Agricultural | 4,953 | 0 | 0 | (224 | ) | 4,729 | 14 | 4,715 | ||||||||||||||||||||
Construction | 122 | 0 | 0 | 312 | 434 | 0 | 434 | |||||||||||||||||||||
Consumer | 321 | (27 | ) | 21 | (53 | ) | 262 | 0 | 262 | |||||||||||||||||||
Other commercial loans | 1,226 | (133 | ) | 43 | (113 | ) | 1,023 | 34 | 989 | |||||||||||||||||||
Other agricultural loans | 864 | 0 | 0 | (306 | ) | 558 | 0 | 558 | ||||||||||||||||||||
State and political subdivision loans | 479 | 0 | 0 | (198 | ) | 281 | 0 | 281 | ||||||||||||||||||||
Unallocated | 460 | 0 | 0 | 311 | 771 | 0 | 771 | |||||||||||||||||||||
Total | $ | 15,815 | $ | (214 | ) | $ | 153 | $ | 1,550 | $ | 17,304 | $ | 121 | $ | 17,183 |
Balance at December 31, 2019 | Charge-offs | Recoveries | Provision | Balance at December 31, 2020 | Individually evaluated for impairment | Collectively evaluated for impairment | ||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||
Residential | $ | 1,114 | $ | 0 | $ | 14 | $ | 46 | $ | 1,174 | $ | 18 | $ | 1,156 | ||||||||||||||
Commercial | 4,549 | (435 | ) | 37 | 2,065 | 6,216 | 95 | 6,121 | ||||||||||||||||||||
Agricultural | 5,022 | (4 | ) | 19 | (84 | ) | 4,953 | 83 | 4,870 | |||||||||||||||||||
Construction | 43 | 0 | 0 | 79 | 122 | 0 | 122 | |||||||||||||||||||||
Consumer | 112 | (50 | ) | 21 | 238 | 321 | 0 | 321 | ||||||||||||||||||||
Other commercial loans | 1,255 | (44 | ) | 12 | 3 | 1,226 | 170 | 1,056 | ||||||||||||||||||||
Other agricultural loans | 961 | 0 | 0 | (97 | ) | 864 | 144 | 720 | ||||||||||||||||||||
State and political subdivision loans | 536 | 0 | 0 | (57 | ) | 479 | 0 | 479 | ||||||||||||||||||||
Unallocated | 253 | 0 | 0 | 207 | 460 | 0 | 460 | |||||||||||||||||||||
Total | $ | 13,845 | $ | (533 | ) | $ | 103 | $ | 2,400 | $ | 15,815 | $ | 510 | $ | 15,305 |
Balance at December 31, 2018 | Charge-offs | Recoveries | Provision | Balance at December 31, 2019 | Individually evaluated for impairment | Collectively evaluated for impairment | ||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||
Residential | $ | 1,105 | $ | (32 | ) | $ | 0 | $ | 41 | $ | 1,114 | $ | 32 | $ | 1,082 | |||||||||||||
Commercial | 4,115 | (578 | ) | 0 | 1,012 | 4,549 | 251 | 4,298 | ||||||||||||||||||||
Agricultural | 4,264 | 0 | 0 | 758 | 5,022 | 151 | 4,871 | |||||||||||||||||||||
Construction | 58 | 0 | 0 | (15 | ) | 43 | 0 | 43 | ||||||||||||||||||||
Consumer | 120 | (49 | ) | 33 | 8 | 112 | 0 | 112 | ||||||||||||||||||||
Other commercial loans | 1,354 | (38 | ) | 10 | (71 | ) | 1,255 | 147 | 1,108 | |||||||||||||||||||
Other agricultural loans | 752 | (60 | ) | 0 | 269 | 961 | 154 | 807 | ||||||||||||||||||||
State and political subdivision loans | 762 | 0 | 0 | (226 | ) | 536 | 0 | 536 | ||||||||||||||||||||
Unallocated | 354 | 0 | 0 | (101 | ) | 253 | 0 | 253 | ||||||||||||||||||||
Total | $ | 12,884 | $ | (757 | ) | $ | 43 | $ | 1,675 | $ | 13,845 | $ | 735 | $ | 13,110 |
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As discussed in Footnote 1, management evaluates various qualitative factors on a quarterly basis. The following are explanations for the changes in the allowance by portfolio segments:
2021
Residential - There was a decrease in the historical loss factor for residential loans when comparing 2020 and 2021 and a slight decrease in the specific reserve for residential loans between 2020 and 2021. The qualitative factor for the level of past due loans for residential real estate loans was decreased due to a decrease in past due loans during 2021.
Commercial real estate – There was a decrease in the historical loss factor and the specific reserve for commercial real estate loans from 2020 to 2021. The qualitative factor for the volume of non-accrual loans was decreased for commercial real estate loans due to a decrease in the volume of non-accrual loans during 2021. The decrease in the qualitative factors was offset by the increase in the commercial real estate portfolio, which resulted in the provision for 2021.
Agricultural real estate – There was no change in the historical loss factor for agricultural real estate loans from 2020 to 2021 The specific reserve for agricultural real estate loans decreased from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for agricultural real estate loans during 2021 due to a decrease in substandard loans.
Construction - There was no change in the historical loss factor or specific reserve for construction loans from 2020 to 2021. The qualitative factors for trends in volume, terms and nature of the portfolio, experience and depth of lending management and relevant staff, and changes in value of underlying value of collateral were increased for the construction loan portfolio during 2021 due to the increase in the overall size of the portfolio, the increase in the size of individual construction loans and the complexity of the construction projects funded.
Consumer - There was a decrease in the historical loss factor for consumer loans from 2020 to 2021. The negative provision was due to a decrease in consumer loans.
Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2020 and 2021. The specific reserve for other commercial loans decreased from 2020 to 2021. The qualitative factors for the level of past due loans, the volume of non-accrual loans and the volume and severity of classified, adversely or graded loans were decreased for other commercial loans due to a decrease in past due loans, non-accrual loans and substandard loans during 2021.
Other agricultural - There was a decrease in the historical loss factor for other agricultural loans from 2020 to 2021. The specific reserve for other agricultural loans decreased from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for other agricultural loans during 2021 due to a decrease in substandard loans. The negative provision was primarily due to the overall decrease in other agricultural loans.
Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for municipal loans during 2021 due to a decrease in substandard loans. The negative provision was primarily due to the overall decrease in other municipal loans during 2021.
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2020
Residential - There was a slight decrease in the historical loss factor for residential loans when comparing 2019 and 2020 and a slight decrease in the specific reserve for residential loans between 2019 and 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.
Commercial real estate– There was an increase in the historical loss factor for commercial real estate loans from 2019 to 2020. The specific reserve for commercial real estate loans decreased from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for commercial real estate loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.
Agricultural real estate – There was a decrease in the historical loss factor and specific reserve for agricultural real estate loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for agricultural real estate loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.
Consumer - There was a slight decrease in the historical loss factor for consumer loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for consumer loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.
Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2019 and 2020. The specific reserve for other commercial loans increased from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020. The majority of the increase in other commercial loans was attributable to PPP loans, which are guaranteed by the SBA and therefore do not have an associated allowance and loans acquired in the MidCoast acquisition, which are not subject to the allowance.
Other agricultural - There was a slight decrease in the historical loss factor for other agricultural loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.
Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020. The negative provision for state and political loans in 2020 is due to the decrease in the amount of state and political loans outstanding from 2019 to 2020.
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2019
Residential - There was a slight increase in the historical loss factor for residential loans when comparing 2018 and 2019. The specific reserve for residential loans decreased slightly between 2018 and 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to an increase in the unemployment rates in the local economy during 2019.
Commercial real estate– There was an increase in the historical loss factor for commercial real estate loans from 2018 to 2019. The specific reserve for commercial real estate loans increased from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all commercial real estate loans due to an increase in the unemployment rates in the local economy during 2019. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of classified and past due loans.
Agricultural real estate – There was an increase in the historical loss factor for agricultural real estate loans from 2018 to 2019. The specific reserve for agricultural real estate loans increased from 2018 to 2019. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for agricultural real estate due to an increase in classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2019.
Other commercial - There was a slight decrease in the historical loss factor for other commercial loans when comparing 2018 and 2019. The specific reserve for other commercial loans decreased from 2018 to 2019. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for other commercial loans due to a decrease in classified and non-accrual loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to an increase in the unemployment rates in the local economy during 2019.
Other agricultural - There was a slight increase in the historical loss factor for other agricultural loans from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural loan categories due to an increase in the unemployment rates in the local economy during 2019.
Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to an increase in the unemployment rates in the local economy during 2019. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of special mention loans.
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6. PREMISES & EQUIPMENT
Premises and equipment at December 31, 2021 and 2020 are summarized as follows (in thousands):
December 31, | ||||||||
2021 | 2020 | |||||||
Land | $ | 5,462 | $ | 5,385 | ||||
Buildings | 20,094 | 19,373 | ||||||
Furniture, fixtures and equipment | 7,275 | 7,046 | ||||||
Construction in process | 67 | 147 | ||||||
32,898 | 31,951 | |||||||
Less: accumulated depreciation | 15,882 | 15,003 | ||||||
Premises and equipment, net | $ | 17,016 | $ | 16,948 |
Depreciation expense amounted to $922,000, $921,000 and $784,000 for 2021, 2020 and 2019, respectively.
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7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table provides the gross carrying value and accumulated amortization of intangible assets as of December 31, 2021 and 2020 (in thousands):
December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
Gross carrying value | Accumulated amortization | Net carrying value | Gross carrying value | Accumulated amortization | Net carrying value | |||||||||||||||||||
Amortized intangible assets (1): | ||||||||||||||||||||||||
MSRs | $ | 2,499 | $ | (1,326 | ) | $ | 1,173 | $ | 2,153 | $ | (1,131 | ) | $ | 1,022 | ||||||||||
Core deposit intangibles | �� | 1,943 | (1,489 | ) | 454 | 1,943 | (1,297 | ) | 646 | |||||||||||||||
Total amortized intangible assets | $ | 4,442 | $ | (2,815 | ) | $ | 1,627 | $ | 4,096 | $ | (2,428 | ) | $ | 1,668 | ||||||||||
Unamortized intangible assets: | ||||||||||||||||||||||||
Goodwill | $ | 31,376 | $ | 31,376 |
(1) Excludes fully amortized intangible assets
The following table provides the current year and estimated future amortization expense for the next five years of amortized intangible assets (in thousands). We based our projections of amortization expense shown below on existing asset balances at December 31, 2021. Future amortization expense may vary from these projections:
MSRs | Core deposit intangibles | Total | ||||||||||
Year ended December 31, 2021 | $ | 265 | $ | 192 | $ | 457 | ||||||
Estimate for year ended December 31, | ||||||||||||
2022 | 305 | 156 | 461 | |||||||||
2023 | 244 | 121 | 365 | |||||||||
2024 | 192 | 86 | 278 | |||||||||
2025 | 146 | 50 | 196 | |||||||||
2026 | 107 | 17 | 124 |
8. FEDERAL HOME LOAN BANK (FHLB) STOCK
As a member of the FHLB of Pittsburgh, the Bank is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. As of December 31, 2021 and 2020, included in other assets, the Bank held $3,292,000 and $4,593,000, respectively, of FHLB stock. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) A significant decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management considered that the FHLB’s regulatory capital ratios are strong, liquidity appears adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of excess capital stock from its members and has paid a quarterly cash dividend.
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9. DEPOSITS
The following table shows the breakdown of deposits as of December 31, 2021 and 2020, by deposit type (in thousands):
2021 | 2020 | |||||||
Non-interest-bearing deposits | $ | 358,073 | $ | 303,762 | ||||
NOW accounts | 485,292 | 422,083 | ||||||
Savings deposits | 313,048 | 255,853 | ||||||
Money market deposit accounts | 350,122 | 225,968 | ||||||
Certificates of deposit | 329,616 | 381,192 | ||||||
Total | $ | 1,836,151 | $ | 1,588,858 |
Certificates of deposit of $250,000 or more amounted to $79,610,000 and $75,869,000 at December 31, 2021 and 2020, respectively. Brokered deposits totaled $23,839,000 as of December 31, 2020. There were 0 brokered certificates of deposits as of December 31, 2021.
Following are maturities of certificates of deposit as of December 31, 2021 (in thousands):
2022 | $ | 184,857 | ||
2023 | 68,192 | |||
2024 | 42,549 | |||
2025 | 16,257 | |||
2026 | 11,994 | |||
Thereafter | 5,767 | |||
Total certificates of deposit | $ | 329,616 |
10. BORROWED FUNDS AND REPURCHASE AGREEMENTS
The following table shows the breakdown of borrowed funds as of December 31, 2021 and 2020 (dollars in thousands):
Securities | ||||||||||||||||||||||||||||||||
Sold Under | FHLB | Federal | FRB | Total | ||||||||||||||||||||||||||||
Agreements to | Advances | Funds | BIC | Subordinated | Notes | Term | Borrowed | |||||||||||||||||||||||||
Repurchase(a) | (b) | Lines (c) | Line (d) | Debt (e) | Payable (f) | Loans(g) | Funds | |||||||||||||||||||||||||
2021 | ||||||||||||||||||||||||||||||||
Balance at December 31 | $ | 16,873 | $ | 0 | $ | 0 | $ | 0 | $ | 9,879 | $ | 7,500 | $ | 39,725 | $ | 73,977 | ||||||||||||||||
Highest balance at any month-end | 16,873 | 0 | 0 | 0 | 9,879 | 7,500 | 66,525 | 100,777 | ||||||||||||||||||||||||
Average balance | 14,726 | 0 | 0 | 0 | 7,036 | 7,500 | 55,360 | 84,622 | ||||||||||||||||||||||||
Weighted average interest rate: | ||||||||||||||||||||||||||||||||
Paid during the year | 0.06 | % | 0.00 | % | 0.51 | % | 0.22 | % | 4.17 | % | 3.57 | % | 1.26 | % | 1.50 | % | ||||||||||||||||
As of year-end | 0.08 | % | 0.00 | % | 0.00 | % | 0.00 | % | 4.18 | % | 3.57 | % | 1.15 | % | 1.56 | % | ||||||||||||||||
2020 | ||||||||||||||||||||||||||||||||
Balance at December 31 | $ | 14,813 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 7,500 | $ | 66,525 | $ | 88,838 | ||||||||||||||||
Highest balance at any month-end | 14,813 | 67,106 | 0 | 0 | 0 | 7,500 | 79,022 | 168,441 | ||||||||||||||||||||||||
Average balance | 12,903 | 12,371 | 0 | 109 | 0 | 7,500 | 60,355 | 93,238 | ||||||||||||||||||||||||
Weighted average interest rate: | ||||||||||||||||||||||||||||||||
Paid during the year | 0.36 | % | 1.63 | % | 0.51 | % | 0.34 | % | 0.00 | % | 3.83 | % | 1.19 | % | 1.34 | % | ||||||||||||||||
As of year-end | 0.11 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 3.57 | % | 1.12 | % | 1.16 | % |
(a) We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The collateral pledged on the repurchase agreements by the remaining contractual maturity of the repurchase agreements in the Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020 is presented in the following tables (in thousands).
40
Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
Overnight and | Up to | Greater than | ||||||||||||||||||
2021 | Continuous | 30 Days | 30 - 90 Days | 90 days | Total | |||||||||||||||
Repurchase Agreements: | ||||||||||||||||||||
U.S. agency securities | $ | 17,155 | $ | 0 | $ | 0 | $ | 0 | $ | 17,155 | ||||||||||
Total carrying value of collateral pledged | $ | 17,155 | $ | 0 | $ | 0 | $ | 0 | $ | 17,155 | ||||||||||
Total liability recognized for repurchase agreements | $ | 16,873 |
Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
Overnight and | Up to | Greater than | ||||||||||||||||||
2020 | Continuous | 30 Days | 30 - 90 Days | 90 days | Total | |||||||||||||||
Repurchase Agreements: | ||||||||||||||||||||
U.S. agency securities | $ | 16,735 | $ | 0 | $ | 0 | $ | 0 | $ | 16,735 | ||||||||||
Total carrying value of collateral pledged | $ | 16,735 | $ | 0 | $ | 0 | $ | 0 | $ | 16,735 | ||||||||||
Total liability recognized for repurchase agreements | $ | 14,813 |
(b) FHLB Advances consist of an “Open RepoPlus” agreement with the FHLB of Pittsburgh. FHLB “Open RepoPlus” advances are short-term borrowings that bear interest based on the FHLB discount rate or Federal Funds rate, whichever is higher. The Company has a borrowing limit of $756,225,000, inclusive of any outstanding advances and letters of credit. FHLB advances are secured by a blanket security agreement that includes the Company’s FHLB stock, as well as certain investment and mortgage-backed securities held in safekeeping at the FHLB and certain residential and commercial mortgage loans. A portion of these advances, $25.0 million, are subject to interest rate swap arrangements. See Note 17 for additional information.
(c) The federal funds lines consist of unsecured lines from two third party banks at market rates. The Company has a borrowing limit totaling $34,000,000, inclusive of any outstanding balances. No specific collateral is required to be pledged for these borrowings.
(d) The Federal Reserve Bank Borrower in Custody (FRB BIC) Line consists of a borrower in custody in agreement opened in January 2010 with the Federal Reserve Bank of Philadelphia secured by municipal loans maintained in the Company’s possession. As of December 31, 2021 and 2020, the Company has a borrowing limit of $1,068,000 and $4,379,000, respectively, inclusive of any outstanding advances. The approximate carrying value of the municipal loan collateral was $1,683,000 and $12,932,000 as of December 31, 2021 and 2020, respectively.
(e) In April 2021, the Company issued $10.0 million of fixed to floating rate subordinated notes that mature on April 16, 2031, unless redeemed earlier. The notes bear interest at 4% per annum through April 16, 2026 and subsequently pay interest at the 90-day average secured overnight financing rate, determined on the determination date of the applicable interest period, plus 323 basis points. The Company may redeem the notes, in whole or in part, on or after April 16, 2026, and at any time upon the occurrence of certain events, subject in each case to the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Issuance costs associated with the notes totaled $131,000 and were capitalized and will be amortized over the life of the note on a straight-line basis, which approximates the effective yield method. As of December 31, 2021, the net unamortized issuance costs totaled $121,000.
(f) In December 2003, the Company formed a special purpose entity (“Entity”) to issue $7,500,000 of floating rate obligated mandatory redeemable trust preferred securities as part of a pooled offering. The rate was determined quarterly and floated based on the 3 month LIBOR plus 2.80 percent. The Entity may redeem them, in whole or in part, at face value after December 17, 2008, and on a quarterly basis thereafter. The Company borrowed the proceeds of the issuance from the Entity in December 2003 in the form of a $7,500,000 note payable. Debt issue costs of $75,000 have been capitalized and fully amortized as of December 31, 2008. Under current accounting rules, the Company’s minority interest in the Entity was recorded at the initial investment amount and is included in the other assets section of the balance sheet. The Entity is not consolidated as part of the Company’s consolidated financial statements. The $7,500,000 note payable is subject to an interest rate swap arrangement. See Note 17 for additional information.
41
(g) Term Loans consist of separate loans with the FHLB of Pittsburgh as follows (dollars in thousands):
Interest Rate | Maturity | December 31, 2021 | December31, 2020 | ||||||||
Fixed: | |||||||||||
0.38 | % | January 4, 2021 | 0 | 25,000 | |||||||
0.26 | % | January 3, 2022 | 25,000 | 0 | |||||||
2.08 | % | January 6, 2022 | 4,725 | 4,725 | |||||||
2.46 | % | March 28, 2024 | 5,000 | 5,000 | |||||||
1.69 | % | August 20, 2024 | 5,000 | 5,000 | |||||||
2.61 | % | February 3, 2021 | 0 | 2,000 | |||||||
3.52 | % | July 12, 2021 | 0 | 2,000 | |||||||
2.37 | % | August 20, 2021 | 0 | 2,800 | |||||||
0.25 | % | July 9, 2021 | 0 | 15,000 | |||||||
1.24 | % | March 3, 2025 | 0 | 5,000 | |||||||
Total term loans | $ | 39,725 | $ | 66,525 |
Following are maturities of borrowed funds as of December 31, 2021 (in thousands):
2022 | $ | 46,598 | ||
2023 | 0 | |||
2024 | 10,000 | |||
2025 | 0 | |||
2026 | 0 | |||
Thereafter | 17,379 | |||
Total borrowed funds | $ | 73,977 |
11. EMPLOYEE BENEFIT PLANS
Noncontributory Defined Benefit Pension Plan
The Bank sponsors a trusteed, noncontributory defined benefit pension plan covering substantially all employees and officers hired prior to January 1, 2007. The Bank also assumed the noncontributory defined benefit pension plan of FNB when it was acquired during 2015. The FNB plan was frozen prior to the acquisition and therefore, no additional benefits will accrue for employees covered under that plan. The Board of Directors in 2018 voted to terminate the plan acquired as part of the FNB acquisition with final settlement occurring in the fourth quarter of 2019. These 2 plans are collectively referred to herein as “the Plans”. The pension plans call for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank and compensation rates during employment. Upon retirement or other termination of employment, employees can elect either an annuity benefit or a lump sum distribution of vested benefits in the pension plan. The Bank’s funding policy is to make annual contributions, if needed, based upon the funding formula developed by the pension plans’ actuary. The Bank did not make any contributions to the pension plans in 2021, 2020 or 2019.
In lieu of the pension plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting length of service requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee’s base compensation. The contribution amount is placed in a separate account within the 401(k) plan and is subject to a vesting requirement. Contributions by the Company totaled $290,000, $212,0000 and $200,000 for 2021, 2020 and 2019, respectively.
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The following table sets forth the obligation and funded status of the Plans as of December 31 (in thousands):
2021 | 2020 | |||||||
Change in benefit obligation | ||||||||
Benefit obligation at beginning of year | $ | 14,020 | $ | 13,027 | ||||
Service cost | 380 | 330 | ||||||
Interest cost | 270 | 332 | ||||||
Actuarial (Gain) / Loss | (438 | ) | 1,810 | |||||
Settlement gain | (17 | ) | (34 | ) | ||||
Benefits paid | (1,092 | ) | (1,445 | ) | ||||
Benefit obligation at end of year | 13,123 | 14,020 | ||||||
Change in plan assets | ||||||||
Fair value of plan assets at beginning of year | 13,247 | 13,277 | ||||||
Actual return (loss) on plan assets | 1,761 | 1,415 | ||||||
Employer contribution | 0 | 0 | ||||||
Benefits paid | (1,092 | ) | (1,445 | ) | ||||
Fair value of plan assets at end of year | 13,916 | 13,247 | ||||||
Funded status | $ | 793 | $ | (773 | ) |
Amounts not yet recognized as a component of net periodic pension cost as of December 31 (in thousands):
Amounts recognized in accumulated other comprehensive loss consists of: | 2021 | 2020 | ||||||
Net loss | $ | 2,491 | $ | 4,383 | ||||
Prior service cost | 0 | 0 | ||||||
Total | $ | 2,491 | $ | 4,383 |
The accumulated benefit obligation for the defined benefit pension plan was $13,123,000 and $14,020,000 at December 31, 2021 and 2020 respectively.
The components of net periodic benefit costs for the years ended December 31 are as follows (in thousands):
2021 | 2020 | 2019 | Affected line item on the Consolidated Statement of Income | ||||||||||
Service cost | $ | 380 | $ | 330 | $ | 289 | Salary and Employee Benefits | ||||||
Interest cost | 270 | 332 | 588 | Other Expenses | |||||||||
Return on plan assets | (895 | ) | (862 | ) | (924 | ) | Other Expenses | ||||||
Settlement loss (gain) | 235 | 302 | (259 | ) | Other Expenses | ||||||||
Net amortization and deferral | 336 | 233 | 272 | Other Expenses | |||||||||
Net periodic benefit cost | $ | 326 | $ | 335 | $ | (34 | ) |
The estimated net loss that will be amortized from accumulated other comprehensive loss into the net periodic benefit cost (income) in 2022 is $142,000.
The weighted-average assumptions used to determine benefit obligations at December 31, 2021 and 2020 is summarized in the following table. The change in the discount rate is the primary driver of the actuarial gain that occurred in 2021 of $438,000.
2021 | 2020 | |||||||
Discount rate FCCB Plan | 2.25 | % | 2.00 | % | ||||
Rate of compensation increase | 3.00 | % | 3.00 | % |
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The weighted-average assumptions used to determine net periodic benefit cost (income) for the year ended December 31. Due to the decision to terminate the pension plan acquired as part of the FNB acquisition, the discount rate for the plans will be separated for 2019.
2021 | 2020 | 2019 | ||||||||||
Discount rate FCCB Plan | 2.00 | % | 2.75 | % | 4.00 | % | ||||||
Discount rate FNB Plan | NA | NA | 3.49 | % | ||||||||
Expected long-term return on plan assets FCCB plan | 7.00 | % | 7.00 | % | 7.00 | % | ||||||
Rate of compensation increase | 3.00 | % | 3.00 | % | 3.00 | % |
The long-term rate of return on plan assets gives consideration to returns currently being earned on plan assets as well as future rates expected to be earned. The investment objective is to maximize total return consistent with the interests of the participants and beneficiaries, and prudent investment management. The allocation of the pension plan assets is determined on the basis of sound economic principles and is continually reviewed in light of changes in market conditions. Asset allocation favors equity securities, with a target allocation of 50-70%. The target allocation for debt securities is 30-50%. At December 31, 2021, the pension plan had a sufficient cash and money market position in order to re-allocate the equity portfolio for diversification purposes and reduce risk in the total portfolio. The following table sets forth by level, within the fair value hierarchy as defined in footnote 19, the Plan’s assets at fair value as of December 31, 2021 and 2020 (dollars in thousands):
2021 | Level I | Level II | Level III | Total | Allocation | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 188 | $ | 0 | $ | 0 | $ | 188 | 1.4 | % | ||||||||||
Equity Securities | 6,291 | 0 | 0 | 6,291 | 45.2 | % | ||||||||||||||
Mutual Funds and ETF’s | 5,246 | 0 | 0 | 5,246 | 37.7 | % | ||||||||||||||
Corporate Bonds | 0 | 2,191 | 0 | 2,191 | 15.7 | % | ||||||||||||||
Total | $ | 11,725 | $ | 2,191 | $ | 0 | $ | 13,916 | 100.0 | % |
2020 | Level I | Level II | Level III | Total | Allocation | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 456 | $ | 0 | $ | 0 | $ | 456 | 3.4 | % | ||||||||||
Equity Securities | 5,709 | 0 | 0 | 5,709 | 43.1 | % | ||||||||||||||
Mutual Funds and ETF’s | 4,410 | 0 | 0 | 4,410 | 33.3 | % | ||||||||||||||
Corporate Bonds | 0 | 2,672 | 0 | 2,672 | 20.2 | % | ||||||||||||||
Total | $ | 10,575 | $ | 2,672 | $ | 0 | $ | 13,247 | 100.0 | % |
Equity securities include the Company’s common stock in the amounts of $686,000 (4.9% of total plan assets) and $627,000 (4.7% of total plan assets) at December 31, 2021 and 2020, respectively.
The Bank does 0t expect to make a contribution to its pension plan in 2022. Expected future benefit payments that the Bank estimates from its pension plan are as follows (in thousands):
2022 | $ | 420 | ||
2023 | 634 | |||
2024 | 806 | |||
2025 | 1,161 | |||
2026 | 2,130 | |||
2027 - 2031 | 3,944 |
Defined Contribution Plan
The Company sponsors a voluntary 401(k) savings plan which eligible employees can elect to contribute up to the maximum amount allowable not to exceed the limits of IRS Code Sections 401(k). Under the plan, the Company also makes required contributions on behalf of the eligible employees. The Company’s contributions vest immediately. Contributions by the Company totaled $563,000, $518,000 and $446,000 for 2021, 2020 and 2019, respectively.
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Directors’ Deferred Compensation Plan
The Company’s directors may elect to defer all or portions of their fees until their retirement or termination from service. Amounts deferred under the deferred compensation plan earn interest based upon the highest current rate offered to certificate of deposit customers. Amounts deferred under the deferred compensation plan are not guaranteed and represent a general liability of the Company. As of December 31, 2021 and 2020, an obligation of $587,000 and $632,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Amounts included in interest expense on the deferred amounts totaled $6,000, $8,000 and $19,000 for the years ended December 31, 2021, 2020 and 2019, respectively.
Restricted Stock Plan
The Company maintains a Restricted Stock Plan (the Plan) whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements. Awards granted under the Plan are in the form of the Company’s common stock and maybe subject to certain vesting requirements including in the case of employees, continuous employment or service with the Company. In April 2016, the Company’s stockholder authorized a total of 150,000 shares of the Company’s common stock to be made available under the Plan. As of December 31, 2021, 119,391 shares remain available to be issued under the Plan. The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation. The following table details the vesting, awarding and forfeiting of unearned restricted shares during 2021:
2021 | ||||||||
Shares | Weighted Average Market Price | |||||||
Outstanding, beginning of year | 10,202 | $ | 55.93 | |||||
Granted | 4,660 | 60.73 | ||||||
Forfeited | (70 | ) | 55.03 | |||||
Vested | (7,838 | ) | 56.51 | |||||
Outstanding, end of year | 6,954 | $ | 58.51 |
Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. Compensation expense related to restricted stock was $318,000, $333,000 and $299,000 for the years ended December 31, 2021, 2020 and 2019, respectively. The per share weighted-average grant-date fair value of restricted shares granted during 2021, 2020 and 2019 was $60.73, $50.89 and $60.02, respectively. At December 31, 2021, the total compensation cost related to nonvested awards that has not yet been recognized was $407,000, which is expected to be recognized over the next 3 years.
Supplemental Executive Retirement Plan
The Company maintains a non-qualified supplemental executive retirement plan (“SERP”) for certain executives to compensate those executive participants in the Company’s noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. At December 31, 2021 and 2020, an obligation of $2,509,000 and $2,077,000, respectively, for the SERP was included in other liabilities in the Consolidated Balance Sheet. Expenses related to the SERP totaled $473,000, $107,000 and $251,000 for the years ended December 31, 2021, 2020 and 2019, respectively. Benefit payments for 2021 and 2020 were $42,000 and $32,000, respectively. There were 0 benefit payments in 2019.
Deferred Compensation Plan
The Company in 2018 initiated a non-qualified executive deferred compensation plan for eligible employees designated by the Board of Directors. At December 31, 2021 and 2020, an obligation of $940,000 and $631,000, respectively, was included in other liabilities for the deferred compensation plan in the Consolidated Balance Sheet. Expenses related to the deferred compensation plan totaled $309,000, $230,000 and $343,000 for the years ended December 31, 2021, 2020 and 2019, respectively. There were 0 benefit payments in 2021, 2020 or 2019.
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Salary Continuation Plan
The Company maintains a salary continuation plan for certain employees acquired through the acquisition of the FNB. At December 31, 2021 and 2020 an obligation of $646,000 and $673,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Expenses related to the salary continuation plan totaled $49,000, $51,000 and $52,000 for the years ended December 31, 2021, 2020 and 2019, respectively.
Continuation of Life Insurance Plan
The Company, as part of the acquisition of FNB, has promised a continuation of life insurance coverage to certain persons post-retirement. GAAP requires the recording of post-retirement costs and a liability equal to the present value of the cost of post-retirement insurance during the person’s term of service. The estimated present value of future benefits to be paid totaled $696,000 and $687,000 at December 31, 2021 and 2020, respectively, which is included in other liabilities in the Consolidated Balance Sheet. Expenses for the plan totaled $9,000, $2,600 and $36,000 for the years ended December 31, 2021, 2020 and 2019, respectively.
12. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Currently payable | $ | 5,510 | $ | 4,896 | $ | 3,503 | ||||||
Deferred tax liability (asset) | 689 | 367 | 317 | |||||||||
Provision for income taxes | $ | 6,199 | $ | 5,263 | $ | 3,820 |
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The following temporary differences gave rise to the net deferred tax asset and liabilities at December 31, 2021 and 2020, respectively (in thousands):
Deferred tax assets: | 2021 | 2020 | ||||||
Allowance for loan losses | $ | 4,712 | $ | 5,135 | ||||
Deferred compensation | 491 | 520 | ||||||
Merger & acquisition costs | 1 | 2 | ||||||
Allowance for losses on available-for-sale securities | 4 | 15 | ||||||
Pension and other retirement obligation | 360 | 599 | ||||||
Unrealized loss on interest rate swap | 0 | 2 | ||||||
Interest on non-accrual loans | 795 | 778 | ||||||
Incentive plan accruals | 536 | 489 | ||||||
Other real estate owned | 16 | 16 | ||||||
Low income housing tax credits | 137 | 131 | ||||||
NOL carry forward | 1,226 | 1,321 | ||||||
Right of use asset | 686 | 482 | ||||||
Accrued vacation | 168 | 187 | ||||||
Other | 159 | 224 | ||||||
Total | $ | 9,291 | $ | 9,901 |
Deferred tax liabilities: | 2021 | 2020 | ||||||
Premises and equipment | $ | (559 | ) | $ | (612 | ) | ||
Investment securities accretion | (90 | ) | (68 | ) | ||||
Loan fees and costs | (644 | ) | (333 | ) | ||||
Goodwill and core deposit intangibles | (2,309 | ) | (2,293 | ) | ||||
Mortgage servicing rights | (246 | ) | (215 | ) | ||||
Unrealized gains on available-for-sale securities | (81 | ) | (1,612 | ) | ||||
Unrealized gains on equity securities | (61 | ) | 0 | |||||
Unrealized gains on interest rate swap | (401 | ) | 0 | |||||
Right of use asset | (685 | ) | (480 | ) | ||||
Other | (133 | ) | (245 | ) | ||||
Total | (5,209 | ) | (5,858 | ) | ||||
Deferred tax (liability) asset, net | $ | 4,082 | $ | 4,043 |
NaN valuation allowance was established at December 31, 2021 and 2020, due to the Company’s ability to carryback to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.
The total provision for income taxes is different from that computed at the statutory rates due to the following items (dollars in thousands):
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Provision at statutory rates on pre-tax income | $ | 7,413 | $ | 6,377 | $ | 4,895 | ||||||
Effect of tax-exempt income | (764 | ) | (936 | ) | (920 | ) | ||||||
Low income housing tax credits | (141 | ) | (141 | ) | (141 | ) | ||||||
Bank owned life insurance | (384 | ) | (146 | ) | (131 | ) | ||||||
Nondeductible interest | 44 | 44 | 52 | |||||||||
Nondeductible merger and acquisition expenses | 0 | 32 | 38 | |||||||||
Other items | 31 | 33 | 27 | |||||||||
Provision for income taxes | $ | 6,199 | $ | 5,263 | $ | 3,820 | ||||||
Statutory tax rates | 21 | % | 21 | % | 21 | % | ||||||
Effective tax rates | 17.6 | % | 17.3 | % | 16.4 | % |
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There is currently 0 liability for uncertain tax positions and 0 known unrecognized tax benefits. With limited exception, the Company’s federal and state income tax returns for taxable years through 2017 have been closed for purposes of examination by the federal and state taxing authorities.
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Investments in Qualified Affordable Housing Projects
As of December 31, 2021 and 2020, the Company was invested in 5 and 4 partnerships, respectively, that provide affordable housing. The balance of the investments, which is included within other assets in the Consolidated Balance Sheet, was $288,000 and $216,000 as of December 31, 2021 and 2020, respectively. Investments purchased prior to January 1, 2015, are accounted for utilizing the effective yield method. As of December 31, 2021, the Company has $141,000 of tax credits remaining that will be recognized over one year for partnerships entered into prior to January 1, 2021. During 2021, the Company entered into an additional partnership that is expected to generate tax credits of $2,951,000 that will be utilized over the next twelve years. Tax credits of $141,000 were recognized as a reduction of tax expense during 2021, 2020 and 2019. Included within other expenses on the Consolidated Statement of Income was $108,000 of amortization of the investments in qualified affordable housing projects for 2021, 2020 and 2019, respectively.
13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive income (loss), net of tax, as of December 31, were as follows (in thousands):
2021 | 2020 | |||||||
Net unrealized gain on securities available for sale | $ | 385 | $ | 7,668 | ||||
Tax effect | (81 | ) | (1,610 | ) | ||||
Net -of-tax amount | 304 | 6,058 | ||||||
Unrealized gain (loss) on interest rate swap | 1,910 | (11 | ) | |||||
Tax effect | (401 | ) | 2 | |||||
Net -of-tax amount | 1,509 | (9 | ) | |||||
Unrecognized pension costs | (2,491 | ) | (4,383 | ) | ||||
Tax effect | 523 | 921 | ||||||
Net -of-tax amount | (1,968 | ) | (3,462 | ) | ||||
Total accumulated other comprehensive (loss) income | $ | (155 | ) | $ | 2,587 |
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The following tables present the changes in accumulated other comprehensive income (loss) by component net of tax for the years ended December 31, 2021, 2020 and 2019 (in thousands):
Unrealized gain (loss) on available for sale securities (a) | Unrealized gain (loss) on interest rate swap (a) | Defined Benefit Pension Items (a) | Total | |||||||||||||
Balance as of December 31, 2018 | $ | (973 | ) | $ | 0 | $ | (2,948 | ) | $ | (3,921 | ) | |||||
Other comprehensive income (loss) before reclassifications (net of tax) | 3,283 | 0 | (186 | ) | 3,097 | |||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax) | (20 | ) | 0 | 215 | 195 | |||||||||||
Net current period other comprehensive income (loss) | 3,263 | 0 | 29 | 3,292 | ||||||||||||
Balance as of December 31, 2019 | $ | 2,290 | $ | 0 | $ | (2,919 | ) | $ | (629 | ) | ||||||
Balance as of December 31, 2019 | $ | 2,290 | $ | 0 | $ | (2,919 | ) | $ | (629 | ) | ||||||
Other comprehensive income (loss) before reclassifications (net of tax) | 4,008 | 4 | (727 | ) | 3,285 | |||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax) | (240 | ) | (13 | ) | 184 | (69 | ) | |||||||||
Net current period other comprehensive income (loss) | 3,768 | (9 | ) | (543 | ) | 3,216 | ||||||||||
Balance as of December 31, 2020 | $ | 6,058 | $ | (9 | ) | $ | (3,462 | ) | $ | 2,587 | ||||||
Balance as of December 31, 2020 | $ | 6,058 | $ | (9 | ) | $ | (3,462 | ) | $ | 2,587 | ||||||
Other comprehensive income (loss) before reclassifications (net of tax) | (5,586 | ) | 1,403 | 1,229 | (2,954 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax) | (168 | ) | 115 | 265 | 212 | |||||||||||
Net current period other comprehensive income (loss) | (5,754 | ) | 1,518 | 1,494 | (2,742 | ) | ||||||||||
Balance as of December 31, 2021 | $ | 304 | $ | 1,509 | $ | (1,968 | ) | $ | (155 | ) |
(a) Amounts in parentheses indicate debits
The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the years ended December 31, 2021, 2020 and 2019 (in thousands):
Details about accumulated other comprehensive income (loss) | Amount reclassified from accumulated comprehensive income (loss) (a) | Affected line item in the Consolidated Statement of Income | |||||||||||
December 31, | |||||||||||||
2021 | 2020 | 2019 | |||||||||||
Unrealized gains and losses on available for sale securities | |||||||||||||
$ | 212 | $ | 305 | $ | 24 | Available for sale securities gains, net | |||||||
(44 | ) | (65 | ) | (4 | ) | Provision for income taxes | |||||||
$ | 168 | $ | 240 | $ | 20 | Net of tax | |||||||
Unrealized gain (loss) on interest rate swap | $ | (147 | ) | $ | 18 | $ | 0 | Interest expense | |||||
32 | (5 | ) | 0 | Provision for income taxes | |||||||||
$ | (115 | ) | $ | 13 | $ | 0 | Net of tax | ||||||
Defined benefit pension items | |||||||||||||
$ | (336 | ) | $ | (233 | ) | $ | (272 | ) | Other expenses | ||||
71 | 49 | 57 | Provision for income taxes | ||||||||||
$ | (265 | ) | $ | (184 | ) | $ | (215 | ) | Net of tax | ||||
Total reclassifications | $ | (212 | ) | $ | 69 | $ | (195 | ) |
(a) Amounts in parentheses indicate debits
14. RELATED PARTY TRANSACTIONS
Certain executive officers and directors of the Company, or companies in which they have 10 percent or more beneficial ownership, were indebted to the Bank. A summary of loan activity for the years ended December 31, 2021 and 2020 with officers, directors, stockholders and associates of such persons is listed below (in thousands):
Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Balance, beginning of year | $ | 12,970 | $ | 13,457 | ||||
New loans | 5,341 | 5,098 | ||||||
Repayments | (6,631 | ) | (5,585 | ) | ||||
Balance, end of year | $ | 11,680 | $ | 12,970 |
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15. REGULATORY MATTERS
Dividend Restrictions:
The approval of the Federal Reserve Board (FRB) is required for the Bank to pay dividends to the Company if the total of all dividends declared in any calendar year exceeds the Bank’s net income (as defined) for that year combined with its retained net income for the preceding two calendar years. Under this formula, the Bank can declare dividends in 2022 without approval of the FRB or Pennsylvania Department of Banking of approximately $30,429,000, plus the Bank’s 2022 year-to-date net income at the time of the dividend declaration.
Loans:
The Bank is subject to regulatory restrictions which limit its ability to loan funds to the Company. At December 31, 2021, the Bank’s regulatory lending limit amounted to approximately $29,855,000.
Regulatory Capital Requirements:
Federal regulations require the Bank to maintain minimum amounts of capital. Specifically, the Bank is required to maintain certain minimum dollar amounts and ratios of Total, Tier I and Common Equity Tier I capital to risk-weighted assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) established 5 capital categories ranging from “well capitalized” to “critically under-capitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized”, it would become subject to a series of increasingly restrictive regulatory actions.
As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. Following the passage of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in response to the COVID-19 pandemic, the federal banking regulators revised the CBLR framework as follows: (i) beginning in the second quarter of 2020, a qualifying community bank need only have a leverage ratio of at least 8%, subject to the other qualifying requirements, and (ii) if a qualifying community bank’s leverage ratio falls below 8%, then it will have two calendar quarters to maintain a leverage ratio of 7% or greater. These revisions under the CARES Act are effective April 23, 2020 and will terminate upon the earlier of the termination of the national emergency related to COVID-19 or December 31, 2020. Following such termination there is a grace period for returning to the 9% CBLR threshold. The CBLR will be set at 8% for the remainder of 2020, 8.5% for 2021, and 9% thereafter. The grace period is also adjusted to account for the graduating increase. As a result, in 2020 and 2021, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 7% and 7.5%, respectively. Thereafter, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period, then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply. At December 31, 2021 and 2020, the Bank was considered “well-capitalized” under the CBLR framework, with a leverage ratio of 8.94% and 8.75%, respectively.
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16. COMMITMENTS, CONTINGENT LIABILITIES, RISKS AND UNCERTAINTIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet.
Credit Extension Commitments
The Company’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 Company 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, 2021 and 2020, are as follows (in thousands):
2021 | 2020 | |||||||
Commitments to extend credit | $ | 275,998 | $ | 274,327 | ||||
Standby letters of credit | 17,083 | 21,978 | ||||||
$ | 293,081 | $ | 296,305 |
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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company on extension of credit is based on management’s credit assessment of the counter party.
Standby letters of credit are conditional commitments issued by the Company to guarantee a financial agreement between a customer and a third party. Performance letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized during the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
The Company also offers limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing for business, personal or household use. The non-contractual amount of financial instruments with off-balance sheet risk at December 31, 2021 was $12,230,000. The Company reserves the right to discontinue this service without prior notice.
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Legal and Regulatory Proceedings
In the ordinary course of business, the Company is subject to legal proceedings, including claims, litigation, investigations and administrative proceedings, all of which are considered incidental to the normal conduct of business. Litigation may relate to lending, deposit and other customer relationships, vendor and contractual issues, employee matters, intellectual property matters, personal injuries and torts, regulatory and legal compliance, and other matters. The Company believes it has substantial defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal proceedings, intends to defend itself vigorously.
The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in its consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments. Where a loss is not probable or the amount of a probable loss is not reasonably estimable, the Company does not accrue legal reserves. Additionally, for those matters where a loss is reasonably possible and the amount of loss is reasonably estimable, the Company estimates the amount of losses that it could incur beyond the accrued legal reserves. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.”
While the outcome of legal proceedings and the timing of the ultimate resolution are inherently difficult to predict, based on information currently available, advice of counsel and available insurance coverage, the Company believes that it has established adequate legal reserves. Further, based upon available information, the Company is of the opinion that these legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to the Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.
Paycheck Protection Program (PPP)
Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company may be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against and is not resolved in a manner favorable to the Company, it may result in significant financial liability or adversely affect reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.
The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company , the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
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17. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed interest payments. As of December 31, 2021 and 2020, the Company had 6 interest rate swaps with a notional of $50.5 million associated with the Company’s cash outflows associated with various floating-rate amounts.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did 0t recognize any hedge ineffectiveness in earnings during the periods ended December 31, 2021 and 2020. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that $0 will be reclassified as an increase in interest expense.
Customer Swaps
The Company also enters into derivative contracts, which consist of interest rate swaps, to facilitate the needs of customers desiring to manage interest rate risk. These swaps are not designated as accounting hedges under ASC 815, Derivatives and Hedging. In order to economically hedge the interest rate risk associated with offering this product, the Company simultaneously enters into derivative contracts with third parties to offset the customer contracts, such that the Company minimizes its net risk exposure resulting from such transactions. The derivative contracts are structured such that the notional amounts decrease over time to generally match the expected amortization of the underlying loans. These derivatives are not speculative and arise from a service provided to customers. The Company utilizes a loan hedging program to accommodate clients preferring a fixed rate loan. The loan documents include an addendum with a zero premium collar. The zero premium collar is a cap and floor at the same interest rate, resulting in a fixed rate to the borrower. To hedge this embedded option, the Company enters into a dealer facing trade exactly mirroring the terms of the loan addendum. At December 31, 2021, the Company had interest rate swaps related to this program with an aggregate notional amount of $87.3 million.
Counterparty Credit Risk
As a result of its derivative contracts, the Company is exposed to credit risk. Specifically, approved counterparties and exposure limits are defined. On at least an annual basis, the customer derivative contracts and related counterparties are evaluated for credit risk with an adjustment made to the contracts fair value. In accordance with the interest rate agreements with derivative dealers, the Company may be required to post margin to these counterparties. At December 31, 2021, the Company has required collateral with certain of its derivative counterparties in the amount of $5.2 million and was not holding collateral of any derivative counterparties.
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The following table reflects the estimated fair value positions of derivative contracts as of December 31, 2021:
Derivatives designated as hedging instruments under ASC 815 (in thousands):
Fair Value December 31, | |||||||||||||||
Third party interest rate swaps | Balance Sheet Location | Notional Amount | Interest rate Paid | Interest rate Received | 2021 | 2020 | |||||||||
Maturing in 2025 | other assets/(other liabilities) | $ | 15,000 | Fixed - 0.57% | 3-Month Libor | $ | 291 | $ | (143 | ) | |||||
Maturing in 2027 | other assets/(other liabilities) | 10,000 | Fixed - 0.65% | 3-Month Libor | 361 | (50 | ) | ||||||||
Maturing in 2027 | other assets/(other liabilities) | 7,500 | Fixed - 3.57% | 3-Month Libor + 280 | 239 | (87 | ) | ||||||||
Maturing in 2027 | other assets/(other liabilities) | 6,000 | Fixed - 0.61% | 3-Month Libor | 244 | 24 | |||||||||
Maturing in 2029 | other assets/(other liabilities) | 6,000 | Fixed - 0.72% | 3-Month Libor | 329 | 74 | |||||||||
Maturing in 2032 | other assets/(other liabilities) | 6,000 | Fixed - 0.82% | 3-Month Libor | 446 | 171 | |||||||||
$ | 50,500 | $ | 1,910 | $ | (11 | ) |
Derivatives not designated as hedging instruments under ASC 815 (in thousands):
December 31, 2021 | December 31, 2020 | ||||||||||||||||
Interest Rate Products | Balance Sheet Location | Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||
Zero Premium Collar | other assets/(other liabilities) | $ | 67,375 | $ | (1,817 | ) | $ | 64,013 | $ | 1,111 | |||||||
Zero Premium Collar | other assets/(other liabilities) | $ | 19,938 | $ | 284 | $ | 0 | $ | 0 | ||||||||
Dealer Offset to Zero Premium Collar | other assets/(other liabilities) | $ | 67,375 | $ | 1,817 | $ | 64,013 | $ | (1,111 | ) | |||||||
Dealer Offset to Zero Premium Collar | other assets/(other liabilities) | $ | 19,938 | $ | (284 | ) | $ | 0 | $ | 0 |
The following table presents the effect of the Company’s cash flow hedge accounting on Accumulated Other Comprehensive Income for the periods ended December 31, 2021 and 2020 (in thousands):
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income | |||||||||||||||||
Amount of (Loss) Gain Recognized in OCI on Derivatives | Location of Gain Reclassified from | Amount of (loss) gain reclassified from Accumulated OCI into income | |||||||||||||||
Year Ended December 31, | Accumulated OCI into | Year Ended December 31, | |||||||||||||||
Derivatives in Hedging relationships | 2021 | 2020 | Income | 2021 | 2020 | ||||||||||||
Interest rate Products | $ | 1,921 | $ | (11 | ) | Interest Expense | $ | (147 | ) | $ | 18 |
18. LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
Lessee Accounting
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches with terms extending through 2030. All of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s Consolidated Balance Sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as right-of-use (“ROU”) assets and corresponding lease liabilities.
The following table represents the Consolidated Balance Sheet classification of the Company’s ROU assets and lease liabilities (in thousands). The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), on the Consolidated Balance Sheet.
Balance at December 31, | |||||||||
Lease Type | 2021 | 2020 | Affected line item on the Consolidated Balance Sheet | ||||||
Right of Use Assets | |||||||||
Operating | $ | 3,264 | $ | 2,286 | Other Assets | ||||
Lease Liabilities: | |||||||||
Operating | $ | 3,266 | $ | 2,295 | Other Liabilities |
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The following table displays the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases outstanding as of December 31, 2021:
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Operating | ||||
Weighted average term (years) | 6.16 | |||
Weighted average discount rate | 1.84 | % |
The following table represents lease costs and other lease information for the years ended December 31, 2021, and 2020, respectively (in thousands). As the Company elected not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.
December 31, | ||||||||||||
Lease Cost | 2021 | 2020 | 2019 | |||||||||
Operating lease cost | $ | 676 | $ | 571 | $ | 340 | ||||||
Variable lease cost | 63 | 50 | 88 | |||||||||
Total lease cost | $ | 739 | $ | 621 | $ | 428 |
Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2021 along with a reconciliation to the discounted amount recorded on the December 31, 2021 Consolidated Balance Sheet (in thousands):
Undiscounted cash flows due within | Operating | |||
2022 | 672 | |||
2023 | 604 | |||
2024 | 513 | |||
2025 | 447 | |||
2026 | 377 | |||
2027 and thereafter | 851 | |||
Total undiscounted cash flows | 3,464 | |||
Impact of present value discount | (198 | ) | ||
Amount reported on balance sheet | $ | 3,266 |
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows:
Level I: | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
Level II: | Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. |
Level III: | Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. |
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
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In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.
Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The fair values of equity securities and securities available for sale are determined by quoted prices in active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities and classified as Level II. The fair values consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
The following tables present the assets reported on the consolidated balance sheet at their fair value on a recurring basis as of December 31, 2021 and 2020 (in thousands) by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
2021 | Level I | Level II | Level III | Total | ||||||||||||
Fair value measurements on a recurring basis: | ||||||||||||||||
Assets: | ||||||||||||||||
Equity securities | $ | 2,270 | $ | 0 | $ | 0 | $ | 2,270 | ||||||||
Available for sale securities: | ||||||||||||||||
U.S. Agency securities | 0 | 73,945 | 0 | 73,945 | ||||||||||||
U.S. Treasuries securities | 115,347 | 0 | 0 | 115,347 | ||||||||||||
Obligations of state and political subdivisions | �� | 0 | 112,021 | 0 | 112,021 | |||||||||||
Corporate obligations | 0 | 10,333 | 0 | 10,333 | ||||||||||||
Mortgage-backed securities in government sponsored entities | 0 | 100,756 | 0 | 100,756 | ||||||||||||
Other Assets: | ||||||||||||||||
Derivative instruments | 0 | 4,011 | 0 | 4,011 | ||||||||||||
Liabilities: | ||||||||||||||||
Derivative instruments | 0 | (2,101 | ) | 0 | (2,101 | ) |
2020 | Level I | Level II | Level III | Total | ||||||||||||
Fair value measurements on a recurring basis: | ||||||||||||||||
Assets: | ||||||||||||||||
Equity securities | $ | 1,931 | $ | 0 | $ | 0 | $ | 1,931 | ||||||||
Available for sale securities: | ||||||||||||||||
U.S. Agency securities | 0 | 81,416 | 0 | 81,416 | ||||||||||||
U.S. Treasuries securities | 28,043 | 0 | 0 | 28,043 | ||||||||||||
Obligations of state and political subdivisions | 0 | 102,972 | 0 | 102,972 | ||||||||||||
Corporate obligations | 0 | 6,509 | 0 | 6,509 | ||||||||||||
Mortgage-backed securities in government sponsored entities | 0 | 76,249 | 0 | 76,249 | ||||||||||||
Other Assets: | ||||||||||||||||
Derivative instruments | 0 | 1,111 | 0 | 1,111 | ||||||||||||
Liabilities: | ||||||||||||||||
Derivative instruments | 0 | (1,122 | ) | 0 | (1,122 | ) |
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Financial Instruments, Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during 2021 and 2020 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense.
Assets measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020 (in thousands) are included in the table below:
2021 | Level I | Level II | Level III | Total | ||||||||||||
Impaired Loans | $ | 0 | $ | 0 | $ | 459 | $ | 459 | ||||||||
Other real estate owned | 0 | 0 | 552 | 552 | ||||||||||||
2020 | Level I | Level II | Level III | Total | ||||||||||||
Impaired Loans | $ | 0 | $ | 0 | $ | 3,243 | $ | 3,243 | ||||||||
Other real estate owned | 0 | 0 | 1,700 | 1,700 |
• | Impaired Loans - The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not currently being carried at its fair value. The fair values above excluded estimated selling costs of $47,000 and $356,000 at December 31, 2021 and 2020, respectively. |
• | Other Real Estate Owned – OREO is carried at the lower of cost or fair value, less estimated costs to sell, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as a Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO. |
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The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques (dollars in thousands).
2021 | Fair Value | Valuation Technique(s) | Unobservable input | Range | Weighted average |
Impaired Loans | 459 | Appraised Collateral Values | Discount for time since appraisal | 0-100% | 23.38% |
Selling costs | 8%-10% | 8.27% | |||
Holding period | 6 - 12 months | 11.52 months | |||
Other real estate owned | 552 | Appraised Collateral Values | Discount for time since appraisal | 20-44% | 41.76% |
2020 | Fair Value | Valuation Technique(s) | Unobservable input | Range | Weighted average |
Impaired Loans | 3,243 | Appraised Collateral Values | Discount for time since appraisal | 0-100% | 20.61% |
Selling costs | 5%-10% | 9.51% | |||
Holding period | 6 - 12 months | 11.65 months | |||
Other real estate owned | 1,700 | Appraised Collateral Values | Discount for time since appraisal | 20-31% | 28.67% |
Financial Instruments Not Required to be Measured or Reported at Fair Value
The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows (in thousands):
December 31, 2021 | Carrying Amount | Fair Value | Level I | Level II | Level III | |||||||||||||||
Financial assets: | ||||||||||||||||||||
Interest bearing time deposits with other banks | $ | 11,026 | $ | 11,026 | $ | 0 | $ | 0 | $ | 11,026 | ||||||||||
Loans held for sale | 4,554 | 4,554 | 0 | 0 | 4,554 | |||||||||||||||
Net loans | 1,424,229 | 1,426,698 | 0 | 0 | 1,426,698 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 1,836,151 | 1,836,179 | 1,506,535 | 0 | 329,644 | |||||||||||||||
Borrowed funds | 73,977 | 72,346 | 0 | 0 | 72,346 |
December 31, 2020 | Carrying Amount | Fair Value | Level I | Level II | Level III | |||||||||||||||
Financial assets: | ||||||||||||||||||||
Interest bearing time deposits with other banks | $ | 13,758 | $ | 13,758 | $ | 0 | $ | 0 | $ | 13,758 | ||||||||||
Loans held for sale | 14,640 | 14,640 | 0 | 0 | 14,640 | |||||||||||||||
Net loans | 1,389,466 | 1,404,166 | 0 | 0 | 1,404,166 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 1,588,858 | 1,593,738 | 1,506,535 | 0 | 87,206 | |||||||||||||||
Borrowed funds | 88,838 | 88,263 | 0 | 0 | 88,263 |
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The carrying amounts for cash and cash equivalents, bank owned life insurance, regulatory stock, accrued interest receivable and payable approximate fair value and are considered Level I measurements.
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20. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The following is condensed financial information for Citizens Financial Services, Inc.:
CITIZENS FINANCIAL SERVICES, INC. | ||||||||
CONDENSED BALANCE SHEET | ||||||||
December 31, | ||||||||
(in thousands) | 2021 | 2020 | ||||||
Assets: | ||||||||
Cash | $ | 15,046 | $ | 5,301 | ||||
Investments | 2,150 | 1,866 | ||||||
Investment in subsidiary: | 212,057 | 194,312 | ||||||
Other assets | 1,297 | 846 | ||||||
Total assets | $ | 230,550 | $ | 202,325 | ||||
Liabilities: | ||||||||
Other liabilities | $ | 679 | $ | 566 | ||||
Borrowed funds | 17,379 | 7,500 | ||||||
Total liabilities | 18,058 | 8,066 | ||||||
Stockholders’ equity | 212,492 | 194,259 | ||||||
Total liabilities and stockholders’ equity | $ | 230,550 | $ | 202,325 |
CITIZENS FINANCIAL SERVICES, INC. | ||||||||||||
CONDENSED STATEMENT OF INCOME | ||||||||||||
Year Ended December 31, | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Dividends from: | ||||||||||||
Bank subsidiary | $ | 8,994 | $ | 16,171 | $ | 9,565 | ||||||
Equity securities | 104 | 45 | 17 | |||||||||
Total income | 9,098 | 16,216 | 9,582 | |||||||||
Realized securities gains (losses) | 284 | (23 | ) | 101 | ||||||||
Expenses | 1,008 | 775 | 1,103 | |||||||||
Income before equity in undistributed earnings of subsidiary | 8,374 | 15,418 | 8,580 | |||||||||
Equity in undistributed earnings - First Citizens Community Bank | 20,744 | 9,685 | 10,910 | |||||||||
Net income | $ | 29,118 | $ | 25,103 | $ | 19,490 | ||||||
Comprehensive income | $ | 26,376 | $ | 28,319 | $ | 22,782 |
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CITIZENS FINANCIAL SERVICES, INC. | ||||||||||||
STATEMENT OF CASH FLOWS | ||||||||||||
Year Ended December 31, | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 29,118 | $ | 25,103 | $ | 19,490 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Equity in undistributed earnings of subsidiaries | (20,744 | ) | (9,685 | ) | (10,910 | ) | ||||||
Investment securities (gains) losses, net | (284 | ) | 23 | (101 | ) | |||||||
Other, net | 543 | 14 | 717 | |||||||||
Net cash provided by operating activities | 8,633 | 15,455 | 9,196 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of equity securities | 0 | (1,339 | ) | 0 | ||||||||
Proceeds from the sale of equity securities | 0 | 168 | 0 | |||||||||
Acquisition of Midcoast | 0 | (7,614 | ) | 0 | ||||||||
Net cash used in investing activities | 0 | (8,785 | ) | 0 | ||||||||
Cash flows from financing activities: | ||||||||||||
Cash dividends paid | (7,383 | ) | (6,539 | ) | (6,315 | ) | ||||||
Issuance of subordinated debt | 9,869 | 0 | 0 | |||||||||
Purchase of treasury stock | (1,374 | ) | (2,122 | ) | (1,291 | ) | ||||||
Sale of treasury stock to employee stock purchase plan | 0 | 126 | 0 | |||||||||
Net cash provided by (used in) financing activities | 1,112 | (8,535 | ) | (7,606 | ) | |||||||
Net decrease in cash | 9,745 | (1,865 | ) | 1,590 | ||||||||
Cash at beginning of year | 5,301 | 7,166 | 5,576 | |||||||||
Cash at end of year | $ | 15,046 | $ | 5,301 | $ | 7,166 |
21. CONSOLIDATED CONDENSED QUARTERLY DATA (UNAUDITED)
The following table presents summarized quarterly financial data for 2021 and 2020:
(in thousands, except share data) | Three Months Ended, | |||||||||||||||
2021 | Mar 31 | June 30 | Sep 30 | Dec 31 | ||||||||||||
Interest income | $ | 18,295 | $ | 18,075 | $ | 18,342 | $ | 18,505 | ||||||||
Interest expense | 1,854 | 1,863 | 1,752 | 1,636 | ||||||||||||
Net interest income | 16,441 | 16,212 | 16,590 | 16,869 | ||||||||||||
Provision for loan losses | 650 | 500 | 400 | 0 | ||||||||||||
Non-interest income | 3,998 | 2,677 | 2,618 | 2,461 | ||||||||||||
Investment securities gains, net | 237 | 29 | 234 | 51 | ||||||||||||
Non-interest expenses | 9,947 | 10,320 | 10,400 | 10,883 | ||||||||||||
Income before provision for income taxes | 10,079 | 8,098 | 8,642 | 8,498 | ||||||||||||
Provision for income taxes | 1,616 | 1,451 | 1,578 | 1,554 | ||||||||||||
Net income | $ | 8,463 | $ | 6,647 | $ | 7,064 | $ | 6,944 | ||||||||
Earnings Per Share Basic | $ | 2.14 | $ | 1.69 | $ | 1.79 | $ | 1.76 | ||||||||
Earnings Per Share Diluted | $ | 2.14 | $ | 1.69 | $ | 1.79 | $ | 1.76 |
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Three Months Ended, | ||||||||||||||||
2020 | Mar 31 | June 30 | Sep 30 | Dec 31 | ||||||||||||
Interest income | $ | 15,339 | $ | 18,160 | $ | 18,386 | $ | 18,411 | ||||||||
Interest expense | 2,449 | 1,874 | 1,916 | 1,866 | ||||||||||||
Net interest income | 12,890 | 16,286 | 16,470 | 16,545 | ||||||||||||
Provision for loan losses | 400 | 550 | 550 | 900 | ||||||||||||
Non-interest income | 2,105 | 1,941 | 3,386 | 3,726 | ||||||||||||
Investment securities gains, net | (254 | ) | 128 | 152 | 238 | |||||||||||
Non-interest expenses | 8,921 | 11,413 | 9,692 | 10,821 | ||||||||||||
Income before provision for income taxes | 5,420 | 6,392 | 9,766 | 8,788 | ||||||||||||
Provision for income taxes | 889 | 1,054 | 1,759 | 1,561 | ||||||||||||
Net income | $ | 4,531 | $ | 5,338 | $ | 8,007 | $ | 7,227 | ||||||||
Earnings Per Share Basic | $ | 1.26 | $ | 1.37 | $ | 2.02 | $ | 1.83 | ||||||||
Earnings Per Share Diluted | $ | 1.26 | $ | 1.37 | $ | 2.02 | $ | 1.83 |
22. ACQUISITION OF MIDCOAST COMMUNITY BANCORP, INC.
In the third quarter of 2019, the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of MidCoast Community Bancorp, Inc. (“MidCoast”) for $6.50 per share in cash and stock. MidCoast was a Pennsylvania Corporation that conducted its business primarily through, its wholly owned subsidiary MidCoast Community Bank, which operated from a main office in Wilmington, Delaware, and 2 branches in Wilmington, Delaware, and 1 branch in Dover, Delaware.
The transaction closed on April 17, 2020, with MidCoast Community Bank having been merged into First Citizens Community Bank, with First Citizens Community Bank as the surviving entity. The acquisition established the Company’s presence in the Wilmington and Dover, Delaware markets.
Under the terms of the merger agreement, the Company acquired all of the outstanding shares of MidCoast for a total purchase price of approximately $26,843,000. As a result of the acquisition, the Company issued 373,356 common shares and $7.6 million in cash to the former shareholders of MidCoast. The shares were issued with a value of $51.50 per share, which was based on the close price of the Company’s stock on April 17, 2020.
The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of MidCoast. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Company also recorded an identifiable intangible asset representing the core deposit base of MidCoast based on management’s evaluation of the cost of such deposits relative to alternative funding sources. Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products.
The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. MidCoast’s loans were deemed to have credit impairment at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $4,869,000 of purchased credit-impaired loans. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.
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MidCoast’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and pre-payment speeds.
The following table summarizes the purchase of MidCoast as of April 17, 2020:
(In Thousands, Except Per Share Data) | ||||||||
Purchase Price Consideration in Common Stock | ||||||||
Citizens Financial Services, Inc. shares issued | 373,356 | |||||||
Value assigned to Citizens Financial Services, Inc. common share | $ | 51.50 | ||||||
Purchase price assigned to MidCoast common shares exchanged for Citizens Financial Services, Inc. | $ | 19,228 | ||||||
Purchase Price Consideration - Cash for Common Stock | ||||||||
Purchase price assigned to MidCoast common shares exchanged for cash | 7,615 | |||||||
Total Purchase Price | 26,843 | |||||||
Net Assets Acquired: | ||||||||
MidCoast Community Bancorp, Inc shareholders’ equity | $ | 24,330 | ||||||
Adjustments to reflect assets acquired at fair value: | ||||||||
Investments | 0 | |||||||
Loans | ||||||||
Interest rate | 1,424 | |||||||
General credit | (4,375 | ) | ||||||
Specific credit - non-amortizing | (2,135 | ) | ||||||
Specific credit - amortizing | (966 | ) | ||||||
Core deposit intangible | 157 | |||||||
Owned premises | (426 | ) | ||||||
Other assets | 65 | |||||||
Deferred tax assets | 2,217 | |||||||
Adjustments to reflect liabilities acquired at fair value: | ||||||||
Time deposits | (1,018 | ) | ||||||
Borrowings | (497 | ) | ||||||
Other liabilities | (13 | ) | ||||||
18,763 | ||||||||
Goodwill resulting from merger | $ | 8,080 |
The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed:
(In Thousands) | ||||||||
Total purchase price | $ | 26,843 | ||||||
Net assets acquired: | ||||||||
Cash and cash equivalents | $ | 8,637 | ||||||
Loans | 223,235 | |||||||
Premises and equipment, net | 1,787 | |||||||
Accrued interest receivable | 586 | |||||||
Bank-owned life insurance | 3,766 | |||||||
Intangibles | 157 | |||||||
Deferred tax asset | 3,402 | |||||||
Other assets | 2,878 | |||||||
Time deposits | (123,841 | ) | ||||||
Deposits other than time deposits | (84,985 | ) | ||||||
Accrued interest payable | (164 | ) | ||||||
Borrowings | (15,497 | ) | ||||||
Other liabilities | (1,198 | ) | ||||||
18,763 | ||||||||
Goodwill resulting from the MidCoast merger | $ | 8,080 |
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The Company recorded goodwill and other intangibles associated with the acquisition of MidCoast totaling $8,237,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment from April 17, 2020 to December 31, 2021. None of the goodwill acquired is expected to be deductible for tax purposes.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. For the period from April 17, 2020 to December 31, 2021, no such adjustments were recorded. The identifiable intangible asset consists of core deposit intangibles which are being amortized on an accelerated basis over the useful life of such assets. The gross carrying amount of the core deposit intangible at December 31, 2021 and 2020 was $157,000, and accumulated amortization was $46,000 and 19,000 as of December 31, 2021 and 2020, respectively.
As of December 31, 2021, the current year and estimated future amortization expense for the core deposit intangibles was (in thousands):
Core deposit intangibles | ||||
Amortization for 2021 | $ | 27 | ||
Estimate for year ending December 31, | ||||
2022 | 24 | |||
2023 | 21 | |||
2024 | 18 | |||
2025 | 15 | |||
2026 | 12 | |||
Thereafter | 21 | |||
Total | $ | 111 |
Amounts recognized separately from the acquisition include primarily legal fees, investment banking fees, system conversion costs, severance costs and contract termination costs. These costs were included in merger and acquisition expenses within non-interest expenses on the Consolidated Statement of Income and amounted to approximately $2,179,000 and $466,000 for 2020 and 2019, respectively.
Results of operations for MidCoast prior to the acquisition date are not included in the Consolidated Statement of Income for 2020.
The following table presents financial information regarding the former MidCoast operations included in our Consolidated Statement of Income from the date of acquisition through December 31, 2020 under the column “Actual from Acquisition Date through December 31, 2020”. In addition, the following table presents unaudited pro forma information as if the acquisition of MidCoast had occurred on January 1, 2019 under the “Pro Forma” columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited proforma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments are included in the numbers below.
Actual from Acquisition | Pro Formas | |||||||||||
Date Through | Twelve Months Ended December 31, | |||||||||||
(In Thousands, Except Per Share Data) | December 31, 2020 | 2020 | 2019 | |||||||||
Net interest income | $ | 9,314 | $ | 63,860 | $ | 60,097 | ||||||
Non-interest income | 1,024 | 11,743 | 8,685 | |||||||||
Net income | 4,909 | 23,274 | 22,251 | |||||||||
Pro forma earnings per share: | ||||||||||||
Basic | $ | 5.94 | $ | 5.66 | ||||||||
Diluted | $ | 5.94 | $ | 5.66 |
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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
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.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course by management or employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework. Because there were no material weaknesses discovered, management believes that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.
/s/ Randall E. Black
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
Date: March 10, 2022
/s/ Stephen J. Guillaume
By: Stephen J. Guillaume
Chief Financial Officer
(Principal Financial & Accounting Officer)
Date: March 10, 2022
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Citizens Financial Services, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Citizens Financial Services, Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements 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 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 PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the 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 regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Allowance for Loan Losses (ALL)
Description of the Matter
The Company’s loan portfolio totaled $1.4 billion as of December 31, 2021, and the associated ALL was $17.3 million. As discussed in Notes 1 and 5 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.
We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.
How We Addressed the Matter in Our Audit
We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment.
To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL.
Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s historical loan performance data and third-party macroeconomic data, and considered the existence of new or contrary information. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s loan portfolio, various internal risk metrics, and asset quality trends.
We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.
We have served as the Company’s auditor since 1994.
/s/S.R. Snodgrass, P.C.
Cranberry Township, Pennsylvania
March 10, 2022
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PART IV
ITEM 15. | Exhibits and Financial Statement Schedules. |
(a) | The following documents are filed as a part of this report: |
1. | The following financial statements are incorporated by reference in Item 8: |
Report of Independent Registered Public Accounting Firm (PCAOB ID 74)
Consolidated Balance Sheet as of December 31, 2021 and 2020
Consolidated Statement of Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statement of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
2. | All financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statement or in the notes thereto, which are incorporated by reference at subsection (a)(1) of this Item. |
3. | The following Exhibits are filed herewith: |
Consent of Snodgrass, P.C., Independent Registered Public Accountants |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
Section 1350 Certification of Chief Executive Officer |
Section 1350 Certification of Chief Financial Officer |
101 | The following materials from the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows, and (vi) related notes. |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.
CITIZENS FINANCIAL SERVICES, INC. | ||
Date: April 29, 2022 | By: | /s/ Randall E. Black |
Randall E. Black | ||
Chief Executive Officer and President | ||
(Principal Executive Officer) |
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