EXHIBIT 99.1
MONUMENT BANCORP, INC.
DOYLESTOWN, PENNSYLVANIA
AUDIT REPORT
DECEMBER 31, 2018
MONUMENT BANCORP, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Page | |
Number | |
Independent Auditor’s Report | 1 |
Financial Statements | |
Consolidated Balance Sheet | 2 |
Consolidated Statement of Income | 3 |
Consolidated Statement of Comprehensive Income | 4 |
Consolidated Statement of Changes in Stockholders’ Equity | 5 |
Consolidated Statement of Cash Flows | 6 |
Notes to the Consolidated Financial Statements | 7–35 |
INDEPENDENT AUDITOR’S REPORT
Board of Directors and Stockholders
Monument Bancorp, Inc.
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Monument Bancorp, Inc. and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Monument Bancorp, Inc. and subsidiaries as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ S.R. Snodgrass, P.C. | |
Cranberry Township, Pennsylvania | |
March 15, 2019 |
MONUMENT BANCORP, INC.
CONSOLIDATED BALANCE SHEET
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 2,376,317 | $ | 1,685,950 | ||||
Interest-bearing deposits with other banks | 387,975 | 198,465 | ||||||
Federal funds sold | - | 529,000 | ||||||
Cash and cash equivalents | 2,764,292 | 2,413,415 | ||||||
Investment securities available for sale, at fair value | 94,252,156 | 71,559,989 | ||||||
Investment securities held to maturity | 1,250,000 | 1,250,000 | ||||||
Loans receivable (net of allowance for loan losses of $2,770,000 and $2,590,000) | 253,663,824 | 238,928,875 | ||||||
Accrued interest receivable | 1,484,031 | 1,479,378 | ||||||
Premises and equipment | 2,425,516 | 2,521,053 | ||||||
Regulatory stock | 5,177,350 | 5,105,300 | ||||||
Other real estate owned | 1,064,475 | 2,145,445 | ||||||
Other assets | 1,030,441 | 499,450 | ||||||
TOTAL ASSETS | $ | 363,112,085 | $ | 325,902,905 | ||||
LIABILITIES | ||||||||
Deposits | $ | 234,796,811 | $ | 208,893,289 | ||||
Short-term borrowings | 55,017,650 | 13,500,000 | ||||||
Other borrowings | 34,259,500 | 66,992,159 | ||||||
Subordinated debt | 12,247,505 | 12,211,648 | ||||||
Accrued interest payable | 559,246 | 430,808 | ||||||
Other liabilities | 567,345 | 368,137 | ||||||
TOTAL LIABILITIES | 337,448,057 | 302,396,041 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Common stock, $1.00 par value; 10,000,000 shares authorized; 1,577,553 and 1,392,804 issued at December 31, 2018 and 2017 | $ | 1,577,553 | $ | 1,392,804 | ||||
Additional paid-in capital | 14,279,896 | 12,937,350 | ||||||
Retained earnings | 10,927,840 | 8,616,189 | ||||||
Treasury stock at cost, 12,954 shares | (227,990 | ) | (227,990 | ) | ||||
Accumulated other comprehensive (loss) income | (893,271 | ) | 788,511 | |||||
TOTAL STOCKHOLDERS' EQUITY | 25,664,028 | 23,506,864 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 363,112,085 | $ | 325,902,905 |
See accompanying notes to the consolidated financial statements.
2 |
MONUMENT BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, | �� | |||||||
2018 | 2017 | |||||||
INTEREST AND DIVIDEND INCOME | ||||||||
Loans, including fees | $ | 11,879,689 | $ | 10,474,176 | ||||
Investment securities | 2,590,454 | 1,799,424 | ||||||
Other interest and dividend income | 378,963 | 268,143 | ||||||
Total interest and dividend income | 14,849,106 | 12,541,743 | ||||||
INTEREST EXPENSE | ||||||||
Deposits | 3,211,822 | 2,069,395 | ||||||
Other borrowings | 2,092,126 | 1,686,476 | ||||||
Total interest expense | 5,303,948 | 3,755,871 | ||||||
NET INTEREST INCOME | 9,545,158 | 8,785,872 | ||||||
Provision for loan losses | 475,523 | 290,000 | ||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 9,069,635 | 8,495,872 | ||||||
NONINTEREST INCOME | ||||||||
Service fees on deposit accounts | 21,779 | 23,730 | ||||||
Investment securities gains, net | 729,821 | 11,162 | ||||||
Gain on sale of loans, net | 9,512 | 62,749 | ||||||
Other | 83,686 | 56,581 | ||||||
Total noninterest income | 844,798 | 154,222 | ||||||
NONINTEREST EXPENSE | ||||||||
Compensation and employee benefits | 3,747,286 | 3,691,521 | ||||||
Occupancy and equipment | 370,342 | 402,119 | ||||||
Advertising | 168,255 | 172,428 | ||||||
Professional fees | 521,239 | 266,154 | ||||||
Federal deposit insurance expense | 65,365 | 122,356 | ||||||
Data processing | 561,079 | 513,183 | ||||||
Pennsylvania shares tax expense | 188,637 | 190,981 | ||||||
Loss on sale of other real estate owned | 535,122 | 223,183 | ||||||
Other | 984,270 | 715,356 | ||||||
Total noninterest expense | 7,141,595 | 6,297,281 | ||||||
Income before income taxes | 2,772,838 | 2,352,813 | ||||||
Income taxes | 461,187 | 670,438 | ||||||
NET INCOME | 2,311,651 | 1,682,375 | ||||||
Dividend on preferred stock | - | 85,388 | ||||||
Income available to common stockholders | $ | 2,311,651 | $ | 1,596,987 | ||||
EARNINGS PER SHARE: | ||||||||
Basic | $ | 1.50 | $ | 1.19 | ||||
Diluted | 1.48 | 1.09 | ||||||
WEIGHTED-AVERAGE SHARES OUTSTANDING: | ||||||||
Basic | 1,538,874 | 1,345,289 | ||||||
Diluted | 1,562,139 | 1,468,764 |
See accompanying notes to the consolidated financial statements.
3 |
MONUMENT BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Net income | $ | 2,311,651 | $ | 1,682,375 | ||||
Net unrealized (loss) gain on investment securities available for sale | (1,399,018 | ) | 396,433 | |||||
Tax effect | 293,795 | (136,847 | ) | |||||
Reclassification adjustment for gains recognized in net income | (729,821 | ) | (11,162 | ) | ||||
Tax effect | 153,262 | 3,795 | ||||||
Other comprehensive (loss) income, net of tax | (1,681,782 | ) | 252,219 | |||||
Total comprehensive income | $ | 629,869 | $ | 1,934,594 |
See accompanying notes to the consolidated financial statements.
4 |
MONUMENT BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | Stockholders' | ||||||||||||||||||||||
Stock | Stock | Capital | Earnings | Stock | Income (Loss) | Equity | ||||||||||||||||||||||
Balance, December 31, 2016 | $ | 2,970,000 | $ | 1,342,265 | $ | 12,483,772 | $ | 7,148,956 | $ | - | $ | 406,538 | $ | 24,351,531 | ||||||||||||||
Net income | - | - | - | 1,682,375 | - | - | 1,682,375 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 252,219 | 252,219 | |||||||||||||||||||||
Reclassification of certain income tax effects from accumulated other comprehensive income (loss) | - | - | - | (129,754 | ) | - | 129,754 | - | ||||||||||||||||||||
Acquisiton of treasury stock (12,954 shares) | - | - | - | - | (227,990 | ) | - | (227,990 | ) | |||||||||||||||||||
Stock-based compensation | - | - | 56,600 | - | - | - | 56,600 | |||||||||||||||||||||
Stock options exercised (12,954 shares) | - | 12,954 | 64,563 | - | - | - | 77,517 | |||||||||||||||||||||
Vesting of restricted stock (585 shares) | - | 585 | (585 | ) | - | - | - | - | ||||||||||||||||||||
Exercise of warrants (37,000 shares) | - | 37,000 | 333,000 | - | - | - | 370,000 | |||||||||||||||||||||
Dividends paid on preferred stock | - | - | - | (85,388 | ) | - | - | (85,388 | ) | |||||||||||||||||||
Redemption of preferred stock | (2,970,000 | ) | - | - | - | - | - | (2,970,000 | ) | |||||||||||||||||||
Balance, December 31, 2017 | - | 1,392,804 | 12,937,350 | 8,616,189 | (227,990 | ) | 788,511 | 23,506,864 | ||||||||||||||||||||
Net income | - | - | - | 2,311,651 | - | - | 2,311,651 | |||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (1,681,782 | ) | (1,681,782 | ) | |||||||||||||||||||
Stock-based compensation | - | - | 45,234 | - | - | - | 45,234 | |||||||||||||||||||||
Stock options exercised (23,213 shares) | - | 23,213 | (150,710 | ) | - | - | - | (127,497 | ) | |||||||||||||||||||
Vesting of restricted stock (584 shares) | - | 584 | (584 | ) | - | - | - | - | ||||||||||||||||||||
Issuance of common stock (5 shares) | - | 5 | 83 | - | - | - | 88 | |||||||||||||||||||||
Exercise of warrants (160,947 shares) | - | 160,947 | 1,448,523 | - | - | - | 1,609,470 | |||||||||||||||||||||
Balance, December 31, 2018 | $ | - | $ | 1,577,553 | $ | 14,279,896 | $ | 10,927,840 | $ | (227,990 | ) | $ | (893,271 | ) | $ | 25,664,028 |
See accompanying notes to the consolidated financial statements.
5 |
MONUMENT BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 2,311,651 | $ | 1,682,375 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 475,523 | 290,000 | ||||||
Depreciation, amortization, and accretion, net | 246,493 | 679,123 | ||||||
Gains on sale of investment securities, net | (729,821 | ) | (11,162 | ) | ||||
Proceeds from sale of loans | 492,012 | 3,321,635 | ||||||
Net gain on sale of loans | (9,512 | ) | (62,749 | ) | ||||
Loans originated for sale | (482,500 | ) | (2,914,900 | ) | ||||
Stock-based compensation expense | 45,234 | 56,600 | ||||||
Deferred income taxes | (60,340 | ) | 8,196 | |||||
Loss on other real estate owned | 535,122 | 223,183 | ||||||
Increase in accrued interest receivable | (4,653 | ) | (191,135 | ) | ||||
Increase in accrued interest payable | 128,438 | 178,977 | ||||||
Other, net | 175,613 | (330,522 | ) | |||||
Net cash provided by operating activities | 3,123,260 | 2,929,621 | ||||||
INVESTING ACTIVITIES | ||||||||
Investment securities held to maturity: Purchases | - | (1,250,000 | ) | |||||
Investment securities available for sale: | ||||||||
Purchases | (58,058,005 | ) | (12,652,392 | ) | ||||
Proceeds from principal repayments and maturities | 6,067,061 | 5,046,899 | ||||||
Proceeds from sales | 27,807,892 | 1,817,466 | ||||||
Net increase in loans receivable | (15,175,542 | ) | (30,408,223 | ) | ||||
Purchase of premises and equipment | (58,163 | ) | (50,655 | ) | ||||
Proceeds from sale of real estate owned | 563,807 | 165,414 | ||||||
Capitalized improvements to other real estate owned | (17,959 | ) | - | |||||
Redemption of regulatory stock | 2,740,300 | 2,133,500 | ||||||
Purchase of regulatory stock | (2,812,350 | ) | (2,696,600 | ) | ||||
Net cash used for investing activities | (38,942,959 | ) | (37,894,591 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net increase in deposits | 25,903,522 | 16,928,723 | ||||||
Net increase in short-term borrowings | 41,517,650 | 8,500,000 | ||||||
Proceeds from other borrowed funds | 5,071,000 | 28,104,000 | ||||||
Repayments on other borrowed funds | 37,803,659 | (22,974,750 | ) | |||||
Proceeds from issuance of subordinated debt | - | 7,000,000 | ||||||
Proceeds from issuance of common stock | 88 | - | ||||||
Dividends paid on preferred stock | - | (85,388 | ) | |||||
Proceeds from the exercise share-based awards | 1,481,973 | 370,000 | ||||||
Proceeds from redemption of preferred stock | - | (2,970,000 | ) | |||||
Repurchase treasury stock | - | (227,990 | ) | |||||
Net cash provided by financing activities | 111,777,892 | 34,644,595 | ||||||
Change in cash and cash equivalents | 350,877 | (216,046 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 2,413,415 | 2,629,461 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 2,764,292 | $ | 2,413,415 | ||||
SUPPLEMENTAL CASH FLOW DISCLOSURE | ||||||||
Cash paid: | ||||||||
Interest | $ | 5,175,510 | $ | 3,576,894 | ||||
Income taxes | 582,500 | 788,200 | ||||||
Noncash items: | ||||||||
Loans transferred to other real estate owned | - | 920,138 |
See accompanying notes to the consolidated financial statements.
6 |
MONUMENT BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
A summary of significant accounting and reporting policies applied in the presentation of the accompanying consolidated financial statements follows:
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of Monument Bancorp, Inc., a Pennsylvania chartered corporation (the “Company”) and its wholly owned subsidiary, Monument Bank (the “Bank”), along with its wholly owned subsidiary, Monument PA Properties, LLC. Monument Bank was incorporated under the laws of the state of Pennsylvania on October 12, 2007, for the purpose of becoming a community-oriented bank with an emphasis on consumer and commercial banking products. Monument PA Properties, LLC is a Pennsylvania limited liability company established on July 27, 2016, to purchase properties at tax sales that represent collateral for delinquent loans of the Bank.
The Company’s principal sources of revenue emanate from interest earnings on its investment securities and loan portfolios. The Company is subject to regulation and supervision by the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking.
The accounting principles followed by the Company and the methods of applying these principles conform to U.S. generally accepted accounting principles and to general practice within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the Consolidated Balance Sheet date and reported amounts of revenues and expenses for the period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Monument Bancorp, Inc., a Pennsylvania chartered corporation (the “Company”) and its wholly owned subsidiary, Monument Bank (the “Bank”), along with its wholly owned subsidiary, Monument PA Properties, LLC. All intercompany accounts and transactions are eliminated in the consolidation.
Investment Securities, Including Mortgage-Backed Securities
Investment securities are classified when purchased as either “securities available for sale” or “securities held to maturity.”
Securities classified as “available for sale” are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, and are carried at fair value. Debt securities are classified as available for sale to serve principally as a source of liquidity and additional income. Unrealized gains or losses are included in other comprehensive income, net of the related deferred tax effect. Realized gains and losses on disposition of securities are recognized as noninterest income measured on specific identification of the simple difference between net proceeds and adjusted book value. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Securities classified as “held to maturity” are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or changes in general economic
7 |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Investment Securities, Including Mortgage-Backed Securities (Continued)
conditions. These securities are carried at cost adjusted for the amortization of premium and accretion of discount, computed by the interest method over the terms of the securities.
Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value, and whether or not the Company intends to sell the security or whether it’s more likely than not that the Company would be required to sell the security before its anticipated recovery in market value. A decline in value that is considered to be other than temporary is recorded as a loss within noninterest income in the Consolidated Statement of Income.
Common stock of the Federal Home Loan Bank (FHLB) of Pittsburgh, Atlantic Community Bancshares, Inc., and the Federal Reserve of Philadelphia represents ownership in institutions that are wholly owned by other financial institutions. These equity securities are accounted for at cost and classified as regulatory stock.
The Company is a member of the FHLB of Pittsburgh and, as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and, as such, is classified as restricted stock, carried at cost, and evaluated for impairment by management. The restricted 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) the significance of the decline in net assets of the issuer as compared with the capital stock amount and the length of time this situation has persisted; (b) commitments by the issuer 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 issuer; and (d) the liquidity position of the issuer. With consideration given to these factors, management concluded that the stock was not impaired at
December 31, 2018 or 2017.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance by a charge against income. Gains and losses on sales of loans held for sale are included in noninterest income. Servicing rights are not retained on loans sold.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are stated at their unpaid principal amounts, net of the allowance for loan losses. Interest on loans is recognized as income when earned on the accrual method. The accrual of interest is generally discontinued when management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well-secured. When a loan is placed on nonaccrual status, unpaid interest previously accrued is charged against interest income. Interest received on nonaccrual loans is applied to the outstanding principal balance of the loan.
Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. The Company is amortizing these amounts over the contractual life of the related loans.
8 |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Allowance for Loan Losses
The allowance for loan losses represents the amount that management estimates is adequate to provide for probable losses inherent in its loan portfolio, as of the Consolidated Balance Sheet date. 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 charged to operations. The provision for loan losses is based on management’s periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to change in the near term.
Impaired loans are commercial and commercial real estate loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. TheCompanyindividually 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 “nonaccrual loans,” although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired, provided the loan is not a commercial or commercial real estate classification.
Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of 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. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
Loans that experience insignificant payment delays, which are 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 circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.
A loan is considered to be a troubled debt restructured loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.
Premises and Equipment
Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from three to seven years for furniture, fixtures, and equipment. Buildings are amortized over their estimated useful lives, which is over 40 years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.
9 |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Other Real Estate Owned
Other real estate owned (OREO) acquired in settlement of foreclosed loans is carried at the lower of cost or fair value minus estimated cost to sell. When the carrying value exceeds the fair value of the loan at the time of foreclosure, the difference is recorded as a charge-off to the allowance. Further declines in fair value are recorded as OREO expense. Direct costs incurred on such properties are recorded as expenses of current operations.
Share-Based Compensation
The Company maintains a stock incentive plan for directors, key officers, and other employees. Under this plan, the Bank recognized compensation expense of $45,234 and $56,600 for the years ended December 31, 2018 and 2017. As of December 31, 2018, there was approximately $6,400 of unrecognized compensation costs related to unvested share-based compensation awards granted, which is expected to be recognized over the next four years.
Stock Options
For purposes of computing compensation expense, the Company estimated the fair values of stock options using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions that can materially affect fair value estimates. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. The fair value of each stock option granted was estimated using the following weighted-average assumptions for grants in 2018 and 2017, respectively: (1) no dividends were expected; (2) risk-free interest rates of 2.33 percent and 2.25 percent; (3) expected volatility of 12.88 percent and 9.05 percent; and (4) expected lives of options of ten years.
The weighted-average fair value of stock options granted for 2018 and 2017 was $5.96 and $4.08, respectively. There were 47,700 options exercised during the year ended December 31, 2018, and 30,000 options exercised during the year ended December 31, 2017.
Federal Income Taxes
Income tax expense consists of current and deferred taxes. Current income tax provisions approximate taxes to be paid or refunded for the applicable year. Deferred tax assets or liabilities are computed based on the difference between the financial statement 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 deferred tax asset or liability from period to period.
Recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefit associated with these temporary differences will be realized. A valuation allowance is recorded for those deferred tax assets for which it is more likely than not that realization will not occur in the near term. No valuation allowance was established at December 31, 2018 and 2017.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
Earnings Per Share
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share for the years ended December 31, 2018 and 2017, are computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the same period. The computation of diluted earnings per share differs in that the dilutive effects of any options or warrants are adjusted for in the denominator.
10 |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Advertising Costs
The Company expenses advertising costs in the period in which they are incurred.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company;
(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Comprehensive Income
The Company is required to present comprehensive income and its components in a full set of general-purpose financial statements for all periods presented. Other comprehensive income (loss) is comprised exclusively of unrealized holding gains and losses on the available-for-sale securities portfolio. The Company reports the effects of other comprehensive income (loss) as part of the Consolidated Statement of Comprehensive Income.
Cash Flow Information
Cash and cash equivalents include amounts due from banks, interest-bearing deposits with other banks, and federal funds sold with banks that have original maturities of 90 days or less.
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.
Change in Accounting Principle
The Bank has early adopted FASB ASU 2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. For entities other than public business entities, the update eliminates the requirement under Topic 825,Financial Instruments, to disclose the fair values of financial assets and financial liabilities measured in the financial statements at amortized cost. Further, this update excludes receivables and payables due in one year or less, deposit liabilities with no defined or contractual maturities, and nonmarketable equity securities accounted for under the practicability election from this disclosure requirement.
11 |
2. | EARNINGS PER SHARE |
There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income available to common shareholders (net income less preferred stock dividends) as presented on the Consolidated Statement of Income is used as the numerator.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
2018 | 2017 | |||||||
Weighted-average common shares outstanding (basic) | 1,538,874 | 1,345,289 | ||||||
Additional common stock equivalents (stock options) used to calculate diluted earnings per share | 22,865 | 40,680 | ||||||
Additional common stock equivalents (warrants) used to calculate diluted earnings per share | 400 | 82,795 | ||||||
Weighted-average common shares outstanding (diluted) | 1,562,139 | 1,468,764 |
Options to purchase 61,590 shares of common stock outstanding at December 31, 2018, were included in the computation of dilutive earnings per share. At December 31, 2018, there were no stock option awards excluded from the computation of diluted earnings per share as there were no stock option awards outstanding with an anti-dilutive impact. Options to purchase 101,880 shares of common stock outstanding at December 31, 2017, were included in the computation of dilutive earnings per share. At December 31, 2017, there were 4,000 stock option awards outstanding at an average weighted price of $17.06 per share that were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive.
12 |
3. | INVESTMENT SECURITIES |
The amortized cost, gross unrealized gains and losses, and fair value of investment securities available for sale at December 31 are summarized as follows:
2018 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Obligations of states andpolitical subdivisions | $ | 1,803,054 | $ | 63,988 | $ | - | $ | 1,867,042 | ||||||||
Corporate securities | 34,066,779 | 76,414 | (929,023 | ) | 33,214,170 | |||||||||||
Mortgage-backed securities - government-sponsored entities | 4,237,936 | 29,040 | (10,646 | ) | 4,256,330 | |||||||||||
Asset-backed securities | 55,275,110 | 12,919 | (373,415 | ) | 54,914,614 | |||||||||||
Total | $ | 95,382,879 | $ | 182,361 | $ | (1,313,084 | ) | $ | 94,252,156 |
2017 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Obligations of states and political subdivisions | $ | 32,206,082 | $ | 787,111 | $ | (26,407 | ) | $ | 32,966,786 | |||||||
Corporate securities | 23,999,432 | 337,987 | (15,136 | ) | 24,322,283 | |||||||||||
Mortgage-backed securities - government-sponsored entities | 5,936,867 | 40,919 | (4,813 | ) | 5,972,973 | |||||||||||
Asset-backed securities | 8,416,372 | 18,835 | (137,260 | ) | 8,297,947 | |||||||||||
Total | $ | 70,558,753 | $ | 1,184,852 | $ | (183,616 | ) | $ | 71,559,989 |
The amortized cost, gross unrealized gains and losses, and fair value of investment securities held to maturity at December 31, 2018 and 2017, are summarized as follows:
2018 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Corporate securities | $ | 1,250,000 | $ | - | $ | (3,640 | ) | $ | 1,246,360 | |||||||
Total | $ | 1,250,000 | $ | - | $ | (3,640 | ) | $ | 1,246,360 |
2017 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Corporate securities | $ | 1,250,000 | $ | - | $ | (3,120 | ) | $ | 1,246,880 | |||||||
Total | $ | 1,250,000 | $ | - | $ | (3,120 | ) | $ | 1,246,880 |
13 |
3. | INVESTMENT SECURITIES (Continued) |
The following tables show 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.
December 31, 2018 | ||||||||||||||||||||||||
Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Corporate securities | $ | 25,320,481 | $ | (929,023 | ) | $ | 996,360 | $ | (3,640 | ) | $ | 26,316,841 | $ | (932,663 | ) | |||||||||
Mortgage-backed securities - government-sponsored entities | 488,156 | (3,521 | ) | 927,623 | (7,125 | ) | 1,415,779 | (10,646 | ) | |||||||||||||||
Asset-backed securities | 45,892,281 | (359,339 | ) | 1,193,568 | (14,076 | ) | 47,085,849 | (373,415 | ) | |||||||||||||||
�� | ||||||||||||||||||||||||
Total | $ | 71,700,918 | $ | (1,291,883 | ) | $ | 3,117,551 | $ | (24,841 | ) | $ | 74,818,469 | $ | (1,316,724 | ) |
December 31, 2017 | ||||||||||||||||||||||||
Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Obligations of states and political subdivisions | $ | 2,193,182 | $ | (26,407 | ) | $ | - | $ | - | $ | 2,193,182 | $ | (26,407 | ) | ||||||||||
Corporate securities | 996,880 | (3,120 | ) | 3,143,526 | (15,136 | ) | 4,140,406 | (18,256 | ) | |||||||||||||||
Mortgage-backed securities - government-sponsored entities | 1,304,971 | (4,813 | ) | - | - | 1,304,971 | (4,813 | ) | ||||||||||||||||
Asset-backed securities | - | - | 7,365,808 | (137,260 | ) | 7,365,808 | (137,260 | ) | ||||||||||||||||
Total | $ | 4,495,033 | $ | (34,340 | ) | $ | 10,509,334 | $ | (152,396 | ) | $ | 15,004,367 | $ | (186,736 | ) |
14 |
3. | INVESTMENT SECURITIES (Continued) |
The Company reviews its position quarterly and has asserted that at December 31, 2018, the declines outlined in the prior table represent temporary declines, and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. There were 61 positions that were temporarily impaired at December 31, 2018. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or Company-specific ratings changes that are not expected to result in the noncollection of principal and interest during the period.
The amortized cost and fair value of debt securities at December 31, 2018, by contractual maturity, are shown below. 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. Mortgage-backed securities included therein provide for periodic, generally monthly, payments of principal and interest and have contractual maturities ranging from 1 to 25 years. However, due to expected repayment terms being significantly less than the underlying mortgage loan pool contractual maturities, the estimated lives of these securities could be significantly shorter.
Available for Sale | Held to Maturity | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Due within one year | $ | 503,849 | $ | 504,910 | $ | - | $ | - | ||||||||
Due after one year through five years | 26,633,968 | 26,329,663 | - | - | ||||||||||||
Due after five years through ten years | 10,781,062 | 10,205,361 | 1,250,000 | 1,246,360 | ||||||||||||
Due after ten years | 57,464,000 | 57,212,222 | - | - | ||||||||||||
Total | $ | 95,382,879 | $ | 94,252,156 | $ | 1,250,000 | $ | 1,246,360 |
Investment securities with a carrying value of $30,070,687 and $25,613,054 at December 31, 2018 and 2017, respectively, were pledged to secure borrowings.
The following is a summary of proceeds received, gross gains, and gross losses realized on the sale of investment securities available for sale for the years ended December 31:
2018 | 2017 | |||||||
Proceeds from sales | $ | 27,807,892 | $ | 1,817,466 | ||||
Gross gains | 748,285 | 11,162 | ||||||
Gross losses | 18,464 | - |
4. | LOANS RECEIVABLE |
Loans receivable consist of the following at December 31:
2018 | 2017 | |||||||
Real estate loans: | ||||||||
Construction | $ | 4,633,539 | $ | 2,661,651 | ||||
Residential | 112,078,753 | 100,653,217 | ||||||
Commercial | 133,448,254 | 133,939,605 | ||||||
Commercial | 5,501,688 | 3,464,248 | ||||||
Consumer | 1,000,007 | 1,004,463 | ||||||
256,662,241 | 241,723,184 | |||||||
Less: | ||||||||
Deferred loan costs | 228,417 | 204,309 | ||||||
Allowance for loan losses | 2,770,000 | 2,590,000 | ||||||
Total | $ | 253,663,824 | $ | 238,928,875 |
15 |
4. | LOANS RECEIVABLE (Continued) |
Aggregate loans extended to executive officers, directors, and corporations in which they are beneficially interested as stockholders, executive officers, or directors were $0 and $1,083,760 at December 31, 2018 and 2017, respectively. During the year 2018, one related party with an outstanding balance of $1,083,760 at December 31, 2017, as shown under “other” in the table below, sold his interest in the relation business and the loans outstanding are no longer considered related party. An analysis of these related-party loans follows:
Loans to Insiders | ||||||||
For the Years Ended December 31, | ||||||||
2018 | 2017 | |||||||
Beginning balance | $ | 1,083,760 | $ | 1,000,487 | ||||
Advances | - | 148,357 | ||||||
Repayments | - | - | ||||||
Other | (1,083,760 | ) | (65,084 | ) | ||||
Ending balance | $ | - | $ | 1,083,760 |
The Company’s primary business activity is with customers located within eastern Pennsylvania and the Delaware Valley. Commercial, residential, and consumer loans are granted. Although the Company has a diversified loan portfolio at December 31, 2018 and 2017, the repayment of the loans outstanding to individuals and businesses are dependent upon the local economic conditions in this lending area.
5. | ALLOWANCE FOR LOAN LOSSES |
The following table presents, by portfolio segment, the activity within the allowance for loan losses and the ending balance of the allowance for loan losses:
Construction | Residential | Commercial | ||||||||||||||||||||||||||
Real Estate | Real Estate | Real Estate | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||
Balance, December 31, 2016 | $ | 53,000 | $ | 908,000 | $ | 1,311,000 | $ | 9,000 | $ | 10,000 | $ | 9,000 | $ | 2,300,000 | ||||||||||||||
Add provisions (credit) charged to operations | (23,000 | ) | 172,000 | 116,000 | 26,000 | - | (1,000 | ) | 290,000 | |||||||||||||||||||
Add recoveries | - | - | - | - | - | - | - | |||||||||||||||||||||
Less loans charged off | - | - | - | - | - | - | - | |||||||||||||||||||||
Balance, December 31, 2017 | 30,000 | 1,080,000 | 1,427,000 | 35,000 | 10,000 | 8,000 | 2,590,000 | |||||||||||||||||||||
Add provisions (credit) charged to operations | 27,000 | 428,523 | (8,000 | ) | 22,000 | - | 6,000 | 475,523 | ||||||||||||||||||||
Add recoveries | - | - | - | - | - | - | - | |||||||||||||||||||||
Less loans charged off | - | (295,523 | ) | - | - | - | - | (295,523 | ) | |||||||||||||||||||
Balance, December 31, 2018 | $ | 57,000 | $ | 1,213,000 | $ | 1,419,000 | $ | 57,000 | $ | 10,000 | $ | 14,000 | $ | 2,770,000 |
16 |
5. | ALLOWANCE FOR LOAN LOSSES (Continued) |
Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: (1) the construction real estate loan portfolio; (2) the residential real estate loan portfolio; (3) the commercial real estate loan portfolio; (4) the commercial loan portfolio; and (5) the consumer loan portfolio. Factors considered in this process included 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 then added to the historical allocation percentage to get the adjusted factor to be applied to nonclassified loans. The following qualitative factors are analyzed for each portfolio segment:
· | Changes in lending policies and procedures |
· | Changes in personnel responsible for the particular portfolio – relative to experience and ability of staff |
· | Trend for past-due, criticized, and classified loans |
· | Relevant economic factors |
· | Quality of the loan review system |
· | Value of collateral for collateral-dependent loans |
· | The effect of any concentrations of credit and the changes in level of such concentrations |
· | Other external factors |
These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio.
The Bank may also maintain an unallocated allowance to account for any factors or conditions that may cause a potential loss but are not specifically addressed in the process described above. The Bank analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.
Loans by Segment
The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the Consolidated Balance Sheet date. The Bank considers the allowance for loan losses of $2,770,000 and $2,590,000 adequate to cover loan losses inherent in the loan portfolio at December 31, 2018 and 2017, respectively. The following table presents, by portfolio segment, the allowance for loan losses for the years ended December 31:
17 |
5. | ALLOWANCE FOR LOAN LOSSES (Continued) |
Loans by Segment (Continued)
2018 | ||||||||||||||||||||||||||||
Construction | Residential | Commercial | ||||||||||||||||||||||||||
Real Estate | Real Estate | Real Estate | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Collectively evaluated for impairment | 57,000 | 1,213,000 | 1,419,000 | 57,000 | 10,000 | 14,000 | 2,770,000 | |||||||||||||||||||||
Total | $ | 57,000 | $ | 1,213,000 | $ | 1,419,000 | $ | 57,000 | $ | 10,000 | $ | 14,000 | $ | 2,770,000 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 553,541 | $ | 834,873 | $ | 24,383 | $ | - | $ | 1,412,797 | ||||||||||||||||
Collectively evaluated for impairment | 4,633,539 | 111,525,212 | 132,613,381 | 5,477,305 | 1,000,007 | 255,249,444 | ||||||||||||||||||||||
Total | $ | 4,633,539 | $ | 112,078,753 | $ | 133,448,254 | $ | 5,501,688 | $ | 1,000,007 | $ | 256,662,241 |
2017 | ||||||||||||||||||||||||||||
Construction | Residential | Commercial | ||||||||||||||||||||||||||
Real Estate | Real Estate | Real Estate | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Collectively evaluated for impairment | 30,000 | 1,080,000 | 1,427,000 | 35,000 | 10,000 | 8,000 | 2,590,000 | |||||||||||||||||||||
Total | $ | 30,000 | $ | 1,080,000 | $ | 1,427,000 | $ | 35,000 | $ | 10,000 | $ | 8,000 | $ | 2,590,000 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | 1,026,328 | $ | 2,342,847 | $ | 9,494 | $ | - | $ | 3,378,669 | ||||||||||||||||
Collectively evaluated for impairment | 2,661,651 | 99,626,889 | 131,596,758 | 3,454,754 | 1,004,463 | 238,344,515 | ||||||||||||||||||||||
Total | $ | 2,661,651 | $ | 100,653,217 | $ | 133,939,605 | $ | 3,464,248 | $ | 1,004,463 | $ | 241,723,184 |
18 |
5. | ALLOWANCE FOR LOAN LOSSES (Continued) |
Credit Quality Information
The following tables represent credit exposures by internally assigned grades for the years ended December 31, 2018 and 2017. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Bank’s internal credit risk grading system is based on experiences with similarly graded loans.
The Bank’s internally assigned grades are as follows:
Pass – loans with adequate debt service coverage, minimal or acceptable balance sheet leverage, profitable earnings trends, expanding or flat markets, adequate payment capacity, and/or current payment history. There are five sub-grades within this category to further distinguish the loan.
Watch – loans with debt service coverage with no room for expansion, a fully leveraged balance sheet, uncertain earnings trends, flat or declining markets, limited repayment capacity, and/or slow payment history.
Special Mention – loans with below-acceptable debt service coverage, a fully leveraged balance sheet showing a possible decline in asset value, declining earnings trends or marginal loss, declining markets, and/or a repayment capacity that needs rehabilitation.
Substandard – loans with deficient debt service coverage, an overly leveraged balance sheet with a slight decline in asset value, an earnings trend with repeated losses, quickly declining markets, and/or an insufficient repayment capacity that requires work-out to be brought current.
Doubtful – loans with impaired debt service coverage, an overly leveraged balance sheet with imminent decline in future asset value, an earnings trend with significant losses, a market with questionable survival, and/or insufficient repayment capacity with a questionable full recovery.
Loss – loans with an impaired debt service coverage with no chance of reversal, an insolvent balance sheet, no earnings trend, a liquidated market with no businesses, and/or no chance of collectability generally resulting in charge-off.
Special | ||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Commercial real estate | $ | 132,482,447 | $ | 489,234 | $ | - | $ | 476,573 | $ | 133,448,254 | ||||||||||
Commercial | 5,477,305 | 24,383 | - | - | 5,501,688 | |||||||||||||||
Total | $ | 137,959,752 | $ | 513,617 | $ | - | $ | 476,573 | $ | 138,949,942 |
Special | ||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Commercial real estate | $ | 131,463,416 | $ | 306,481 | $ | 920,217 | $ | 1,249,491 | $ | 133,939,605 | ||||||||||
Commercial | 3,454,754 | 9,494 | - | - | 3,464,248 | |||||||||||||||
Total | $ | 134,918,170 | $ | 315,975 | $ | 920,217 | $ | 1,249,491 | $ | 137,403,853 |
19 |
5. | ALLOWANCE FOR LOAN LOSSES (Continued) |
Credit Quality Information (Continued)
The following tables present performing and nonperforming residential real estate, construction real estate, and consumer loans based on payment activity for the years ended December 31, 2018 and 2017. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due or are placed on nonaccrual status.
Performing | Nonperforming | Total | ||||||||||
December 31, 2018 | ||||||||||||
Real estate loans: | ||||||||||||
Construction | $ | 4,633,539 | $ | - | $ | 4,633,539 | ||||||
Residential | 112,078,753 | - | 112,078,753 | |||||||||
Consumer | 1,000,007 | - | 1,000,007 | |||||||||
Total | $ | 117,712,299 | $ | - | $ | 117,712,299 |
Performing | Nonperforming | Total | ||||||||||
December 31, 2017 | ||||||||||||
Real estate loans: | ||||||||||||
Construction | $ | 2,661,651 | $ | - | $ | 2,661,651 | ||||||
Residential | 100,653,217 | - | 100,653,217 | |||||||||
Consumer | 1,004,463 | - | 1,004,463 | |||||||||
Total | $ | 104,319,331 | $ | - | $ | 104,319,331 |
Age Analysis of Past-Due Loans by Class
Following are tables that include an aging analysis of the recorded investment of past-due loans as of December 31, 2018 and 2017.
Current | 31-60 Days Past Due | 61-90 Days Past Due | Greater Than 90 Days Past Due | Total Loans | Nonaccrual | |||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Construction | $ | 4,633,539 | $ | - | $ | - | $ | - | $ | 4,633,539 | $ | - | ||||||||||||
Residential | 112,078,753 | - | - | - | 112,078,753 | - | ||||||||||||||||||
Commercial | 133,141,667 | - | - | 306,587 | 133,448,254 | 476,573 | ||||||||||||||||||
Commercial | 5,501,688 | - | - | - | 5,501,688 | - | ||||||||||||||||||
Consumer | 1,000,007 | - | - | - | 1,000,007 | - | ||||||||||||||||||
Total | $ | 256,355,654 | $ | - | $ | - | $ | 306,587 | $ | 256,662,241 | $ | 476,573 |
20 |
5. | ALLOWANCE FOR LOAN LOSSES (Continued) |
Age Analysis of Past-Due Loans by Class (Continued)
Current | 31-60 Days Past Due | 61-90 Days Past Due | Greater Than 90 Days Past Due | Total Loans | Nonaccrual | |||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Construction | $ | 2,661,651 | $ | - | $ | - | $ | - | $ | 2,661,651 | $ | - | ||||||||||||
Residential | 100,653,217 | - | - | - | 100,653,217 | - | ||||||||||||||||||
Commercial | 132,690,114 | 203,312 | - | 1,046,179 | 133,939,605 | 1,249,491 | ||||||||||||||||||
Commercial | 3,464,248 | - | - | - | 3,464,248 | - | ||||||||||||||||||
Consumer | 1,004,463 | - | - | - | 1,004,463 | - | ||||||||||||||||||
Total | $ | 240,473,694 | $ | 203,312 | $ | - | $ | 1,046,179 | $ | 241,723,184 | $ | 1,249,491 |
Nonaccrual Loans
Loans are considered nonaccrual upon 90 days’ delinquency. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income. There were no loans 90 days past due or greater still accruing interest at December 31, 2018 or 2017.
The Bank had 2 nonaccrual loans totaling $476,573 and four nonaccrual loans totaling $1,249,491 at
December 31, 2018 and 2017, respectively. Interest income on the loans would have increased $10,586 during 2018 and $102,229 during 2017, if these loans had performed in accordance with their original terms.
Impaired Loans
Management individually evaluates commercial loans and commercial real estate loans that are 90 days or more past due and considers them to be impaired. Loans rated Substandard or Doubtful and any loan modified in a troubled debt restructuring are also evaluated individually for impairment. These loans are analyzed to determine whether 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 estimate or a charge-off to the allowance.
The following tables include the recorded investment, unpaid principal balances, average recorded investment, and interest income recognized for impaired loans with the associated allowance amount, if applicable, as of and for the years ended December 31:
21 |
5. | ALLOWANCE FOR LOAN LOSSES (Continued) |
Impaired_Loans_(Continued)
2018 | ||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
With no specific allowance recorded: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential | $ | 553,541 | $ | 553,541 | $ | - | $ | 1,011,860 | $ | 30,638 | ||||||||||
Commercial | 834,873 | 1,173,181 | - | 2,229,870 | 25,200 | |||||||||||||||
Commercial | 24,383 | 24,383 | - | 23,255 | 1,085 | |||||||||||||||
Subtotal | 1,412,797 | 1,751,105 | - | 3,264,985 | 56,923 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential | - | - | - | - | - | |||||||||||||||
Commercial | - | - | - | - | - | |||||||||||||||
Subtotal | - | - | - | - | - | |||||||||||||||
Total | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential | 553,541 | 553,541 | 1,011,860 | 30,638 | ||||||||||||||||
Commercial | 834,873 | 1,173,181 | - | 2,229,870 | 25,200 | |||||||||||||||
Commercial | 24,383 | 24,383 | - | 23,255 | 1,085 | |||||||||||||||
Total | $ | 1,412,797 | $ | 1,751,105 | $ | - | $ | 3,264,985 | $ | 56,923 |
2017 | ||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
With no specific allowance recorded: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential | $ | 1,026,328 | $ | 1,026,328 | $ | $ | 1,039,751 | $ | 54,763 | |||||||||||
Commercial | 2,342,847 | 3,046,352 | - | 2,680,445 | 171,464 | |||||||||||||||
Commercial | 9,494 | 9,494 | - | 9,527 | 390 | |||||||||||||||
Subtotal | 3,378,669 | 4,082,174 | - | 3,729,723 | 226,617 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential | - | - | - | - | - | |||||||||||||||
Commercial | - | - | - | - | - | |||||||||||||||
Commercial | - | - | - | - | - | |||||||||||||||
Subtotal | - | - | - | - | - | |||||||||||||||
Total | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential | 1,026,328 | 1,026,328 | 1,039,751 | 54,763 | ||||||||||||||||
Commercial | 2,342,847 | 3,046,352 | - | 2,680,445 | 171,464 | |||||||||||||||
Commercial | 9,494 | 9,494 | - | 9,527 | 390 | |||||||||||||||
Total | $ | 3,378,669 | $ | 4,082,174 | $ | - | $ | 3,729,723 | $ | 226,617 |
22 |
5. | ALLOWANCE FOR LOAN LOSSES (Continued) |
Troubled Debt Restructurings
There were no loans identified as troubled debt restructurings during the 12 months ended December 31, 2018, and December 31, 2017.
6. | PREMISES AND EQUIPMENT |
Premises and equipment consist of the following at December 31:
2018 | 2017 | |||||||
Land | $ | 1,146,061 | $ | 1,146,061 | ||||
Building | 1,315,488 | 1,315,488 | ||||||
Furniture and equipment | 1,337,437 | 1,280,374 | ||||||
Leasehold improvements | 306,788 | 305,688 | ||||||
4,105,774 | 4,047,611 | |||||||
Less accumulated depreciation | 1,680,258 | 1,526,558 | ||||||
Total | $ | 2,425,516 | $ | 2,521,053 |
Depreciation expense for the years ended December 31, 2018 and 2017, was $153,700 and $154,279, respectively.
7. | DEPOSITS |
The details of deposits are as follows at December 31:
2018 | 2017 | |||||||
Amount | Amount | |||||||
Noninterest-bearing demand | $ | 23,008,646 | $ | 25,054,268 | ||||
Statement savings | 14,171,947 | 11,222,991 | ||||||
Interest-bearing demand | 10,907,105 | 8,240,083 | ||||||
Money market deposit accounts | 33,045,853 | 32,174,984 | ||||||
Time certificates of deposit | 153,663,260 | 132,200,963 | ||||||
$ | 234,796,811 | $ | 208,893,289 |
The scheduled maturities of time certificates at December 31, 2018, of deposit are as follows:
Within one year | $ | 109,626,384 | ||
Beyond one year but within two years | 34,945,812 | |||
Beyond two years but within three years | 7,745,566 | |||
Beyond three years but within four years | 519,274 | |||
Beyond four years but within five years | 826,224 | |||
Total | $ | 153,663,260 |
23 |
7. | DEPOSITS (Continued) |
Included in time certificates of deposit are $4,950,000 of brokered deposits as of December 31, 2018 and 2017. As of December 31, 2018, the weighted-average coupon on these brokered deposits was 3.34 percent, and the weighted-average maturity was 2.02 years. As of December 31, 2018, none of these deposits were callable by the Bank and may not be closed early by the account holder. There were unamortized premiums totaling $21,288 and $34,599 as of December 31, 2018 and 2017, respectively.
Time certificates of deposit include certificates of deposit with balances of $250,000 or more. Such deposits amounted to $30,949,000 and $16,151,000 on December 31, 2018 and 2017, respectively. Management believes liquidity is adequate to compensate for these deposit levels. Included in deposit accounts are deposits from directors, executive officers, and their related interests of approximately $9,408,442 and $9,917,359 for the years ended December 31, 2018 and 2017, respectively.
8. | SHORT-TERM BORROWINGS |
The outstanding balance and related information of short-term borrowings, which consist of borrowings from FHLB under the RepoPlus Advantage Credit Arrangement, and federal funds purchased from Atlantic Community Bankers Bank are summarized as follows for the years ended December 31:
2018 | 2017 | |||||||
Balance at year-end | $ | 55,017,650 | $ | 13,500,000 | ||||
Average balance outstanding during the year | 16,378,284 | 10,306,479 | ||||||
Maximum month-end balance | 55,017,650 | 21,295,800 | ||||||
Weighted-average interest rate: | ||||||||
As of year-end | 2.61 | % | 1.54 | % | ||||
Paid during the year | 2.76 | % | 0.70 | % |
The Company has a secured discount window arrangement with the Federal Reserve Bank of Philadelphia. This credit facility is collateralized by pledged securities, and the amount available as of December 31, 2018, was approximately $4,100,000, which was 105 percent of the securities’ market value. This credit facility is not intended to be used for normal, day-to-day bank operations but reserved for non-anticipated or special liquidity needs.
The Company also has a secured federal funds facility of $2.0 million with M&T Bank. This credit facility is collateralized by pledged securities and is extended to $10.0 million for 15 calendar days on either side of each quarter-end. As of December 31, 2018, the entire amount of this credit facility was available for use.
9. | OTHER BORROWINGS AND SUBORDINATED DEBT |
Other borrowed funds consist of advances from the FHLB, which as of December 31 consist of the following:
Weighted- | Stated Interest | |||||||||||||||||||||||
Maturity Range | Average | Rate Range | ||||||||||||||||||||||
Description | From | To | Rate | From | To | 2018 | 2017 | |||||||||||||||||
Fixed rate | 1/23/2019 | 7/29/2019 | 1.22 | % | 1.02 | % | 1.83 | % | $ | 5,089,000 | $ | 18,343,859 | ||||||||||||
Mid term | 2/22/2019 | 2/28/2020 | 1.50 | % | 1.05 | % | 2.35 | % | 29,170,500 | 48,648,300 | ||||||||||||||
Total | $ | 34,259,500 | $ | 66,992,159 |
24 |
9. | OTHER BORROWINGS AND SUBORDINATED DEBT (Continued) |
The following table presents contractual maturities of FHLB long-term advances:
2018 | ||||||||
Year Ending | Weighted- | |||||||
December 31, | Amount | Average Rate | ||||||
2019 | $ | 23,462,250 | 1.25 | % | ||||
2020 | 10,797,250 | 1.91 | % | |||||
Total | $ | 34,259,500 | 1.46 | % |
All borrowings from the FHLB carry fixed rates and are secured by a blanket lien on qualified collateral owned by the Company free and clear of any liens or encumbrances. At December 31, 2018, the Company had a borrowing limit of approximately $169.2 million, with a variable rate of interest based on the FHLB’s cost of funds subject to full collateralization.
On December 19, 2013, the Bank entered into agreements for subordinated debt with The Bryn Mawr Trust Company (Bryn Mawr) as well as with five directors.The subordinated debt totaled $5,342,674 and $5,336,099, net of unamortized costs of $32,326 and $38,901, as of December 31, 2018 and 2017, of which $375,000 was outstanding to directors. The notes mature on April 30, 2024, and carry an interest rate of LIBOR plus 6.50 percent, not to exceed 13 percent, which resets quarterly. As of December 31, 2018, the interest rate was 9.30 percent.
The subordinated debt currently qualifies as Tier 2 capital. However, provisions within the agreements stipulate that if, at any time, any or all of the subordinated debt ceases to be deemed Tier 2 capital, the Bank has the right to redeem all or a portion of the debt. Prior to December 19, 2018, the redemption price was between 101 percent to 105 percent of principal based on the year in which the redemption occurs. Subsequent to March 28, 2019, the Bank has the right to redeem all or a portion of the debt at par value. Pursuant to the agreements, the Bank must maintain a level of capital necessary to be considered “well capitalized” under regulatory standards. As of December 31, 2018, the Bank is in compliance with this covenant.
On March 24, 2017, the Company issued $7,000,000 in additional subordinated debentures to eight financial institutions, as well as directors and members of management. The subordinated debt totaled $6,904,831 and $6,875,549 net of unamortized costs of $95,169 and $124,451 as of December 31, 2018 and 2017, respectively, of which $550,000 was outstanding to members of management and directors. The notes mature on April 1, 2027, and carry a fixed rate of interest of 6.50 percent. The Company maintains the ability to redeem these debentures on or after April 1, 2022.
The subordinated debt currently qualifies as Tier 2 capital. However, provisions within the agreement stipulate that if, at any time, any or all of the subordinated debt ceases to be deemed Tier 2 capital due to a change in applicable capital regulations or tax event, the Company has the right to redeem all or a portion of the debt. The Company contributed $6,500,000 of capital to the Bank related to the issuance of subordinated debt, which qualifies as Tier 1 capital for the Bank.
25 |
10. | INCOME TAXES |
The components of income taxes for the years ended December 31 are summarized as follows:
The following temporary differences gave rise to the net deferred tax assets:
2018 | 2017 | |||||||
Current payable | $ | 521,527 | $ | 662,242 | ||||
Deferred taxes | (60,340 | ) | (112,525 | ) | ||||
Change in effective corporate tax rate | - | 120,721 | ||||||
Total | $ | 461,187 | $ | 670,438 |
2018 | 2017 | |||||||
Deferred tax assets: | ||||||||
Allowance for loan losses | $ | 513,840 | $ | 413,980 | ||||
Startup and organizational costs | 38,036 | 47,164 | ||||||
Nonaccrued interest | 71,045 | 102,718 | ||||||
Unrealized loss on securities | 237,452 | - | ||||||
Other | 2,725 | 6,591 | ||||||
Total gross deferred tax assets | 863,098 | 570,453 | ||||||
Deferred tax liabilities: | ||||||||
Premises and equipment | 47,174 | 57,705 | ||||||
Unrealized gain on securities | - | 209,604 | ||||||
Deferred costs | 113,517 | 108,133 | ||||||
Total gross deferred tax liabilities | 160,691 | 375,442 | ||||||
Net deferred tax assets | $ | 702,407 | $ | 195,011 |
No valuation allowance was established at December 31, 2018, in view of the Company’s certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.
The reconciliation of the federal statutory rate and the Company’s effective income tax rate is as follows at December 31:
2018 | 2017 | |||||||||||||||
% of | % of | |||||||||||||||
Amount | Pretax Income | Amount | Pretax Income | |||||||||||||
Provision at statutory rate | $ | 582,296 | 21.0 | % | $ | 799,958 | 34.0 | % | ||||||||
Effect of tax-exempt (loss) | (22,187 | ) | (0.8 | ) | (249,384 | ) | (10.6 | ) | ||||||||
Change in effective corporate tax rate | - | - | 120,721 | 5.1 | ||||||||||||
Other, net | (98,922 | ) | (3.6 | ) | (857 | ) | - | |||||||||
Actual tax expense and effective rate | $ | 461,187 | 16.6 | % | $ | 670,438 | 28.5 | % |
With few exceptions, the Company is not subject to U.S. federal tax examinations by tax authorities for years before 2015. The Bank has not recorded any unrecognized tax benefits at December 31, 2018 or 2017.
26 |
10. | INCOME TAXES (Continued) |
There is currently no liability for uncertain tax positions and no known unrecognized benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statement of Income.
11. | EMPLOYEE BENEFITS |
Stock Option Plan
The Bank implemented a stock compensation plan. The plan provides for granting incentives or non-qualified stock options to directors, key officers, and other employees of the Bank. A total of 250,000 of either authorized and unissued shares or authorized shares issued by and subsequently reacquired by the Bank as treasury stock will be issuable under the plan. The plan will terminate after the tenth anniversary of the plan. The per share exercise price of any option granted will not be less than the fair market value of a share of common stock on the date the option is granted. The options granted are vested over five years with the exception of director compensation which vests when granted.
The following table presents share data related to the stock option plan:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
2018 | Price | Term (in Years) | Value | |||||||||||||
Outstanding, beginning | 105,880 | $ | 11.93 | 2.90 | $ | 600,074 | ||||||||||
Granted | 4,210 | 22.04 | 9.00 | - | ||||||||||||
Exercised | 47,700 | 10.24 | - | - | ||||||||||||
Forfeited | 800 | 17.06 | - | - | ||||||||||||
Outstanding, ending | 61,590 | $ | 12.36 | 3.99 | $ | 503,302 | ||||||||||
Exercisable at year-end | 59,790 | $ | 13.77 | 3.90 | $ | 483,935 |
The following table summarizes characteristics of stock options outstanding and exercisable at December 31, 2018:
Outstanding | Exercisable | |||||||||||||||||||||
Average | Average | |||||||||||||||||||||
Exercise | Average | Exercise | Exercise | |||||||||||||||||||
Price | Shares | Life | Price | Shares | Price | |||||||||||||||||
$ | 11.00 | 5,000 | 0.58 | $ | 11.00 | 5,000 | $ | 11.00 | ||||||||||||||
$ | 11.12 | 6,000 | 1.73 | $ | 11.12 | 6,000 | $ | 11.12 | ||||||||||||||
$ | 11.50 | 15,500 | 2.00 | $ | 11.50 | 15,500 | $ | 11.50 | ||||||||||||||
$ | 12.00 | 7,910 | 3.21 | $ | 12.00 | 7,910 | $ | 12.00 | ||||||||||||||
$ | 14.20 | 7,470 | 4.21 | $ | 14.20 | 7,470 | $ | 14.20 | ||||||||||||||
$ | 14.63 | 2,635 | 5.00 | $ | 14.63 | 2,635 | $ | 14.63 | ||||||||||||||
$ | 17.06 | 6,575 | 7.17 | $ | 17.06 | 4,775 | $ | 17.06 | ||||||||||||||
$ | 17.11 | 2,110 | 6.00 | $ | 17.11 | 2,110 | $ | 17.11 | ||||||||||||||
$ | 17.60 | 4,180 | 8.00 | $ | 17.60 | 4,180 | $ | 17.60 | ||||||||||||||
$ | 22.04 | 4,210 | 9.00 | $ | 22.04 | 4,210 | $ | 22.04 |
27 |
11. | EMPLOYEE BENEFITS (Continued) |
Restricted Stock
In April 2015, the Bank implemented a restricted stock plan for a member of executive management. A total of 2,922 shares of common stock were authorized to be awarded.
The grant of the restricted shares was contingent on the purchase of 2,922 shares of common stock between March 20, 2015, and April 17, 2015, through a private placement offering. The executive acquired 2,922 shares of common stock through a private placement offering. Provided the executive retains them during the term of the agreement, the restricted shares will vest ratably over a five-year period.
During the years ended December 31, 2018 and 2017, compensation expense was recognized in regards to this restricted stock award in the amount of $9,999 for both years. At December 31, 2018, unrecognized compensation expense of $19,978 was related to the restricted stock award, which is expected to be recognized over a period of three years.
Restricted stock award activity for the year ended December 31, 2018, was as follows:
Weighted- | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Restricted Stock | Fair Value | |||||||
Nonvested at December 31, 2017 | 1,752 | $ | 17.11 | |||||
Granted | - | - | ||||||
Forfeited | - | - | ||||||
Vested | 584 | 17.11 | ||||||
Nonvested at December 31, 2018 | 1,168 | $ | 17.11 |
401(k) Plan
The Company sponsors a qualified Section 401(k) deferred compensation plan for all eligible employees. Employee contributions to the 401(k) Profit Sharing Plan are based on compensation and elected deferral amounts of the plan participants. Any Bank contributions to the plan would be determined by the Board of Directors. The Company contributed $51,808 and $52,283 to the plan for the years ended December 31, 2018 and 2017, respectively.
12. | COMMITMENTS |
In the normal course of business, there are various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments comprise the following:
2018 | 2017 | |||||||
Unfunded commitments under lines of credit | $ | 19,598,420 | $ | 15,883,245 |
28 |
12. | COMMITMENTS (Continued) |
These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The Bank’s exposure to credit loss, in the event of nonperformance by the other parties to the financial instruments, is represented by the contractual amounts as disclosed. The Bank minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures, and collateral requirements as deemed necessary.
The Bank is committed under two noncancellable operating leases for the Bank’s office facilities with remaining terms through October 31, 2020. At December 31, 2018, approximate future minimum rental payments under these leases are as follows:
2019 | $ | 55,323 | ||
2020 | 13,932 | |||
Total | $ | 69,255 |
Rent expense for the years ended December 31, 2018 and 2017, was $103,260 and $134,385 respectively. The bank signed a month-on-month lease agreement effective January 1, 2019 for 65 W Street Road, Warminster, PA 18974.
13. | REGULATORY RESTRICTIONS |
The Bank is subject to dividend restrictions by both the Board of Governors of the Federal Reserve System and the Pennsylvania Department of Banking and Securities. Under the Board of Governors of the Federal Reserve System, the Bank is subject to a dividend restriction that generally limits the amount of dividends that can be paid by a state member bank. Prior approval of the Board of Governors of the Federal Reserve System is required if the total of all dividends declared by a state member bank in any calendar year exceeds net profits, as defined for the year, combined with its retained net profits for the two preceding calendar years less any required transfers to surplus. The Pennsylvania Banking Code also restricts the availability of capital funds for the payment of dividends by all state-chartered banks to the surplus of the Bank.
The Federal Deposit Insurance Corporation (FDIC) has formal and informal policies that provide that FDIC-insured banks generally should pay dividends only out of current operating earnings, with some exceptions. The Federal Deposit Insurance Act generally prohibits the payment of any dividend by an insured bank that is then in default on any assessment to the FDIC.
14. | REGULATORY MATTERS |
Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
29 |
14. | REGULATORY MATTERS (Continued) |
Regulatory Capital Requirements (Continued)
Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, common equity Tier 1 capital to total risk-weighted assets, of Tier 1 capital to average assets. Management believes, as of December 31, 2018, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2018, and December 31, 2017, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 risk-based capital, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.
The Bank’s actual capital ratios are presented in the following table as of December 31, 2018 and 2017, which shows the Bank met all regulatory capital requirements.
2018 | 2017 | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
Total capital (to risk-weighted assets) | ||||||||||||||||
Actual | $ | 44,404,000 | 16.98 | % | $ | 37,193,000 | 15.67 | % | ||||||||
For capital adequacy purposes | 20,920,960 | 8.00 | 18,986,800 | 8.00 | ||||||||||||
To be well capitalized | 26,151,200 | 10.00 | 23,733,500 | 10.00 | ||||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||
Actual | $ | 36,291,000 | 13.88 | % | $ | 29,228,000 | 12.32 | % | ||||||||
For capital adequacy purposes | 15,690,720 | 6.00 | 14,240,100 | 6.00 | ||||||||||||
To be well capitalized | 20,920,960 | 8.00 | 18,986,800 | 8.00 | ||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||
Actual | $ | 36,291,000 | 9.99 | % | $ | 29,228,000 | 9.05 | % | ||||||||
For capital adequacy purposes | 14,525,280 | 4.00 | 12,920,080 | 4.00 | ||||||||||||
To be well capitalized | 18,156,600 | 5.00 | 16,150,100 | 5.00 | ||||||||||||
Common equity Tier 1 capital (to risk-weighted assets) | ||||||||||||||||
Actual | $ | 36,291,000 | 13.88 | % | $ | 29,228,000 | 12.32 | % | ||||||||
For capital adequacy purposes | 11,768,040 | 4.50 | 10,680,075 | 4.50 | ||||||||||||
To be well capitalized | 16,998,280 | 6.50 | 15,426,775 | 6.50 |
15. | FAIR VALUE MEASUREMENTS |
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows:
Level I: | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
30 |
15. | FAIR VALUE MEASUREMENTS (Continued) |
Level II: | Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed. |
Level III: | Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
This hierarchy requires the use of observable market data when available.
The following tables present the assets reported on the Consolidated Balance Sheet at their fair value as of December 31, 2018 and 2017, 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.
December 31, 2018 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets measured at fair value on a recurring basis: | ||||||||||||||||
Obligations of states and political subdivisions | $ | - | $ | 1,867,042 | $ | - | $ | 1,867,042 | ||||||||
Corporate securities | - | 33,214,170 | - | 33,214,170 | ||||||||||||
Mortgage-backed securities - government-sponsored entities | - | 4,256,330 | - | 4,256,330 | ||||||||||||
Asset-backed securities | - | 54,914,614 | - | 54,914,614 |
December 31, 2017 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets measured at fair value on a recurring basis: | ||||||||||||||||
Obligations of states and political subdivisions | $ | - | $ | 32,966,786 | $ | - | $ | 32,966,786 | ||||||||
Corporate securities | - | 24,322,283 | - | 24,322,283 | ||||||||||||
Mortgage-backed securities - government-sponsored entities | - | 5,972,973 | - | 5,972,973 | ||||||||||||
Asset-backed securities | - | 8,297,947 | - | 8,297,947 |
31 |
15. | FAIR VALUE MEASUREMENTS (Continued) |
Impaired Loans
The Bank 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 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 as a Level III measurement, as it is not currently being carried at its fair value. For the years ended December 31, 2018 and 2017, no impaired loans are considered to be carried at fair value.
Other Real Estate Owned
OREO is carried at the lower of cost or fair value, 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 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. For the year ended December 31, 2018, there was a write-down for one OREO property which is now considered to be carried at fair value. For the year ended December 31, 2017, there were no write-downs of any OREO properties were required and therefore none of the properties are considered to be carried at fair value.
Investment Securities Available for Sale
The fair value of investment securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Since the regulatory stock is not actively traded on a secondary market and is held exclusively by member financial institutions, the estimated fair market value approximates the carrying amount
32 |
16. | WARRANTS AND PREFERRED STOCK |
During the Bank’s initial capitalization, investors purchasing common stock were required to purchase an equal number of both three-year, nontransferable Class A and ten-year, nontransferable Class B warrants at a cost of $0.23 and $0.42, respectively. A total of 206,947 Class A and 206,947 Class B warrants were sold as part of the initial offering.
Each three-year Class A warrant entitled the registered holder of the warrant to purchase from the Bank one share of the Bank’s common stock at a price of $10.00 per share, which was exercisable for three years from the date of issuance. As of December 31, 2011, all Class A warrants had been exercised.
Each ten-year Class B warrant entitled the registered holder of the warrant to purchase from the Bank one share of the Bank’s common stock at a price of $10.00 per share, which was be exercisable for ten years from the date of issuance. All Class B warrants had an expiration date of February 22, 2018. During the year ended December 31, 2018, all remaining 160,947 warrants outstanding were exercised.
17. | Participation in U.S. Treasury program |
On July 14, 2011, the Bank elected to participate in the Treasury’s Small Business Lending Fund (SBLF) program. Pursuant to the agreement, the Bank sold to the Treasury 2,970 shares of senior non-cumulativeperpetual preferred stock, Series A at $1,000 liquidation value per share, for the price of $2,970,000.
The preferred stock Series A qualifies as Tier 1 capital and pays quarterly dividends, beginning October 2011. Dividend rates are determined upon funding and for the subsequent nine calendar quarters, adjusted quarterly (based on outstanding loans at the end of the second previous quarter). The percentage of the increase in lending determines the dividend rate. Dividend rates for the tenth quarter after funding through the end of the first 4.5 years are based on the increased lending at the end of the eighth quarter after funding. The dividend rate after 4.5 years, if the funding has not been repaid, is set at 9 percent. For 2017, the Bank qualified for a dividend rate of 9 percent. Under the terms of the SBLF program, with the approval of its regulator, an institution may exit the program at any time by repaying the funding provided plus any accrued dividends. The Bank with approval from its regulators, repaid the U.S. Treasury for the full amount of SBLF funds and final dividend in April 2017.
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18. | ACCUMULATED OTHER COMPREHENSIVE INCOME |
The activity in accumulated other comprehensive income for the years ended December 31, 2018 and 2017, is as follows:
2018 | 2017 | |||||||
Unrealized | Unrealized | |||||||
Gains (Losses) | Gains (Losses) | |||||||
on Securities | on Securities | |||||||
Available for Sale | Available for Sale | |||||||
Beginning balance | $ | 788,511 | $ | 406,538 | ||||
Other comprehensive income (loss) before reclassifications | (1,105,223 | ) | 259,586 | |||||
Amounts reclassified from accumulated other comprehensive income | (576,559 | ) | (7,367 | ) | ||||
Reclassification of certain income tax effects from accumulated other comprehensive income | - | 129,754 | ||||||
Period change | (1,681,782 | ) | 381,973 | |||||
Ending balance | $ | (893,271 | ) | $ | 788,511 |
Amount Reclassified from | Amount Reclassified from | |||||||||
Accumulated Other | Accumulated Other | |||||||||
Comprehensive Income | Comprehensive Income | Affected Line Item in the | ||||||||
Details About Accumulated Other | for the Year Ended | for the Year Ended | Consolidated Statement of | |||||||
Comprehensive Income Components | December 31, 2018 (2) | December 31, 2017 (2) | Income | |||||||
Securities available for sale (1): | ||||||||||
Investment security gains, net | $ | 729,821 | $ | 11,162 | Investment securities gains, net | |||||
Income taxes | (153,262 | ) | (3,795 | ) | Income taxes | |||||
Total reclassifications for the period | $ | 576,559 | $ | 7,367 |
(1) | For additional details related to unrealized gains on securities and related amounts reclassified from accumulated other comprehensive income, see Note 3, “Investment Securities.” |
(2) | Amounts in parentheses indicate debits. |
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19. | BUSINESS COMBINATIONS |
Proposed Merger with Monument Bancorp, Inc.
On September 28, 2018, Citizens & Northern Corporation (Citizens) and Monument Bancorp, Inc. (Monument) entered into a merger agreement (the Merger Agreement) that provided that Monument Bancorp, Inc. will merge with and into Citizens, with Citizens remaining as the surviving entity. Following the merger, Monument Bank will merge with and into Citizens & Northern Bank with Citizens & Northern Bank remaining as the surviving entity.
At the effective time of the merger, Monument shareholders will be entitled to elect to receive, for each share of Monument common stock, subject to the election and adjustment procedures described in the joint proxy statement/prospectus, either 1.0144 share of Citizens common stock or $28.10 in cash, provided, however, that 80 percent of the total number of outstanding shares of Monument common stock will be converted into Citizens common stock, and the remaining outstanding shares of Monument common stock will be converted into cash.
Subject to the satisfaction or waiver of the closing conditions contained in the merger agreement, including the approval of the merger agreement by Monument’s shareholders and the receipt of required regulatory approvals, Citizens and Monument expect that the merger will be completed during the second quarter of 2019. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being completed at a different time or not atall.
20. | SUBSEQUENT EVENTS |
Management has reviewed events occurring through March 15, 2019, the date the consolidated financial statements were issued, and no subsequent events occurred requiring accrual or disclosure.
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