UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 20132016
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________________.
Commission file number: 0-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA | 23-2451943 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
90-92 MAIN STREET, WELLSBORO, PA 16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange Where Registered | |
Common Stock Par Value $1.00 | The NASDAQ Stock Market LLC |
Securities registered pursuant to section 12(g) of the Act:None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨Nox
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer “and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one:) Large accelerated filer¨ Accelerated filerx Non-accelerated filer¨ Smaller reporting company¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ Nox
The aggregate market value of the registrant's common stock held by non-affiliates at June 30, 2013,2016, the registrant’s most recently completed second fiscal quarter, was $232,640,563.$237,079,156.
The number of shares of common stock outstanding at February 13, 20149, 2017 was 12,409,748.
12,143,776.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 17, 201420, 2017 are incorporated by reference into Parts III and IV of this report.
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TABLE OF CONTENTS
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Citizens & Northern Corporation (“Corporation”) is a holding company whose principal activity is community banking. The Corporation’s principal office is located in Wellsboro, Pennsylvania. The largest subsidiary is Citizens & Northern Bank (“C&N Bank” or the “Bank”). The Corporation’s other wholly-owned subsidiaries are Citizens & Northern Investment Corporation and Bucktail Life Insurance Company (“Bucktail”). Citizens & Northern Investment Corporation was formed in 1999 to engage in investment activities. Bucktail reinsures credit and mortgage life and accident and health insurance on behalf of C&N Bank.
C&N Bank is a Pennsylvania banking institution that was formed by the consolidation of Northern National Bank of Wellsboro and Citizens National Bank of Towanda on October 1, 1971. Subsequent mergers included: First National Bank of Ralston in May 1972; Sullivan County National Bank in October 1977; Farmers National Bank of Athens in January 1984; and First National Bank of East Smithfield in May 1990. In 2005, the Corporation acquired Canisteo Valley Corporation and its subsidiary, First State Bank, a New York State chartered commercial bank with offices in Canisteo and South Hornell, NY. In 2010, the First State Bank operations were merged into C&N Bank and Canisteo Valley Corporation was merged into the Corporation. On May 1, 2007, the Corporation acquired Citizens Bancorp, Inc. (“Citizens”), with banking offices in Coudersport, Emporium and Port Allegany, Pennsylvania. Citizens Trust Company, the banking subsidiary of Citizens, was merged with and into C&N Bank as part of the transaction. C&N Bank has held its current name since May 6, 1975, at which time C&N Bank changed its charter from a national bank to a Pennsylvania bank.
C&N Bank provides an extensive range of banking services, including deposit and loan products for personal and commercial customers. The Bank also maintains a trust division that provides a wide range of financial services, such as 401(k) plans, retirement planning, estate planning, estate settlements and asset management. In January 2000, C&N Bank formed a subsidiary, C&N Financial Services Corporation (“C&NFSC”). C&NFSC is a licensed insurance agency that provides insurance products to individuals and businesses. In 2001, C&NFSC added a broker-dealer division, which offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. C&NFSC’s operations are not significant in relation to the total operations of the Corporation.
All phases of the Bank’s business are competitive. The Bank primarily competes in Tioga, Bradford, Sullivan, Lycoming, Potter, Cameron and McKean counties in Pennsylvania, and Steuben and Allegany counties in New York. The Bank competes with local commercial banks headquartered in our market area as well as other commercial banks with branches in our market area. Some of the banks that have branches in our market area are larger in overall size. With respect to lending activities and attracting deposits, the Bank also competes with savings banks, savings and loan associations, insurance companies, regulated small loan companies and credit unions. Also, the Bank competes with mutual funds for deposits. C&N Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management, brokerage and insurance services. The Bank is generally competitive with all financial institutions in our service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The Bank serves a diverse customer base, and is not economically dependent on any small group of customers or on any individual industry.
Major initiatives within the last 5 years included the following:
· | in |
· | in 2013, worked with consultants on projects which resulted in ongoing increases in revenues from service charges on deposit accounts, starting primarily in the fourth quarter 2013, and ongoing reductions in electronic funds processing |
· | in 2014, approved a treasury stock repurchase program for repurchase up to 622,500 shares of the Corporation’s common stock, or approximately 5% of the Corporation’s outstanding shares at July 16, 2014. In the first four months of 2016, the Corporation repurchased the remainder of the shares authorized under the program. In total, 622,500 shares were repurchased for a total cost of $12,140,000, at an average price of $19.50 per share; |
· | in 2015, began an organization-wide effort to enhance customer relationships, growth and |
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· | in April 2016, approved a new treasury stock repurchase program authorizing repurchase of up to 600,000 shares of the |
· | in 2016, submitted application for regulatory approval to establish a loan production office in Elmira, New York. Formal approval has been received, and the office is scheduled to open in the first quarter 2017. |
Virtually all of the Corporation’s banking offices are located in the “Marcellus Shale,” an area extending across portions of New York State, Pennsylvania, Ohio, Maryland, West Virginia and Virginia. In recent years, most of the Pennsylvania counties in which the Corporation operates have beenwere significantly affected by an upsurge in natural gas exploration, as technological developments have made exploration of the Marcellus Shale commercially feasible. FromAfter a surge of activity in 2009 through approximately the first halfmost of 2012, a significant portion of the Corporation’s new business opportunities in lending, Trust and other services arose either directly or indirectly from Marcellus Shale-related activity. Due in large part to a decline in2011, the market price of natural gas declined, causing Marcellus Shale natural gas exploration activity slowed overto slow, though some activity has continued to occur throughout the course of 2012 and further slowed in 2013, though itCorporation’s market area. Through December 31, 2016, the Corporation has not completely stalled. Due to its pervasive nature, it is virtually impossible to quantifyexperienced significant credit issues as a result of the aggregate impact ofexpansion and subsequent reduction in Marcellus Shale-related activity on the Corporation’s financial position at December 31, 2013 and results of operations in 2009 through 2013.activity.
At December 31, 2013,2016, C&N Bank had total assets of $1,224,369,000,$1,228,026,000, total deposits of $956,981,000,$990,241,000, net loans outstanding of $635,640,000$743,362,000 and 287full-time291 full-time equivalent employees.
Most activities of the Corporation and its subsidiaries are regulated by federal or state agencies. The primary regulatory relationships are described as follows:
· | The Corporation is a bank holding company formed under the provisions of Section 3 of the Federal Reserve Act. The Corporation is under the direct supervision of the Federal Reserve and must comply with the reporting requirements of the Federal Bank Holding Company Act. |
· | C&N Bank is a state-chartered, nonmember bank, supervised by the Federal Deposit Insurance Corporation and the Pennsylvania Department of |
· | C&NFSC is a Pennsylvania corporation. The Pennsylvania Department of Insurance regulates C&NFSC’s insurance activities. Brokerage products are offered through third party networking agreements. |
· | Bucktail is incorporated in the state of Arizona and supervised by the Arizona Department of Insurance. |
A copy of the Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current events reports on Form 8-K, and amendments to these reports, will be furnished without charge upon written request to the Corporation’s Treasurer at P.O. Box 58, Wellsboro, PA 16901. Copies of these reports will be furnished as soon as reasonably possible, after they are filed electronically with the Securities and Exchange Commission. The information is also available through the Corporation’s web site at www.cnbankpa.com.
The Corporation is subject to the many risks and uncertainties applicable to all banking companies, as well as risks specific to the Corporation’s geographic locations. Although the Corporation seeks to effectively manage risks, and maintains a level of equity that exceeds the banking regulatory agencies’ thresholds for being considered “well capitalized” (see Note 18 to the consolidated financial statements), management cannot predict the future and cannot eliminate the possibility of credit, operational or other losses. Accordingly, actual results may differ materially from management's expectations. Some of the Corporation’s significant risks and uncertainties are discussed below.
Credit Risk from Lending Activities -A significant source of risk is the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most of the Corporation’s loans are secured, but some loans are unsecured. With respect to secured loans, the collateral securing the repayment of these loans may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when it is not. The Corporation has adopted underwriting and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss. Also, as discussed further in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis, the Corporation attempts to estimate the amount of losses that may be inherent in the portfolio through a quarterly evaluation process that includes several members of management and that addresses specifically identified problem loans, as well as other quantitative data and qualitative factors. Such risk management and accounting policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Biggert-Waters Flood Insurance Act –In 2012, the Biggert-Waters Flood Insurance Act (the “Act”) became law. The Act was designed to strengthen the National Flood Insurance Program by phasing out the federal government’s subsidization of portions of the cost of flood insurance policies. Recent changes resulting from the Act have included: (1) phase-in of increased flood insurance rates for some properties, generally with an increase of 25% per year for 4 years until full-risk rates are reached, and (2) elimination of grandfathering of original flood-risk ratings, so that effective in 2014, all buildings will be rated using the latest flood zone maps. For primary residences that have never flooded and whose insurance policy has never lapsed, the government-funded subsidy will continue; however, the full-risk rate will apply immediately if a flood insurance policy lapses or if a property located in a flood zone is newly purchased.
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Unless the Act is revised or repealed, reductions in collateral values associated with properties located in flood zones that secure some of the Corporation’s residential and commercial loans could occur, and some borrowers may become unable or unwilling to make their loan payments as a result of the increased costs of flood insurance. These potential results of the Act’s provisions could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. For additional information regarding interest rate risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."
Breach of Information Security and Technology Dependence -The Corporation relies on software, communication, and information exchange on a variety of computing platforms and networks and over the Internet. Despite numerous safeguards, the Corporation cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and the Corporation could be exposed to claims from customers. Any of these results could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Limited Geographic Diversification -The Corporation grants commercial, residential and personal loans to customers primarily in the Pennsylvania counties of Tioga, Bradford, Sullivan, Lycoming, Potter, Cameron and McKean, and in Steuben and Allegany Counties in New York State. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. As described in the “Business” section of Form 10-K, in recent years the Corporation’s market area has been significantly impacted by natural gas development activities associated with exploration of the Marcellus Shale. While Marcellus Shale-related development has created economic opportunities for business and individuals throughout much of our market area, natural gas exploration activity slowed in 2012 and further slowed in 2013, and the possibility exists that this activity could be further reduced or cease as a result of changes in economic conditions, environmental concerns or other factors.
Deterioration in economic conditions including possible effects if Marcellus Shale-related activity were to further diminish or cease, could adversely affect the quality of the Corporation's loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.
Competition -All phases of the Corporation’s business are competitive. Some competitors are much larger in total assets and capitalization than the Corporation, have greater access to capital markets and can offer a broader array of financial services. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.
Government Regulation and Monetary Policy -The Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the manner in which the Corporation conducts its business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit the Corporation's shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects short-term interest rates and credit conditions, and any unfavorable change in these conditions could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.
Mortgage Banking – In September 2009, the Corporation entered into an agreement to originate and sell residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation’s mortgage sales activity under this program was not significant in 2009, but has subsequently increased. In 2014, the Corporation entered into an agreement and in June 2014 began to originate and sell residential mortgage loans to the secondary market through the MPFX Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, 2013,2016, total residential mortgages sold and serviced through the two programs amounted to $145,954,000.$163,296,000. The Corporation must strictly adhere to the MPF Xtra and MPFX Original program guidelines for origination, underwriting and servicing loans, and failure to do so may result in the Corporation being forced to repurchase loans or being dropped from the program. As of December 31, 2013,2016, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,420,000.$1,852,000. If the volume of such forced repurchases of loans were to increase significantly, or if the Corporation were to be dropped from the program,programs, it could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
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Equity Securities RiskMarkets -– The fair value of the Corporation's available-for-sale securities, as well as the revenues the Corporation earns from its Trust and Financial Management and brokerage services, are sensitive to price fluctuations and market events.
Declines in the values of the Corporation’s equitysecurities holdings, combined with adverse changes in the expected cash flows from these investments, could result in other-than-temporary impairment charges.
A portion of the Corporation's securities portfolio consists of investments in stocks of banks and bank holding companies. Investments in bank stocks are subject to the risk factors affecting the banking industry, and that could cause a general market decline in the value of bank stocks. Also, losses could occur in individual stocks held by the Corporation because of specific circumstances related to each bank. These factors could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. For additional information regarding equity securities risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."
Debt Securities Risk– In 2009, the Corporation’s earnings were materially impaired by securities losses. Much of the Corporation’s 2009 losses from trust-preferred securities and other securities stem from the much-publicized economic problems affecting the national and international economy, which particularly hurt the banking industry. The Corporation has exposure to the possibility of future losses from investments in obligations of states and political subdivisions (also known as municipal bonds). As discussed in more detail in the “Income Taxes” section of Management’s Discussion and other debt securities. Analysis, the Trump Administration and the U.S. Congress have recently been discussing the possibility of lowering corporate income tax rates. If corporate income tax rates were lowered, fully taxable-equivalent yields on tax-exempt securities (municipal bonds) would decrease from their recent levels, which may result in a reduction in the fair value of such securities held at December 31, 2016.
For additional information regarding debt securities, see the “Securities” section of Management’s Discussion and Analysis and Note 7 to the consolidated financial statements.
The Corporation's Trust and Financial Management revenue is determined, in part, from the value of the underlying investment portfolios. Accordingly, if the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation's revenue could be negatively impacted. In addition, the Corporation's ability to sell its brokerage services is dependent, in part, upon consumers' level of confidence in securities markets.
The Federal Home Loan Bank of Pittsburgh- Through its subsidiary (C&N Bank), the Corporation is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 1211 regional Federal Home Loan Banks. The Corporation has a line of credit with the FHLB-Pittsburgh that is secured by a blanket lien on its loan portfolio. Access to this line of credit is critical if a funding need arises. However, there can be no assurance that the FHLB-Pittsburgh will be able to provide funding when needed, nor can there be assurance that the FHLB-Pittsburgh will provide funds specifically to the Corporation should its financial condition deteriorate and/or regulators prevent that access. The inability to access this source of funds could have a materially adverse effect on the Corporation’s financial flexibility if alternate financing is not available at acceptable interest rates. The failure of the FHLB-Pittsburgh or the FHLB system in general, may materially impair the Corporation’s ability to meet short- and long-term liquidity needs or to meet growth plans.
The Corporation owns common stock of the FHLB-Pittsburgh in order to qualify for membership in the FHLB system and access services from the FHLB-Pittsburgh. The FHLB-Pittsburgh faces a variety of risks in its operations including interest rate risk, counterparty credit risk, and adverse changes in its regulatory framework. In addition, the 1211 Federal Home Loan Banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB cannot meet its obligations, other FHLBs can be called upon to make required payments. Such risks affecting the FHLB-Pittsburgh could adversely impact the value of the Corporation’s investment in the common stock of the FHLB-Pittsburgh and/or affect its access to credit.
Soundness of Other Financial Institutions- In addition to the FHLB-Pittsburgh, the Corporation maintains other credit facilities that provide it with additional liquidity. These facilities include secured and unsecured borrowings from the Federal Reserve Bank and third-party commercial banks. The Corporation believes that it maintains a strong liquidity position and that it is well positioned to withstand foreseeable market conditions. However, legal agreements with counterparties typically include provisions allowing them to restrict or terminate the Corporation’s access to these credit facilities with or without advance notice and at their sole discretion.
Financial institutions are interconnected as a result of trading, clearing, counterparty, and other relationships. Financial market conditions have been negatively impacted in the past and such disruptions or adverse changes in the Corporation's results of operations or financial condition could, in the future, have a negative impact on available sources of liquidity. Such a situation may arise due to circumstances that are outside the Corporation’s control, such as general market disruptions or operational problems affecting the Corporation or third parties. The Corporation’s efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in available liquidity. In such events, the Corporation’s cost of funds may increase, thereby reducing net interest income, or the Corporation may need to sell a portion of its securities and/or loan portfolio, which, depending upon market conditions, could necessitate realizing a loss.
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FDIC Insurance Assessments -In 2008 and 2009, higher levels of bank failures dramatically increased the resolution costs of the Federal Deposit Insurance Corporation, or the FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress have taken action to increaseincreased federal deposit insurance coverage, placing additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, in 2009 the FDIC increased assessment rates and imposedrates. As a specialresult of lowering assessment on all insured institutions. In December 2009, we paid a pre-payment of the FDIC’s estimated assessment totallevels for the next three years, totaling approximately $5.5 million. The pre-payment amount was includedCorporation and other US banks, the Corporation’s 2016 FDIC assessment expense decreased to $488,000 from $603,000 in Other Assets in2015. Although the consolidated balance sheet, with amounts amortized in 2010 through the first six months of 2013 based on current assessments. In June 2013, as the FDIC’s funding position was strengthened in comparison to its position in 2009, the FDIC refunded the unamortized portions of the pre-payments from banks, including a refund of $2.7 million to the Corporation.
Although ourCorporation’s total expenses from FDIC assessments have steadily decreased - to $604,000 in 2013, $633,000 in 2012, $832,000 in 2011 and $1,450,000 in 2010 - from $2,092,000 in 2009, we arethe Corporation is generally unable to control the amountcost of premiums that we are required to pay for FDIC insurance.the premiums. If a significant number of bank or financial institution failures occur, wethe Corporation may be required to pay higher FDIC premiums. Future increases in FDIC insurance premiums or additional special assessments may materially adversely affect ourthe Corporation’s results of operations.
Bank Secrecy Act and Related Laws and Regulations -These laws and regulations have significant implications for all financial institutions. They increase due diligence requirements and reporting obligations for financial institutions, create new crimes and penalties, and require the federal banking agencies, in reviewing merger and other acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering activities. Even innocent noncompliance and inconsequential failure to follow the regulations could result in significant fines or other penalties, which could have a material adverse impact on the Corporation's financial condition, results of operations or liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
The Bank owns each of its properties, except for the branch facilities located at 130 Court Street, Williamsport, PA, and at 2 East Mountain Avenue, South Williamsport, PA, which are leased. In September 2011, the Athens, PA office was damaged by flooding and reopened in April 2012. The Bank did not incur a significant financial loss associated with the flooding, as almost all of the cost of replacement was covered by insurance. All of the other properties are in good condition. None of the owned properties are subject to encumbrance.
A listing of properties is as follows:
Main administrative offices:
90-92 Main Street | or | 10 Nichols Street |
Wellsboro, PA 16901 | Wellsboro, PA 16901 |
Branch offices – Citizens & Northern Bank:
428 S. Main Street | 514 Main Street | 2 East Mountain Avenue ** | |||
Athens, PA 18810 | Laporte, PA 18626 | South Williamsport, PA 17702 | |||
10 North Main Street | 4534 Williamson Trail | 41 Main Street | |||
Coudersport, PA 16915 | Liberty, PA 16930 | Tioga, PA 16946 | |||
111 W. Main Street | 1085 S. Main Street | 428 Main Street | |||
Dushore, PA 18614 | Mansfield, PA 16933 | Towanda, PA 18848 | |||
563 Main Street | 612 James Monroe Avenue | 64 Elmira Street | |||
East Smithfield, PA 18817 | Monroeton, PA 18832 | Troy, PA 16947 | |||
104 W. Main Street | 3461 Route 405 Highway | 90-92 Main Street | |||
Elkland, PA 16920 | Muncy, PA 17756 | Wellsboro, PA 16901 | |||
135 East Fourth Street | 100 Maple Street | 1510 Dewey Avenue | |||
Emporium, PA 15834 | Port Allegany, PA 16743 | Williamsport, PA 17701 | |||
230 Railroad Street | 24 Thompson Street | 130 Court Street ** | |||
Jersey Shore, PA 17740 | Ralston, PA 17763 | Williamsport, PA 17701 | |||
102 E. Main Street | 1827 Elmira Street | 1467 Golden Mile Road | |||
Knoxville, PA 16928 | Sayre, PA 18840 | Wysox, PA 18854 | |||
3 Main Street | 6250 County Rte 64 | ||||
Canisteo, NY 14823 | Hornell, NY 14843 |
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Loan production office of Citizens & Northern Bank (opening first quarter 2017):
250 East Water Street
Elmira, NY 14901
Facilities management office:
13 Water Street
Wellsboro, PA 16901
** designates leased branch facility
The Corporation and the Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material adverse effect on the Corporation’s financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
QUARTERLY SHARE DATA
Trades of the Corporation’s stock are executed through various brokers who maintain a market in the Corporation’s stock. The Corporation’s stock is listed on the NASDAQ Capital Market with the trading symbol CZNC. As of December 31, 2013,2016, there were 2,4652,260 shareholders of record of the Corporation’s common stock.
The following table sets forth the high and low sales prices of the common stock during 20132016 and 2012.2015.
2013 | 2012 | 2016 | 2015 | |||||||||||||||||||||||||||||
Dividend | Dividend | Dividend | Dividend | |||||||||||||||||||||||||||||
Declared | Declared | Declared | Declared | |||||||||||||||||||||||||||||
per | per | per | per | |||||||||||||||||||||||||||||
High | Low | Quarter | High | Low | Quarter | High | Low | Quarter | High | Low | Quarter | |||||||||||||||||||||
First quarter | First quarter | $20.00 | $18.65 | $0.25 | $22.48 | $18.12 | $0.18 | $ | 20.99 | $ | 19.26 | $ | 0.26 | $ | 21.50 | $ | 19.01 | $ | 0.26 | |||||||||||||
Second quarter | Second quarter | 20.46 | 18.51 | 0.25 | 20.69 | 16.79 | 0.20 | 21.00 | 19.40 | 0.26 | 21.17 | 19.16 | 0.26 | |||||||||||||||||||
Third quarter | Third quarter | 21.45 | 19.08 | 0.25 | 20.80 | 17.78 | 0.22 | 22.67 | 20.00 | 0.26 | 20.73 | 19.25 | 0.26 | |||||||||||||||||||
Fourth quarter | Fourth quarter | 21.00 | 19.37 | 0.25 | 20.25 | 17.51 | 0.24 | 26.57 | 20.54 | 0.26 | 21.45 | 19.07 | 0.26 |
Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.
On May 19, 2011,Effective July 17, 2014, the Corporation authorizedestablished a plan for repurchasestreasury stock repurchase program authorizing repurchase of outstandingup to 622,500 shares of the Corporation’s common stock, upor approximately 5% of the Corporation’s issued and outstanding shares at July 16, 2014. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases under the program could be made from time to time in the open market at prevailing prices, or through privately negotiated transactions. In the first four months of 2016, the Corporation repurchased the remainder of the shares authorized under the program. In total, 622,500 shares were repurchased for a total cost of $1 million. On September 22, 2011,$12,140,000, at an average price of $19.50 per share.
Effective April 21, 2016, the Corporation’s Board of Directors authorized additional repurchases of outstanding common stock in open market or privately negotiated transactions, up toapproved a total of $1 million, as an addition to the May 2011new treasury stock repurchase program. TheUnder the newly approved stock repurchase program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation's common stock or slightly less than 5% of the Corporation's issued and outstanding shares at April 19, 2016. Consistent with the previous program, the Board of Directors’ authorizations provideApril 21, 2016 authorization provides that: (1) the new treasury stock repurchase programs becameprogram shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the programsnew program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. As of December 31, 2013, the maximum additional value available forTo date, no purchases have been made under this program was $980,694.repurchase program.
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In
The following table sets forth a summary of purchases by the Corporation, in the open market, of its equity securities during the fourth quarter 2013, the Corporation made no purchases of its equity securities.2016:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
October 1 - 31, 2016 | 0 | $ | - | 0 | 600,000 | |||||||||||
November 1 - 30, 2016 | 0 | $ | - | 0 | 600,000 | |||||||||||
December 1 - 31, 2016 | 0 | $ | - | 0 | 600,000 |
9 |
PERFORMANCE GRAPH
Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the Russell 2000 and a Peer Group Index of similar banking organizations selected by the Corporation for the five-year period commencing December 31, 20082011 and ended December 31, 2013.2016. The index values are market-weighted dividend-reinvestment numbers, which measure the total return for investing $100.00 five years ago. This meets Securities & Exchange Commission requirements for showing dividend reinvestment share performance over a five-year period and measures the return to an investor for placing $100.00 into a group of bank stocks and reinvesting any and all dividends into the purchase of more of the same stock for which dividends were paid.
Period Ending | Period Ending | |||||||||||||||||||||||||||||
Index | 12/31/08 | 12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 12/31/11 | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | ||||||||||||||||||
Citizens & Northern Corporation | 100.00 | 50.34 | 80.96 | 104.19 | 111.31 | 127.65 | 100.00 | 106.83 | 122.52 | 129.48 | 138.55 | 181.75 | ||||||||||||||||||
Russell 2000 | 100.00 | 127.17 | 161.32 | 154.59 | 179.86 | 249.69 | 100.00 | 116.35 | 161.52 | 169.43 | 161.95 | 196.45 | ||||||||||||||||||
CZNC Peer Group Index* | 100.00 | 97.12 | 110.34 | 106.20 | 123.81 | 154.01 | 100.00 | 124.14 | 157.02 | 172.35 | 180.02 | 253.70 |
The Corporation’s peer group consists of all publicly traded (who file financial statements with the Securities & Exchange Commission) commercial banks headquartered inand thrifts within New Jersey, New York, Ohio and Pennsylvania with total assets of $700between $750 million to $2and $3.5 billion as of September 30, 2013. This peer group consists of ACNB Corporation, Gettysburg; AmeriServ Financial, Inc., Johnstown; Citizens Financial Services, Inc., Mansfield; CNB Financial Corporation, Clearfield; Codorus Valley Bancorp, Inc., York; ENB Financial Corp., Ephrata; ESB Financial Corporation, Ellwood; ESSA Bancorp, Inc., Stroudsburg; First Keystone Corporation, Berwick; First National Community Bancorp, Inc., Dunmore; FNB Bancorp, Inc., Newtown; Fox Chase Bancorp, Inc., Hatboro; Franklin Financial Services Corporation, Chambersburg; Harleysville Savings Financial Corporation, Harleysville; Integrity Bancshares, Inc., Camp Hill; Norwood Financial Corp., Honesdale; Orrstown Financial Services, Inc., Shippensburg; Penns Woods Bancorp, Inc., Williamsport; Peoples Financial Services Corp., Scranton; QNB Corp., Quakertown; Republic First Bancorp, Inc., Philadelphia; Royal Bancshares of Pennsylvania, Inc., Narberth; Somerset Trust Holding Company, Somerset; TF Financial Corporation, Newtown.2016.
The data for this graph was obtained from SNL Financial LC, Charlottesville, VA.
10 |
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information concerning the Stock Incentive Plan and Independent Directors Stock Incentive Plan, both of which have been approved by the Corporation’s shareholders. The figures shown in the table below are as of December 31, 2013.2016.
Number of | |||
Number of | Weighted- | Securities | |
Securities to be | average | Remaining | |
Issued Upon | Exercise | for Future | |
Exercise of | Price of | Issuance Under | |
Outstanding | Outstanding | Equity Compen- | |
Options | Options | sation Plans | |
Equity compensation plans | |||
approved by shareholders | 358,176 | $19.03 | 334,810 |
Equity compensation plans | |||
not approved by shareholders | 0 | N/A | 0 |
Number of | ||||||||||||
Number of | Weighted- | Securities | ||||||||||
Securities to be | average | Remaining | ||||||||||
Issued Upon | Exercise | for Future | ||||||||||
Exercise of | Price of | Issuance Under | ||||||||||
Outstanding | Outstanding | Equity Compen- | ||||||||||
Options | Options | sation Plans | ||||||||||
Equity compensation plans approved by shareholders | 202,037 | $ | 18.58 | 302,550 | ||||||||
Equity compensation plans not approved by shareholders | 0 | N/A | 0 |
More details related to the Corporation’s equity compensation plans are provided in Notes 1 and 13 to the consolidated financial statements.
ITEM 6. SELECTED FINANCIAL DATA | |||||||||
As of or for the Year Ended December 31, | |||||||||
INCOME STATEMENT (In Thousands) | 2013 | 2012 | 2011 | 2010 | 2009 | ||||
Interest and fee income | $48,914 | $56,632 | $61,256 | $62,114 | $67,976 | ||||
Interest expense | 5,765 | 9,031 | 13,556 | 19,245 | 24,456 | ||||
Net interest income | 43,149 | 47,601 | 47,700 | 42,869 | 43,520 | ||||
Provision (credit) for loan losses | 2,047 | 288 | (285) | 1,191 | 680 | ||||
Net interest income after provision (credit) for loan losses | 41,102 | 47,313 | 47,985 | 41,678 | 42,840 | ||||
Noninterest income excluding securities gains (losses) | 16,451 | 16,383 | 13,897 | 13,809 | 12,711 | ||||
Net impairment losses recognized in earnings from | |||||||||
available-for-sale securities | (25) | (67) | 0 | (433) | (85,363) | ||||
Net realized gains on available-for-sale securities | 1,743 | 2,749 | 2,216 | 1,262 | 1,523 | ||||
Loss on prepayment of debt | 1,023 | 2,333 | 0 | 0 | 0 | ||||
Noninterest expense excluding loss on prepayment of debt | 33,471 | 32,914 | 32,016 | 31,461 | 33,701 | ||||
Income (loss) before income tax provision (credit) | 24,777 | 31,131 | 32,082 | 24,855 | (61,990) | ||||
Income tax provision (credit) | 6,183 | 8,426 | 8,714 | 5,800 | (22,655) | ||||
Net income (loss) | 18,594 | 22,705 | 23,368 | 19,055 | (39,335) | ||||
U.S. Treasury preferred dividends | 0 | 0 | 0 | 1,474 | 1,428 | ||||
Net income (loss) available to common shareholders | $18,594 | $22,705 | $23,368 | $17,581 | ($40,763) | ||||
PER COMMON SHARE: | |||||||||
Basic earnings per share | $1.51 | $1.86 | $1.92 | $1.45 | ($4.40) | ||||
Diluted earnings per share | $1.50 | $1.85 | $1.92 | $1.45 | ($4.40) | ||||
Cash dividends declared per share | $1.00 | $0.84 | $0.58 | $0.39 | $0.72 | ||||
Book value per common share at period-end | $14.49 | $14.89 | $13.77 | $11.43 | $10.46 | ||||
Tangible book value per common share at period-end | $13.51 | $13.91 | $12.77 | $10.42 | $9.43 | ||||
Weighted average common shares outstanding - basic | 12,352,383 | 12,235,748 | 12,162,045 | 12,131,039 | 9,271,869 | ||||
Weighted average common shares outstanding - diluted | 12,382,790 | 12,260,208 | 12,166,768 | 12,131,039 | 9,271,869 | ||||
END OF PERIOD BALANCES (In Thousands) | |||||||||
Available-for-sale securities | $482,658 | $472,577 | $481,685 | $443,956 | $396,288 | ||||
Gross loans | 644,303 | 683,910 | 708,315 | 730,411 | 721,011 | ||||
Allowance for loan losses | 8,663 | 6,857 | 7,705 | 9,107 | 8,265 | ||||
Total assets | 1,237,695 | 1,286,907 | 1,323,735 | 1,316,588 | 1,321,795 | ||||
Deposits | 954,516 | 1,006,106 | 1,018,206 | 1,004,348 | 926,789 | ||||
Borrowings | 96,723 | 89,379 | 130,313 | 166,908 | 235,471 | ||||
Stockholders' equity | 179,472 | 182,786 | 167,385 | 138,944 | 152,410 | ||||
Common stockholders' equity (stockholders' equity, | |||||||||
excluding preferred stock) | 179,472 | 182,786 | 167,385 | 138,944 | 126,661 | ||||
AVERAGE BALANCES (In Thousands) | |||||||||
Total assets | 1,237,096 | 1,305,163 | 1,313,445 | 1,326,145 | 1,296,086 | ||||
Earning assets | 1,145,340 | 1,199,538 | 1,208,584 | 1,205,608 | 1,208,280 | ||||
Gross loans | 656,495 | 700,241 | 714,421 | 721,997 | 728,748 | ||||
Deposits | 964,031 | 1,008,469 | 1,001,125 | 965,615 | 886,703 | ||||
Stockholders' equity | 181,412 | 175,822 | 152,718 | 150,133 | 141,787 |
11 |
As of or for the Year Ended December 31, | |||||
2013 | 2012 | 2011 | 2010 | 2009 | |
KEY RATIOS | |||||
Return on average assets | 1.50% | 1.74% | 1.78% | 1.44% | -3.03% |
Return on average equity | 10.25% | 12.91% | 15.30% | 12.69% | -27.74% |
Average equity to average assets | 14.66% | 13.47% | 11.63% | 11.32% | 10.94% |
Net interest margin (1) | 4.05% | 4.26% | 4.22% | 3.81% | 3.84% |
Efficiency (2) | 53.27% | 48.82% | 49.37% | 52.64% | 57.00% |
Cash dividends as a % of diluted earnings per share | 66.67% | 45.41% | 30.21% | 26.90% | NM |
Tier 1 leverage | 13.79% | 12.53% | 10.93% | 9.20% | 9.86% |
Tier 1 risk-based capital | 25.10% | 22.86% | 19.95% | 15.87% | 16.70% |
Total risk-based capital | 26.59% | 24.01% | 21.17% | 17.17% | 17.89% |
Tangible common equity/tangible assets | 13.66% | 13.39% | 11.84% | 9.71% | 8.72% |
Nonperforming assets/total assets | 1.53% | 0.82% | 0.73% | 0.92% | 0.76% |
Nonperforming loans/total loans | 2.80% | 1.41% | 1.19% | 1.58% | 1.27% |
Allowance for loan losses/total loans | 1.34% | 1.00% | 1.09% | 1.25% | 1.15% |
Net charge-offs/average loans | 0.04% | 0.16% | 0.16% | 0.05% | 0.04% |
NM = Not a meaningful ratio.ITEM 6. SELECTED FINANCIAL DATA
As of or for the Year Ended December 31, | ||||||||||||||||||||
INCOME STATEMENT (In Thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Interest and fee income | $ | 44,098 | $ | 44,519 | $ | 46,009 | $ | 48,914 | $ | 56,632 | ||||||||||
Interest expense | 3,693 | 4,602 | 5,122 | 5,765 | 9,031 | |||||||||||||||
Net interest income | 40,405 | 39,917 | 40,887 | 43,149 | 47,601 | |||||||||||||||
Provision for loan losses | 1,221 | 845 | 476 | 2,047 | 288 | |||||||||||||||
Net interest income after provision for loan losses | 39,184 | 39,072 | 40,411 | 41,102 | 47,313 | |||||||||||||||
Noninterest income excluding securities gains | 15,511 | 15,478 | 15,420 | 16,451 | 16,383 | |||||||||||||||
Net impairment losses recognized in earnings from | ||||||||||||||||||||
available-for-sale securities | 0 | 0 | 0 | (25 | ) | (67 | ) | |||||||||||||
Net realized gains on available-for-sale securities | 1,158 | 2,861 | 1,104 | 1,743 | 2,749 | |||||||||||||||
Loss on prepayment of debt | 0 | 2,573 | 0 | 1,023 | 2,333 | |||||||||||||||
Noninterest expense excluding loss on prepayment of debt | 34,744 | 33,030 | 34,157 | 33,471 | 32,914 | |||||||||||||||
Income before income tax provision | 21,109 | 21,808 | 22,778 | 24,777 | 31,131 | |||||||||||||||
Income tax provision | 5,347 | 5,337 | 5,692 | 6,183 | 8,426 | |||||||||||||||
Net income | $ | 15,762 | $ | 16,471 | $ | 17,086 | $ | 18,594 | $ | 22,705 | ||||||||||
PER COMMON SHARE: | ||||||||||||||||||||
Basic earnings per share | $ | 1.30 | $ | 1.35 | $ | 1.38 | $ | 1.51 | $ | 1.86 | ||||||||||
Diluted earnings per share | $ | 1.30 | $ | 1.35 | $ | 1.38 | $ | 1.50 | $ | 1.85 | ||||||||||
Cash dividends declared per share | $ | 1.04 | $ | 1.04 | $ | 1.04 | $ | 1.00 | $ | 0.84 | ||||||||||
Book value per common share at period-end | $ | 15.36 | $ | 15.39 | $ | 15.34 | $ | 14.49 | $ | 14.89 | ||||||||||
Tangible book value per common share at period-end | $ | 14.37 | $ | 14.41 | $ | 14.36 | $ | 13.51 | $ | 13.91 | ||||||||||
Weighted average common shares outstanding - basic | 12,098,129 | 12,211,941 | 12,390,067 | 12,352,383 | 12,235,748 | |||||||||||||||
Weighted average common shares outstanding - diluted | 12,128,364 | 12,233,773 | 12,412,050 | 12,382,790 | 12,260,208 | |||||||||||||||
END OF PERIOD BALANCES (Dollars In Thousands) | ||||||||||||||||||||
Available-for-sale securities | $ | 395,077 | $ | 420,290 | $ | 516,807 | $ | 482,658 | $ | 472,577 | ||||||||||
Gross loans | 751,835 | 704,880 | 630,545 | 644,303 | 683,910 | |||||||||||||||
Allowance for loan losses | 8,473 | 7,889 | 7,336 | 8,663 | 6,857 | |||||||||||||||
Total assets | 1,242,292 | 1,223,417 | 1,241,963 | 1,237,695 | 1,286,907 | |||||||||||||||
Deposits | 983,843 | 935,615 | 967,989 | 954,516 | 1,006,106 | |||||||||||||||
Borrowings | 64,629 | 92,263 | 78,597 | 96,723 | 89,379 | |||||||||||||||
Stockholders' equity | 186,008 | 187,487 | 188,362 | 179,472 | 182,786 | |||||||||||||||
Common shares outstanding | 12,113,228 | 12,180,623 | 12,279,980 | 12,390,063 | 12,274,035 | |||||||||||||||
AVERAGE BALANCES (In Thousands) | ||||||||||||||||||||
Total assets | 1,229,866 | 1,243,209 | 1,239,897 | 1,237,096 | 1,305,163 | |||||||||||||||
Earning assets | 1,147,549 | 1,159,298 | 1,155,401 | 1,145,340 | 1,199,538 | |||||||||||||||
Gross loans | 723,076 | 657,727 | 627,753 | 656,495 | 700,241 | |||||||||||||||
Deposits | 970,447 | 968,201 | 965,418 | 964,031 | 1,008,469 | |||||||||||||||
Stockholders' equity | 188,373 | 188,905 | 185,469 | 181,412 | 175,822 |
12 |
ITEM 6. SELECTED FINANCIAL DATA (Continued)
As of or for the Year Ended December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
KEY RATIOS | ||||||||||||||||||||
Return on average assets | 1.28 | % | 1.32 | % | 1.38 | % | 1.50 | % | 1.74 | % | ||||||||||
Return on average equity | 8.37 | % | 8.72 | % | 9.21 | % | 10.25 | % | 12.91 | % | ||||||||||
Average equity to average assets | 15.32 | % | 15.19 | % | 14.96 | % | 14.66 | % | 13.47 | % | ||||||||||
Net interest margin (1) | 3.76 | % | 3.69 | % | 3.80 | % | 4.05 | % | 4.26 | % | ||||||||||
Efficiency (2) | 59.22 | % | 56.66 | % | 57.59 | % | 53.27 | % | 48.82 | % | ||||||||||
Cash dividends as a % of diluted earnings per share | 80.00 | % | 77.04 | % | 75.36 | % | 66.67 | % | 45.41 | % | ||||||||||
Tier 1 leverage | 14.27 | % | 14.31 | % | 13.89 | % | 13.78 | % | 12.53 | % | ||||||||||
Tier 1 risk-based capital | 22.48 | % | 23.29 | % | 26.26 | % | 25.15 | % | 22.86 | % | ||||||||||
Total risk-based capital | 23.60 | % | 24.40 | % | 27.60 | % | 26.60 | % | 24.01 | % | ||||||||||
Tangible common equity/tangible assets | 14.15 | % | 14.49 | % | 14.34 | % | 13.66 | % | 13.39 | % | ||||||||||
Nonperforming assets/total assets | 1.43 | % | 1.31 | % | 1.34 | % | 1.53 | % | 0.82 | % | ||||||||||
Nonperforming loans/total loans | 2.07 | % | 2.09 | % | 2.45 | % | 2.80 | % | 1.41 | % | ||||||||||
Allowance for loan losses/total loans | 1.13 | % | 1.12 | % | 1.16 | % | 1.34 | % | 1.00 | % | ||||||||||
Net charge-offs/average loans | 0.09 | % | 0.04 | % | 0.29 | % | 0.04 | % | 0.16 | % |
(1) Rates of return on tax-exempt securities and loans are calculated on a fully-taxable equivalent basis.
(2) The efficiency ratio is calculated by dividing: (a) total noninterest expense excluding losses from prepayment of debt, by (b) the sum of net interest income (including income from tax-exempt securities and loans on a fully-taxable equivalent basis) and noninterest income excluding securities gains or losses.
13 |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this Annual Report on Form 10-K are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
· | changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates |
· | changes in general economic conditions |
· | legislative or regulatory changes |
· | downturn in demand for loan, deposit and other financial services in the Corporation’s market area |
· | increased competition from other banks and non-bank providers of financial services |
· | technological changes and increased technology-related costs |
· | changes in accounting principles, or the application of generally accepted accounting principles. |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
EARNINGS OVERVIEW
In 2013,2016, net income totaled $18,594,000,$15,762,000, or $1.51$1.30 per common share - basic and $1.50 per share – diluted, as compared to $1.86$1.35 per share – basic and $1.85diluted in 2015 and $1.38 per share – diluted in 2012 and $1.92 per- basic and diluted share in 2011.2014. The results for 20132016 represented a return on average assets of 1.50%1.28% and a return on average equity of 10.25%8.37%.
20132016 vs. 20122015
Net income per share – diluted for 2013 of $18,594,0002016 was $4,111,000 (18.1%)3.7% lower than 2012 net income.in 2015. Some of the more significant highlights related to annual earnings in 2016 as compared to 2015 are as follows:
· | Net interest income was $488,000 (1.2%) higher than the comparable total for 2015. The net interest margin was 3.76%, which was 0.07% higher than the margin for 2015, reflecting the benefits of a lower cost of borrowed funds and a more favorable mix of earning assets. The average balance of total borrowed funds was $62,516,000 at an average interest rate of 2.57% in 2016, down from average borrowings of $77,642,000 at an average interest rate of 3.45% in 2015. Average total loans outstanding were higher by $65.3 million (9.9%) in 2016 as compared to 2015, while average total available-for-sale securities were lower by $74.2 million. Average total deposits increased $2.2 million (0.2%). |
· | The provision for loan losses was $1,221,000 in 2016, an increase of $376,000 over 2015. In 2016, the provision included the impact of increasing the allowance for loan losses for the effects of loan growth and slight increases in net charge-off experience and qualitative factors used in determining the collectively evaluated portion of the allowance. In comparison, in 2015 the provision also reflected the effects of loan growth, but the qualitative factors used in determining a portion of the collectively determined allowance decreased slightly during the period. Also in 2016, the provision included an increase of $148,000 as compared to 2015 from changes in specific allowances on loans individually identified as impaired, adjusted for the impact of net charge-offs. |
· | Total noninterest revenue for 2016 increased $33,000 (0.2%) over 2015. Net gains from sales of loans increased $294,000 (40.0%), reflecting higher volume of sales, and Trust and Financial Management revenue increased $134,000 (2.9%). Other operating income increased $35,000 (2.1%), including an increase of $148,000 from redemptions of tax credits and increases in lending-related fees of $80,000, while this category included a gain of $212,000 from a split-dollar life insurance policy in 2015. Service charges on deposit accounts decreased $169,000 (3.5%) in 2016, reflecting a reduction in consumer overdraft volume. The fair value of mortgage servicing rights decreased $282,000 in 2016, which was a larger decrease by $120,000 as compared to 2015. Brokerage revenue decreased $83,000 (9.9%), as the volume of sales of annuities declined. |
14 |
· | In 2016, realized gains from securities totaled $1,158,000, including gains from sales of bank stocks of $1,125,000. In 2015, the Corporation generated gains from sales of securities totaling $2,861,000, including gains from sales of bank stocks of $2,220,000, and also incurred losses of $2,573,000 from prepayments of a borrowing in the second and fourth quarters totaling $34 million. In the fourth quarter 2016, the Corporation completed its program of bank stock sales that had begun in 2015, and had no remaining investments in bank stocks at December 31, 2016. |
· | Noninterest expenses, excluding losses on prepayment of borrowings, in 2016 exceeded the amount for 2015 by $1,714,000 (5.2%). Salaries and wages expense increased $729,000 (5.0%). Several new positions were established in the latter portion of 2015 and early 2016, including new positions established for lending, lending support, information technology, training, human resources and marketing functions. Professional fees expense increased $488,000, including increases related to employee sales and service training, information technology and marketing. Other operating expense increased $399,000 (7.8%), including increases in other real estate expenses of $123,000, donations and public relations-related expenses of $94,000 and education and training-related expenses of $60,000. Also, other operating expense was reduced in 2015 by $69,000 as a result of a recovery of sales tax previously paid. |
· | The provision for income tax totaled $5,347,000 in 2016, or an effective tax rate of 25.3% of pre-tax income. In comparison, the provision for income tax of $5,337,000 in 2015 represented a 24.5% effective rate. The higher effective tax rate in 2016 included the impact of a $300,000 reduction in tax-exempt interest income and an increase in the provision for state income tax of $64,000 that resulted mainly from a catch-up adjustment to increase New York State taxes for the effect of changes in the tax methodology that first became effective in 2015. |
2015 vs. 2014
Basic and diluted net income of $1.35 per share for 2015 was 2.2% lower than in 2014. Some of the more significant highlights related to annual earnings in 2015 as compared to 2014 are as follows:
· | Net interest income totaled |
2012 vs. 2011
In 2012, net income of $22,705,000 was $663,000 (2.8%) lower than 2011 net income. Some of the more significant highlights are as follows:
· | The provision for loan losses was |
· | In |
· |
15 |
· | In 2015, noninterest expenses, excluding losses on prepayment of borrowings; totaled $33,030,000, which was $1,127,000 (3.3%) |
More detailed information concerning fluctuations in the Corporation’s earnings results are provided in other sections of Management’s Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates
A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
As described in Note 7 to the consolidated financial statements, management evaluates securities for other-than-temporary impairment (“OTTI”). In making that evaluation, consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery. Management’s assessments of the likelihood and potential for recovery in value of securities are subjective and based on sensitive assumptions.
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables I, II and III include information regarding the Corporation’s net interest income in 2013, 2012,2016, 2015, and 2011.2014. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.
In 2009The calculations of fully taxable-equivalent yields on tax-exempt loans and the first quarter 2010, the Corporation recorded OTTI on its holding of a trust preferred security issued by Carolina First Mortgage Loan Trust, a subsidiary of The South Financial Group, Inc. In the fourth quarter 2010, The Toronto-Dominion Bank acquired The South Financial Group, Inc., made a payment for the full amount of previously deferred interest, and resumed quarterly payments on the security. The Corporation recognized a material changesecurities in the expected cash flows and recorded accretion income (included in interest income) to offset the previous OTTI charges as an adjustment to the security’s yield over its remaining life. Accretion income from this security totaled $855,000 in 2012 and $825,000 in 2011. The security had a face amount of $2,000,000 and matured in May 2012.
Excluding interest income (including accretion) and the average balance of this security from the calculations used to determine Tables I, II and III reflect inherent tax benefit based on the interestCorporation’s marginal federal income tax rate spreadof 35% for all periods presented. As discussed in more detail in the “Income Taxes” section of Management’s Discussion and interest margin (fully taxable equivalent net interestAnalysis, the Trump Administration and the U.S. Congress have recently been discussing the possibility of lowering corporate income divided by average total earning assets)tax rates. If corporate income tax rates were lowered, fully taxable-equivalent yields on tax-exempt loans and securities held at December 31, 2016 would be as follows:decrease from their recent levels.
Year Ended December 31, | |||
2013 | 2012 | 2011 | |
Interest rate spread: | |||
Actual from Table II | 3.88% | 4.04% | 3.96% |
Excluding Carolina First security | 3.88% | 3.97% | 3.89% |
Interest margin: | |||
Actual from Table II | 4.05% | 4.26% | 4.22% |
Excluding Carolina First security | 4.05% | 4.18% | 4.14% |
16 |
20132016 vs. 20122015
Fully taxable equivalent net interest income was $46,384,000$43,157,000 in 2013, $4,657,000 (9.1%2016, which was $338,000 (0.8%) lowerhigher than in 2012.2015. As shown in Table III, in 20132016 compared to 2012,2015, net changes in volume had the effect of increasing net interest income $2,754,000, and interest rate changes had the effect of decreasing net interest income $3,743,000, and net changes in volume had the effect of decreasing net interest income $914,000.$2,416,000. The most significant components of the ratevolume-related increase in net interest income in 2016 was an increase in interest income of $3,255,000 attributable to an increase in the balance of loans receivable and a decrease in interest expense of $991,000 attributable to a reduction in the balance of borrowed funds, partially offset by a volume-related decrease in interest income on available-for-securities of $1,542,000. The most significant components of the rate-related change in net interest income in 20132016 were a decrease in interest income of $2,615,000$1,560,000 attributable to lower rates earned on loans receivable and a decrease of $758,000 in interest income of $2,554,000 attributable to lower rates earned on available-for-sale securities, partially offset by a decrease in interest expense of $1,413,000 due to lower rates paid on interest-bearing deposits. The most significant components of the volume change in net interest income in 2013 were a decrease in interest income of $2,588,000 attributable to a decline in the balance of loans receivable, a decrease in interest expense of $1,180,000 attributable to a reduction in the balance of borrowed funds, and a decrease in interest expense of $691,000 attributable to a reduction in the balance of interest-bearing deposits (primarily certificates of deposit).securities. As presented in Table II, the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.88%3.63% in 2013,2016 as compared to 4.04%3.54% in 2012.2015.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $52,149,000$46,850,000 in 2013,2016, a decrease of 13.2%1.2% from 2012.2015. Although yields on securities and loans fell, overall yield on earning assets dropped only 0.01% due to a change in mix of earning assets to increase loans and decrease securities. Interest and fees on loans receivable increased $1,695,000, or 5.0%, while interest on available-for-sale securities decreased $5,203,000,$2,300,000, or 12.2%17.1%. The average balance of gross loans receivable increased 9.9% to $723,076,000 in 2016 from $657,727,000 in 2015. The Corporation experienced significant growth in all loan categories, particularly in participation loans purchased of $19,664,000, residential mortgages of $16,405,000, commercial real estate loans of $13,452,000, and tax free municipal loans of $6,351,000. The Corporation’s average rate of return on loans receivable declined to 4.92% in 2016 from 5.15% in 2015 as average interest rates on new loans are lower, reflecting recent market conditions.
As indicated in Table II, average available-for-sale securities (at amortized cost) totaled $461,564,000$404,979,000 in 2013,2016, a decrease of $2,785,000 (0.6%$74,169,000 (15.5%) from 2012. Net contraction2015. Funds generated from the net decrease in the Corporation’s available-for-sale securities portfolio was primarily made up of U.S. Government agency mortgage-backed securities and trust preferred securities. This contraction was partially offset by increaseswere used, in part, to fund the balances of U.S. Government agency bonds, municipal securities, and U.S. Government agency collateralized mortgage obligations.loan growth described above. The Corporation’s yield on securities fellwas lower in 2012 and 2013 because of low market interest rates,2016 than in 2015, primarily due to higher-yielding securities maturing as the maturity of the Carolina First security noted above, calls on municipal bonds and trust preferred securities, and prepayments on mortgage-backed securities and collateralized mortgage obligations.portfolio size was reduced. The average rate of return on available-for-sale securities was 3.12% for 20132.75% in 2016 and 3.67%2.81% in 2012.
The average balance of gross loans receivable decreased 6.2% to $656,495,000 in 2013 from $700,241,000 in 2012. The Corporation experienced contraction in the balance of loans receivable due to borrowers prepaying or refinancing existing loans combined with modest demand for new loans. The decline in the balance of the residential mortgage portfolio was also affected by management’s decision to sell a significant portion of newly originated residential mortgages on the secondary market. The Corporation’s average rate of return on loans receivable declined to 5.73% in 2013 from 6.11% in 2012.2015.
The average balance of interest-bearing due from banks decreased to $26,159,000$19,022,000 in 20132016 from $32,337,000$22,201,000 in 2012.2015. This has consisted primarily of balances held by the Federal Reserve and also includes other overnight deposits and FDIC-insured certificates of deposit issued by other financial institutions.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense fell $3,266,000,$909,000, or 36.2%19.8%, to $5,765,000$3,693,000 in 20132016 from $9,031,000$4,602,000 in 2012.2015. Table II shows that the overall cost of funds on interest-bearing liabilities fell to 0.67%0.45% in 20132016 from 0.97%0.55% in 2012.2015.
Total average deposits (interest-bearing and noninterest-bearing) increased slightly (0.2%) to $970,447,000 in 2016 from $968,201,000 in 2015. Decreases in the average balances of certificates of deposit and Individual Retirement Accounts were offset by increases in average balances of interest checking, money market accounts, savings accounts and noninterest-bearing demand deposits. The average rate paid on interest-bearing deposits increased slightly to 0.28% in 2016 from 0.26% in 2015.
Total average borrowed funds decreased 4.4%$15,126,000 to $62,516,000 in 2016 from $77,642,000 in 2015. The average rate on borrowed funds was 2.57% in 2016 compared to 3.45% in 2015, reflecting a $27,604,000 reduction in the average balance of higher-rate, long-term borrowings resulting from prepayment in the second and fourth quarters of 2015 of a long-term repurchase agreement borrowing with an interest rate of 4.265%. The average balance of short-term borrowings increased $12,478,000 in 2016 over 2015, as average overnight borrowings were higher in 2016 and the Corporation funded the pay-off of the long-term repurchase agreement with a series of short-term advances from the FHLB-Pittsburgh that matured over the course of 2016.
17 |
2015 vs. 2014
Fully taxable equivalent net interest income was $42,819,000 in 2015, which was $1,074,000 (2.4%) lower than in 2014. As shown in Table III, in 2015 compared to 2014, interest rate changes had the effect of decreasing net interest income $2,283,000, and net changes in volume had the effect of increasing net interest income $1,209,000. The most significant components of the rate-related change in net interest income in 2015 were a decrease in interest income of $1,957,000 attributable to lower rates earned on loans receivable and a decrease of $468,000 in interest income on available-for-sale securities. The most significant components of the volume-related increase in net interest income in 2015 was an increase in interest income of $1,544,000 attributable to an increase in the balance of loans receivable, a decrease in interest expense of $270,000 attributable to a reduction in the balance of borrowed funds, and a decrease in interest expense of $117,000 attributable to a reduction in the balance of interest-bearing deposits (primarily certificates of deposit), partially offset by a volume-related decrease in interest income on available-for-securities of $681,000. As presented in Table II, the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.54% in 2015 as compared to 3.63% in 2014.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $47,421,000 in 2015, a decrease of 3.2% from 2014. Interest and fees on loans receivable decreased $413,000, or 1.2%. As indicated in Table II, average available-for-sale securities (at amortized cost) totaled $479,148,000 in 2015, a decrease of $15,786,000 (3.2%) from 2014. The net decrease in the Corporation’s available-for-sale securities portfolio consisted of decreases in tax-exempt municipal securities, U.S. Government mortgage-backed securities, U.S. Government agency bonds, and equity securities. These decreases were partially offset by increases in the balances of collateralized mortgage obligations and taxable municipal securities. The Corporation’s yield on securities was lower in 2015 than in 2014, primarily because of low market interest rates on new investments combined with higher-yielding securities maturing. The average rate of return on available-for-sale securities was 2.81% for 2015 and 2.95% in 2014.
The average balance of gross loans receivable increased 4.8% to $657,727,000 in 2015 from $627,753,000 in 2014. The Corporation experienced growth in the balances of tax free municipal loans, residential mortgages and participation loans purchased. These increases were partially offset by decreases in balances of commercial real estate loans. The Corporation’s average rate of return on loans receivable declined to 5.15% in 2015 from 5.46% in 2014.
The average balance of interest-bearing due from banks decreased to $22,201,000 in 2015 from $32,510,000 in 2014. This has consisted primarily of balances held by the Federal Reserve and also includes other overnight deposits and FDIC-insured certificates of deposit issued by other financial institutions.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense fell $520,000, or 10.2%, to $964,031,000$4,602,000 in 20132015 from $1,008,469,000$5,122,000 in 2012.2014. Table II shows that the overall cost of funds on interest-bearing liabilities fell to 0.55% in 2015 from 0.61% in 2014.
Total average deposits (interest-bearing and noninterest-bearing) increased 0.3%, to $968,201,000 in 2015 from $965,418,000 in 2014. Decreases in the average balances of certificates of deposit, Individual Retirement Accounts, and money market accounts were partially offset by increases in average balances of interest checking, savings accounts and savings accounts. Consistent with continuing low short-term market interest rates, thenon-interest bearing demand deposits. The average rates incurredrate paid on certificates of deposit and Individual Retirement Accounts have decreased significantlyinterest-bearing deposits fell slightly to 0.26% in 2013 as compared to 2012.2015 from 0.28% in 2014.
Total average borrowed funds decreased $29,723,000$2,298,000 to $82,328,000$77,642,000 in 20132015 from $112,051,000$79,940,000 in 2012. During 2012 and 2013, the Corporation has paid off long-term borrowings as they matured using the cash flow received from loans and investment securities. In 2012, the Corporation prepaid principal totaling $17,000,000 on long-term borrowings (repurchase agreements); the Corporation incurred losses from the prepayments totaling $2,333,000. In March 2013, the Corporation prepaid principal of $7,000,000 on a long-term borrowing (repurchase agreement) with a rate of 3.60%; the Corporation incurred a loss from the prepayment totaling $1,023,000, which is reported in Other Expenses in the Consolidated Statements of Income. Management expects that the prepayments will have a favorable effect on the net interest margin in the future. After the effect of the prepayments, the remaining balance of long-term borrowings under repurchase agreements was $61,000,000 at December 31, 2013.2014. The average rate on borrowed funds was 3.72%3.45% in 2013,2015 compared to 3.77%3.70% in 2012.
2012 vs. 2011
Fully taxable equivalent net interest income was $51,041,000 in 2012, $86,000 (0.2%) higher than in 2011. As shown in Table III, net changes in volume had the effect of increasing net interest income $961,000 in 2012 compared to 2011, and interest rate changes had the effect of decreasing net interest income $875,000. The most significant components of the volume change in net interest income in 2012 were2014, reflecting a decrease in interest expense of $1,203,000 attributable to a$6,982,000 reduction in the average balance of borrowed funds,higher-rate, long-term borrowings resulting from pre-payment of a decreaselong-term repurchase agreement borrowing with an interest rate of 4.265%. The Corporation paid off $10 million of principal on this borrowing in interest expenseMay 2015, and $24 million in December 2015, leaving no remaining balance outstanding at December 31, 2015. (The pre-payment of $411,000 attributable to a reductionlong-term borrowings is described in the balance of interest-bearing deposits (primarily certificates of deposit and Individual Retirement Accounts), and a decrease in interest income of $887,000 attributable to a decline in the balance of loans receivable. The most significant components of the rate change in net interest income in 2012 were a decrease in interest expense of $2,894,000 due to lower rates paid on interest-bearing deposits, a decrease in interest income of $2,072,000 attributable to lower rates earned on available-for-sale securities and a decrease in interest income of $1,733,000 attributable to lower rates earned on loans receivable. As presented in Table II, the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 4.04% in 2012, as compared to 3.96% in 2011.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $60,072,000 in 2012, a decrease of 6.9% from 2011. Interest and fees on loans receivable decreased $2,620,000, or 5.8% while income from available-for-sale securities decreased $1,914,000, or 10.1%. As indicated in Table II, average available-for-sale securities (at amortized cost) totaled $464,349,000 in 2012, an increase of $2,445,000 (0.5%Earnings Overview section.) from 2011. Net growth in the Corporation’s available-for-sale securities portfolio was primarily made up of U.S. Government agency collateralized mortgage obligations and municipal securities. This growth was partially offset by reductions in the balances of mortgage-backed securities, U.S. Government agency bonds, and trust preferred securities. The Corporation’s yield on taxable securities fell in 2011 and 2012 because of rapid prepayments on mortgage-backed securities and collateralized mortgage obligations as well as low market interest rates. The average rate of return on available-for-sale securities was 3.67% for 2012 and 4.11% in 2011.
The average balance of gross loans receivable decreased 2.0% to $700,241,000short-term borrowings increased $4,684,000 in 2012 from $714,421,0002015 over 2014, as average overnight borrowings were higher in 2011. The2015 and the Corporation experienced contraction infunded the balance of loans receivable due to borrowers prepaying or refinancing existing loans combined with modest demand for new loans. The decline in the balancepay-off of the residential mortgage portfolio was also affected by management’s decision to selllong-term repurchase agreement in December 2015 with funds from a significant portionseries of newly originated residential mortgages onshort-term advances from the secondary market. The Corporation’sFHLB-Pittsburgh totaling $25,072,000 at an average rate of return on loans receivable declined to 6.11% in 2012 from 6.36% in 2011.0.86%.
18 |
The average balance of interest-bearing due from banks increased to $32,337,000 in 2012 from $31,359,000 in 2011. This consisted primarily of balances held by the Federal Reserve, as well as FDIC-insured certificates of deposit. During the fourth quarter 2011, the Corporation began investing in FDIC-insured certificates of deposit issued by other financial institutions and maturing within five years; these investments totaled $4,820,000 at December 31, 2012. The average balance of certificates of deposit issued by other financial institutions increased to $4,554,000 in 2012 from $677,000 in 2011.
TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense fell $4,525,000, or 33.4%, to $9,031,000 in 2012 from $13,556,000 in 2011. Table II shows that the overall cost of funds on interest-bearing liabilities fell to 0.97% in 2012 from 1.38% in 2011.
Total average deposits (interest-bearing and noninterest-bearing) increased 0.7%, to $1,008,469,000 in 2012 from $1,001,125,000 in 2011. Increases in the average balances of demand deposits, savings accounts, and money market accounts were partially offset by decreases in Individual Retirement Accounts and certificates of deposit. Consistent with continuing low short-term market interest rates, the average rates incurred on deposit accounts decreased significantly in 2012 as compared to 2011.
Variable-rate accounts made up $130,833,000 of the average balance in Individual Retirement Accounts in 2012 and $144,008,000 in 2011. Prior to May 2011, substantially all of these accounts were paid interest at a rate that could change quarterly at management’s discretion with a contractual floor of 3.00%. Effective in May 2011, the rate floor was removed; following this change, the rate paid on these accounts was lowered several times. As shown in Table II, the average rate on Individual Retirement Accounts decreased to 0.80% in 2012 from 2.04% in 2011.
Total average borrowed funds decreased $40,059,000 to $112,051,000 in 2012 from $152,110,000 in 2011. During 2011 and 2012, the Corporation paid off long-term borrowings as they matured using the cash flow received from loans and investment securities. In May and September 2012, the Corporation prepaid principal totaling $17,000,000 on long-term borrowings (repurchase agreements); the Corporation incurred losses from the prepayments totaling $2,333,000. The average rate on borrowed funds was 3.77% in 2012, compared to 3.58% in 2011.
The average balance of “RepoSweep” arrangements, which are used by the Corporation to borrow funds from commercial banking customers on an overnight basis and included within short-term borrowings, declined to $4,454,000 in 2012 from $17,216,000 in 2011 primarily as a result of changes to service charges assessed on related business checking accounts. During 2012, the Corporation took several short-term and overnight advances from the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh) to offset seasonal declines in deposit balances and meet other liquidity needs. Short-term and overnight advances averaged $2,377,000 in 2012 with no such advances outstanding during 2011.
TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE | |||||||||||||||||||||||||
Years Ended December 31, | Increase/(Decrease) | Years Ended December 31, | Increase/(Decrease) | ||||||||||||||||||||||
(In Thousands) | 2013 | 2012 | 2011 | 2013/2012 | 2012/2011 | 2016 | 2015 | 2014 | 2016/2015 | 2015/2014 | |||||||||||||||
INTEREST INCOME | |||||||||||||||||||||||||
Available-for-sale securities: | |||||||||||||||||||||||||
Taxable | $7,105 | $9,334 | $11,297 | ($2,229) | ($1,963) | $ | 5,916 | $ | 7,587 | $ | 8,028 | $ | (1,671 | ) | $ | (441 | ) | ||||||||
Tax-exempt | 7,296 | 7,725 | 7,676 | (429) | 49 | 5,240 | 5,869 | 6,577 | (629 | ) | (708 | ) | |||||||||||||
Total available-for-sale securities | 14,401 | 17,059 | 18,973 | (2,658) | (1,914) | 11,156 | 13,456 | 14,605 | (2,300 | ) | (1,149 | ) | |||||||||||||
Interest-bearing due from banks | 105 | 114 | 73 | (9) | 41 | 116 | 93 | 125 | 23 | (32 | ) | ||||||||||||||
Loans held for sale | 54 | 107 | 53 | (53) | 54 | 27 | 16 | 16 | 11 | 0 | |||||||||||||||
Loans receivable: | |||||||||||||||||||||||||
Taxable | 35,484 | 40,453 | 43,178 | (4,969) | (2,725) | 32,827 | 31,311 | 32,127 | 1,516 | (816 | ) | ||||||||||||||
Tax-exempt | 2,105 | 2,339 | 2,234 | (234) | 105 | 2,724 | 2,545 | 2,142 | 179 | 403 | |||||||||||||||
Total loans receivable | 37,589 | 42,792 | 45,412 | (5,203) | (2,620) | 35,551 | 33,856 | 34,269 | 1,695 | (413 | ) | ||||||||||||||
Total Interest Income | 52,149 | 60,072 | 64,511 | (7,923) | (4,439) | 46,850 | 47,421 | 49,015 | (571 | ) | (1,594 | ) | |||||||||||||
INTEREST EXPENSE | |||||||||||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||||||||||
Interest checking | 211 | 206 | 399 | 5 | (193) | 293 | 214 | 216 | 79 | (2 | ) | ||||||||||||||
Money market | 290 | 354 | 494 | (64) | (140) | 342 | 299 | 286 | 43 | 13 | |||||||||||||||
Savings | 117 | 108 | 161 | 9 | (53) | 133 | 128 | 121 | 5 | 7 | |||||||||||||||
Certificates of deposit | 1,522 | 3,002 | 3,905 | (1,480) | (903) | 882 | 831 | 1,069 | 51 | (238 | ) | ||||||||||||||
Individual Retirement Accounts | 562 | 1,136 | 3,150 | (574) | (2,014) | 434 | 451 | 470 | (17 | ) | (19 | ) | |||||||||||||
Other time deposits | 1 | 3 | 0 | (2) | 1 | 1 | 1 | 0 | 0 | ||||||||||||||||
Total interest-bearing deposits | 2,703 | 4,807 | 8,112 | (2,104) | (3,305) | 2,085 | 1,924 | 2,163 | 161 | (239 | ) | ||||||||||||||
Borrowed funds: | |||||||||||||||||||||||||
Short-term | 9 | 10 | 23 | (1) | (13) | 155 | 32 | 9 | 123 | 23 | |||||||||||||||
Long-term | 3,053 | 4,214 | 5,421 | (1,161) | (1,207) | 1,453 | 2,646 | 2,950 | (1,193 | ) | (304 | ) | |||||||||||||
Total borrowed funds | 3,062 | 4,224 | 5,444 | (1,162) | (1,220) | 1,608 | 2,678 | 2,959 | (1,070 | ) | (281 | ) | |||||||||||||
Total Interest Expense | 5,765 | 9,031 | 13,556 | (3,266) | (4,525) | 3,693 | 4,602 | 5,122 | (909 | ) | (520 | ) | |||||||||||||
Net Interest Income | $46,384 | $51,041 | $50,955 | ($4,657) | $86 | $ | 43,157 | $ | 42,819 | $ | 43,893 | $ | 338 | $ | (1,074 | ) |
(1) | Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 35% |
(2) | Fees on loans are included with interest on loans and amounted to |
TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES | ||||||
(Dollars in Thousands) | ||||||
Year | Year | Year | ||||
Ended | Rate of | Ended | Rate of | Ended | Rate of | |
12/31/2013 | Return/ | 12/31/2012 | Return/ | 12/31/2011 | Return/ | |
Average | Cost of | Average | Cost of | Average | Cost of | |
Balance | Funds % | Balance | Funds % | Balance | Funds % | |
EARNING ASSETS | ||||||
Available-for-sale securities, | ||||||
at amortized cost: | ||||||
Taxable | $330,980 | 2.15% | $332,911 | 2.80% | $333,441 | 3.39% |
Tax-exempt | 130,584 | 5.59% | 131,438 | 5.88% | 128,463 | 5.98% |
Total available-for-sale securities | 461,564 | 3.12% | 464,349 | 3.67% | 461,904 | 4.11% |
Interest-bearing due from banks | 26,159 | 0.40% | 32,337 | 0.35% | 31,359 | 0.23% |
Federal funds sold | 4 | 0.00% | 0 | 0.00% | 0 | 0.00% |
Loans held for sale | 1,118 | 4.83% | 2,611 | 4.10% | 900 | 5.89% |
Loans receivable: | ||||||
Taxable | 620,412 | 5.72% | 662,751 | 6.10% | 679,357 | 6.36% |
Tax-exempt | 36,083 | 5.83% | 37,490 | 6.24% | 35,064 | 6.37% |
Total loans receivable | 656,495 | 5.73% | 700,241 | 6.11% | 714,421 | 6.36% |
Total Earning Assets | 1,145,340 | 4.55% | 1,199,538 | 5.01% | 1,208,584 | 5.34% |
Cash | 16,854 | 17,408 | 17,762 | |||
Unrealized gain/loss on securities | 8,875 | 18,444 | 7,105 | |||
Allowance for loan losses | (7,204) | (7,688) | (8,688) | |||
Bank premises and equipment | 18,154 | 18,956 | 21,381 | |||
Intangible Asset - Core Deposit Intangible | 113 | 176 | 272 | |||
Intangible Asset - Goodwill | 11,942 | 11,942 | 11,942 | |||
Other assets | 43,022 | 46,387 | 55,087 | |||
Total Assets | $1,237,096 | $1,305,163 | $1,313,445 | |||
INTEREST-BEARING LIABILITIES | ||||||
Interest-bearing deposits: | ||||||
Interest checking | $174,790 | 0.12% | $163,840 | 0.13% | $162,583 | 0.25% |
Money market | 203,023 | 0.14% | 208,814 | 0.17% | 206,612 | 0.24% |
Savings | 117,055 | 0.10% | 108,218 | 0.10% | 97,099 | 0.17% |
Certificates of deposit | 148,598 | 1.02% | 194,175 | 1.55% | 205,231 | 1.90% |
Individual Retirement Accounts | 129,255 | 0.43% | 142,315 | 0.80% | 154,688 | 2.04% |
Other time deposits | 1,062 | 0.09% | 1,191 | 0.08% | 1,231 | 0.24% |
Total interest-bearing deposits | 773,783 | 0.35% | 818,553 | 0.59% | 827,444 | 0.98% |
Borrowed funds: | ||||||
Short-term | 6,422 | 0.14% | 6,831 | 0.15% | 17,216 | 0.13% |
Long-term | 75,906 | 4.02% | 105,220 | 4.00% | 134,894 | 4.02% |
Total borrowed funds | 82,328 | 3.72% | 112,051 | 3.77% | 152,110 | 3.58% |
Total Interest-bearing Liabilities | 856,111 | 0.67% | 930,604 | 0.97% | 979,554 | 1.38% |
Demand deposits | 190,248 | 189,916 | 173,681 | |||
Other liabilities | 9,325 | 8,821 | 7,492 | |||
Total Liabilities | 1,055,684 | 1,129,341 | 1,160,727 | |||
Stockholders' equity, excluding | ||||||
other comprehensive income/loss | 175,893 | 164,316 | 148,324 | |||
Other comprehensive income/loss | 5,519 | 11,506 | 4,394 | |||
Total Stockholders' Equity | 181,412 | 175,822 | 152,718 | |||
Total Liabilities and Stockholders' Equity | $1,237,096 | $1,305,163 | $1,313,445 | |||
Interest Rate Spread | 3.88% | 4.04% | 3.96% | |||
Net Interest Income/Earning Assets | 4.05% | 4.26% | 4.22% | |||
Total Deposits (Interest-bearing | ||||||
and Demand) | $964,031 | $1,008,469 | $1,001,125 |
19 |
TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(Dollars in Thousands)
Year | Year | Year | ||||||||||||||||||||||
Ended | Rate of | Ended | Rate of | Ended | Rate of | |||||||||||||||||||
12/31/2016 | Return/ | 12/31/2015 | Return/ | 12/31/2014 | Return/ | |||||||||||||||||||
Average | Cost of | Average | Cost of | Average | Cost of | |||||||||||||||||||
Balance | Funds % | Balance | Funds % | Balance | Funds % | |||||||||||||||||||
EARNING ASSETS | ||||||||||||||||||||||||
Available-for-sale securities, at amortized cost: | ||||||||||||||||||||||||
Taxable | $ | 293,636 | 2.01 | % | $ | 366,448 | 2.07 | % | $ | 371,125 | 2.16 | % | ||||||||||||
Tax-exempt | 111,343 | 4.71 | % | 112,700 | 5.21 | % | 123,809 | 5.31 | % | |||||||||||||||
Total available-for-sale securities | 404,979 | 2.75 | % | 479,148 | 2.81 | % | 494,934 | 2.95 | % | |||||||||||||||
Interest-bearing due from banks | 19,022 | 0.61 | % | 22,201 | 0.42 | % | 32,510 | 0.38 | % | |||||||||||||||
Federal funds sold | 0 | 0.00 | % | 0 | 0.00 | % | 0 | 0.00 | % | |||||||||||||||
Loans held for sale | 472 | 5.72 | % | 222 | 7.21 | % | 204 | 7.84 | % | |||||||||||||||
Loans receivable: | ||||||||||||||||||||||||
Taxable | 662,769 | 4.95 | % | 603,771 | 5.19 | % | 589,120 | 5.45 | % | |||||||||||||||
Tax-exempt | 60,307 | 4.52 | % | 53,956 | 4.72 | % | 38,633 | 5.54 | % | |||||||||||||||
Total loans receivable | 723,076 | 4.92 | % | 657,727 | 5.15 | % | 627,753 | 5.46 | % | |||||||||||||||
Total Earning Assets | 1,147,549 | 4.08 | % | 1,159,298 | 4.09 | % | 1,155,401 | 4.24 | % | |||||||||||||||
Cash | 16,570 | 16,639 | 16,865 | |||||||||||||||||||||
Unrealized gain/loss on securities | 7,166 | 8,871 | 6,350 | |||||||||||||||||||||
Allowance for loan losses | (8,082 | ) | (7,380 | ) | (7,992 | ) | ||||||||||||||||||
Bank premises and equipment | 15,413 | 15,911 | 16,789 | |||||||||||||||||||||
Intangible Asset - Core Deposit Intangible | 24 | 41 | 70 | |||||||||||||||||||||
Intangible Asset – Goodwill | 11,942 | 11,942 | 11,942 | |||||||||||||||||||||
Other assets | 39,284 | 37,887 | 40,472 | |||||||||||||||||||||
Total Assets | $ | 1,229,866 | $ | 1,243,209 | $ | 1,239,897 | ||||||||||||||||||
INTEREST-BEARING LIABILITIES | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Interest checking | $ | 201,357 | 0.15 | % | $ | 195,940 | 0.11 | % | $ | 183,874 | 0.12 | % | ||||||||||||
Money market | 199,405 | 0.17 | % | 196,585 | 0.15 | % | 198,990 | 0.14 | % | |||||||||||||||
Savings | 132,679 | 0.10 | % | 128,355 | 0.10 | % | 121,685 | 0.10 | % | |||||||||||||||
Certificates of deposit | 117,130 | 0.75 | % | 121,803 | 0.68 | % | 134,732 | 0.79 | % | |||||||||||||||
Individual Retirement Accounts | 103,467 | 0.42 | % | 110,659 | 0.41 | % | 120,016 | 0.39 | % | |||||||||||||||
Other time deposits | 1,036 | 0.10 | % | 1,031 | 0.10 | % | 1,039 | 0.10 | % | |||||||||||||||
Total interest-bearing deposits | 755,074 | 0.28 | % | 754,373 | 0.26 | % | 760,336 | 0.28 | % | |||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||
Short-term | 23,906 | 0.65 | % | 11,428 | 0.28 | % | 6,744 | 0.13 | % | |||||||||||||||
Long-term | 38,610 | 3.76 | % | 66,214 | 4.00 | % | 73,196 | 4.03 | % | |||||||||||||||
Total borrowed funds | 62,516 | 2.57 | % | 77,642 | 3.45 | % | 79,940 | 3.70 | % | |||||||||||||||
Total Interest-bearing Liabilities | 817,590 | 0.45 | % | 832,015 | 0.55 | % | 840,276 | 0.61 | % | |||||||||||||||
Demand deposits | 215,373 | 213,828 | 205,082 | |||||||||||||||||||||
Other liabilities | 8,530 | 8,461 | 9,070 | |||||||||||||||||||||
Total Liabilities | 1,041,493 | 1,054,304 | 1,054,428 | |||||||||||||||||||||
Stockholders' equity, excluding accumulated other comprehensive income | 183,671 | 183,125 | 181,271 | |||||||||||||||||||||
Accumulated other comprehensive income | 4,702 | 5,780 | 4,198 | |||||||||||||||||||||
Total Stockholders' Equity | 188,373 | 188,905 | 185,469 | |||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 1,229,866 | $ | 1,243,209 | $ | 1,239,897 | ||||||||||||||||||
Interest Rate Spread | 3.63 | % | 3.54 | % | 3.63 | % | ||||||||||||||||||
Net Interest Income/Earning Assets | 3.76 | % | 3.69 | % | 3.80 | % | ||||||||||||||||||
Total Deposits (Interest-bearing and Demand) | $ | 970,447 | $ | 968,201 | $ | 965,418 |
(1) |
(2) | Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. |
TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES | ||||||
(In Thousands) | Year Ended 12/31/13 vs. 12/31/12 | Year Ended 12/31/12 vs. 12/31/11 | ||||
Change in | Change in | Total | Change in | Change in | Total | |
Volume | Rate | Change | Volume | Rate | Change | |
EARNING ASSETS | ||||||
Available-for-sale securities: | ||||||
Taxable | ($54) | ($2,175) | ($2,229) | ($18) | ($1,945) | ($1,963) |
Tax-exempt | (50) | (379) | (429) | 176 | (127) | 49 |
Total available-for-sale securities | (104) | (2,554) | (2,658) | 158 | (2,072) | (1,914) |
Interest-bearing due from banks | (24) | 15 | (9) | 2 | 39 | 41 |
Loans held for sale | (69) | 16 | (53) | 74 | (20) | 54 |
Loans receivable: | ||||||
Taxable | (2,502) | (2,467) | (4,969) | (1,039) | (1,686) | (2,725) |
Tax-exempt | (86) | (148) | (234) | 152 | (47) | 105 |
Total loans receivable | (2,588) | (2,615) | (5,203) | (887) | (1,733) | (2,620) |
Total Interest Income | (2,785) | (5,138) | (7,923) | (653) | (3,786) | (4,439) |
INTEREST-BEARING LIABILITIES | ||||||
Interest-bearing deposits: | ||||||
Interest checking | 13 | (8) | 5 | 3 | (196) | (193) |
Money market | (10) | (54) | (64) | 5 | (145) | (140) |
Savings | 9 | 0 | 9 | 16 | (69) | (53) |
Certificates of deposit | (607) | (873) | (1,480) | (201) | (702) | (903) |
Individual Retirement Accounts | (96) | (478) | (574) | (234) | (1,780) | (2,014) |
Other time deposits | 0 | 0 | 0 | 0 | (2) | (2) |
Total interest-bearing deposits | (691) | (1,413) | (2,104) | (411) | (2,894) | (3,305) |
Borrowed funds: | ||||||
Short-term | (1) | 0 | (1) | (15) | 2 | (13) |
Long-term | (1,179) | 18 | (1,161) | (1,188) | (19) | (1,207) |
Total borrowed funds | (1,180) | 18 | (1,162) | (1,203) | (17) | (1,220) |
Total Interest Expense | (1,871) | (1,395) | (3,266) | (1,614) | (2,911) | (4,525) |
Net Interest Income | ($914) | ($3,743) | ($4,657) | $961 | ($875) | $86 |
(3) | Rates of return on earning assets and costs of funds are presented on an annualized basis. |
20 |
TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)
Year Ended 12/31/16 vs. 12/31/15 | Year Ended 12/31/15 vs. 12/31/14 | |||||||||||||||||||||||
Change in | Change in | Total | Change in | Change in | Total | |||||||||||||||||||
Volume | Rate | Change | Volume | Rate | Change | |||||||||||||||||||
EARNING ASSETS | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||
Taxable | $ | (1,472 | ) | $ | (199 | ) | $ | (1,671 | ) | $ | (100 | ) | $ | (341 | ) | $ | (441 | ) | ||||||
Tax-exempt | (70 | ) | (559 | ) | (629 | ) | (581 | ) | (127 | ) | (708 | ) | ||||||||||||
Total available-for-sale securities | (1,542 | ) | (758 | ) | (2,300 | ) | (681 | ) | (468 | ) | (1,149 | ) | ||||||||||||
Interest-bearing due from banks | (14 | ) | 37 | 23 | (42 | ) | 10 | (32 | ) | |||||||||||||||
Loans held for sale | 15 | (4 | ) | 11 | 1 | (1 | ) | 0 | ||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||
Taxable | 2,965 | (1,449 | ) | 1,516 | 786 | (1,602 | ) | (816 | ) | |||||||||||||||
Tax-exempt | 290 | (111 | ) | 179 | 758 | (355 | ) | 403 | ||||||||||||||||
Total loans receivable | 3,255 | (1,560 | ) | 1,695 | 1,544 | (1,957 | ) | (413 | ) | |||||||||||||||
Total Interest Income | 1,714 | (2,285 | ) | (571 | ) | 822 | (2,416 | ) | (1,594 | ) | ||||||||||||||
INTEREST-BEARING LIABILITIES | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Interest checking | 6 | 73 | 79 | 14 | (16 | ) | (2 | ) | ||||||||||||||||
Money market | 4 | 39 | 43 | (3 | ) | 16 | 13 | |||||||||||||||||
Savings | 4 | 1 | 5 | 7 | 0 | 7 | ||||||||||||||||||
Certificates of deposit | (33 | ) | 84 | 51 | (97 | ) | (141 | ) | (238 | ) | ||||||||||||||
Individual Retirement Accounts | (30 | ) | 13 | (17 | ) | (38 | ) | 19 | (19 | ) | ||||||||||||||
Other time deposits | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total interest-bearing deposits | (49 | ) | 210 | 161 | (117 | ) | (122 | ) | (239 | ) | ||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||
Short-term | 56 | 67 | 123 | 9 | 14 | 23 | ||||||||||||||||||
Long-term | (1,047 | ) | (146 | ) | (1,193 | ) | (279 | ) | (25 | ) | (304 | ) | ||||||||||||
Total borrowed funds | (991 | ) | (79 | ) | (1,070 | ) | (270 | ) | (11 | ) | (281 | ) | ||||||||||||
Total Interest Expense | (1,040 | ) | 131 | (909 | ) | (387 | ) | (133 | ) | (520 | ) | |||||||||||||
Net Interest Income | $ | 2,754 | $ | (2,416 | ) | $ | 338 | $ | 1,209 | $ | (2,283 | ) | $ | (1,074 | ) |
(1) | Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 35% |
(2) | The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. |
21 |
NONINTEREST INCOME
Years Ended December 31, 2013, 20122016, 2015 and 20112014
The table below presents a comparison of noninterest income and excludes realized gains on available for saleavailable-for-sale securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis.
TABLE IV - COMPARISON OF NONINTEREST INCOME | ||||
(In Thousands) | $ | % | ||
2013 | 2012 | Change | Change | |
Service charges on deposit accounts | $4,966 | $5,036 | ($70) | (1.4) |
Service charges and fees | 877 | 929 | (52) | (5.6) |
Trust and financial management revenue | 4,087 | 3,847 | 240 | 6.2 |
Brokerage revenue | 784 | 801 | (17) | (2.1) |
Insurance commissions, fees and premiums | 170 | 221 | (51) | (23.1) |
Interchange revenue from debit card transactions | 1,941 | 1,938 | 3 | 0.2 |
Net gains from sales of loans | 2,191 | 1,925 | 266 | 13.8 |
Increase in cash surrender value of life insurance | 399 | 455 | (56) | (12.3) |
Net (loss) gain from premises and equipment | (16) | 270 | (286) | (105.9) |
Other operating income | 1,052 | 961 | 91 | 9.5 |
Total other operating income before realized | ||||
(losses) gains on available-for-sale securities, net | $16,451 | $16,383 | $68 | 0.4 |
$ | % | |||
2012 | 2011 | Change | Change | |
Service charges on deposit accounts | $5,036 | $4,773 | $263 | 5.5 |
Service charges and fees | 929 | 849 | 80 | 9.4 |
Trust and financial management revenue | 3,847 | 3,472 | 375 | 10.8 |
Brokerage revenue | 801 | 640 | 161 | 25.2 |
Insurance commissions, fees and premiums | 221 | 257 | (36) | (14.0) |
Interchange revenue from debit card transactions | 1,938 | 1,922 | 16 | 0.8 |
Net gains from sales of loans | 1,925 | 1,107 | 818 | 73.9 |
Increase in cash surrender value of life insurance | 455 | 509 | (54) | (10.6) |
Net gain from premises and equipment | 270 | 324 | (54) | (16.7) |
Impairment loss on limited partnership investment | 0 | (948) | 948 | (100.0) |
Other operating income | 961 | 992 | (31) | (3.1) |
Total other operating income before realized | ||||
(losses) gains on available-for-sale securities, net | $16,383 | $13,897 | $2,486 | 17.9 |
TABLE IV - COMPARISON OF NONINTEREST INCOME
(In Thousands)
Years Ended | ||||||||||||||||
December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Service charges on deposit accounts | $ | 4,695 | $ | 4,864 | $ | (169 | ) | (3.5 | ) | |||||||
Service charges and fees | 439 | 494 | (55 | ) | (11.1 | ) | ||||||||||
Trust and financial management revenue | 4,760 | 4,626 | 134 | 2.9 | ||||||||||||
Brokerage revenue | 756 | 839 | (83 | ) | (9.9 | ) | ||||||||||
Insurance commissions, fees and premiums | 102 | 109 | (7 | ) | (6.4 | ) | ||||||||||
Interchange revenue from debit card transactions | 1,943 | 1,935 | 8 | 0.4 | ||||||||||||
Net gains from sales of loans | 1,029 | 735 | 294 | 40.0 | ||||||||||||
Decrease in fair value of servicing rights | (282 | ) | (162 | ) | (120 | ) | 74.1 | |||||||||
Increase in cash surrender value of life insurance | 382 | 386 | (4 | ) | (1.0 | ) | ||||||||||
Other operating income | 1,687 | 1,652 | 35 | 2.1 | ||||||||||||
Total other operating income before realized gains on available-for-sale securities, net | $ | 15,511 | $ | 15,478 | $ | 33 | 0.2 |
Years Ended | ||||||||||||||||
December 31, | $ | % | ||||||||||||||
2015 | 2014 | Change | Change | |||||||||||||
Service charges on deposit accounts | $ | 4,864 | $ | 5,025 | $ | (161 | ) | (3.2 | ) | |||||||
Service charges and fees | 494 | 538 | (44 | ) | (8.2 | ) | ||||||||||
Trust and financial management revenue | 4,626 | 4,490 | 136 | 3.0 | ||||||||||||
Brokerage revenue | 839 | 901 | (62 | ) | (6.9 | ) | ||||||||||
Insurance commissions, fees and premiums | 109 | 118 | (9 | ) | (7.6 | ) | ||||||||||
Interchange revenue from debit card transactions | 1,935 | 1,959 | (24 | ) | (1.2 | ) | ||||||||||
Net gains from sales of loans | 735 | 768 | (33 | ) | (4.3 | ) | ||||||||||
Decrease in fair value of servicing rights | (162 | ) | (27 | ) | (135 | ) | 500.0 | |||||||||
Increase in cash surrender value of life insurance | 386 | 376 | 10 | 2.7 | ||||||||||||
Other operating income | 1,652 | 1,272 | 380 | 29.9 | ||||||||||||
Total other operating income before realized gains on available-for-sale securities, net | $ | 15,478 | $ | 15,420 | $ | 58 | 0.4 |
Total noninterest income, excluding realized gains on available-for-sale securities, increased $68,000 or .4%$33,000 in 20132016 compared to 2012.2015. In 2012,2015, total noninterest income increased $2,486,000 (17.9%)$58,000 from 2011. Total noninterest income in 2011 included an impairment loss of $948,000 related to an investment in a real estate limited partnership (discussed in more detail below). Excluding the 2011 impairment loss on the limited partnership investment and gains from available-for-sale securities, noninterest income increased $1,538,000 (10.4%) in 2012 over 2011. Items2014. Changes of significance related to noninterest income are as follows:discussed in the narrative that follows.
20132016 vs. 20122015
Net gains from sales of loans increased $266,000$294,000 (40.0%), reflecting higher volume of sales. The increase in 2013. Since December 2009,volume in 2016 included the Corporation has soldimpact of employing one additional mortgage lender in a significant amountdedicated, full-time capacity throughout most of residential2016 as compared to 2015.
Trust and Financial Management revenue increased $134,000 (2.9%). The increase in Trust revenue in 2016 reflected, in part, the effect of higher value of U.S. equity markets in the latter portion of the year.
Other operating income increased $35,000 (2.1%), including an increase of $148,000 from redemptions of tax credits and increases in lending-related fees of $80,000, while this category included a gain of $212,000 from a split-dollar life insurance policy in 2015.
22 |
Service charges on deposit accounts decreased $169,000 (3.5%) in 2016, including a $131,000 reduction in consumer overdraft fees due to a lower volume of overdrafts.
The fair value of mortgage servicing rights decreased $282,000 in 2016, as their valuation was negatively impacted by a reduction in demand by banks for purchasing servicing rights resulting from regulatory changes that have generally increased their risk-based capital weighting. In comparison, the fair value of mortgage servicing rights decreased $162,000 in 2015.
Brokerage revenue decreased $83,000 (9.9%), as the volume of sales of annuities declined.
2015 vs. 2014
Service charges on deposit accounts were $161,000 lower in 2015 than 2014. Total consumer and business overdraft and uncollected funds fees decreased $387,000 in 2015 as compared to 2014. These decreases were partially offset by revenues resulting from adjustments to the existing fee structure of certain checking products in April 2015.
The fair value of servicing rights decreased $162,000 in 2015 as compared to a decrease of $27,000 in 2014. The greater decline in fair value in 2015 reflected the impact of a reduction in the outstanding balance of mortgage loans intosold and serviced in 2015, as compared to an increase in the secondary market throughbalance of loans serviced in 2014 over 2013.
Included in the MPF Xtra program administered by$380,000 increase in other operating revenue in 2015 is the effect of a $212,000 gain recognized from a life insurance arrangement in which the benefits were split between Corporation and the heirs of the former employee. In addition, dividend income from Federal Home Loan BanksBank of Pittsburgh stock increased $36,000, and Chicago. Volume remained brisk throughout most of 2013, slowing somewhatrevenue from merchant services increased $28,000, in the fourth quarter2015 as long-term interest rates rose. Overall, the sales volume in 2013 was comparablecompared to 2012, with the aggregate increase in revenue attributable to higher values of servicing rights on 2013 originations, mainly due to estimated longer average lives of loans caused by an increase in long-term interest rates.2014.
In 2013,2015, Trust and financial management revenue increased $240,000,$136,000, or 6.2%3.0%. Trust revenue from employee benefit andThis increase was primarily in retirement services was $121,000 higher in 2013 as compared to 2012. The increase in trust revenue in 2013 reflects the impact of new business obtained as well as higher valuations of U.S. equities and fixed income securities throughout most of the period. Assets under management by the Corporation’s Trust and financial management group totaled $796,115,000 at December 31, 2013, an increase of 12.5% over the total one year earlier.revenue.
The net gain from premises and equipment of $270,000 in 2012 included a gain of $272,000 from the excess of insurance proceeds received over the historical book value of assets replaced or reconstructed at the Athens, PA branch, which was damaged by a flood in September 2011 and remained closed until it was re-opened in April 2012. The loss of $16,000 in 2013 included charges related to the abandonment of certain communications equipment.
2012 vs. 2011
In 2011, the Corporation reported an impairment loss of $948,000 related to an investment in a real estate limited partnership. Based on updated financial information, management prepared an estimated valuation based on cash flow analysis. That analysis showed the estimated cash flows to be derived from the limited partnership’s activities would not be sufficient to provide a return on the Corporation’s limited partnership investment. Accordingly, management made the decision to completely write-off the limited partnership investment in 2011.
Net gains from sales of loans increased $818,000 in 2012. The increase in revenue from sales in 2012 reflected the impact of significant refinancing activity, as market interest rates fell throughout most of the year.
Trust and financial management revenue increased $375,000, or 10.8%, in 2012, including an increase in revenue from employee benefit and retirement services of $129,000. The increase in trust revenue in 2012 reflects the impact of new business obtained as well as higher valuations of U.S. equities and fixed income securities throughout most of the period. Assets under management by the Corporation’s Trust and financial management group totaled $707,912,000 at December 31, 2012, an increase of 11.5% over the total one year earlier.
In 2012, service charges on deposit accounts increased $263,000, or 5.5%, reflecting changes in prices and terms for some types of fees effective at the beginning of 2012.
In 2012, brokerage revenue increased $161,000, or 25.2%, reflecting increased sales of annuities used by customers as investment vehicles in retirement.
As described above, the net gain from premises and equipment of $270,000 in 2012 included a gain of $272,000 from the excess of insurance proceeds received over the historical book value of assets replaced or reconstructed at the Athens, PA branch. In 2011, the Corporation realized net gains from sales of premises and equipment totaling $324,000, including a gain of $329,000 from sale of the Court Street, Williamsport, PA location. The Corporation has entered into a leasing arrangement to continue to utilize approximately 18% of the facility. The Corporation has accounted for the leaseback as an operating lease.
NONINTEREST EXPENSE
Years Ended December 31, 2013, 20122016, 2015 and 20112014
As shownTotal noninterest expense decreased $859,000, or 2.4%, in Table V below,2016 as compared to 2015; however, excluding losses from prepayment of borrowings in 2015, noninterest expense was $1,714,000 (5.2%) higher in 2016 as compared to 2015. Excluding losses from prepayment of debt in 2015, total noninterest expense decreased $753,000$1,127,000 (3.3%) in 20132015 as compared to 2012. As discussed in the Earnings Overview section of Management’s Discussion and Analysis, in 2013,2014. In 2015, the Corporation incurred losses totaling $1,023,000 and, in 2012, losses total $2,333,000$2,573,000 from prepayment of borrowings (repurchase agreements). ExcludingThere were no losses from prepayment of debt, total noninterest expense was $557,000 (1.7%) higherborrowings incurred in 2013 as compared to 2012. In 2012, total noninterest expense, excluding losses on prepayment of debt, increased $898,000 (2.8%) over 2011.2016 or 2014. Changes of significance (other than the previously discussed losslosses on prepayment of debt) are discussed in the narrative that follows.
TABLE V - COMPARISON OF NONINTEREST EXPENSE
(In Thousands)
Years Ended | ||||||||||||||||
December 31, | $ | % | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
Salaries and wages | $ | 15,411 | $ | 14,682 | $ | 729 | 5.0 | |||||||||
Pensions and other employee benefits | 4,717 | 4,420 | 297 | 6.7 | ||||||||||||
Occupancy expense, net | 2,340 | 2,574 | (234 | ) | (9.1 | ) | ||||||||||
Furniture and equipment expense | 1,730 | 1,860 | (130 | ) | (7.0 | ) | ||||||||||
FDIC Assessments | 488 | 603 | (115 | ) | (19.1 | ) | ||||||||||
Pennsylvania shares tax | 1,274 | 1,248 | 26 | 2.1 | ||||||||||||
Professional fees | 1,126 | 638 | 488 | 76.5 | ||||||||||||
Automated teller machine and interchange expense | 1,137 | 988 | 149 | 15.1 | ||||||||||||
Software subscriptions | 981 | 876 | 105 | 12.0 | ||||||||||||
Loss on prepayment of borrowings | 0 | 2,573 | (2,573 | ) | (100.0 | ) | ||||||||||
Other operating expense | 5,540 | 5,141 | 399 | 7.8 | ||||||||||||
Total Other Expense | $ | 34,744 | $ | 35,603 | $ | (859 | ) | (2.4 | ) |
23 |
TABLE V - COMPARISON OF NONINTEREST EXPENSE | ||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||
$ | % | |||||||||||||||||||
2013 | 2012 | Change | ||||||||||||||||||
Salaries and wages | $14,206 | $14,370 | ($164) | (1.1) | ||||||||||||||||
Pensions and other employee benefits | 4,150 | 4,497 | (347) | (7.7) | ||||||||||||||||
Occupancy expense, net | 2,473 | 2,476 | (3) | (0.1) | ||||||||||||||||
Furniture and equipment expense | 1,948 | 1,887 | 61 | 3.2 | ||||||||||||||||
FDIC Assessments | 604 | 633 | (29) | (4.6) | ||||||||||||||||
Pennsylvania shares tax | 1,402 | 1,312 | 90 | 6.9 | ||||||||||||||||
Professional fees | 1,534 | 486 | 1,048 | 215.6 | ||||||||||||||||
Automated teller machine and interchange expense | 1,020 | 1,136 | (116) | (10.2) | ||||||||||||||||
Software subscriptions | 836 | 890 | (54) | (6.1) | ||||||||||||||||
Loss on prepayment of debt | 1,023 | 2,333 | (1,310) | (56.2) | ||||||||||||||||
Other operating expense | 5,298 | 5,227 | 71 | 1.4 | ||||||||||||||||
Total Other Expense | $34,494 | $35,247 | ($753) | (2.1) | ||||||||||||||||
Years Ended | ||||||||||||||||||||
$ | % | December 31, | $ | % | ||||||||||||||||
2012 | 2011 | Change | 2015 | 2014 | Change | Change | ||||||||||||||
Salaries and wages | $14,370 | $13,866 | $504 | 3.6 | $ | 14,682 | $ | 15,121 | $ | (439 | ) | (2.9 | ) | |||||||
Pensions and other employee benefits | 4,497 | 4,407 | 90 | 2.0 | 4,420 | 4,769 | (349 | ) | (7.3 | ) | ||||||||||
Occupancy expense, net | 2,476 | 2,638 | (162) | (6.1) | 2,574 | 2,628 | (54 | ) | (2.1 | ) | ||||||||||
Furniture and equipment expense | 1,887 | 1,932 | (45) | (2.3) | 1,860 | 1,859 | 1 | 0.1 | ||||||||||||
FDIC Assessments | 633 | 832 | (199) | (23.9) | 603 | 600 | 3 | 0.5 | ||||||||||||
Pennsylvania shares tax | 1,312 | 1,306 | 6 | 0.5 | 1,248 | 1,350 | (102 | ) | (7.6 | ) | ||||||||||
Professional fees | 486 | 455 | 31 | 6.8 | 638 | 699 | (61 | ) | (8.7 | ) | ||||||||||
Automated teller machine and interchange expense | 1,136 | 1,026 | 110 | 10.7 | 988 | 924 | 64 | 6.9 | ||||||||||||
Software subscriptions | 890 | 703 | 187 | 26.6 | 876 | 784 | 92 | 11.7 | ||||||||||||
Loss on prepayment of debt | 2,333 | 0 | 2,333 | 100.0 | ||||||||||||||||
Loss on prepayment of borrowings | 2,573 | 0 | 2,573 | 100.0 | ||||||||||||||||
Other operating expense | 5,227 | 4,851 | 376 | 7.8 | 5,141 | 5,423 | (282 | ) | (5.2 | ) | ||||||||||
Total Other Expense | $35,247 | $32,016 | $3,231 | 10.1 | $ | 35,603 | $ | 34,157 | $ | 1,446 | 4.2 |
2013 vs. 20122016 vs 2015
Professional feesSalaries and wages expense increased $1,048,000, or 215.6%.. As noted$729,000 (5.0%), reflecting an increase in the Earnings Overview section, the Corporation incurred professional fee expensenumber of $315,000employees. The average number of full-time equivalent employees was 287 in 20132016, up from 281 in 2015, including new positions established for a consulting project related to debit card operationslending, lending support, information technology, training and electronic funds processing, for which management expects the consultants’ services to result in increases in noninterest revenue and reductions in noninterest expense going forward, most significantly from an estimated total reduction in expense of $1.9 million for electronic funds processing over approximately the next 5 years. In addition, the Corporation incurred professional fees expense of $724,000 related to a consulting engagement in which the consulting firm identified recommendations for potential increases in revenues with an estimated annual total pre-tax benefit of approximately $1.3 million. Management expects to realize ongoing benefits from implementing the recommendations to a significant extent starting in the fourth quarter 2013 and thereafter, though the actual amount of benefits to be derived is difficult to estimate and is dependent on many variables.marketing functions.
PensionsPension and other employee benefits decreased $347,000, or 7.7%expense increased $297,000 (6.7%). Health careThe increase resulted mainly from an increase of $214,000 in healthcare expense decreased $171,000 as the amounta result of claims incurred during 2013 was lower than 2012.increased healthcare claims. The Corporation is self-insured for health insurance, up to a cap for catastrophic levels of losses, which are insured by a third party. Postretirement health care expense decreased $156,000, reflecting amendmentsPayroll taxes and other expenses within this category increased in 2016, as well, due to the plan that include eliminationincrease in number of the accrual of service time by full-time employees as well as changes to some of the age and length-of-service requirements for participants to receive some of the benefits provided under the plan. Unemployment compensation decreased $51,000 as a result of a decrease in the Corporation’s experience-based Pennsylvania rate in 2013.described above.
SalariesProfessional fees expense increased $488,000, including increases related to employee sales and wages decreased $164,000, or 1.1%, mainly as a result of reduced incentive bonus compensation.
service training, information technology and marketing.
Automated teller machine and interchange expenses decreased $116,000, or 10.2%, mainly resulting from benefits derived from consulting project noted previously.expense increased $149,000, including the costs of purchasing new debit cards with EMV functionality.
2012 vs. 2011
Salaries and wagesSoftware subscriptions increased $504,000, or 3.6%, mainly$105,000 as a result of merit-based salary increases. The increaseenhancements and new applications initiated in this category in 2012 also included an increase in stock-based compensation for employees (excluding non-employee Directors) of $98,000.
Occupancy expense decreased $162,000, or 6.1%. Within this category, snow removal2015 and related expenses were $52,000 lower in 2012, reflecting the milder winter weather throughout the Corporation’s market area. Depreciation expense was $118,000 lower in 2012, mainly due to the impact of the sale of the Court Street, Williamsport property in the third quarter 2011. In connectioncontinuing into 2016 including costs associated with the sale, the Corporation entered into a lease arrangement to continue to use a portion of the building. The lease is accounted for as annetwork operating lease. Management estimates that total building-related expenses (including the effects of lower depreciation referred to above) for this location were $122,000 lower in 2012 than in 2011.
FDIC Assessments decreased $199,000, or 23.9%. Effective April 1, 2011, the FDIC’s method of determining assessments to banks changed, with the new methodology resulting in higher assessments to larger, more complex or higher-risk institutions,system, automated document signatures and smaller assessments to many community and small regional banks. The Corporation’s estimated first quarter 2012 FDIC assessment was substantially lower than the first quarter 2011 amount, reflecting the new methodology. The favorable decline also reflects rate changes attributed to improvements in the Corporation’s risk profile based on financial ratios.
Software-related subscriptions and updates, mainly related to lending-related activities, increased $187,000, or 26.6%
Fees paid related to interchange and ATM processing, increased $110,000 or 10.8%, reflecting increases in transaction volumes as well as nonrecurring charges related to changes in technical requirements.marketing-related functionality.
Other operating expense increased $376,000, or 7.8%. This category includes many different types$399,000 (7.8%), including increases in other real estate expenses of $123,000, donations and public relations-related expenses with the most significant differencesof $94,000 and education and training-related expenses of $60,000. Also, other operating expense was reduced in amounts between 2012 and 20112015 by $69,000 as follows:a result of a recovery of sales tax previously paid.
Occupancy expenses in 2016 were $234,000 under 2015 primarily as a result lower depreciation costs as well as lower winter-related expenses such as snow removal and fuel costs.
Furniture and equipment expenses in 2016 were $130,000 under 2015 primarily as a result lower depreciation costs.
FDIC insurance decreased $115,000 in 2016 reflecting lower assessment levels beginning in the third quarter of 2016.
2015 vs 2014
Salaries and wages decreased $439,000 (2.9%). As noted in the Earnings Overview section, this decrease is primarily the result of severance benefits incurred and paid in 2014. The decrease from severance benefits was partially offset by annual merit-based pay increases, an increase in incentive and other bonuses of $168,000 and the addition of new lending and other personnel.
Pensions and other employee benefits decreased $349,000 (7.3%). Health care expense decreased $342,000 as the amount of claims incurred during 2015 was lower than in 2014. In addition, pension expense decreased $111,000 as the result of a charge in 2014 related to a distribution from a defined benefit plan. These decreases were partially offset by annual increases in other benefit and administrative costs.
Other operating expense decreased $282,000 (5.2%). The reduction included a $191,000 decrease in loan collection expenses and an $86,000 decrease in other real estate expenses.
INCOME TAXES
The effective income tax rate was approximately 25%25.3% of pre-tax income in 2013, down from approximately 27%2016, 24.5% in 20122015 and 2011. The lower effective tax rate25.0% in 2013 is mainly attributable to lower pre-tax income in comparison to 2012 and 2011.2014. The Corporation’s effective tax rates differ from the statutory rate of 35% principally because of the effects of tax-exempt interest income.
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At December 31, 2013,2016, the net deferred tax asset was $6,344,000, up$5,117,000, an increase from the balance at December 31, 20122015 of $1,725,000.$3,115,000. The largest changeschange in temporary difference components were as follows:was a change to a deferred tax asset of $512,000 on the aggregate unrealized loss on available-for-sale securities at December 31, 2016 from a deferred tax liability of $1,342,000 on the aggregate unrealized gain on available-for-sale securities at December 31, 2015. The decline in fair values of available-for-sale securities was mainly due to an increase in interest rates in the last few months of 2016.
The Corporation uses currently enacted tax rates to value deferred tax assets and liabilities. The Trump Administration and the U.S. Congress are in the process of evaluating possible tax changes which may include a reduction in U.S. corporate income tax rates. If corporate tax rates were reduced, management expects the Corporation would record an initial charge against earnings to lower the carrying amount of the net deferred tax asset, and then would record a lower tax provision going forward on an ongoing basis.
The following schedule estimates the amount of initial reduction in the net deferred tax asset that would be recognized, at varying marginal federal income tax rates, based on the Corporation’s temporary difference components at December 31, 2016. The schedule also shows the pro forma impact on the 2016 provision for income taxes, assuming the alternative tax rates presented had been in effect throughout the year, without adjustment for reinvestment of additional funds and assuming no other changes in the composition of the Corporation’s assets and liabilities.
(Dollars in Thousands) | ||||||||||||||||
Valuation at Marginal Federal Tax Rate of: | ||||||||||||||||
35% | 25% | 20% | 15% | |||||||||||||
(Actual) | ||||||||||||||||
Carrying Value of Deferred Tax Asset at 12/31/16: | ||||||||||||||||
Accumulated Other Comprehensive Items, Net | $ | 485 | $ | 347 | $ | 278 | $ | 207 | ||||||||
Other Items, Net | 4,632 | 3,309 | 2,647 | 1,985 | ||||||||||||
Total | $ | 5,117 | $ | 3,656 | $ | 2,925 | $ | 2,192 | ||||||||
Pro Forma Reduction in Carrying Value of Deferred Tax Asset from 12/31/16: | ||||||||||||||||
Accumulated Other Comprehensive Items, Net | $ | (138 | ) | $ | (207 | ) | $ | (278 | ) | |||||||
Other Items, Net (Initial Charge to Earnings) | (1,323 | ) | (1,985 | ) | (2,647 | ) | ||||||||||
Total | $ | (1,461 | ) | $ | (2,192 | ) | $ | (2,925 | ) |
For the Year Ended 12/31/16 at Marginal | ||||||||||||||||
Federal Tax Rate of: | ||||||||||||||||
35% | 25% | 20% | 15% | |||||||||||||
(Actual) | ||||||||||||||||
Income Tax Provision | $ | 5,347 | $ | 3,797 | $ | 3,025 | $ | 2,250 | ||||||||
Income Tax Provision as % of Pre-tax Income | 25.3 | % | 18.0 | % | 14.3 | % | 10.7 | % | ||||||||
Pro Forma Reduction in 2016 Annual Income Tax Provision if Alternative Rate Were in Effect Throughout 2016 | $ | (1,550 | ) | $ | (2,322 | ) | $ | (3,097 | ) |
The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. Further, as discussed above, realization of deferred tax assets would be impacted if income tax rates are lowered from currently enacted levels.
Management believes the recorded net deferred tax asset at December 31, 20132016 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.
Additional information related to income taxes is presented in Note 14 to the consolidated financial statements.
SECURITIES
Table VI shows the composition of the investment portfolio at December 31, 2013, 20122016, 2015 and 2011.2014. Comparison of the amortized cost totals of available-for-sale securities at each year-end presented reflects a decrease of $10,554,000$92,227,000 to $454,781,000$416,455,000 at December 31, 20122015 from December 31, 2011.2014. This change was followed by an increasea decrease of $29,422,000$19,917,000 to $484,203,000$396,538,000 at December 31, 2013. In both 2012 and 2013,2016. The continued decrease in securities in 2016 reflects the Corporation increased itsuse of cash generated from the investment portfolio to help fund the increase in loans outstanding. The Corporation’s holdings of municipal bonds, agency collateralized mortgage obligations and U.S. Government agency securities. The increases were partially offset by decreases in the balances of mortgage-backed securities trust preferred securities,issued or guaranteed by U.S. Government agencies or sponsored agencies have decreased to $237,654,000 at December 31, 2016 from $266,372,000 at December 31, 2015 and pooled trust preferred securities as management reinvested cash flows from these securities$322,099,000 at December 31, 2014. Within that overall category, in other types of investments. Changes in the investment portfolio are discussed in more detail in the Net Interest Income section of Management’s Discussion and Analysis. As discussed in more detail in Note 7 to the financial statements,2016, the Corporation reported net realized gains from available-for-saleadded some commercial mortgage-backed securities for which the underlying collateral consists of $1,718,000 in 2013, $2,682,000 in 2012 and $2,216,000 in 2011.multi-family properties. The total amortized cost of commercial mortgage-backed securities held at December 31, 2016 was $30,817,000.
As reflected in Table VI, the fair value of available-for-sale securities as of December 31, 20132016 was $1,545,000,$1,461,000, or 0.3%0.37%, less than the total amortized cost basis. The aggregate unrealized loss position at December 31, 2013 included an unrealized loss of $4,431,000 on debt securities, partially offset by2016 was down from an unrealized gain of $2,886,000 on marketable equity securities (bank stocks). Increases$3,835,000 at December 31, 2015, partly due to an increase in interest rates in the last few months of 2016. Changes in intermediate-term and long-term interest rates have a significant impact on changes in 2013 led to a decrease infair values of debt securities. The fair values of tax-exempt municipal bonds at December 31, 2016 may have been negatively impacted, as well, by the market’s perception that U.S. corporate income tax rates may be reduced within the next 1-2 years. The aggregate unrealized gain on tax-exempt municipal bonds was $897,000, or 0.8% of amortized cost, at December 31, 2016. In comparison, the aggregate fair value ofunrealized gain on tax-exempt municipal bonds held at December 31, 2015 was $4,343,000, or 4.2%. The aggregate unrealized loss on debt securities at December 31, 2016 was 0.36% of the amortized cost basis, down from net unrealized gains on debt securities of 0.75% at December 31, 2015 and 1.01% at December 31, 2014. Also contributing to the reduction in 2013aggregate unrealized gain (loss) was the liquidation of the bank stock portfolio in 2015 and 2016 as the Corporation realized gains from the sale of bank stocks. As discussed in more detail in Note 7 to the consolidated financial statements, the Corporation reported net realized gains from available-for-sale securities of $1,158,000 in 2016, including realized gains from sales of equity securities (bank stocks) of $1,125,000. In comparison, to historical cost basis. net realized gains from available-for-sale securities totaled $2,861,000 in 2015 and $1,104,000 in 2014.
Management has reviewed the Corporation’s holdings as of December 31, 20132016 and concluded that unrealized losses on all of the securities in an unrealized loss position are considered temporary. Notes 6 and 7 to the consolidated financial statements provide more detail concerning the Corporation’s processes for evaluating securities for other-than-temporary impairment, and for valuation of trust-preferred securities.impairment. Management will continue to closely monitor the status of impaired securities in 2014.2017.
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TABLE VI - INVESTMENT SECURITIES
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
(In Thousands) | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | Cost | Value | ||||||||||||||||||
AVAILABLE-FOR-SALE SECURITIES: | ||||||||||||||||||||||||||||||
Obligations of U.S. Government agencies | $47,382 | $45,877 | $30,695 | $31,217 | $24,877 | $25,587 | $ | 9,671 | $ | 9,541 | $ | 10,663 | $ | 10,483 | $ | 27,221 | $ | 26,676 | ||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||||||||
Tax-exempt | 127,748 | 128,426 | 130,168 | 137,020 | 129,401 | 132,962 | 118,140 | 119,037 | 103,414 | 107,757 | 120,086 | 124,839 | ||||||||||||||||||
Taxable | 35,153 | 34,471 | 24,426 | 24,817 | 14,004 | 14,334 | 30,073 | 30,297 | 34,317 | 34,597 | 33,637 | 33,878 | ||||||||||||||||||
Mortgage-backed securities | 84,849 | 86,208 | 76,368 | 80,196 | 116,602 | 121,769 | ||||||||||||||||||||||||
Collateralized mortgage obligations, Issued by U.S. Government agencies | 182,373 | 178,092 | 179,770 | 183,510 | 161,818 | 165,131 | ||||||||||||||||||||||||
Trust preferred securities issued by individual institutions | 0 | 5,167 | 5,171 | 7,334 | 8,146 | |||||||||||||||||||||||||
Collateralized debt obligations: | ||||||||||||||||||||||||||||||
Pooled trust preferred securities - senior tranches | 0 | 1,615 | 1,613 | 4,996 | 4,638 | |||||||||||||||||||||||||
Pooled trust preferred securities - mezzanine tranches | 0 | 730 | ||||||||||||||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||||||||||||
Residential pass-through securities | 58,922 | 58,404 | 73,227 | 73,343 | 82,479 | 83,903 | ||||||||||||||||||||||||
Residential collateralized mortgage obligations | 147,915 | 146,608 | 193,145 | 191,715 | 239,620 | 238,823 | ||||||||||||||||||||||||
Commercial mortgage-backed securities | 30,817 | 30,219 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Other collateralized debt obligations | 660 | 0 | 0 | 9 | 9 | 34 | 34 | |||||||||||||||||||||||
Total debt securities | 478,165 | 473,734 | 448,869 | 464,204 | 459,692 | 473,957 | 395,538 | 394,106 | 414,775 | 417,904 | 503,077 | 508,153 | ||||||||||||||||||
Marketable equity securities | 6,038 | 8,924 | 5,912 | 8,373 | 5,643 | 7,728 | 1,000 | 971 | 1,680 | 2,386 | 5,605 | 8,654 | ||||||||||||||||||
Total | $484,203 | $482,658 | $454,781 | $472,577 | $465,335 | $481,685 | $ | 396,538 | $ | 395,077 | $ | 416,455 | $ | 420,290 | $ | 508,682 | $ | 516,807 |
The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2013.2016. Yields on tax-exempt securities are presented on a nominal basis, that is, the yields are not presented on a fully taxable-equivalent basis. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands, Except for Percentages) | Within | One- | Five- | After | Within | One- | Five- | After | ||||||||||||||||||||||||||||||||||||||||||
One | Five | Ten | Ten | One | Five | Ten | Ten | |||||||||||||||||||||||||||||||||||||||||||
Year | Yield | Years | Yield | Years | Yield | Years | Yield | Total | Yield | Year | Yield | Years | Yield | Years | Yield | Years | Yield | Total | Yield | |||||||||||||||||||||||||||||||
AVAILABLE-FOR-SALE SECURITIES: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of U.S. Government agencies | $12,434 | 1.73% | $11,073 | 1.72% | $23,875 | 1.33% | $0 | 0.00% | $47,382 | 1.53% | $ | 1,637 | 1.36 | % | $ | 8,034 | 1.42 | % | $ | 0 | 0.00 | % | $ | 0 | 0.00 | % | $ | 9,671 | 1.41 | % | ||||||||||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt | 8,823 | 3.29% | 21,703 | 1.89% | 37,116 | 2.67% | 60,106 | 4.68% | 127,748 | 3.53% | 13,429 | 3.13 | % | 43,417 | 2.80 | % | 36,175 | 2.22 | % | 25,119 | 3.77 | % | 118,140 | 2.86 | % | |||||||||||||||||||||||||
Taxable | 3,855 | 1.99% | 16,005 | 2.09% | 14,728 | 2.40% | 565 | 3.60% | 35,153 | 2.24% | 3,613 | 1.81 | % | 18,108 | 2.25 | % | 8,352 | 3.07 | % | 0 | 0.00 | % | 30,073 | 2.43 | % | |||||||||||||||||||||||||
Trust preferred securities issued by individual institutions | 0 | 0.00% | 0 | 0.00% | 0 | 0.00% | 0 | 0.00% | 0 | 0.00% | ||||||||||||||||||||||||||||||||||||||||
Collateralized debt obligations: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Pooled trust preferred securities - senior tranches | 0 | 0.00% | 0 | 0.00% | 0 | 0.00% | 0 | 0.00% | 0 | 0.00% | ||||||||||||||||||||||||||||||||||||||||
Other collateralized debt obligations | 626 | 0.00% | 0 | 0.00% | 0 | 0.00% | 34 | 0.00% | 660 | 0.00% | ||||||||||||||||||||||||||||||||||||||||
Subtotal | $25,738 | 2.26% | $48,781 | 1.92% | $75,719 | 2.19% | $60,705 | 4.67% | $210,943 | 2.85% | ||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 84,849 | 2.78% | ||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations, Issued by U.S. Government agencies | 182,373 | 1.95% | ||||||||||||||||||||||||||||||||||||||||||||||||
Sub-total | $ | 18,679 | 2.72 | % | $ | 69,559 | 2.50 | % | $ | 44,527 | 2.38 | % | $ | 25,119 | 3.77 | % | 157,884 | 2.69 | % | |||||||||||||||||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Residential pass-through securities | 58,922 | 2.07 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Residential collateralized mortgage obligations | 147,915 | 1.96 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 30,817 | 2.34 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $478,165 | 2.50% | $ | 395,538 | 2.12 | % |
The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase.increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period.
27 |
FINANCIAL CONDITION
Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. The discussion provides useful information regarding changes in the Corporation’s balance sheet over the 3-year period ended December 31, 2013, including discussions related to available-for-sale securities, loans, deposits and borrowings. Other significant balance sheet items - the allowance for loan losses and stockholders’ equity - are discussed in separate sections of Management’s Discussion and Analysis.
The total ofGross loans outstanding (without consideration of the allowance(excluding mortgage loans held for loan losses)sale) were $751,835,000 at December 31, 2013 reflects a total decrease of $76,708,000 (10.6%)2016, up 6.7% from the balance$704,880,000 at December 31, 2009 to the2015. The total outstanding balances of $644,303,000residential mortgage segment loans at December 31, 2013. Loan volumes are heavily dependent on economic conditions in the Corporation’s market area, and are significantly influenced by interest rates. Since the end of 2009, the Corporation experienced a net decrease in total loans outstanding under the residential mortgage segment ($39,721,000) with more residential mortgage originations than in previous years sold into the secondary market. In September 2009, the Corporation initiated participation in the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago for the sale of mortgage loans to the secondary market. At December 31, 2013, the outstanding balance of residential mortgage loans originated by the Corporation, and sold with servicing retained was $145,954,000. Total commercial segment loans outstanding decreased ($28,547,000) at December 31, 20132016 increased $34,683,000 (9.0%) as compared to December 31, 2009, including a reduction2015, and the total outstanding balances of $26,176,000commercial segment loans at December 31, 20132016 increased $9,206,000 (3.0%) as compared to December 31, 2015. The 2016 loan growth followed significant growth in loans outstanding in 2015, as gross loans outstanding at December 31, 2015 were up 11.8% from year-end 2012. Also,December 31, 2014. Total outstanding commercial loans were higher by $54,239,000 (21.4%), and residential mortgage segment loans were up $19,674,000 (5.4%), at December 31, 2015 as compared to December 31, 2014.
The increases in loans outstanding in 2015 and 2016 included increases in commercial participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the last four years, consumer“Commercial and industrial,” “Commercial loans have steadily decreased ($8,440,000)secured by real estate” and “Political subdivisions” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to the$47,508,000 at December 31, 20132016, up from $44,456,000 at December 31, 2015. At December 31, 2016, the balance of $10,762,000.participation loans outstanding includes a total of $34,890,000 to businesses located outside of the Corporation’s market area, including $11,967,000 from participations in loans originated through the Corporation’s membership in a network that originates loans throughout the U.S. The Corporation’s participation loans originated through the network consist of loans to businesses that are larger than the Corporation’s typical commercial customer base. The loans originated through the network are considered “leveraged loans,” meaning the businesses typically have minimal tangible book equity and the extent of collateral available is limited, though the businesses have demonstrated strong cash flow performance in their recent histories. At December 31, 2016, total leveraged participation loans, including loans originated through the network and two loans to one borrower originated through another lead institution, totaled $15,207,000.
Table VIII presents loan maturity data as of December 31, 2013.2016. The interest rate simulation model classifies certain loans under different categories than theyfrom the categories that appear in Table VII. Fixed-rate loans are shown in Table VIII based on their contractually scheduled principal repayments, and variable-rate loans are shown based on the date of the next change in rate. Table VIII shows that fixed-rate loans are approximately 38% of the loan portfolio. Of the 62% of the portfolio made up of variable-rate loans, a significant portion (45%(36%) will re-price after more than one year. Variable-rate loans re-pricing after more than one year include significant amounts of residential and commercial real estate secured loans. The Corporation’s substantial investment in long-term, fixed-rate loans and variable-rate loans with extended periods until re-pricing is one of the concerns management attempts to address through interest rate risk management practices. See Part II, Item 7A for a more detailed discussion of the Corporation’s interest rate risk.
Other significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the “Net Interest Income” section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis.
Total future capital purchases of bank premises and equipment in 20142017 are estimated at approximately $1.7$2.5 million. Management does not expect capital expendituresthe amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition during 2014.in 2017.
TABLE VII - Five-year SummarySince 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of LoansPittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by Typethe Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh.
(In Thousands)
2013 | % | 2012 | % | 2011 | % | 2010 | % | 2009 | % | |
Residential mortgage: | ||||||||||
Residential mortgage loans - first liens | $299,831 | 46.5 | $311,627 | 45.6 | $331,015 | 46.7 | $333,012 | 45.6 | $340,268 | 47.2 |
Residential mortgage loans - junior liens | 23,040 | 3.6 | 26,748 | 3.9 | 28,851 | 4.1 | 31,590 | 4.3 | 35,734 | 5.0 |
Home equity lines of credit | 34,530 | 5.4 | 33,017 | 4.8 | 30,037 | 4.2 | 26,853 | 3.7 | 23,577 | 3.3 |
1-4 Family residential construction | 13,909 | 2.2 | 12,842 | 1.9 | 9,959 | 1.4 | 14,379 | 2.0 | 11,452 | 1.6 |
Total residential mortgage | 371,310 | 57.6 | 384,234 | 56.2 | 399,862 | 56.5 | 405,834 | 55.6 | 411,031 | 57.0 |
Commercial: | ||||||||||
Commercial loans secured by real estate | 147,215 | 22.8 | 158,413 | 23.2 | 156,388 | 22.1 | 167,094 | 22.9 | 163,483 | 22.7 |
Commercial and industrial | 42,387 | 6.6 | 48,442 | 7.1 | 57,191 | 8.1 | 59,005 | 8.1 | 49,753 | 6.9 |
Political subdivisions | 16,291 | 2.5 | 31,789 | 4.6 | 37,620 | 5.3 | 36,480 | 5.0 | 37,598 | 5.2 |
Commercial construction | 17,003 | 2.6 | 28,200 | 4.1 | 23,518 | 3.3 | 24,004 | 3.3 | 15,264 | 2.1 |
Loans secured by farmland | 10,468 | 1.6 | 11,403 | 1.7 | 10,949 | 1.5 | 11,353 | 1.6 | 11,856 | 1.6 |
Multi-family (5 or more) residential | 10,985 | 1.7 | 6,745 | 1.0 | 6,583 | 0.9 | 7,781 | 1.1 | 8,338 | 1.2 |
Agricultural loans | 3,251 | 0.5 | 3,053 | 0.4 | 2,987 | 0.4 | 3,472 | 0.5 | 3,848 | 0.5 |
Other commercial loans | 14,631 | 2.3 | 362 | 0.1 | 552 | 0.1 | 392 | 0.1 | 638 | 0.1 |
Total commercial | 262,231 | 40.7 | 288,407 | 42.2 | 295,788 | 41.8 | 309,581 | 42.4 | 290,778 | 40.3 |
Consumer | 10,762 | 1.7 | 11,269 | 1.6 | 12,665 | 1.8 | 14,996 | 2.1 | 19,202 | 2.7 |
Total | 644,303 | 100.0 | 683,910 | 100.0 | 708,315 | 100.0 | 730,411 | 100.0 | 721,011 | 100.0 |
Less: allowance for loan losses | (8,663) | (6,857) | (7,705) | (9,107) | (8,265) | |||||
Loans, net | $635,640 | $677,053 | $700,610 | $721,304 | $712,746 |
For loan sales originated under the MPF Xtra and Original programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received, or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At December 31, 2016, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,852,000, and the corresponding total outstanding balance repurchased at December 31, 2015 was $1,968,000.
28 |
At December 31, 2016, outstanding balances of loans sold and serviced through the two programs totaled $163,296,000, including loans sold through the MPF Xtra program of $116,978,000 and loans sold through the Original program of $46,318,000. At December 31, 2015, outstanding balances of loans sold and serviced through the two programs totaled $152,448,000, including loans sold through the MPF Xtra program of $125,571,000 and loans sold through the Original Program of $26,877,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 2016 and December 31, 2015.
For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At December 31, 2016, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,664,000, and the Corporation has recorded a related allowance for credit losses in the amount of $196,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets. There was no allowance recorded at December 31, 2015. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.
Table VII – Summary of Loans by Type | ||||||||||||||||||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||||||||||
2016 | % | 2015 | % | 2014 | % | 2013 | % | 2012 | % | |||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 334,102 | 44.4 | $ | 304,783 | 43.2 | $ | 291,882 | 46.3 | $ | 299,831 | 46.5 | $ | 311,627 | 45.6 | |||||||||||||||||||||||||
Residential mortgage loans - junior liens | 23,706 | 3.2 | 21,146 | 3.0 | 21,166 | 3.4 | 23,040 | 3.6 | 26,748 | 3.9 | ||||||||||||||||||||||||||||||
Home equity lines of credit | 38,057 | 5.1 | 39,040 | 5.5 | 36,629 | 5.8 | 34,530 | 5.4 | 33,017 | 4.8 | ||||||||||||||||||||||||||||||
1-4 Family residential construction | 24,908 | 3.3 | 21,121 | 3.0 | 16,739 | 2.7 | 13,909 | 2.2 | 12,842 | 1.9 | ||||||||||||||||||||||||||||||
Total residential mortgage | 420,773 | 56.0 | 386,090 | 54.8 | 366,416 | 58.1 | 371,310 | 57.6 | 384,234 | 56.2 | ||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 150,468 | 20.0 | 154,779 | 22.0 | 145,878 | 23.1 | 147,215 | 22.8 | 158,413 | 23.2 | ||||||||||||||||||||||||||||||
Commercial and industrial | 83,854 | 11.2 | 75,196 | 10.7 | 50,157 | 8.0 | 42,387 | 6.6 | 48,442 | 7.1 | ||||||||||||||||||||||||||||||
Political subdivisions | 38,068 | 5.1 | 40,007 | 5.7 | 17,534 | 2.8 | 16,291 | 2.5 | 31,789 | 4.6 | ||||||||||||||||||||||||||||||
Commercial construction | 14,287 | 1.9 | 5,122 | 0.7 | 6,938 | 1.1 | 17,003 | 2.6 | 28,200 | 4.1 | ||||||||||||||||||||||||||||||
Loans secured by farmland | 7,294 | 1.0 | 7,019 | 1.0 | 7,916 | 1.3 | 10,468 | 1.6 | 11,403 | 1.7 | ||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 7,896 | 1.1 | 9,188 | 1.3 | 8,917 | 1.4 | 10,985 | 1.7 | 6,745 | 1.0 | ||||||||||||||||||||||||||||||
Agricultural loans | 3,998 | 0.5 | 4,671 | 0.7 | 3,221 | 0.5 | 3,251 | 0.5 | 3,053 | 0.4 | ||||||||||||||||||||||||||||||
Other commercial loans | 11,475 | 1.5 | 12,152 | 1.7 | 13,334 | 2.1 | 14,631 | 2.3 | 362 | 0.1 | ||||||||||||||||||||||||||||||
Total commercial | 317,340 | 42.2 | 308,134 | 43.7 | 253,895 | 40.3 | 262,231 | 40.7 | 288,407 | 42.2 | ||||||||||||||||||||||||||||||
Consumer | 13,722 | 1.8 | 10,656 | 1.5 | 10,234 | 1.6 | 10,762 | 1.7 | 11,269 | 1.6 | ||||||||||||||||||||||||||||||
Total | 751,835 | 100.0 | 704,880 | 100.0 | 630,545 | 100.0 | 644,303 | 100.0 | 683,910 | 100.0 | ||||||||||||||||||||||||||||||
Less: allowance for loan losses | (8,473 | ) | (7,889 | ) | (7,336 | ) | (8,663 | ) | (6,857 | ) | ||||||||||||||||||||||||||||||
Loans, net | $ | 743,362 | $ | 696,991 | $ | 623,209 | $ | 635,640 | $ | 677,053 |
TABLE VIII – LOAN MATURITY DISTRIBUTION
(In Thousands) As of December 31, 2016
Fixed-Rate Loans | Variable- or Adjustable-Rate Loans | Fixed-Rate Loans | Variable- or Adjustable-Rate Loans | |||||||||||||||||||||||||||||||||||||
1 Year | 1-5 | >5 | 1 Year | 1-5 | >5 | 1 Year | 1-5 | >5 | 1 Year | 1-5 | >5 | |||||||||||||||||||||||||||||
or Less | Years | Total | or Less | Years | Total | or Less | Years | Years | Total | or Less | Years | Years | Total | |||||||||||||||||||||||||||
Real Estate | $776 | $16,678 | $173,974 | $191,428 | $60,003 | $214,804 | $54,604 | $329,411 | $ | 4,027 | $ | 22,376 | $ | 170,014 | $ | 196,417 | $ | 144,585 | $ | 152,883 | $ | 94,394 | $ | 391,862 | ||||||||||||||||
Commercial | 15,225 | 9,463 | 18,628 | 43,317 | 46,286 | 22,687 | 308 | 69,281 | 8,814 | 39,959 | 23,926 | 72,699 | 54,631 | 21,798 | 985 | 77,414 | ||||||||||||||||||||||||
Consumer | 2,444 | 5,258 | 3,035 | 10,737 | 77 | 0 | 52 | 129 | 1,733 | 8,432 | 3,218 | 13,383 | 60 | 0 | 0 | 60 | ||||||||||||||||||||||||
Total | $18,445 | $31,399 | $195,637 | $245,482 | $106,367 | $237,491 | $54,963 | $398,821 | $ | 14,574 | $ | 70,767 | $ | 197,158 | $ | 282,499 | $ | 199,276 | $ | 174,681 | $ | 95,379 | $ | 469,336 |
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PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses.
While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
The allowance for loan losses was $8,663,000$8,473,000 at December 31, 2013,2016, up from $6,857,000$7,889,000 at December 31, 2012.2015. As shown in Table X, the total of specific allowances on impaired loans totaled $2,333,000$674,000 at December 31, 2013,2016, which was $1,710,000 higher$146,000 lower than the total of specific allowances on impaired loans at December 31, 2012. The increase in the specific allowances on impaired loans in 2013 includes an allowance of $1,522,000 established on loans to one commercial borrower.2015. Table X also shows the collectively determined component of the allowance for residential mortgages was $145,000$473,000 higher at December 31, 20132016 than at December 31, 2012. The allowance for2015, reflecting growth in outstanding loans and use of slightly higher qualitative factors to estimate the residential mortgage segment was affected by the net charge-off percentage used to determine a portion ofrequired allowance. Also, the collectively determined component of the allowance whichfor commercial loans was $270,000 higher at December 31, 20132016 than at December 31, 2012. The collectively evaluated components2015, reflecting the effects of the allowance for the residentialgrowth in outstanding loans and commercial segments were also affected by slight increases in the average net charge-offs experience and qualitative factors at December 31, 2013 as comparedused to December 31, 2012, while lower loan balances hadestimate the effect of decreasing the collectively evaluated components of the allowance for the commercial segment.required allowance.
The provision for loan losses is determined based on the amount required in order to maintain an appropriate allowance for loan losses in light of all factors considered. The provision for loan losses by segment for 2013, 20122016, 2015 and 20112014 is as follows:
(In Thousands) | |||||||||||||||
2013 | 2012 | 2011 | 2016 | 2015 | 2014 | ||||||||||
Residential mortgage | $559 | $149 | $194 | $ | 542 | $ | (19 | ) | $ | 250 | |||||
Commercial | 1,507 | 20 | (625) | 687 | 816 | 227 | |||||||||
Consumer | 24 | 112 | 25 | 21 | 16 | 2 | |||||||||
Unallocated | (43) | 7 | 121 | (29 | ) | 32 | (3 | ) | |||||||
Total | $2,047 | $288 | ($285) | $ | 1,221 | $ | 845 | $ | 476 |
The provision for loan losses was $2,047,000 in 2013, in comparison to a provision for loan losses of $288,000 in 2012 and a credit for loan losses of $285,000 in 2011. As shown in Table XII, the average provision for loan losses for the five-year period ended December 31, 20132016 was $784,000.$975,000. The total amount of the provision for loan losses for each period is determined based on the amount required to maintain an appropriate allowance.
The $542,000 provision for the residential mortgage segment in 2016 included the $473,000 increase in the collectively determined allowance, as noted above, and a net charge of $69,000 related to the change in light of all oftotal specific allowances on impaired loans, as adjusted for net charge-offs during the factors described above.
period. In 2013,2015, the provision$19,000 credit for loan losses in the residential mortgage segment resulted mainly from a reduction in the specific allowance related to one loan relationship, partially offset by the commercial segment includes a provision of $1,522,000 from the establishmenteffects of an increase of $122,000 in the collectively determined allowance on loansdue to one borrower. loan growth. The provision for the residential segment of $250,000 in 2014 included the effects of an increase in the collectively determined allowance of $139,000, mainly due to loan growth.
In 2012,2016, the Corporation’s$687,000 provision for loan losses for the commercial segment included a net provision of $464,000 related to a commercial relationship for which charge-offs totaling $760,000 were recorded, while the provision was reduced by$417,000 from the net decreasechange in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, and $270,000 from the net increase in the collectively evaluated portion ofdetermined allowance as described above. In comparison, the allowance$816,000 provision for loan losses as a result of a lower balance of outstanding loans. Similarly, the credit for loan losses from the commercial segment in 2011 reflected2015 included $445,000 from the effect of a lower balance ofnet change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, and $371,000 from the net increase in the collectively determined allowance, with growth in the collectively determined allowance in 2015 caused by growth in outstanding along with reductions related to a few large commercial relationships.loans. The provision for loan losses for the residential mortgagecommercial segment increasedof $227,000 in 2013, mainly as a result2014 included the effects of thean increase in average net charge-offsthe collectively determined allowance of $149,000, reflecting loan growth and a slight increase in qualitative factors used to estimate a portion of the collectively determinedrequired allowance.
30 |
Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). At December 31, 2013, total impairedTotal nonperforming loans were $16,321,000, up from $7,429,000as a percentage of outstanding loans was 2.07% at December 31, 2012. Nonaccrual2016, down slightly from 2.09% at December 31, 2015, and nonperforming assets as a percentage of total assets was 1.43% at December 31, 2016, up from 1.31% at December 31, 2015. Table XI presents data at the end of each of the years ended December 31, 2012 through 2016. For the range of dates presented in Table XI, total nonperforming loans totaled $14,934,000as a percentage of loans has ranged from a low of 1.41% at December 31, 2012 to a high of 2.80% at December 31, 2013, upand total nonperforming assets as a percentage of assets has ranged from $7,353,000a low of 0.82% at December 31, 2012. The2012 to a high of 1.53% at December 31, 2013.
Total impaired loans of $10,860,000 at December 31, 2016, are up $886,000 from the corresponding amount at December 31, 2015 of $9,974,000, including an increase in impaired and nonaccrual loans in 2013 resulted mainly from classification as nonperforming of two large commercial loans with a valuation allowance of $1,439,000. In 2016, the Corporation recorded an allowance of $528,000 related to one real estate secured commercial loan relationship with an outstanding balances totaling $7,599,000balance of $2,773,000 that was classified as impaired with a valuation allowance at December 31, 2016. Table XI shows that over the period 2012-2016, the year-end total outstanding balance of impaired loans has ranged from a low of $7,429,000 in 2012 to a high of $16,321,000 in 2013.
Total loans past due 90 days or more and still in accrual status increased to $3,131,000nonperforming assets of $17,754,000 at December 31, 20132016 are up $1,748,000 from $2,311,000the corresponding amount at December 31, 2012. Interest continues to be accrued on loans 90 days or more past due that management deems to be well secured and2015. A summary of changes in the processcomponents of collection,nonperforming assets at December 31, 2016 as compared to December 31, 2015 is as follows:
· | Nonaccrual loans totaled $8,736,000 at December 31, 2016, down from $11,517,000 at December 31, 2015. As described in more detail below, the net reduction in nonaccrual loans included the effect of moving loans to one commercial borrower with recorded investments totaling $4,786,000 to full accrual status in the fourth quarter 2016. The net change in nonaccrual loans also included the effect of classifying the real estate secured commercial loan noted above with an outstanding balance at December 31, 2016 of $2,773,000 as nonaccrual in 2016. |
· | Total loans past due 90 days or more and still accruing interest amounted to $6,838,000 at December 31, 2016, an increase of $3,609,000 from $3,229,000 at December 31, 2015. The increase in 2016 in the balance of loans past due 90 days or more and still accruing interest included a commercial loan with a balance of $2,677,000 at December 31, 2016 that was deemed by management to be well secured and in the process of collection. At December 31, 2016, in addition to this commercial loan, total residential mortgage loans that were more than 90 days past due but deemed to be well secured and in the process of collection amounted to $3,022,000, up from $2,381,000 at December 31, 2015. The Corporation reviews the status of loans past due 90 days or more each quarter to determine if it is appropriate to continue to accrue interest, and has determined the loans included in this category are well secured and that ultimate collection of all principal and interest is probable. |
· | Foreclosed assets held for sale consisted of real estate, and totaled $2,180,000 at December 31, 2016, an increase of $920,000 from $1,260,000 at December 31, 2015. At December 31, 2016, the Corporation held 19 such properties for sale, with total carrying values of $1,102,000 related to residential real estate, $650,000 of land and $428,000 related to commercial real estate. At December 31, 2015, the Corporation held 12 such properties for sale, with total carrying values of $556,000 related to residential real estate and $704,000 of land. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property. |
As shown in Table XI, loans classified as TDRs increased to $8,677,000 at December 31, 2016 from $6,364,000 at December 31, 2015. The increase resulted primarily from a concession granted to one commercial customer with a loan balance of $2,773,000 at December 31, 2016. The Corporation entered into a forbearance agreement with this customer which includes extending the period to twelve months for which no loss is anticipated. required monthly payments will include interest only. Table XI shows that over the period 2012-2016, the year-end total outstanding balance of TDRs has ranged from a low of $2,061,000 in 2012 to a high of $8,677,000 in 2016.
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Recorded investments in impaired loans without a valuation allowance and performing TDRs at December 31, 2016 include $4,786,000 from loans to one commercial entity. In 2014, the Corporation entered into a forbearance agreement with this commercial borrower which included a reduction in monthly payment amounts over a fifteen-month period. At the end of the fifteen-month period, the monthly payment amounts would revert to the original amounts, unless the forbearance agreement was extended or the payment requirements otherwise modified. The forbearance agreement was extended for two additional twelve-month periods, most recently in July 2016. The Corporation recorded a charge-off of $1,486,000 in 2014 as a result of these modifications, as the payment amounts based on the forbearance agreement were not sufficient to fully amortize the contractual amount of principal outstanding on the loans. In December 2016, the Corporation and the borrower entered into a modification agreement, terminating the forbearance agreement and establishing loan terms with essentially the same interest rate and monthly payment amounts as had been in effect under the forbearance agreement. The weighted average maturity of the loan contracts has been extended under the modification agreement as compared to the maturities provided for in the original loan contracts. At December 31, 2016, the outstanding contractual balances of these loans total $6,529,000, and the recorded investments total $4,786,000. These loans are still classified as TDRs at December 31, 2016. The borrower made all required payments on the loans in accordance with the terms of the forbearance agreement, as extended, and (as noted above), the loans were restored to full accrual status at December 31, 2016.
Over the period 2009-2013,2012-2016, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of December 31, 2013.2016. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.
Tables IX through XII present historical data related to the allowance for loan losses.
32 |
TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands) | Years Ended December 31, | ||||
2013 | 2012 | 2011 | 2010 | 2009 | |
Balance, beginning of year | $6,857 | $7,705 | $9,107 | $8,265 | $7,857 |
Charge-offs: | |||||
Residential mortgage | (95) | (552) | (100) | (340) | (146) |
Commercial | (459) | (498) | (1,189) | (91) | (39) |
Consumer | (117) | (171) | (157) | (188) | (293) |
Total charge-offs | (671) | (1,221) | (1,446) | (619) | (478) |
Recoveries: | |||||
Residential mortgage | 24 | 18 | 3 | 55 | 8 |
Commercial | 348 | 8 | 255 | 113 | 77 |
Consumer | 58 | 59 | 71 | 102 | 121 |
Total recoveries | 430 | 85 | 329 | 270 | 206 |
Net charge-offs | (241) | (1,136) | (1,117) | (349) | (272) |
Provision (credit) for loan losses | 2,047 | 288 | (285) | 1,191 | 680 |
Balance, end of period | $8,663 | $6,857 | $7,705 | $9,107 | $8,265 |
Net charge-offs as a % of average loans | 0.04% | 0.16% | 0.16% | 0.05% | 0.04% |
TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars In Thousands) | Years Ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Balance, beginning of year | $ | 7,889 | $ | 7,336 | $ | 8,663 | $ | 6,857 | $ | 7,705 | ||||||||||
Charge-offs: | ||||||||||||||||||||
Residential mortgage | (73 | ) | (217 | ) | (327 | ) | (95 | ) | (552 | ) | ||||||||||
Commercial | (597 | ) | (251 | ) | (1,715 | ) | (459 | ) | (498 | ) | ||||||||||
Consumer | (87 | ) | (94 | ) | (97 | ) | (117 | ) | (171 | ) | ||||||||||
Total charge-offs | (757 | ) | (562 | ) | (2,139 | ) | (671 | ) | (1,221 | ) | ||||||||||
Recoveries: | ||||||||||||||||||||
Residential mortgage | 3 | 1 | 25 | 24 | 18 | |||||||||||||||
Commercial | 35 | 214 | 264 | 348 | 8 | |||||||||||||||
Consumer | 82 | 55 | 47 | 58 | 59 | |||||||||||||||
Total recoveries | 120 | 270 | 336 | 430 | 85 | |||||||||||||||
Net charge-offs | (637 | ) | (292 | ) | (1,803 | ) | (241 | ) | (1,136 | ) | ||||||||||
Provision for loan losses | 1,221 | 845 | 476 | 2,047 | 288 | |||||||||||||||
Balance, end of period | $ | 8,473 | $ | 7,889 | $ | 7,336 | $ | 8,663 | $ | 6,857 | ||||||||||
Net charge-offs as a % of average loans | 0.09 | % | 0.04 | % | 0.29 | % | 0.04 | % | 0.16 | % |
(In Thousands)
TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES |
(In Thousands) |
As of December 31, | |||||
2013 | 2012 | 2011 | 2010 | 2009 | |
ASC 310 - Impaired loans | $2,333 | $623 | $1,126 | $2,288 | $1,126 |
ASC 450 - Collective segments: | |||||
Commercial | 2,583 | 2,594 | 2,819 | 3,047 | 2,677 |
Residential mortgage | 3,156 | 3,011 | 3,130 | 3,227 | 3,859 |
Consumer | 193 | 188 | 204 | 232 | 281 |
Unallocated | 398 | 441 | 426 | 313 | 322 |
Total Allowance | $8,663 | $6,857 | $7,705 | $9,107 | $8,265 |
TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(In Thousands)
As of December 31, | |||||
2013 | 2012 | 2011 | 2010 | 2009 | |
Impaired loans with a valuation allowance | $9,889 | $2,710 | $3,433 | $5,457 | $2,690 |
Impaired loans without a valuation allowance | 6,432 | 4,719 | 4,431 | 3,191 | 3,257 |
Total impaired loans | $16,321 | $7,429 | $7,864 | $8,648 | $5,947 |
Total loans past due 30-89 days and still accruing | $8,305 | $7,756 | $7,898 | $7,125 | $9,445 |
Nonperforming assets: | |||||
Total nonaccrual loans | $14,934 | $7,353 | $7,197 | $10,809 | $9,092 |
Total loans past due 90 days or more and still accruing | 3,131 | 2,311 | 1,267 | 727 | 31 |
Total nonperforming loans | 18,065 | 9,664 | 8,464 | 11,536 | 9,123 |
Foreclosed assets held for sale (real estate) | 892 | 879 | 1,235 | 537 | 873 |
Total nonperforming assets | $18,957 | $10,543 | $9,699 | $12,073 | $9,996 |
Loans subject to troubled debt restructurings (TDRs): | |||||
Performing | $3,267 | $906 | $1,064 | $645 | $326 |
Nonperforming | 908 | 1,155 | 2,413 | 0 | 0 |
Total TDRs | $4,175 | $2,061 | $3,477 | $645 | $326 |
Total nonperforming loans as a % of loans | 2.80% | 1.41% | 1.19% | 1.58% | 1.27% |
Total nonperforming assets as a % of assets | 1.53% | 0.82% | 0.73% | 0.92% | 0.76% |
Allowance for loan losses as a % of total loans | 1.34% | 1.00% | 1.09% | 1.25% | 1.15% |
Allowance for loan losses as a % of nonperforming loans | 47.95% | 70.95% | 91.03% | 78.94% | 90.60% |
As of December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
ASC 310 - Impaired loans | $ | 674 | $ | 820 | $ | 769 | $ | 2,333 | $ | 623 | ||||||||||
ASC 450 - Collective segments: | ||||||||||||||||||||
Commercial | 3,373 | 3,103 | 2,732 | 2,583 | 2,594 | |||||||||||||||
Residential mortgage | 3,890 | 3,417 | 3,295 | 3,156 | 3,011 | |||||||||||||||
Consumer | 138 | 122 | 145 | 193 | 188 | |||||||||||||||
Unallocated | 398 | 427 | 395 | 398 | 441 | |||||||||||||||
Total Allowance | $ | 8,473 | $ | 7,889 | $ | 7,336 | $ | 8,663 | $ | 6,857 |
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TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS |
AND TROUBLED DEBT RESTRUCTURINGS (TDRs) |
(Dollars In Thousands) |
As of December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Impaired loans with a valuation allowance | $ | 3,372 | $ | 1,933 | $ | 3,241 | $ | 9,889 | $ | 2,710 | ||||||||||
Impaired loans without a valuation allowance | 7,488 | 8,041 | 9,075 | 6,432 | 4,719 | |||||||||||||||
Total impaired loans | $ | 10,860 | $ | 9,974 | $ | 12,316 | $ | 16,321 | $ | 7,429 | ||||||||||
Total loans past due 30-89 days and still accruing | $ | 7,735 | $ | 7,057 | $ | 7,121 | $ | 8,305 | $ | 7,756 | ||||||||||
Nonperforming assets: | ||||||||||||||||||||
Total nonaccrual loans | $ | 8,736 | $ | 11,517 | $ | 12,610 | $ | 14,934 | $ | 7,353 | ||||||||||
Total loans past due 90 days or more and still accruing | 6,838 | 3,229 | 2,843 | 3,131 | 2,311 | |||||||||||||||
Total nonperforming loans | 15,574 | 14,746 | 15,453 | 18,065 | 9,664 | |||||||||||||||
Foreclosed assets held for sale (real estate) | 2,180 | 1,260 | 1,189 | 892 | 879 | |||||||||||||||
Total nonperforming assets | $ | 17,754 | $ | 16,006 | $ | 16,642 | $ | 18,957 | $ | 10,543 | ||||||||||
Loans subject to troubled debt restructurings (TDRs): | ||||||||||||||||||||
Performing | $ | 5,803 | $ | 1,186 | $ | 1,807 | $ | 3,267 | $ | 906 | ||||||||||
Nonperforming | 2,874 | 5,178 | 5,388 | 908 | 1,155 | |||||||||||||||
Total TDRs | $ | 8,677 | $ | 6,364 | $ | 7,195 | $ | 4,175 | $ | 2,061 | ||||||||||
Total nonperforming loans as a % of loans | 2.07 | % | 2.09 | % | 2.45 | % | 2.80 | % | 1.41 | % | ||||||||||
Total nonperforming assets as a % of assets | 1.43 | % | 1.31 | % | 1.34 | % | 1.53 | % | 0.82 | % | ||||||||||
Allowance for loan losses as a % of total loans | 1.13 | % | 1.12 | % | 1.16 | % | 1.34 | % | 1.00 | % | ||||||||||
Allowance for loan losses as a % of nonperforming loans | 54.40 | % | 53.50 | % | 47.47 | % | 47.95 | % | 70.95 | % |
TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES |
(Dollars In Thousands) |
2016 | 2015 | 2014 | 2013 | 2012 | Average | |||||||||||||||||||
Average gross loans | $ | 723,076 | $ | 657,727 | $ | 627,753 | $ | 656,495 | $ | 700,241 | $ | 673,058 | ||||||||||||
Year-end gross loans | 751,835 | 704,880 | 630,545 | 644,303 | 683,910 | 683,095 | ||||||||||||||||||
Year-end allowance for loan losses | 8,473 | 7,889 | 7,336 | 8,663 | 6,857 | 7,844 | ||||||||||||||||||
Year-end nonaccrual loans | 8,736 | 11,517 | 12,610 | 14,934 | 7,353 | 11,030 | ||||||||||||||||||
Year-end loans 90 days or more past due and still accruing | 6,838 | 3,229 | 2,843 | 3,131 | 2,311 | 3,670 | ||||||||||||||||||
Net charge-offs | 637 | 292 | 1,803 | 241 | 1,136 | 822 | ||||||||||||||||||
Provision for loan losses | 1,221 | 845 | 476 | 2,047 | 288 | 975 | ||||||||||||||||||
Earnings coverage of charge-offs | 37 | x | 85 | x | 14 | x | 116 | x | 30 | x | 33 | x | ||||||||||||
Allowance coverage of charge-offs | 13 | x | 27 | x | 4 | x | 36 | x | 6 | x | 10 | x | ||||||||||||
Net charge-offs as a % of provision for loan losses | 52.17 | % | 34.56 | % | 378.78 | % | 11.77 | % | 394.44 | % | 84.31 | % | ||||||||||||
Net charge-offs as a % of average gross loans | 0.09 | % | 0.04 | % | 0.29 | % | 0.04 | % | 0.16 | % | 0.12 | % | ||||||||||||
Income before income taxes on a fully taxable equivalent basis | 23,861 | 24,710 | 25,784 | 28,012 | 34,571 | 27,388 |
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TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES
(In Thousands)
2013 | 2012 | 2011 | 2010 | 2009 | Average | |
Average gross loans | $656,495 | $700,241 | $714,421 | $721,997 | $728,748 | $704,380 |
Year-end gross loans | 644,303 | 683,910 | 708,315 | 730,411 | 721,011 | 697,590 |
Year-end allowance for loan losses | 8,663 | 6,857 | 7,705 | 9,107 | 8,265 | 8,119 |
Year-end nonaccrual loans | 14,934 | 7,353 | 7,197 | 10,809 | 9,092 | 9,877 |
Year-end loans 90 days or more past due and still accruing | 3,131 | 2,311 | 1,267 | 727 | 31 | 1,493 |
Net charge-offs | 241 | 1,136 | 1,117 | 349 | 272 | 623 |
Provision (credit) for loan losses | 2,047 | 288 | (285) | 1,191 | 680 | 784 |
Earnings coverage of charge-offs | 77 | 20 | 21 | 55 | (145) | 14 |
Allowance coverage of charge-offs | 36 | 6 | 7 | 26 | 30 | 13 |
Net charge-offs as a % of provision (credit) for loan losses | 11.77% | 394.44% | -391.93% | 29.30% | 40.00% | 79.46% |
Net charge-offs as a % of average gross loans | 0.04% | 0.16% | 0.16% | 0.05% | 0.04% | 0.09% |
Net income (loss) | 18,594 | 22,705 | 23,368 | 19,055 | (39,335) | 8,877 |
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Table XIII presents the Corporation’s significant fixed and determinable contractual obligations as of December 31, 20132016 by payment date. The payment amounts represent the principal amounts of time deposits and borrowings and do not include interest.
TABLE XIII – CONTRACTUAL OBLIGATIONS
(In Thousands)
1 Year | 1-3 | 3-5 | Over 5 | 1 Year | 1-3 | 3-5 | Over 5 | ||||||||||||||||||
or Less | Years | Total | or Less | Years | Years | Years | Total | ||||||||||||||||||
Time deposits | $147,316 | $89,560 | $24,161 | $0 | $261,037 | $ | 113,974 | $ | 76,828 | $ | 21,168 | $ | 248 | $ | 212,218 | ||||||||||
Short-term borrowings: | |||||||||||||||||||||||||
Federal Home Loan Bank of Pittsburgh | 20,000 | 0 | 20,000 | 21,000 | 0 | 0 | 0 | 21,000 | |||||||||||||||||
Customer repurchase agreements | 3,385 | 0 | 3,385 | 5,175 | 0 | 0 | 0 | 5,175 | |||||||||||||||||
Long-term borrowings: | |||||||||||||||||||||||||
Federal Home Loan Bank of Pittsburgh | 0 | 153 | 10,022 | 2,163 | 12,338 | 10,004 | 0 | 646 | 804 | 11,454 | |||||||||||||||
Repurchase agreements | 0 | 61,000 | 0 | 61,000 | 27,000 | 0 | 0 | 0 | 27,000 | ||||||||||||||||
Total | $170,701 | $89,713 | $95,183 | $2,163 | $357,760 | $ | 177,153 | $ | 76,828 | $ | 21,814 | $ | 1,052 | $ | 276,847 |
In addition to the amounts described in Table XIII, the Corporation has obligations related to deposits without a stated maturity with outstanding principal balances totaling $693,479,000$771,625,000 at December 31, 2013.2016.
The Corporation’s operating lease and other commitments at December 31, 20132016 are immaterial. The Corporation’s significant off-balance sheet arrangements consist ofinclude commitments to extend credit and standby letters of credit. Off-balance sheet arrangements are described in Note 16 to the consolidated financial statements.
As described in more detail in the “Financial Condition” section of Management’s Discussion and Analysis, the Corporation sells residential mortgage loans for which the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received, or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. At December 31, 2016, outstanding balances of such loans sold totaled $163,296,000.
Also, for loans sold under the MPF Original program, the Corporation provides a credit enhancement. At December 31, 2016, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,664,000, and the Corporation has recorded a related allowance for credit losses in the amount of $196,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets.
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At December 31, 2013,2016, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $22,674,000.$11,070,000.
The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale securities with a carrying value of $27,188,000$17,690,000 at December 31, 2013.2016.
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The Corporation’s outstanding, available, and total credit facilities at December 31, 20132016 and December 31, 20122015 are as follows:
Outstanding | Available | Total Credit | Outstanding | Available | Total Credit | |||||||||||||||||||||||||
(In Thousands) | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||
Federal Home Loan Bank of Pittsburgh | $34,335 | $17,809 | $304,875 | $328,023 | $339,210 | $345,832 | $ | 32,454 | $ | 60,348 | $ | 306,767 | $ | 262,361 | $ | 339,221 | $ | 322,709 | ||||||||||||
Federal Reserve Bank Discount Window | 0 | 26,078 | 27,367 | 26,078 | 27,367 | 0 | 0 | 15,636 | 19,606 | 15,636 | 19,606 | |||||||||||||||||||
Other correspondent banks | 0 | 45,000 | 0 | 0 | 45,000 | 45,000 | 45,000 | 45,000 | ||||||||||||||||||||||
Total credit facilities | $34,335 | $17,809 | $375,953 | $400,390 | $410,288 | $418,199 | $ | 32,454 | $ | 60,348 | $ | 367,403 | $ | 326,967 | $ | 399,857 | $ | 387,315 |
At December 31, 2013, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh included a short-term borrowing of $20,000,000, long-term borrowings with a total amount of $12,338,000 and a letter of credit in the amount of $1,997,000. At December 31, 2012,2016, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $21,000,000 and long-term borrowings with a total amount of $15,812,000 as well as$11,454,000. At December 31, 2015, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $23,500,000, short-term borrowings of $25,081,000, and long-term borrowings with a letter of credit in thetotal amount of $1,997,000.$11,767,000. Additional information regarding borrowed funds is included in Note 12 to the consolidated financial statements.
Additionally, the Corporation uses repurchase agreements placed with brokers to borrow funds secured by investment assets and “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations. At December 31, 2013,2016, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $246,560,000.$199,364,000.
Management believes the Corporation is well-positioned to meet its short-term and long-term obligations.
STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY
The Corporation and C&N Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Details concerning regulatory capital amounts and ratios are presented in Note 18 to the consolidated financial statements. As reflected in Note 18, at December 31, 20132016 and 2012, the ratios of total capital to risk-weighted assets, tier 1 capital to risk-weighted assets and tier 1 capital to average total assets are well in excess of regulatory capital requirements.
Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition,2015, the Corporation and C&N Bank meet all capital adequacy requirements to which they are subject to restrictions on the amount of dividendsand maintain capital conservation buffers that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.
Management expectsallow the Corporation and C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future. Planned capital expenditures are not expected to have a significantly detrimental effectavoid limitations on capital ratios. See the discussion of future changes in regulatory capital requirements in the “New Capital Rule” section below.
The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale securities. The difference between amortized costdistributions, including dividend payments and fair value of available-for-sale securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income (Loss) within stockholders’ equity. The balance in Accumulated Other Comprehensive Income relatedcertain discretionary bonus payments to unrealized (losses) gains on available-for-sale securities, net of deferred income tax, amounted to ($1,004,000) at December 31, 2013 and $11,568,000 at December 31, 2012. Changes in accumulated other comprehensive income (loss) are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 7 to the consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale securities for other-than-temporary impairment at December 31, 2013.
Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income (Loss) related to defined benefit plans, net of deferred income tax, was $11,000 at December 31, 2013 and ($565,000) at December 31, 2012.
NEW CAPITAL RULEcertain executive officers.
In July 2013, the federal regulatory authorities issued a new capital rule based, in part, on revisions developed by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). The Corporation and C&N Bank arewere subject to the new rule on January 1, 2015. Generally, the new rule implements higher minimum capital requirements, revises the definition of regulatory capital components and related calculations, adds a new common equity tier 1 capital ratio, implements a new capital conservation buffer, increases the risk weighting for past due loans and provides a transition period for several aspects of the new rule.
A summarized comparison of the existing capital requirements with requirements under the new rule is as follows:
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Current General | ||
Risk-Based | ||
Capital Rule | New Capital Rule | |
Minimum regulatory capital ratios: | ||
Common equity tier 1 capital/ risk-weighted assets (RWA) | N/A | 4.5% |
Tier 1 capital / RWA | 4% | 6% |
Total capital / RWA | 8% | 8% |
Tier 1 capital / Average assets | ||
(Leverage ratio) | 4% | 4% |
Capital buffers: | ||
Capital conservation buffer | N/A | 2.5% of RWA; composed of common equity tier 1 capital |
Prompt correction action levels - Common equity tier 1 capital ratio: | ||
Well capitalized | N/A | ³6.5% |
Adequately capitalized | N/A | ³4.5% |
Undercapitalized | N/A | <4.5% |
Significantly undercapitalized | N/A | <3% |
Prompt correction action levels - Tier 1 capital ratio: | ||
Well capitalized | ³6% | ³8% |
Adequately capitalized | ³4% | ³6% |
Undercapitalized | <4% | <6% |
Significantly undercapitalized | <3% | <4% |
Prompt correction action levels - Total capital ratio: | ||
Well capitalized | ³10% | ³10% |
Adequately capitalized | ³8% | ³8% |
Undercapitalized | <8% | <8% |
Significantly undercapitalized | <6% | <6% |
Prompt correction action levels - Leverage ratio: | ||
Well capitalized | ³5% | ³5% |
Adequately capitalized | ³4% | ³4% |
Undercapitalized | <4% | <4% |
Significantly undercapitalized | <3% | <3% |
Prompt correction action levels - Critically undercapitalized: | ||
Tangible equity to total assets | ≤2% | ≤2% |
The new capital rule provides that, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. Phase-in of the capital conservation buffer requirements will beginbegan January 1, 2016. The transition schedule for new ratios, including the capital conservation buffer, is as follows:
As of January 1: | |||||
2015 | 2016 | 2017 | 2018 | 2019 | |
Minimum common equity tier 1 capital ratio | 4.5% | 4.5% | 4.5% | 4.5% | 4.5% |
Common equity tier 1 capital conservation buffer | N/A | 0.625% | 1.25% | 1.875% | 2.5% |
Minimum common equity tier 1 capital ratio plus | |||||
capital conservation buffer | 4.5% | 5.125% | 5.75% | 6.375% | 7.0% |
Phase-in of most deductions from common equity | |||||
tier 1 capital | 40% | 60% | 80% | 100% | 100% |
Minimum tier 1 capital ratio | 6.0% | 6.0% | 6.0% | 6.0% | 6.0% |
Minimum tier 1 capital ratio plus capital | |||||
conservation buffer | N/A | 6.625% | 7.25% | 7.875% | 8.5% |
Minimum total capital ratio | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% |
Minimum total capital ratio plus capital | |||||
conservation buffer | N/A | 8.625% | 9.25% | 9.875% | 10.5% |
As of January 1: | ||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||
Minimum common equity tier 1 capital ratio | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | ||||||||||
Common equity tier 1 capital conservation buffer | N/A | 0.625 | % | 1.25 | % | 1.875 | % | 2.5 | % | |||||||||||
Minimum common equity tier 1 capital ratio plus capital conservation buffer | 4.5 | % | 5.125 | % | 5.75 | % | 6.375 | % | 7.0 | % | ||||||||||
Phase-in of most deductions from common equity tier 1 capital | 40 | % | 60 | % | 80 | % | 100 | % | 100 | % | ||||||||||
Minimum tier 1 capital ratio | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | ||||||||||
Minimum tier 1 capital ratio plus capital conservation buffer | N/A | 6.625 | % | 7.25 | % | 7.875 | % | 8.5 | % | |||||||||||
Minimum total capital ratio | 8.0 | % | 8.0 | % | 8.0 | % | 8.0 | % | 8.0 | % | ||||||||||
Minimum total capital ratio plus capital conservation buffer | N/A | 8.625 | % | 9.25 | % | 9.875 | % | 10.5 | % |
As fully phased in, a banking organization with a buffer greater than 2.5% would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer | Maximum Payout | |
(as a % of risk-weighted assets) | (as a % of eligible retained income) | |
Greater than 2.5% | No payout limitation applies | |
≤2.5% and >1.875% | 60% | |
≤1.875% and >1.25% | 40% | |
≤1.25% and >0.625% | 20% | |
≤0.625% | 0% |
At December 31, 2016, the Corporation’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 15.60%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 13.03%.
Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.
Management expects the Corporation and C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future. Planned capital expenditures are not expected to have a significantly detrimental effect on capital ratios.
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The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale securities. The difference between amortized cost and fair value of available-for-sale securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income (Loss) within stockholders’ equity. The balance in Accumulated Other Comprehensive Income (Loss) related to unrealized gains (losses) on available-for-sale securities, net of deferred income tax, amounted to ($949,000) at December 31, 2016, $2,493,000 at December 31, 2015 and $5,281,000 at December 31, 2014. Changes in accumulated other comprehensive income (loss) are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 7 to the consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale securities for other-than-temporary impairment at December 31, 2016.
Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income (Loss) related to defined benefit plans, net of deferred income tax, was $51,000 at December 31, 2016, $35,000 at December 31, 2015 and $79,000 at December 31, 2014.
COMPREHENSIVE INCOME
Comprehensive Income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as Other Comprehensive Income. Changes in the components of Accumulated Other Comprehensive Income (Loss) are included in Other Comprehensive Income, and for the Corporation, consist of changes in unrealized gains or losses on available-for-sale securities and changes in underfunded or overfunded defined benefit plans.
Comprehensive Income totaled $6,598,000$12,336,000 in 20132016 as compared to $23,548,000$13,639,000 in 20122015 and $35,129,000$23,439,000 in 2011.2014. In 2013,2016, Comprehensive Income included: (1) Net Income of $18,594,000 in 2013,$15,762,000, which was $4,111,000$709,000 lower than in 20122015 and $4,774,000$1,324,000 lower than in 2011;2014; (2) Other Comprehensive Loss from unrealized losses on available-for-sale securities, net of deferred income tax, of ($12,572,000) in 20133,442,000) as compared to Other Comprehensive Loss of ($2,788,000) in 2015 and Other Comprehensive Income $777,000of $6,285,000 in 2012 and $12,142,000 in 2011;2014; and (3) Other Comprehensive Income from defined benefit plans of $576,000$16,000 in 20132016 as compared to Other Comprehensive IncomeLoss of $66,000($44,000) in 20122015 and Other Comprehensive LossIncome of $381,000$68,000 in 2011.
2014. Fluctuations in the amountsinterest rates significantly affected fair values of unrealized gains and losses on the Corporation’s available-for-sale securities in 20112014 through 2013 have resulted mainly from changes2016, and accordingly had an effect on Other Comprehensive Income (Loss) in interest rates. Increases in intermediate-term and long-term interest rates in 2013 led to a decrease in the aggregate fair value of securities in 2013, after fairly limited changes in rates in 2012 and a decrease in rates in 2011 led to an aggregate increase in fair value of securities in 2011.each year.
INFLATION
The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. Beginning in September 2007, in response to concerns about weakness in the U.S. economy, the Federal Reserve lowered the fed funds target rate numerous times; in December 2008, it established a target range of 0% to 0.25%, which it has maintained through 2013. mid-December 2015. On December 16, 2015, the Federal Reserve raised their target for the federal funds rate to 0.25% to 0.50%. The Federal Reserve then raised the target rate to 0.50% to 0.75% on December 14, 2016. The most recent decision was based on data available that suggested economic activity had been expanding at a moderate pace and the labor market had continued to strengthen since mid-year. The Fed noted that the data indicated an increase in household spending, though business fixed investments had remained soft. While inflation increased from the beginning of 2016, it is still below the Federal Open Market Committee’s (FOMC) 2.00% longer run objective. This was partly due to declines in energy prices and in prices of non-energy imports. The FOMC expects to continue gradual adjustments in the stance of monetary policy, which will allow economic activity to expand at a moderate pace with inflation reaching the forecasted 2.00% over the medium term.
Also, throughout the period of low interest rates, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. The Federal Reserve has purchased large amounts of securities in an effort to keep interest rates low and stimulate economic growth. AlthoughBeginning in late 2013, the Federal Reserve reducedbegan reducing the amount of securities it purchased beginningunder its asset purchase program and then ended the program in late 2013, highly accommodative monetaryOctober 2014, though still reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and continued to roll over maturing Treasury securities at auction. The Federal Reserve maintained their commitment to this policy in their December 14, 2016 statement and anticipates doing so until normalization of the formlevel of low short-term interest ratesthe federal funds rate is expected for the foreseeable future.well under way.
Despite the current low short-term rate environment, liquidity injections, and commodity price increases, inflation statistics indicate that the overall rate of inflation is unlikely to significantly affect the Corporation’s operations within the near future. Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including any indicators of inflationary pressures, in managing interest rate and other financial risks.
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RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements for a description of recent accounting pronouncements and their recent or potential future effects on the Corporation’s financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices of the Corporation’s financial instruments. In addition to the effects of interest rates, the market prices of the Corporation’s debt securities within the available-for-sale securities portfolio are affected by fluctuations in the risk premiums (amounts of spread over risk-free rates) demanded by investors.
Management cannot control changes in market prices of securities based on fluctuations in the risk premiums demanded by investors, nor can management control the volume of deferrals or defaults by the issuers of debt securities owned by the Corporation. However, management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).
The Corporation’s two major categoriescategory of market risk, are interest rate risk, and equity securities risk, which areis discussed in the following sections.section.
INTEREST RATE RISK
Business risk arising from changes in interest rates is an inherent factor in operating a bank. TheA significant portion of the Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change.
The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the market value of portfolio equity. For purposes of these calculations, the market value of portfolio equity includes the fair values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.
The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and market value of portfolio equity. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.
The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in the market value of portfolio equity from the baseline values based on current rates.
Table XIV, which follows this discussion, is based on the results of calculations performed using the simulation model as of December 31, 20132016 and OctoberDecember 31, 2012.2015. The table shows that as of the respective dates, the changes in net interest income and changes in market value were within the policy limits in all scenarios.
39 |
TABLE XIV - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
December 31, 20132016 Data
(In Thousands) | Period Ending December 31, 2014 | ||||
Basis Point | Interest | Interest | Net Interest | NII | NII |
Change in Rates | Income | Expense | Income (NII) | % Change | Risk Limit |
+400 | $53,993 | $23,975 | $30,018 | -24.4% | 25.0% |
+300 | 51,748 | 18,975 | 32,773 | -17.4% | 20.0% |
+200 | 49,496 | 14,091 | 35,405 | -10.8% | 15.0% |
+100 | 47,146 | 9,552 | 37,594 | -5.3% | 10.0% |
0 | 44,821 | 5,123 | 39,698 | 0.0% | 0.0% |
-100 | 42,432 | 4,897 | 37,535 | -5.4% | 10.0% |
-200 | 40,747 | 4,895 | 35,852 | -9.7% | 15.0% |
-300 | 40,059 | 4,895 | 35,164 | -11.4% | 20.0% |
-400 | 39,968 | 4,895 | 35,073 | -11.7% | 25.0% |
Market Value of Portfolio Equity at December 31, 2013 | |||||
Present | Present | Present | |||
Basis Point | Value | Value | Value | ||
Change in Rates | Equity | % Change | Risk Limit | ||
+400 | $161,652 | -28.5% | 50.0% | ||
+300 | 175,176 | -22.6% | 45.0% | ||
+200 | 192,513 | -14.9% | 35.0% | ||
+100 | 209,428 | -7.4% | 25.0% | ||
0 | 226,204 | 0.0% | 0.0% | ||
-100 | 230,189 | 1.8% | 25.0% | ||
-200 | 233,902 | 3.4% | 35.0% | ||
-300 | 250,451 | 10.7% | 45.0% | ||
-400 | 282,994 | 25.1% | 50.0% | ||
October 31, 2012 Data | |||||
(In Thousands) | Period Ending October 31, 2013 | ||||
Basis Point | Interest | Interest | Net Interest | NII | NII |
Change in Rates | Income | Expense | Income (NII) | % Change | Risk Limit |
+400 | $60,813 | $26,050 | $34,763 | -18.9% | 25.0% |
+300 | 58,329 | 20,789 | 37,540 | -12.4% | 20.0% |
+200 | 55,398 | 16,004 | 39,394 | -8.1% | 15.0% |
+100 | 52,592 | 11,338 | 41,254 | -3.7% | 10.0% |
0 | 49,534 | 6,673 | 42,861 | 0.0% | 0.0% |
-100 | 46,881 | 6,236 | 40,645 | -5.2% | 10.0% |
-200 | 46,178 | 6,233 | 39,945 | -6.8% | 15.0% |
-300 | 45,925 | 6,233 | 39,692 | -7.4% | 20.0% |
-400 | 45,800 | 6,233 | 39,567 | -7.7% | 25.0% |
Market Value of Portfolio Equity at October 31, 2012 | |||||
Present | Present | Present | |||
Basis Point | Value | Value | Value | ||
Change in Rates | Equity | % Change | Risk Limit | ||
+400 | $165,826 | -21.7% | 50.0% | ||
+300 | 179,904 | -15.1% | 45.0% | ||
+200 | 193,117 | -8.8% | 35.0% | ||
+100 | 204,290 | -3.6% | 25.0% | ||
0 | 211,846 | 0.0% | 0.0% | ||
-100 | 207,561 | -2.0% | 25.0% | ||
-200 | 230,184 | 8.7% | 35.0% | ||
-300 | 268,229 | 26.6% | 45.0% |
EQUITY SECURITIES RISK
The Corporation’s equity securities portfolio consists of investments in stocks of banks and bank holding companies. Investments in bank stocks are subject to risk factors that affect the banking industry in general, including credit risk, competition from non-bank entities, interest rate risk and other factors, which could result in a decline in market prices. Also, losses could occur in individual stocks held by the Corporation because of specific circumstances related to each bank. As discussed further in Note 6 of the consolidated financial statements, the Corporation recognized other-than-temporary impairment losses related to bank stocks of $25,000 in the first quarter 2013 and $67,000 in the first quarter 2012.
Equity securities held as of December 31, 2013 and 2012 are presented in Table XV. Table XV presents quantitative data concerning the effects of a decline in fair value of the Corporation’s equity securities of 10% or 20%. The data in Table XV does not reflect the effects of any appreciation in value that may occur, nor does it present the Corporation’s maximum exposure to loss on equity securities, which would be 100% of their fair value as of December 31, 2013.
TABLE XV - EQUITY SECURITIES RISK
(In Thousands)
Period Ending December 31, 2017
Dec. 31, | Dec. 31, | |
2013 | 2012 | |
Cost | $6,038 | $5,912 |
Fair Value | 8,924 | 8,373 |
Hypothetical 10% Decline In Market Value | (892) | (837) |
Hypothetical 20% Decline In Market Value | (1,785) | (1,675) |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | ||
CONSOLIDATED BALANCE SHEETS | ||
(In Thousands, Except Share and Per Share Data) | December 31, | December 31, |
2013 | 2012 | |
ASSETS | ||
Cash and due from banks: | ||
Noninterest-bearing | $15,917 | $21,356 |
Interest-bearing | 28,702 | 38,480 |
Total cash and due from banks | 44,619 | 59,836 |
Available-for-sale securities, at fair value | 482,658 | 472,577 |
Loans held for sale | 54 | 2,545 |
Loans receivable | 644,303 | 683,910 |
Allowance for loan losses | (8,663) | (6,857) |
Loans, net | 635,640 | 677,053 |
Bank-owned life insurance | 21,743 | 21,344 |
Accrued interest receivable | 4,146 | 4,281 |
Bank premises and equipment, net | 17,430 | 18,707 |
Foreclosed assets held for sale | 892 | 879 |
Deferred tax asset, net | 6,344 | 1,725 |
Intangible asset - Core deposit intangibles | 87 | 138 |
Intangible asset - Goodwill | 11,942 | 11,942 |
Other assets | 12,140 | 15,880 |
TOTAL ASSETS | $1,237,695 | $1,286,907 |
LIABILITIES | ||
Deposits: | ||
Noninterest-bearing | $191,245 | $189,941 |
Interest-bearing | 763,271 | 816,165 |
Total deposits | 954,516 | 1,006,106 |
Short-term borrowings | 23,385 | 5,567 |
Long-term borrowings | 73,338 | 83,812 |
Accrued interest and other liabilities | 6,984 | 8,636 |
TOTAL LIABILITIES | 1,058,223 | 1,104,121 |
STOCKHOLDERS' EQUITY | ||
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference | ||
per share; no shares issued at December 31, 2013 and December 31, 2012 | 0 | 0 |
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2013 and | ||
2012; issued 12,596,540 at December 31, 2013 and 12,525,411 at December 31, 2012 | 12,596 | 12,525 |
Paid-in capital | 70,105 | 68,622 |
Retained earnings | 101,216 | 94,839 |
Treasury stock, at cost; 206,477 shares at December 31, 2013 | ||
and 251,376 shares at December 31, 2012 | (3,452) | (4,203) |
Sub-total | 180,465 | 171,783 |
Accumulated other comprehensive (loss) income: | ||
Unrealized (loss) gain on available-for-sale securities | (1,004) | 11,568 |
Defined benefit plans gain (loss) | 11 | (565) |
Total accumulated other comprehensive (loss) income | (993) | 11,003 |
TOTAL STOCKHOLDERS' EQUITY | 179,472 | 182,786 |
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | $1,237,695 | $1,286,907 |
Basis Point | Interest | Interest | Net Interest | NII | NII | |||||||||||||||
Change in Rates | Income | Expense | Income (NII) | % Change | Risk Limit | |||||||||||||||
+400 | $ | 53,712 | $ | 22,315 | $ | 31,397 | -20.5 | % | 25.0 | % | ||||||||||
+300 | 51,128 | 17,545 | 33,583 | -15.0 | % | 20.0 | % | |||||||||||||
+200 | 48,500 | 12,809 | 35,691 | -9.6 | % | 15.0 | % | |||||||||||||
+100 | 45,845 | 8,102 | 37,743 | -4.4 | % | 10.0 | % | |||||||||||||
0 | 43,132 | 3,643 | 39,489 | 0.0 | % | 0.0 | % | |||||||||||||
-100 | 40,581 | 2,978 | 37,603 | -4.8 | % | 10.0 | % | |||||||||||||
-200 | 38,881 | 2,949 | 35,932 | -9.0 | % | 15.0 | % | |||||||||||||
-300 | 38,269 | 2,936 | 35,333 | -10.5 | % | 20.0 | % | |||||||||||||
-400 | 38,104 | 2,936 | 35,168 | -10.9 | % | 25.0 | % |
The accompanying notes are an integral partMarket Value of the consolidated financial statements.Portfolio Equity at December 31, 2016
Consolidated Statements of Income | Years Ended December 31, | ||
(In Thousands Except Per Share Data) | 2013 | 2012 | 2011 |
INTEREST INCOME | |||
Interest and fees on loans | $35,484 | $40,453 | $43,178 |
Interest on balances with depository institutions | 105 | 114 | 73 |
Interest on loans to political subdivisions | 1,381 | 1,539 | 1,499 |
Interest on mortgages held for sale | 54 | 107 | 53 |
Income from available-for-sale securities: | |||
Taxable | 6,810 | 9,029 | 11,036 |
Tax-exempt | 4,785 | 5,085 | 5,156 |
Dividends | 295 | 305 | 261 |
Total interest and dividend income | 48,914 | 56,632 | 61,256 |
INTEREST EXPENSE | |||
Interest on deposits | 2,703 | 4,807 | 8,112 |
Interest on short-term borrowings | 9 | 10 | 23 |
Interest on long-term borrowings | 3,053 | 4,214 | 5,421 |
Total interest expense | 5,765 | 9,031 | 13,556 |
Net interest income | 43,149 | 47,601 | 47,700 |
Provision (credit) for loan losses | 2,047 | 288 | (285) |
Net interest income after provision (credit) for loan losses | 41,102 | 47,313 | 47,985 |
OTHER INCOME | |||
Service charges on deposit accounts | 4,966 | 5,036 | 4,773 |
Service charges and fees | 877 | 929 | 849 |
Trust and financial management revenue | 4,087 | 3,847 | 3,472 |
Interchange revenue from debit card transactions | 1,941 | 1,938 | 1,922 |
Net gains from sale of loans | 2,191 | 1,925 | 1,107 |
Increase in cash surrender value of life insurance | 399 | 455 | 509 |
Insurance commissions, fees and premiums | 170 | 221 | 257 |
Impairment loss on limited partnership investment | 0 | 0 | (948) |
Other operating income | 1,820 | 2,032 | 1,956 |
Sub-total | 16,451 | 16,383 | 13,897 |
Total other-than-temporary impairment losses on available-for-sale securities | (25) | (67) | 0 |
Portion of (gain) recognized in other comprehensive loss (before taxes) | 0 | 0 | 0 |
Net impairment losses recognized in earnings | (25) | (67) | 0 |
Realized gains on available-for-sale securities, net | 1,743 | 2,749 | 2,216 |
Net realized gains recognized in earnings on available-for-sale securities | 1,718 | 2,682 | 2,216 |
Total other income | 18,169 | 19,065 | 16,113 |
OTHER EXPENSES | |||
Salaries and wages | 14,206 | 14,370 | 13,866 |
Pensions and other employee benefits | 4,150 | 4,497 | 4,407 |
Occupancy expense, net | 2,473 | 2,476 | 2,638 |
Furniture and equipment expense | 1,948 | 1,887 | 1,932 |
FDIC Assessments | 604 | 633 | 832 |
Pennsylvania shares tax | 1,402 | 1,312 | 1,306 |
Professional fees | 1,534 | 486 | 455 |
Automated teller machine and interchange expense | 1,020 | 1,136 | 1,026 |
Software subscriptions | 836 | 890 | 703 |
Loss on prepayment of debt | 1,023 | 2,333 | 0 |
Other operating expense | 5,298 | 5,227 | 4,851 |
Total other expenses | 34,494 | 35,247 | 32,016 |
Income before income tax provision | 24,777 | 31,131 | 32,082 |
Income tax provision | 6,183 | 8,426 | 8,714 |
NET INCOME | $18,594 | $22,705 | $23,368 |
NET INCOME PER SHARE - BASIC | $1.51 | $1.86 | $1.92 |
NET INCOME PER SHARE - DILUTED | $1.50 | $1.85 | $1.92 |
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||
(In Thousands) | Years Ended December 31, | ||
2013 | 2012 | 2011 | |
Net income | $18,594 | $22,705 | $23,368 |
Unrealized (losses) gains on available-for-sale securities: | |||
Unrealized holding (losses) gains on available-for-sale securities | (17,623) | 4,128 | 20,611 |
Reclassification adjustment for gains realized in income | (1,718) | (2,682) | (2,216) |
Other comprehensive (loss) gain on available-for-sale securities | (19,341) | 1,446 | 18,395 |
Unfunded pension and postretirement obligations: | |||
Changes from plan amendments and actuarial gains and losses included in | |||
accumulated other comprehensive gain (loss) | 885 | 8 | (626) |
Amortization of net transition obligation, prior service cost and net | |||
actuarial loss included in net periodic benefit cost | 2 | 77 | 55 |
Other comprehensive gain (loss) on unfunded retirement obligations | 887 | 85 | (571) |
Other comprehensive (loss) income before income tax | (18,454) | 1,531 | 17,824 |
Income tax related to other comprehensive loss (income) | 6,458 | (688) | (6,063) |
Net other comprehensive (loss) income | (11,996) | 843 | 11,761 |
Comprehensive income | $6,598 | $23,548 | $35,129 |
Present | Present | Present | ||||||||||
Basis Point | Value | Value | Value | |||||||||
Change in Rates | Equity | % Change | Risk Limit | |||||||||
+400 | $ | 168,600 | -24.6 | % | 50.0 | % | ||||||
+300 | 180,500 | -19.3 | % | 45.0 | % | |||||||
+200 | 194,471 | -13.1 | % | 35.0 | % | |||||||
+100 | 208,830 | -6.7 | % | 25.0 | % | |||||||
0 | 223,744 | 0.0 | % | 0.0 | % | |||||||
-100 | 227,806 | 1.8 | % | 25.0 | % | |||||||
-200 | 229,602 | 2.6 | % | 35.0 | % | |||||||
-300 | 252,118 | 12.7 | % | 45.0 | % | |||||||
-400 | 290,792 | 30.0 | % | 50.0 | % |
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Changes in
Stockholders' EquityDecember 31, 2015 Data
(In Thousands Except Share and PerThousands)
Share Data) | Accumulated | |||||||
Other | ||||||||
Comprehensive | ||||||||
Common | Treasury | Common | Paid-in | Retained | Income | Treasury | ||
Shares | Shares | Stock | Capital | Earnings | (Loss) | Stock | Total | |
Balance, January 1, 2011 | 12,408,212 | 254,614 | $12,408 | $66,648 | $65,920 | ($1,601) | ($4,431) | $138,944 |
Net income | 23,368 | 23,368 | ||||||
Other comprehensive income, net | 11,761 | 11,761 | ||||||
Cash dividends declared on common | ||||||||
stock, $.58 per share | (7,052) | (7,052) | ||||||
Treasury stock purchased | 70,849 | (1,022) | (1,022) | |||||
Shares issued for dividend reinvestment plan | 52,708 | 53 | 772 | 825 | ||||
Shares issued from treasury related to | ||||||||
Exercise of stock options | (4,856) | (11) | 82 | 71 | ||||
Restricted stock granted | (15,622) | (272) | 272 | 0 | ||||
Forfeiture of restricted stock | 406 | 7 | (7) | 0 | ||||
Stock-based compensation expense | 423 | 423 | ||||||
Tax effect of stock option exercises | 1 | 1 | ||||||
Tax benefit from employee benefit plan | 66 | 66 | ||||||
Balance, December 31, 2011 | 12,460,920 | 305,391 | 12,461 | 67,568 | 82,302 | 10,160 | (5,106) | 167,385 |
Net income | 22,705 | 22,705 | ||||||
Other comprehensive income, net | 843 | 843 | ||||||
Cash dividends declared on common | ||||||||
stock, $.84 per share | (10,272) | (10,272) | ||||||
Shares issued for dividend reinvestment plan | 64,491 | 64 | 1,147 | 1,211 | ||||
Shares issued from treasury related to | ||||||||
exercise of stock options | (15,023) | (22) | 251 | 229 | ||||
Restricted stock granted | (42,552) | (711) | 711 | 0 | ||||
Forfeiture of restricted stock | 3,560 | 59 | (59) | 0 | ||||
Stock-based compensation expense | 567 | 567 | ||||||
Tax effect of stock option exercises | 14 | 14 | ||||||
Tax benefit from employee benefit plan | 104 | 104 | ||||||
Balance, December 31, 2012 | 12,525,411 | 251,376 | 12,525 | 68,622 | 94,839 | 11,003 | (4,203) | 182,786 |
Net income | 18,594 | 18,594 | ||||||
Other comprehensive loss, net | (11,996) | (11,996) | ||||||
Cash dividends declared on common | ||||||||
stock, $1.00 per share | (12,343) | (12,343) | ||||||
Shares issued for dividend reinvestment plan | 71,129 | 71 | 1,356 | 1,427 | ||||
Shares issued from treasury related to | ||||||||
exercise of stock options | (10,656) | 5 | 179 | 184 | ||||
Restricted stock granted | (37,886) | (633) | 633 | 0 | ||||
Forfeiture of restricted stock | 3,643 | 61 | (61) | 0 | ||||
Stock-based compensation expense | 696 | 696 | ||||||
Tax effect of stock option exercises | (2) | (2) | ||||||
Tax benefit from employee benefit plan | 126 | 126 | ||||||
Balance, December 31, 2013 | 12,596,540 | 206,477 | $12,596 | $70,105 | $101,216 | ($993) | ($3,452) | $179,472 |
Period Ending December 31, 2016
Basis Point | Interest | Interest | Net Interest | NII | NII | |||||||||||||||
Change in Rates | Income | Expense | Income (NII) | % Change | Risk Limit | |||||||||||||||
+400 | $ | 52,181 | $ | 21,985 | $ | 30,196 | -20.8 | % | 25.0 | % | ||||||||||
+300 | 49,687 | 17,282 | 32,405 | -15.0 | % | 20.0 | % | |||||||||||||
+200 | 47,136 | 12,659 | 34,477 | -9.6 | % | 15.0 | % | |||||||||||||
+100 | 44,546 | 8,109 | 36,437 | -4.4 | % | 10.0 | % | |||||||||||||
0 | 41,835 | 3,715 | 38,120 | 0.0 | % | 0.0 | % | |||||||||||||
-100 | 39,116 | 3,171 | 35,945 | -5.7 | % | 10.0 | % | |||||||||||||
-200 | 37,417 | 3,168 | 34,249 | -10.2 | % | 15.0 | % | |||||||||||||
-300 | 36,838 | 3,168 | 33,670 | -11.7 | % | 20.0 | % | |||||||||||||
-400 | 36,689 | 3,168 | 33,521 | -12.1 | % | 25.0 | % |
The accompanying notes are an integral partMarket Value of the consolidated financial statements.Portfolio Equity at December 31, 2015
CONSOLIDATED STATEMENTS OF CASH FLOWS | Years Ended December 31, | ||
(In Thousands) | 2013 | 2012 | 2011 |
CASH FLOWS FROM OPERATING ACTIVITIES: | |||
Net income | $18,594 | $22,705 | $23,368 |
Adjustments to reconcile net income to net cash provided by operating activities: | |||
Provision (credit) for loan losses | 2,047 | 288 | (285) |
Realized gains on available-for-sale securities, net | (1,718) | (2,682) | (2,216) |
Loss on prepayment of debt | 1,023 | 2,333 | 0 |
Loss (gain) on disposition of premises and equipment | 16 | (270) | (324) |
Loss (gain) on sale of foreclosed assets, net | 71 | 66 | (41) |
Depreciation expense | 2,020 | 1,939 | 2,077 |
Accretion and amortization on securities, net | 1,836 | 1,581 | 1,317 |
Accretion and amortization on loans, deposits and borrowings, net | (32) | (49) | (35) |
Amortization of mortgage servicing rights | 155 | 97 | 68 |
Impairment loss on limited partnership interest | 0 | 0 | 948 |
Increase in cash surrender value of life insurance | (399) | (455) | (509) |
Stock-based compensation | 696 | 567 | 423 |
Amortization of core deposit intangibles | 51 | 74 | 114 |
Deferred income taxes | 1,839 | 3,760 | 3,818 |
Gains on sales of mortgage loans, net | (2,191) | (1,925) | (1,107) |
Origination of mortgage loans for sale | (58,427) | (62,829) | (26,610) |
Proceeds from sales of mortgage loans | 62,436 | 62,821 | 31,786 |
Decrease (increase) in accrued interest receivable and other assets | 3,234 | (1,043) | 3,580 |
(Decrease) increase in accrued interest payable and other liabilities | (679) | 674 | 1,092 |
Net Cash Provided by Operating Activities | 30,572 | 27,652 | 37,464 |
CASH FLOWS FROM INVESTING ACTIVITIES: | |||
Proceeds from maturities of certificates of deposit | 480 | 0 | 0 |
Purchase of certificates of deposit | (1,688) | (1,060) | (3,760) |
Proceeds from sales of available-for-sale securities | 25,500 | 24,228 | 25,471 |
Proceeds from calls and maturities of available-for-sale securities | 97,123 | 114,247 | 108,138 |
Purchase of available-for-sale securities | (152,163) | (126,820) | (152,044) |
Redemption of Federal Home Loan Bank of Pittsburgh stock | 2,680 | 1,931 | 1,513 |
Purchase of Federal Home Loan Bank of Pittsburgh stock | (1,624) | 0 | 0 |
Net decrease in loans | 39,059 | 22,320 | 19,264 |
Proceeds from bank-owned life insurance | 0 | 0 | 1,442 |
Purchase of premises and equipment | (801) | (1,622) | (998) |
Proceeds from disposition of premises and equipment | 42 | 456 | 3,060 |
Purchase of investment in limited liability entity | (147) | (538) | (397) |
Return of principal on limited liability entity investments | 164 | 114 | 116 |
Proceeds from sale of foreclosed assets | 255 | 1,380 | 1,112 |
Net Cash Provided by Investing Activities | 8,880 | 34,636 | 2,917 |
CASH FLOWS FROM FINANCING ACTIVITIES: | |||
Net (decrease) increase in deposits | (51,590) | (12,106) | 13,839 |
Net increase (decrease) in short-term borrowings | 17,818 | 617 | (13,463) |
Repayments of long-term borrowings | (11,497) | (43,884) | (23,132) |
Purchase of treasury stock | 0 | 0 | (1,022) |
Sale of treasury stock | 184 | 229 | 71 |
Tax benefit from compensation plans | 124 | 118 | 67 |
Common dividends paid | (10,916) | (9,061) | (6,227) |
Net Cash Used in Financing Activities | (55,877) | (64,087) | (29,867) |
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (16,425) | (1,799) | 10,514 |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 55,016 | 56,815 | 46,301 |
CASH AND CASH EQUIVALENTS, END OF YEAR | $38,591 | $55,016 | $56,815 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||
Assets acquired through foreclosure of real estate loans | $339 | $1,004 | $1,769 |
Interest paid | $5,782 | $9,246 | $13,609 |
Income taxes paid | $4,213 | $4,250 | $3,616 |
Present | Present | Present | ||||||||||
Basis Point | Value | Value | Value | |||||||||
Change in Rates | Equity | % Change | Risk Limit | |||||||||
+400 | $ | 167,741 | -24.4 | % | 50.0 | % | ||||||
+300 | 179,772 | -18.9 | % | 45.0 | % | |||||||
+200 | 193,823 | -12.6 | % | 35.0 | % | |||||||
+100 | 207,803 | -6.3 | % | 25.0 | % | |||||||
0 | 221,750 | 0.0 | % | 0.0 | % | |||||||
-100 | 223,517 | 0.8 | % | 25.0 | % | |||||||
-200 | 225,185 | 1.5 | % | 35.0 | % | |||||||
-300 | 250,353 | 12.9 | % | 45.0 | % | |||||||
-400 | 286,210 | 29.1 | % | 50.0 | % |
40 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(In Thousands, Except Share and Per Share Data) | December 31, | December 31, | ||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Cash and due from banks: | ||||||||
Noninterest-bearing | $ | 17,551 | $ | 14,710 | ||||
Interest-bearing | 14,558 | 21,351 | ||||||
Total cash and due from banks | 32,109 | 36,061 | ||||||
Available-for-sale securities, at fair value | 395,077 | 420,290 | ||||||
Loans held for sale | 142 | 280 | ||||||
Loans receivable | 751,835 | 704,880 | ||||||
Allowance for loan losses | (8,473 | ) | (7,889 | ) | ||||
Loans, net | 743,362 | 696,991 | ||||||
Bank-owned life insurance | 19,704 | 20,764 | ||||||
Accrued interest receivable | 3,963 | 3,768 | ||||||
Bank premises and equipment, net | 15,397 | 15,406 | ||||||
Foreclosed assets held for sale | 2,180 | 1,260 | ||||||
Deferred tax asset, net | 5,117 | 3,115 | ||||||
Intangible assets - Goodwill and core deposit intangibles | 11,959 | 11,972 | ||||||
Other assets | 13,282 | 13,510 | ||||||
TOTAL ASSETS | $ | 1,242,292 | $ | 1,223,417 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 224,175 | $ | 211,041 | ||||
Interest-bearing | 759,668 | 724,574 | ||||||
Total deposits | 983,843 | 935,615 | ||||||
Short-term borrowings | 26,175 | 53,496 | ||||||
Long-term borrowings | 38,454 | 38,767 | ||||||
Accrued interest and other liabilities | 7,812 | 8,052 | ||||||
TOTAL LIABILITIES | 1,056,284 | 1,035,930 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued | 0 | 0 | ||||||
Common stock, par value $1.00 per share; authorized 20,000,000 shares; issued 12,655,171; outstanding 12,113,228 at December 31, 2016 and 12,180,623 December 31, 2015 | 12,655 | 12,655 | ||||||
Paid-in capital | 71,730 | 71,654 | ||||||
Retained earnings | 112,790 | 109,454 | ||||||
Treasury stock, at cost; 541,943 shares at December 31, 2016 and 474,548 shares at December 31, 2015 | (10,269 | ) | (8,804 | ) | ||||
Accumulated other comprehensive (loss) income | (898 | ) | 2,528 | |||||
TOTAL STOCKHOLDERS' EQUITY | 186,008 | 187,487 | ||||||
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | $ | 1,242,292 | $ | 1,223,417 |
The accompanying notes are an integral part of the consolidated financial statements.
41 |
Consolidated Statements of Income
(In Thousands Except Per Share Data)
Years Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
INTEREST INCOME | ||||||||||||
Interest and fees on loans: | ||||||||||||
Taxable | $ | 32,827 | $ | 31,311 | $ | 32,127 | ||||||
Tax-exempt | 1,783 | 1,668 | 1,403 | |||||||||
Interest on mortgages held for sale | 27 | 16 | 16 | |||||||||
Interest on balances with depository institutions | 116 | 93 | 125 | |||||||||
Income from available-for-sale securities: | ||||||||||||
Taxable | 5,846 | 7,303 | 7,721 | |||||||||
Tax-exempt | 3,429 | 3,844 | 4,310 | |||||||||
Dividends | 70 | 284 | 307 | |||||||||
Total interest and dividend income | 44,098 | 44,519 | 46,009 | |||||||||
INTEREST EXPENSE | ||||||||||||
Interest on deposits | 2,085 | 1,924 | 2,163 | |||||||||
Interest on short-term borrowings | 155 | 32 | 9 | |||||||||
Interest on long-term borrowings | 1,453 | 2,646 | 2,950 | |||||||||
Total interest expense | 3,693 | 4,602 | 5,122 | |||||||||
Net interest income | 40,405 | 39,917 | 40,887 | |||||||||
Provision for loan losses | 1,221 | 845 | 476 | |||||||||
Net interest income after provision for loan losses | 39,184 | 39,072 | 40,411 | |||||||||
OTHER INCOME | ||||||||||||
Service charges on deposit accounts | 4,695 | 4,864 | 5,025 | |||||||||
Service charges and fees | 439 | 494 | 538 | |||||||||
Trust and financial management revenue | 4,760 | 4,626 | 4,490 | |||||||||
Brokerage revenue | 756 | 839 | 901 | |||||||||
Insurance commissions, fees and premiums | 102 | 109 | 118 | |||||||||
Interchange revenue from debit card transactions | 1,943 | 1,935 | 1,959 | |||||||||
Net gains from sale of loans | 1,029 | 735 | 768 | |||||||||
Decrease in fair value of servicing rights | (282 | ) | (162 | ) | (27 | ) | ||||||
Increase in cash surrender value of life insurance | 382 | 386 | 376 | |||||||||
Other operating income | 1,687 | 1,652 | 1,272 | |||||||||
Sub-total | 15,511 | 15,478 | 15,420 | |||||||||
Realized gains on available-for-sale securities, net | 1,158 | 2,861 | 1,104 | |||||||||
Total other income | 16,669 | 18,339 | 16,524 | |||||||||
OTHER EXPENSES | ||||||||||||
Salaries and wages | 15,411 | 14,682 | 15,121 | |||||||||
Pensions and other employee benefits | 4,717 | 4,420 | 4,769 | |||||||||
Occupancy expense, net | 2,340 | 2,574 | 2,628 | |||||||||
Furniture and equipment expense | 1,730 | 1,860 | 1,859 | |||||||||
FDIC assessments | 488 | 603 | 600 | |||||||||
Pennsylvania shares tax | 1,274 | 1,248 | 1,350 | |||||||||
Professional fees | 1,126 | 638 | 699 | |||||||||
Automated teller machine and interchange expense | 1,137 | 988 | 924 | |||||||||
Software subscriptions | 981 | 876 | 784 | |||||||||
Loss on prepayment of debt | 0 | 2,573 | 0 | |||||||||
Other operating expense | 5,540 | 5,141 | 5,423 | |||||||||
Total other expenses | 34,744 | 35,603 | 34,157 | |||||||||
Income before income tax provision | 21,109 | 21,808 | 22,778 | |||||||||
Income tax provision | 5,347 | 5,337 | 5,692 | |||||||||
NET INCOME | $ | 15,762 | $ | 16,471 | $ | 17,086 | ||||||
NET INCOME PER SHARE - BASIC | $ | 1.30 | $ | 1.35 | $ | 1.38 | ||||||
NET INCOME PER SHARE - DILUTED | $ | 1.30 | $ | 1.35 | $ | 1.38 |
The accompanying notes are an integral part of the consolidated financial statements.
42 |
Consolidated Statements of Comprehensive Income
(In Thousands)
Years Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Net income | $ | 15,762 | $ | 16,471 | $ | 17,086 | ||||||
Unrealized (losses) gains on available-for-sale securities: | ||||||||||||
Unrealized holding (losses) gains on available-for-sale securities | (4,138 | ) | (1,429 | ) | 10,774 | |||||||
Reclassification adjustment for gains realized in income | (1,158 | ) | (2,861 | ) | (1,104 | ) | ||||||
Other comprehensive (loss) gain on available-for-sale securities | (5,296 | ) | (4,290 | ) | 9,670 | |||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain (loss) | 46 | (135 | ) | (79 | ) | |||||||
Amortization of net transition obligation, prior service cost, net actuarial (gain) loss, and loss on settlement included in net periodic benefit cost | (22 | ) | 67 | 184 | ||||||||
Other comprehensive gain (loss) on unfunded retirement obligations | 24 | (68 | ) | 105 | ||||||||
Other comprehensive (loss) income before income tax | (5,272 | ) | (4,358 | ) | 9,775 | |||||||
Income tax related to other comprehensive loss (income) | 1,846 | 1,526 | (3,422 | ) | ||||||||
Net other comprehensive (loss) income | (3,426 | ) | (2,832 | ) | 6,353 | |||||||
Comprehensive income | $ | 12,336 | $ | 13,639 | $ | 23,439 |
The accompanying notes are an integral part of the consolidated financial statements.
43 |
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands Except Share and Per Share Data)
Accumulated | ||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Comprehensive | ||||||||||||||||||||||||||||||||
Common | Treasury | Common | Paid-in | Retained | Income | Treasury | ||||||||||||||||||||||||||
Shares | Shares | Stock | Capital | Earnings | (Loss) | Stock | Total | |||||||||||||||||||||||||
Balance, January 1, 2014 | 12,596,540 | 206,477 | $ | 12,596 | $ | 70,105 | $ | 101,216 | $ | (993 | ) | $ | (3,452 | ) | $ | 179,472 | ||||||||||||||||
Net income | 17,086 | 17,086 | ||||||||||||||||||||||||||||||
Other comprehensive income, net | 6,353 | 6,353 | ||||||||||||||||||||||||||||||
Cash dividends declared on common stock, $1.04 per share | (12,889 | ) | (12,889 | ) | ||||||||||||||||||||||||||||
Shares issued for dividend reinvestment Plan | 59,498 | (18,473 | ) | 60 | 1,069 | 368 | 1,497 | |||||||||||||||||||||||||
Treasury stock purchased | 208,300 | (4,002 | ) | (4,002 | ) | |||||||||||||||||||||||||||
Shares issued from treasury related to exercise of stock options | (867 | ) | (11,860 | ) | (1 | ) | (64 | ) | 188 | 123 | ||||||||||||||||||||||
Restricted stock granted | (16,711 | ) | (279 | ) | 279 | 0 | ||||||||||||||||||||||||||
Forfeiture of restricted stock | 7,458 | 125 | (125 | ) | 0 | |||||||||||||||||||||||||||
Stock-based compensation expense | 565 | 565 | ||||||||||||||||||||||||||||||
Tax benefit from compensation plans | 20 | 137 | 157 | |||||||||||||||||||||||||||||
Balance, December 31, 2014 | 12,655,171 | 375,191 | 12,655 | 71,541 | 105,550 | 5,360 | (6,744 | ) | 188,362 | |||||||||||||||||||||||
Net income | 16,471 | 16,471 | ||||||||||||||||||||||||||||||
Other comprehensive loss, net | (2,832 | ) | (2,832 | ) | ||||||||||||||||||||||||||||
Cash dividends declared on common stock, $1.04 per share | (12,710 | ) | (12,710 | ) | ||||||||||||||||||||||||||||
Shares issued for dividend reinvestment Plan | (73,810 | ) | 86 | 1,379 | 1,465 | |||||||||||||||||||||||||||
Treasury stock purchased | 226,900 | (4,415 | ) | (4,415 | ) | |||||||||||||||||||||||||||
Shares issued from treasury related to exercise of stock options | (22,435 | ) | (27 | ) | 408 | 381 | ||||||||||||||||||||||||||
Restricted stock granted | (34,800 | ) | (627 | ) | 627 | 0 | ||||||||||||||||||||||||||
Forfeiture of restricted stock | 3,502 | 59 | (59 | ) | 0 | |||||||||||||||||||||||||||
Stock-based compensation expense | 606 | 606 | ||||||||||||||||||||||||||||||
Tax benefit from compensation plans | 16 | 143 | 159 | |||||||||||||||||||||||||||||
Balance, December 31, 2015 | 12,655,171 | 474,548 | 12,655 | 71,654 | 109,454 | 2,528 | (8,804 | ) | 187,487 | |||||||||||||||||||||||
Net income | 15,762 | 15,762 | ||||||||||||||||||||||||||||||
Other comprehensive loss, net | (3,426 | ) | (3,426 | ) | ||||||||||||||||||||||||||||
Cash dividends declared on common stock, $1.04 per share | (12,578 | ) | (12,578 | ) | ||||||||||||||||||||||||||||
Shares issued for dividend reinvestment Plan | (68,571 | ) | 170 | 1,296 | 1,466 | |||||||||||||||||||||||||||
Treasury stock purchased | 187,300 | (3,723 | ) | (3,723 | ) | |||||||||||||||||||||||||||
Shares issued from treasury related to exercise of stock options | (19,113 | ) | (98 | ) | 361 | 263 | ||||||||||||||||||||||||||
Restricted stock granted | (35,427 | ) | (658 | ) | 658 | 0 | ||||||||||||||||||||||||||
Forfeiture of restricted stock | 3,431 | 61 | (61 | ) | 0 | |||||||||||||||||||||||||||
Stock-based compensation expense | 578 | 578 | ||||||||||||||||||||||||||||||
Other stock-based expense | (225 | ) | 4 | 4 | ||||||||||||||||||||||||||||
Tax benefit from compensation plans | 23 | 152 | 175 | |||||||||||||||||||||||||||||
Balance, December 31, 2016 | 12,655,171 | 541,943 | $ | 12,655 | $ | 71,730 | $ | 112,790 | $ | (898 | ) | $ | (10,269 | ) | $ | 186,008 |
The accompanying notes are an integral part of the consolidated financial statements.
44 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 15,762 | $ | 16,471 | $ | 17,086 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision for loan losses | 1,221 | 845 | 476 | |||||||||
Realized gains on available-for-sale securities, net | (1,158 | ) | (2,861 | ) | (1,104 | ) | ||||||
Loss on prepayment of debt | 0 | 2,573 | 0 | |||||||||
Realized loss (gain) on foreclosed assets | 49 | (84 | ) | (136 | ) | |||||||
(Gain) loss on disposition of premises and equipment | (3 | ) | 1 | (8 | ) | |||||||
Depreciation expense | 1,589 | 1,888 | 1,940 | |||||||||
Accretion and amortization on securities, net | 1,462 | 1,562 | 1,375 | |||||||||
Accretion and amortization on loans and deposits, net | (15 | ) | (21 | ) | (27 | ) | ||||||
Decrease in fair value of servicing rights | 282 | 162 | 27 | |||||||||
Increase in cash surrender value of life insurance | (382 | ) | (386 | ) | (376 | ) | ||||||
Gain on life insurance benefits | 0 | (212 | ) | 0 | ||||||||
Stock-based compensation and other expense | 582 | 606 | 565 | |||||||||
Amortization of core deposit intangibles | 13 | 22 | 35 | |||||||||
Deferred income taxes | (156 | ) | 79 | 1,254 | ||||||||
Gains on sales of loans, net | (1,029 | ) | (735 | ) | (768 | ) | ||||||
Origination of loans for sale | (29,296 | ) | (21,823 | ) | (21,680 | ) | ||||||
Proceeds from sales of loans | 30,215 | 22,101 | 22,317 | |||||||||
(Increase) decrease in accrued interest receivable and other assets | (410 | ) | (1,697 | ) | 1,395 | |||||||
(Decrease) increase in accrued interest payable and other liabilities | (216 | ) | 1,195 | (90 | ) | |||||||
Net Cash Provided by Operating Activities | 18,510 | 19,686 | 22,281 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Proceeds from maturities of certificates of deposit | 1,540 | 1,780 | 2,560 | |||||||||
Purchase of certificates of deposit | (2,280 | ) | (100 | ) | (960 | ) | ||||||
Proceeds from sales of available-for-sale securities | 37,032 | 44,504 | 56,269 | |||||||||
Proceeds from calls and maturities of available-for-sale securities | 74,477 | 89,159 | 78,101 | |||||||||
Purchase of available-for-sale securities | (91,896 | ) | (40,363 | ) | (158,894 | ) | ||||||
Redemption of Federal Home Loan Bank of Pittsburgh stock | 5,277 | 5,029 | 2,804 | |||||||||
Purchase of Federal Home Loan Bank of Pittsburgh stock | (5,046 | ) | (8,102 | ) | (602 | ) | ||||||
Net (increase) decrease in loans | (49,085 | ) | (77,129 | ) | 10,317 | |||||||
Proceeds from bank owned life insurance | 1,442 | 1,953 | 0 | |||||||||
Purchase of premises and equipment | (1,580 | ) | (1,039 | ) | (801 | ) | ||||||
Proceeds from disposition of premises and equipment | 3 | 0 | 43 | |||||||||
Return of principal on limited liability entity investments | 178 | 181 | 173 | |||||||||
Proceeds from sale of foreclosed assets | 539 | 2,536 | 1,504 | |||||||||
Net Cash (Used in) Provided by Investing Activities | (29,399 | ) | 18,409 | (9,486 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Net increase (decrease) in deposits | 48,228 | (32,374 | ) | 13,473 | ||||||||
Net (decrease) increase in short-term borrowings | (27,321 | ) | 47,959 | (17,848 | ) | |||||||
Repayments of long-term borrowings | (313 | ) | (36,866 | ) | (278 | ) | ||||||
Purchase of treasury stock | (3,723 | ) | (4,415 | ) | (4,002 | ) | ||||||
Sale of treasury stock | 263 | 381 | 123 | |||||||||
Tax benefit from compensation plans | 175 | 159 | 157 | |||||||||
Common dividends paid | (11,112 | ) | (11,245 | ) | (11,392 | ) | ||||||
Net Cash Provided by (Used in) Financing Activities | 6,197 | (36,401 | ) | (19,767 | ) | |||||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (4,692 | ) | 1,694 | (6,972 | ) | |||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 33,313 | 31,619 | 38,591 | |||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 28,621 | $ | 33,313 | $ | 31,619 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||
Accrued purchase of available-for-sale securities | $ | 0 | $ | 0 | $ | 226 | ||||||
Assets acquired through foreclosure of real estate loans | $ | 1,508 | $ | 2,523 | $ | 1,665 | ||||||
Interest paid | $ | 3,698 | $ | 4,636 | $ | 5,138 | ||||||
Income taxes paid | $ | 5,129 | $ | 4,827 | $ | 4,432 |
The accompanying notes are an integral part of the consolidated financial statements.
45 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION -The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”), as well as C&N Bank’s wholly-owned subsidiary, C&N Financial Services Corporation. All material intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS -The Corporation is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in North Central Pennsylvania and Southern New York State. Lending products include mortgage loans, commercial loans and consumer loans, as well as specialized instruments such as commercial letters-of-credit. Deposit products include various types of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, Individual Retirement Accounts and certificates of deposit. The Corporation also offers non-insured “RepoSweep” accounts.
The Corporation provides Trust and Financial Management services, including administration of trusts and estates, retirement plans, and other employee benefit plans, and investment management services. The Corporation offers a variety of personal and commercial insurance products through C&N Financial Services Corporation. C&N Financial Services Corporation also offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. Management has determined that the Corporation has one reportable segment, “Community Banking.” All of the Corporation’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others.
The Corporation is subject to competition from other financial institutions. It is also subject to regulation by certain federal and state agencies and undergoes periodic examination by those regulatory authorities. As a consequence, the Corporation’s business is particularly susceptible to being affected by future federal and state legislation and regulations.
USE OF ESTIMATES -The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions in the United States of America.America (“U.S. GAAP”). In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates.
Material estimates that are particularly susceptible to change include: (1) the allowance for loan losses, (2) fair values of debt securities based on estimates from independent valuation services or from brokers, (3) fair values of debt securities based on unobservable inputs, as determined using management’s estimates of cash flows and applicable discount rates,(4) assessment of impaired securities to determine whether or not the securities are other-than-temporarily impaired, (5)(4) valuation of deferred tax assets and (6)(5) valuation of obligations from defined benefit plans.
INVESTMENT SECURITIES -Investment securities are accounted for as follows:
Available-for-sale securities -includes debt securities not classified as held-to-maturity or trading, and unrestricted equity securities. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (loss), net of tax. Amortization of premiums and accretion of discounts on available-for-sale securities are recorded using the level yield method over the remaining contractual life of the securities, adjusted for actual prepayments. Realized gains and losses on sales of available-for-sale securities are computed on the basis of specific identification of the adjusted cost of each security. Securities within the available-for-sale portfolio may be used as part of the Corporation’s asset and liability management strategy and may be sold in response to changes in interest rate risk, prepayment risk or other factors.
Other-than-temporary impairment- Declines in the fair value of available-for-sale securities that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment (OTTI) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis. The credit-related impairment is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. For debt securities classified as held-to-maturity, if any, the amount of noncredit-related impairment is recognized in other comprehensive income and accreted over the remaining life of the debt security as an increase in the carrying value of the security. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, prolonged recession in the U.S. economy, changes to real estate values, interest deferrals and whether the federal government provides assistance to financial institutions.
46 |
Restricted equity securities - Restricted equity securities consist primarily of Federal Home Loan Bank of Pittsburgh stock, and are carried at cost and evaluated for impairment. Holdings of restricted equity securities are included in Other Assets in the Consolidated Balance Sheet,consolidated balance sheets, and dividends received on restricted securities are included in Other Income in the Consolidated Statementconsolidated statements of Income.income.
LOANS HELD FOR SALE-Mortgage loans held for sale are reported at the lower of cost or market, determined in the aggregate.
LOANS RECEIVABLE -Loans receivable which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method.
The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential mortgage segment includes the following classes: first and junior lien residential mortgages, home equity lines of credit and residential construction loans. The most significant classes of commercial loans are commercial loans secured by real estate, non-real estate secured commercial and industrial loans, loans to political subdivisions, commercial construction, and loans secured by farmland.
Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
ALLOWANCE FOR LOAN LOSSES-The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repaymentcollection of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than when they are 120 days past due on a contractual basis, or earlier in the event of bankruptcy or if there is an amount deemed uncollectible.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of December 31, 20132016 and 2012,2015, management determined that no allowance for credit losses related to unfunded loan commitments was required.
The allowance consists primarily of two major components – (1) a specific component based on a detailed assessment of certain larger loan relationships, mainly commercial purpose, determined on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio based on a collective evaluation of pools of loans with similar risk characteristics. The general component is assigned to each pool of loans based on both historical net charge-off experience, and an evaluation of certain qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the above methodologies for estimating specific and general losses in the portfolio.
The specific component relates to loans that are classified as impaired based on a detailed assessment of certain larger loan relationships evaluated by a management committee referred to as the Watch List Committee. Specific loan relationships are identified for evaluation based on the related credit risk rating. For individual loans classified as impaired, an allowance is established when the collateral value less estimated selling costs, present value of discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan.
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The general component covers pools of loans by loan class including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject to a restructuring agreement. The pools of loans for each loan segment are evaluated for loss exposure based upon average historical net charge-off rates (currently thirty-six months), adjusted for qualitative factors. Qualitative risk factors (described in the following paragraph) are evaluated for the impact on each of the three distinct segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. Any adjustments to the factors are supported by a narrative documentation of changes in conditions accompanying the allowance for loan losslosses calculation.
The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. Further, the residential mortgage segment is significantly affected by the values of residential real estate that provide collateral for the loans. The majority of the Corporation’s commercial segment loans (approximately 71%57% at December 31, 2013)2016) are secured by real estate, and accordingly, the Corporation’s risk for the commercial segment is significantly affected by commercial real estate values. The consumer segment includes a wide mix of loans for different purposes, primarily secured loans, including loans secured by motor vehicles, manufactured housing and other types of collateral.
Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agingsaging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve reductions in required payments, an extension of a loan’s stated maturity date or a temporary reduction in interest rate. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired. Non-accrual troubled debt restructurings may be restored to accrual status if the ultimately collectability of principal and interest payments under the modified terms is not in doubt, and there has been a period (generally, for at least six consecutive months) of satisfactory payment performance by the borrower either immediately before or after the restructuring.
BANK PREMISES AND EQUIPMENT- Bank premises and equipment are stated at cost less accumulated depreciation. Repair and maintenance expenditures which extend the useful lives of assets are capitalized, and other repair and maintenance expenditures are expensed as incurred. Depreciation expense is computed using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS- The Corporation reviews long-lived assets, such as premises and equipment and intangibles, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. These changes in circumstances may include a significant decrease in the market value of an asset or the manner in which an asset is used. If there is an indication the carrying value of an asset may not be recoverable, future undiscounted cash flows expected to result from use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset, a loss is recognized for the difference between the carrying value and fair market value of the asset.
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INTEREST COSTS - The Corporation capitalizes interest as a component of the cost of premises and equipment constructed or acquired for its own use. The amount of capitalized interest in 2013, 2012, and 2011 was not significant.
FORECLOSED ASSETS HELD FOR SALE- Foreclosed assets held for sale consist of real estate acquired by foreclosure and are initially recorded at fair value, less estimated selling costs.
GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS -Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill is tested at least annually for impairment, or more often if events or circumstances indicate there may be impairment. Core deposit intangibles are being amortized over periods of time that represent the expected lives using a method of amortization that reflects the pattern of economic benefit. Core deposit intangibles are subject to impairment testing whenever events or changes in circumstances indicate their carrying amounts may not be recoverable.
SERVICING RIGHTS - The estimated fair value of servicing rights related to mortgage loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. The valuation of servicing rights is adjusted quarterly, with changes in fair value included in Other Operating Income in the consolidated statements of operations.income. Significant inputs to the valuation include expected net servicing income to be received, the expected life of the underlying loans and the discount rate. The servicing rights asset is included in Other Assets in the consolidated balance sheet, with a balance equal to fair value of $1,123,000 at December 31, 2013 and $605,000 at December 31, 2012.sheets.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence.Tax benefits from investments in limited partnerships that have qualified for federal low-income tax credits are recognized as a reduction in the provision for income tax over the term of the investment using the effective yield method. The Corporation includes income tax penalties in the provision for income tax. The Corporation has no accrued interest related to unrecognized tax benefits.
STOCK COMPENSATION PLANS - The Corporation’s stock-based compensation policy applies to all forms of stock-based compensation including stock options and restricted stock units. All stock-based compensation is accounted for under the fair value method as required by generally accepted accounting principles in the United States.U.S. GAAP. The expense associated with stock-based compensation is recognized over the vesting period of each individual arrangement.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option valuation model. The fair value of restricted stock is based on the current market price on the date of grant.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
CASH FLOWS- The Corporation utilizes the net reporting of cash receipts and cash payments for certain deposit and lending activities. Cash equivalents include federal funds sold and all cash and amounts due from depository institutions and interest-bearing deposits in other banks with original maturities of three months or less.
TRUST ASSETS AND INCOME- Assets held by the Corporation in a fiduciary or agency capacity for its customers are not included in the financial statements since such items are not assets of the Corporation. Trust income is recorded on a cash basis, which is not materially different from the accrual basis.
2. RECENT ACCOUNTING PRONOUNCEMENTS:PRONOUNCEMENTS
The FASBFinancial Accounting Standards Board (“FASB”) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.
In January 2013,May 2014, the FASB issued ASU 2013-01, Clarifying2014-09, Revenue from Contracts with Customers, which provides a principles-based framework for revenue recognition that supersedes virtually all previously issued revenue recognition guidance under U.S. GAAP. Additionally, the ScopeASU requires improved disclosures to help users of Disclosures about Offsettingfinancial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The core principle of the five-step revenue recognition framework is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In April 2016, the FASB issued ASU 2016-10, which provides clarifying information related to identifying performance obligations and licensing. In May 2016, the FASB issued ASU 2016-12 and in December 2016, the FASB issued ASU 2016-20, which provide clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. In August 2015 the FASB issued ASU 2015-14, which deferred the effective date of the revenue recognition standard by a year, making it applicable for the Corporation in the first quarter 2018 and for the annual period ending December 31, 2018. The amendments should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. Initial adoption of this ASU is not expected to have a significant impact on the Corporation, as recognition of interest income and the larger sources of noninterest income in the Corporation’s current business model would not be impacted by the ASU. The Corporation is in the process of evaluating whether there will be any impact as a result of adopting the amendments.
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In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. This makes significant changes in U.S. GAAP related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes provided for in this Update that are applicable to the Corporation are as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; however, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) for equity investments without readily determinable fair values, require a qualitative assessment to identify impairment, and if a qualitative assessment indicates that impairment exists, requiring an entity to measure the investment at fair value; (3) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (at December 31, 2016 and 2015, the Corporation has no liabilities for which the fair value measurement option has been elected); (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this standard clarify thatUpdate will become effective for the scope of ASU 2011-11 applies to (among other types of instruments) repurchase agreements that are either offset or subject to an enforceable master netting arrangement or similar agreement. The amendments in ASU 2011-11 require an entity to disclose information about offsettingCorporation for annual and related arrangements to enable users of financial statements to understand the effect of those arrangements on the entity’s financial position. The Corporation has two types of repurchase agreements that have been recognized as borrowingsinterim periods beginning in the consolidated financial statements: (1) overnight repurchase agreements with customers, and (2) repurchase agreements with a broker-dealer. The Corporation does not offset assets and liabilities related to eitherfirst quarter 2018. With limited exceptions, early adoption of these types of repurchase agreement. The overnight repurchase agreements with customers are not subject to a master netting arrangement or similar arrangement, and accordingly, the disclosure requirements of ASU 2011-11 do not apply. As disclosed in Note 12 to these consolidated financial statements, the Master Repurchase Agreement between the Corporation and the broker-dealer provides that the Agreement constitutes a “netting contract,” as defined; however, the Corporation and the broker-dealer have no other obligations to one another and therefore, no netting has occurred.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this standard require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, this standard requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required by U.S. GAAP to be reclassified in their entirety to net income, an entity will be required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. As required, the Corporation has implemented the amendments in this ASU prospectively in Note 3 to these consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this standard clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. For the Corporation, the amendments in this Update is not permitted. Amendments are to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively. Initial adoption of this ASU is not expected to have a significant impact on the Corporation’s financial position; however, the method for determining the fair value of loans and other financial instruments for disclosure purposes will be affected.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. Specifically, a lessee should recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. Topic 842 would not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP; however, the principal change from current GAAP is that lease assets and liabilities arising from operating leases would be recognized on the balance sheet. Topic 842 provides several other changes or clarifications to existing GAAP, and will require qualitative disclosures, along with quantitative disclosures, so that financial statement users can understand more about the nature of an entity’s leasing activities. In transition, Topic 842 provides that lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including optional practical expedients. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees will be required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. Topic 842 will become effective for the Corporation for annual and interim periods beginning in the first quarter 2014.2019. The Corporation will be affected by these amendments if unrecognized tax benefits ariseis in future periods.the early stages of evaluating the potential impact of adopting this amendment.
In December 2013,March 2016, the FASB issued ASU 2013-12, DefinitionNo. 2016-07, Investments – Equity Method and Joint Ventures. This ASU eliminates the requirement that when an investment qualifies for the equity method as a result of a Public Business Entity.an increase in the level of ownership interest or influence, an investor must adjust the investment, results of operations and retained earnings retroactively as if the equity method had been in effect during all previous periods the investment had been held. The amendmentASU requires the equity method investor to add the cost of acquiring an additional interest in this Update provides a single definitionthe investee to the basis of public business entitythe investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for use in future financial accounting and reporting guidance.the equity method. The amendment does not affect existing requirements and does not have an effective date. The amendment specifies the following: (1)ASU further requires that an entity that is required by the Securities and Exchange Commission (SEC) to file or furnish financial statements with the SEC, or does file or furnish financial statements with the SEC, is considered a public entity, (2) a consolidated subsidiary of a public company is not considered a public business entityhas an available-for-sale equity security that becomes qualified for purposes of its standalone financial statements other than those included in an SEC filing by its parent or by other registrants or those that are issuers and are required to file or furnish financial statements with the SEC, and (3) a business entity that has securities that are not subject to contractual restrictions on transfer and that is by law, contract or regulation required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis is considered a public business entity. Based on this definition, Citizens & Northern Corporation is considered a public business entity, while the individual subsidiaries are not considered to be public business entities for purposes of their standalone financial statements.
In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. This Update provides guidance on accounting for investments in flow-through limited liability entities that qualify for the federal low-income housing tax credit. Currently, under U.S. GAAP, a reporting entity that invests in a qualified affordable housing project may elect to account for that investment using the effective yield method if certain conditions are met, or alternatively, the investment would be accounted for under either the equity method recognize through earnings the unrealized gain or loss in accumulated other comprehensive income at the cost method. Generally, investors indate the investment becomes qualified affordable housing project investments expect to receive all of their return through the receipt of tax credits and tax deductions from operating losses, andfor use of the effective yield method results in recognition of the return as a reduction of income tax expense over the period of the investment. The amendments in this Update modify the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost methods to account for investments in qualified affordable housing projects. Additionally, the amendments introduce new recurring disclosure requirements about investments in qualified affordable housing projects.method. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2015, and are to2017. The amendments should be applied retrospectively. Information concerningprospectively upon their effective date. Initial adoption of this ASU in 2017 did not have a significant impact on the Corporation’s investments in qualified affordable housing projects is provided in Note 14 to these consolidated financial statements.Corporation.
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In January 2014,March 2016, the FASB issued ASU 2014-04, ReclassificationNo. 2016-09, Compensation – Stock Compensation. This ASU changes several aspects of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective ofaccounting for share-based payment transactions, and includes some changes that apply only to nonpublic companies. This Update includes amendments that currently apply, or may apply in the amendments in this Update is to reduce diversity among reporting entities by clarifying when an in substance foreclosure occurs. The amendments in this Update clarify that an in substance foreclosure occurs, and a creditor is considered to have received physical possession of residential real property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal titlefuture, to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate propertyCorporation related to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally,following: (1) accounting for the amendments require interimdifference between the deduction for tax purposes and annual disclosure of both (1) the amount of foreclosed residential real estate property held bycompensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the creditor and (2) the recorded investmentstatement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in consumer mortgage loans collateralized by residential real estate property that arecash in the process of foreclosure according to the requirementsexcess of the applicable jurisdiction. An entity can elect to adoptemployer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the amendments in this Update using either a modified retrospective transition method or a prospective transition method. Under the modified retrospective transition method,statement of cash flows when an entity would record a cumulative-effect adjustment to residential consumer mortgage loans and foreclosed residential real estate properties existing as of the beginning of the annual periodemployer withholds shares for which the amendments are effective. For prospective transition, an entity would apply the amendments to all instances of an entity receiving physical possession of residential real estate property collateralizing consumer mortgage loans that occur after the date of adoption. Early adoption is permitted.tax-withholding purposes. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2015,2017, with earlier adoption permitted. The ASU provides separate transition provisions for each of the amendments. Initial adoption of this ASU in 2017 did not have a significant impact on the Corporation.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This ASU will result in significant changes in the Corporation’s accounting for credit losses related to loans receivable and investment securities. A summary of significant provisions of this ASU is as follows:
· | The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. GAAP in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring. |
· | The amendments in the Update retain many of the disclosure requirements related to credit quality in current U.S. GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the Update requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination. |
· | This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased available-for-sale securities with a more-than-insignificant amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other available-for-sale debt securities; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition. |
· | This ASU will be effective for the Corporation for interim and annual periods beginning in the first quarter of 2020. Earlier adoption is permitted beginning in the first quarter of 2019. The entity will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective. |
The Corporation is in the processearly stages of determiningevaluating the potential impact of adopting this amendment.
In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) –Classification of Certain Cash Receipts and Cash Payments. This Update provides clarification regarding eight specific cash flow issues with the objective of reducing diversity in practice in how it will applycertain cash receipts and cash payments are presented and classified in the statement of cash flows. For the Corporation, the amendments in this Update are effective beginning in the first quarter 2018. The amendments in this Update should be applied using a retroactive transition method to each period presented. The Corporation anticipates there will be no adjustments to the Consolidated Statements of Cash Flows, as previously reported, as a result of the clarifications provided in the Update.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its accountingfair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This Update will become effective for the Corporation’s annual and reporting practices.interim goodwill impairment tests beginning in the first quarter of 2020.
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3. COMPREHENSIVE INCOME
Comprehensive income (loss) is the total of (1) net income, (loss), and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive (loss) income. The components of other comprehensive (loss) income, (loss), and the related tax effects, are as follows:
(In Thousands) | Before- Tax | Income Tax | Net-of- Tax |
Amount | Effect | Amount | |
2013 | |||
Unrealized (losses) gains on available-for-sale securities: | |||
Unrealized holding losses on available-for-sale securities | ($17,623) | $6,168 | ($11,455) |
Reclassification adjustment for (gains) realized in income | (1,718) | 601 | (1,117) |
Other comprehensive loss on available-for-sale securities | (19,341) | 6,769 | (12,572) |
Unfunded pension and postretirement obligations: | |||
Changes from plan amendments and actuarial gains and losses | |||
included in other comprehensive income | 885 | (310) | 575 |
Amortization of net transition obligation, prior service cost and net | |||
actuarial loss included in net periodic benefit cost | 2 | (1) | 1 |
Other comprehensive gain on unfunded retirement obligations | 887 | (311) | 576 |
Total other comprehensive loss | ($18,454) | $6,458 | ($11,996) |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
2016 | ||||||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses on available-for-sale securities | $ | (4,138 | ) | $ | 1,448 | $ | (2,690 | ) | ||||
Reclassification adjustment for (gains) realized in income | (1,158 | ) | 406 | (752 | ) | |||||||
Other comprehensive loss on available-for-sale securities | (5,296 | ) | 1,854 | (3,442 | ) | |||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses included in other comprehensive income | 46 | (16 | ) | 30 | ||||||||
Amortization of net transition obligation, prior service cost and net actuarial gain included in net periodic benefit cost | (22 | ) | 8 | (14 | ) | |||||||
Other comprehensive income on unfunded retirement obligations | 24 | (8 | ) | 16 | ||||||||
Total other comprehensive loss | $ | (5,272 | ) | $ | 1,846 | $ | (3,426 | ) |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax |
Amount | Effect | Amount | |
2012 | |||
Unrealized gains on available-for-sale securities: | |||
Unrealized holding gains on available-for-sale securities | $4,128 | ($1,608) | $2,520 |
Reclassification adjustment for (gains) realized in income | (2,682) | 939 | (1,743) |
Other comprehensive gain on available-for-sale securities | 1,446 | (669) | 777 |
Unfunded pension and postretirement obligations: | |||
Changes from plan amendments and actuarial gains and losses | |||
included in other comprehensive income | 8 | (2) | 6 |
Amortization of net transition obligation, prior service cost and net | |||
actuarial loss included in net periodic benefit cost | 77 | (17) | 60 |
Other comprehensive gain on unfunded retirement obligations | 85 | (19) | 66 |
Total other comprehensive income | $1,531 | ($688) | $843 |
(In Thousands) | Before- Tax | Income Tax | Net-of- Tax |
Amount | Effect | Amount | |
2011 | |||
Unrealized gains on available-for-sale securities: | |||
Unrealized holding gains on available-for-sale securities | $20,611 | ($7,006) | $13,605 |
Reclassification adjustment for (gains) realized in income | (2,216) | 753 | (1,463) |
Other comprehensive gain on available-for-sale securities | 18,395 | (6,253) | 12,142 |
Unfunded pension and postretirement obligations: | |||
Changes from plan amendments and actuarial gains and losses | |||
included in other comprehensive income | (626) | 208 | (418) |
Amortization of net transition obligation, prior service cost and net | |||
actuarial loss included in net periodic benefit cost | 55 | (18) | 37 |
Other comprehensive loss on unfunded retirement obligations | (571) | 190 | (381) |
Total other comprehensive income | $17,824 | ($6,063) | $11,761 |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
2015 | ||||||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses on available-for-sale securities | $ | (1,429 | ) | $ | 500 | $ | (929 | ) | ||||
Reclassification adjustment for (gains) realized in income | (2,861 | ) | 1,002 | (1,859 | ) | |||||||
Other comprehensive loss on available-for-sale securities | (4,290 | ) | 1,502 | (2,788 | ) | |||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses included in other comprehensive loss | (135 | ) | 47 | (88 | ) | |||||||
Amortization of net transition obligation, prior service cost, net actuarial loss and loss on settlement included in net periodic benefit cost | 67 | (23 | ) | 44 | ||||||||
Other comprehensive loss on unfunded retirement obligations | (68 | ) | 24 | (44 | ) | |||||||
Total other comprehensive loss | $ | (4,358 | ) | $ | 1,526 | $ | (2,832 | ) |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
2014 | ||||||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains on available-for-sale securities | $ | 10,774 | $ | (3,771 | ) | $ | 7,003 | |||||
Reclassification adjustment for (gains) realized in income | (1,104 | ) | 386 | (718 | ) | |||||||
Other comprehensive income on available-for-sale securities | 9,670 | (3,385 | ) | 6,285 | ||||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses included in other comprehensive income | (79 | ) | 28 | (51 | ) | |||||||
Amortization of net transition obligation, prior service cost, net actuarial loss and loss on settlement included in net periodic benefit cost | 184 | (65 | ) | 119 | ||||||||
Other comprehensive income on unfunded retirement obligations | 105 | (37 | ) | 68 | ||||||||
Total other comprehensive income | $ | 9,775 | $ | (3,422 | ) | $ | 6,353 |
52 |
Changes in the components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:
(In Thousands) | Unrealized | Unfunded | Accumulated | Unrealized | Unfunded | Accumulated | |||||||||
Holding Gains | Pension and | Other | Holding Gains | Pension and | Other | ||||||||||
(Losses) | Postretirement | Comprehensive | (Losses) | Postretirement | Comprehensive | ||||||||||
on Securities | Obligations | Income (Loss) | on Securities | Obligations | Income (Loss) | ||||||||||
2013 | |||||||||||||||
2016 | |||||||||||||||
Balance, beginning of period | $11,568 | ($565) | $11,003 | $ | 2,493 | $ | 35 | $ | 2,528 | ||||||
Other comprehensive (loss) income before reclassifications | (11,455) | 575 | (10,880) | ||||||||||||
Amounts reclassified from accumulated other | |||||||||||||||
comprehensive loss | (1,117) | 1 | (1,116) | ||||||||||||
Other comprehensive (loss) | (12,572) | 576 | (11,996) | ||||||||||||
Other comprehensive loss before reclassifications | (2,690 | ) | 30 | (2,660 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive (loss) income | (752 | ) | (14 | ) | (766 | ) | |||||||||
Other comprehensive (loss) income | (3,442 | ) | 16 | (3,426 | ) | ||||||||||
Balance, end of period | ($1,004) | $11 | ($993) | $ | (949 | ) | $ | 51 | $ | (898 | ) | ||||
2012 | |||||||||||||||
2015 | |||||||||||||||
Balance, beginning of period | $ | 5,281 | $ | 79 | $ | 5,360 | |||||||||
Other comprehensive loss before reclassifications | (929 | ) | (88 | ) | (1,017 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income | (1,859 | ) | 44 | (1,815 | ) | ||||||||||
Other comprehensive loss | (2,788 | ) | (44 | ) | (2,832 | ) | |||||||||
Balance, end of period | $ | 2,493 | $ | 35 | $ | 2,528 | |||||||||
2014 | |||||||||||||||
Balance, beginning of period | $10,791 | ($631) | $10,160 | $ | (1,004 | ) | $ | 11 | $ | (993 | ) | ||||
Other comprehensive income before reclassifications | 2,520 | 6 | 2,526 | 7,003 | (51 | ) | 6,952 | ||||||||
Amounts reclassified from accumulated other | |||||||||||||||
comprehensive income | (1,743) | 60 | (1,683) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income | (718 | ) | 119 | (599 | ) | ||||||||||
Other comprehensive income | 777 | 66 | 843 | 6,285 | 68 | 6,353 | |||||||||
Balance, end of period | $11,568 | ($565) | $11,003 | $ | 5,281 | $ | 79 | $ | 5,360 | ||||||
2011 | |||||||||||||||
Balance, beginning of period | ($1,351) | ($250) | ($1,601) | ||||||||||||
Other comprehensive loss before reclassifications | 13,605 | (418) | 13,187 | ||||||||||||
Amounts reclassified from accumulated other | |||||||||||||||
comprehensive income | (1,463) | 37 | (1,426) | ||||||||||||
Other comprehensive income | 12,142 | (381) | 11,761 | ||||||||||||
Balance, end of period | $10,791 | ($631) | $10,160 |
Items reclassified out of each component of other comprehensive income are as follows:
For the Year Ended December 31, 2016 | ||||||
(In Thousands) | ||||||
Reclassified from | ||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | ||||
Comprehensive Income Components | Comprehensive Income | Statements of Income | ||||
Unrealized gains and losses on available-for-sale securities | $ | (1,158 | ) | Realized gains on available-for-sale securities, net | ||
406 | Income tax provision | |||||
(752 | ) | Net of tax | ||||
Amortization of defined benefit pension and postretirement items: | ||||||
Prior service cost | (31 | ) | Pensions and other employee benefits | |||
Actuarial loss | 9 | Pensions and other employee benefits | ||||
(22 | ) | Total before tax | ||||
8 | Income tax provision | |||||
(14 | ) | Net of tax | ||||
Total reclassifications for the period | $ | (766 | ) |
For the Year Ended December 31, 2013
(In Thousands)
53 |
For the Year Ended December 31, 2015 | ||||||
(In Thousands) | ||||||
Reclassified from | ||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | ||||
Comprehensive Income Components | Comprehensive Income | Statements of Income | ||||
Unrealized gains and losses on available-for-sale Securities | $ | (2,861 | ) | Realized gains on available-for-sale securities, net | ||
1,002 | Income tax provision | |||||
(1,859 | ) | Net of tax | ||||
Amortization of defined benefit pension and postretirement items: | ||||||
Prior service cost | (31 | ) | Pensions and other employee benefits | |||
Actuarial loss | 11 | Pensions and other employee benefits | ||||
Loss on settlement | 87 | Pensions and other employee benefits | ||||
67 | Total before tax | |||||
(23 | ) | Income tax provision | ||||
44 | Net of tax | |||||
Total reclassifications for the period | $ | (1,815 | ) |
For the Year Ended December 31, 2014 | ||||||
(In Thousands) | ||||||
Reclassified from | ||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | ||||
Comprehensive Income Components | Comprehensive Income | Statements of Income | ||||
Unrealized gains and losses on available-for-sale Securities | $ | (1,104 | ) | Realized gains on available-for-sale securities, net | ||
386 | Income tax provision | |||||
(718 | ) | Net of tax | ||||
Amortization of defined benefit pension and postretirement items: | ||||||
Prior service cost | (31 | ) | Pensions and other employee benefits | |||
Actuarial loss | 19 | Pensions and other employee benefits | ||||
Loss on settlement | 196 | Pensions and other employee benefits | ||||
184 | Total before tax | |||||
(65 | ) | Income tax provision | ||||
119 | Net of tax | |||||
Total reclassifications for the period | $ | (599 | ) |
4. PER SHARE DATA
Net income per share is based on the weighted-average number of shares of common stock outstanding. The following data show the amounts used in computing basic and diluted net income per share. As shown in the table that follows, diluted earnings per share is computed using weighted average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation's common stock during the period.
Weighted- | |||
Average | Earnings | ||
Net | Common | Per | |
Income | Shares | Share | |
2013 | |||
Earnings per share – basic | $18,594,000 | 12,352,383 | $1.51 |
Dilutive effect of potential common stock | |||
arising from stock options: | |||
Exercise of outstanding stock options | 250,236 | ||
Hypothetical share repurchase at $19.86 | (219,829) | ||
Earnings per share – diluted | $18,594,000 | 12,382,790 | $1.50 |
2012 | |||
Earnings per share – basic | $22,705,000 | 12,235,748 | $1.86 |
Dilutive effect of potential common stock | |||
arising from stock options: | |||
Exercise of outstanding stock options | 200,589 | ||
Hypothetical share repurchase at $19.16 | (176,129) | ||
Earnings per share – diluted | $22,705,000 | 12,260,208 | $1.85 |
Weighted- | |||
Average | Earnings | ||
Net | Common | Per | |
Income | Shares | Share | |
2011 | |||
Earnings per share – basic | $23,368,000 | 12,162,045 | $1.92 |
Dilutive effect of potential common stock | |||
arising from stock options: | |||
Exercise of outstanding stock options | 92,398 | ||
Hypothetical share repurchase at $ 15.87 | (87,675) | ||
Earnings per share – diluted | $23,368,000 | 12,166,768 | $1.92 |
Weighted- | ||||||||||||
Average | Earnings | |||||||||||
Net | Common | Per | ||||||||||
Income | Shares | Share | ||||||||||
2016 | ||||||||||||
Earnings per share – basic | $ | 15,762,000 | 12,098,129 | $ | 1.30 | |||||||
Dilutive effect of potential common stock | ||||||||||||
arising from stock options: | ||||||||||||
Exercise of outstanding stock options | 215,581 | |||||||||||
Hypothetical share repurchase at $21.23 | (185,346 | ) | ||||||||||
Earnings per share – diluted | $ | 15,762,000 | 12,128,364 | $ | 1.30 |
54 |
Weighted- | ||||||||||||
Average | Earnings | |||||||||||
Net | Common | Per | ||||||||||
Income | Shares | Share | ||||||||||
2015 | ||||||||||||
Earnings per share – basic | $ | 16,471,000 | 12,211,941 | $ | 1.35 | |||||||
Dilutive effect of potential common stock arising from stock options: | ||||||||||||
Exercise of outstanding stock options | 210,402 | |||||||||||
Hypothetical share repurchase at $20.04 | (188,570 | ) | ||||||||||
Earnings per share – diluted | $ | 16,471,000 | 12,233,773 | $ | 1.35 | |||||||
2014 | ||||||||||||
Earnings per share – basic | $ | 17,086,000 | 12,390,067 | $ | 1.38 | |||||||
Dilutive effect of potential common stock arising from stock options: | ||||||||||||
Exercise of outstanding stock options | 224,015 | |||||||||||
Hypothetical share repurchase at $19.41 | (202,032 | ) | ||||||||||
Earnings per share – diluted | $ | 17,086,000 | 12,412,050 | $ | 1.38 |
Stock options that were anti-dilutive were excluded from net income per share calculations. Weighted-average common shares available from anti-dilutive instruments totaled 88,52131,153 shares in 2013, 145,3332016, 61,590 shares in 20122015 and 223,333151,310 shares in 2011.2014.
5. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 20132016 and 20122015 include the following:
(In thousands) | Dec. 31, | Dec. 31, | Dec. 31, | |||||||
2013 | 2012 | 2016 | 2015 | |||||||
Cash and cash equivalents | $38,591 | $55,016 | $ | 28,621 | $ | 33,313 | ||||
Certificates of deposit | 6,028 | 4,820 | 3,488 | 2,748 | ||||||
Total cash and due from banks | $44,619 | $59,836 | $ | 32,109 | $ | 36,061 |
Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.
The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $15,318,000$16,654,000 at December 31, 20132016 and $14,128,000$15,327,000 at December 31, 2012.2015.
6. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB ASC topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
55 |
Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.
Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.
The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.
At December 31, 20132016 and 2012,2015, assets measured at fair value and the valuation methods used are as follows:
December 31, 2016 | ||||||||||||||||
Quoted Prices | Other | |||||||||||||||
in Active | Observable | Unobservable | Total | |||||||||||||
Markets | Inputs | Inputs | Fair | |||||||||||||
(In Thousands) | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||||||
Recurring fair value measurements | ||||||||||||||||
AVAILABLE-FOR-SALE SECURITIES: | ||||||||||||||||
Obligations of U.S. Government agencies | $ | 0 | $ | 9,541 | $ | 0 | $ | 9,541 | ||||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 0 | 119,037 | 0 | 119,037 | ||||||||||||
Taxable | 0 | 30,297 | 0 | 30,297 | ||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 0 | 58,404 | 0 | 58,404 | ||||||||||||
Residential collateralized mortgage obligations | 0 | 146,608 | 0 | 146,608 | ||||||||||||
Commercial mortgage-backed securities | 0 | 30,219 | 0 | 30,219 | ||||||||||||
Total debt securities | 0 | 394,106 | 0 | 394,106 | ||||||||||||
Marketable equity securities | 971 | 0 | 0 | 971 | ||||||||||||
Total available-for-sale securities | 971 | 394,106 | 0 | 395,077 | ||||||||||||
Servicing rights | 0 | 0 | 1,262 | 1,262 | ||||||||||||
Total recurring fair value measurements | $ | 971 | $ | 394,106 | $ | 1,262 | $ | 396,339 | ||||||||
Nonrecurring fair value measurements | ||||||||||||||||
Impaired loans with a valuation allowance | $ | 0 | $ | 0 | $ | 3,372 | $ | 3,372 | ||||||||
Valuation allowance | 0 | 0 | (674 | ) | (674 | ) | ||||||||||
Impaired loans, net | 0 | 0 | 2,698 | 2,698 | ||||||||||||
Foreclosed assets held for sale | 0 | 0 | 2,180 | 2,180 | ||||||||||||
Total nonrecurring fair value measurements | $ | 0 | $ | 0 | $ | 4,878 | $ | 4,878 |
December 31, 2013 | ||||
Quoted Prices | Other | |||
in Active | Observable | Unobservable | Total | |
Markets | Inputs | Inputs | Fair | |
(In Thousands) | (Level 1) | (Level 2) | (Level 3) | Value |
Recurring fair value measurements | ||||
AVAILABLE-FOR-SALE SECURITIES: | ||||
Obligations of U.S. Government agencies | $0 | $45,877 | $0 | $45,877 |
Obligations of states and political subdivisions: | ||||
Tax-exempt | 0 | 128,426 | 0 | 128,426 |
Taxable | 0 | 34,471 | 0 | 34,471 |
Mortgage-backed securities | 0 | 86,208 | 0 | 86,208 |
Collateralized mortgage obligations, | ||||
Issued by U.S. Government agencies | 0 | 178,092 | 0 | 178,092 |
Collateralized debt obligations | 0 | 660 | 0 | 660 |
Total debt securities | 0 | 473,734 | 0 | 473,734 |
Marketable equity securities | 8,924 | 0 | 0 | 8,924 |
Total available-for-sale securities | 8,924 | 473,734 | 0 | 482,658 |
Servicing rights | 0 | 0 | 1,123 | 1,123 |
Total recurring fair value measurements | $8,924 | $473,734 | $1,123 | $483,781 |
Nonrecurring fair value measurements | ||||
Impaired loans with a valuation allowance | $0 | $0 | $9,889 | $9,889 |
Valuation allowance | 0 | 0 | (2,333) | (2,333) |
Impaired loans, net | 0 | 0 | 7,556 | 7,556 |
Foreclosed assets held for sale | 0 | 0 | 892 | 892 |
Total nonrecurring fair value measurements | $0 | $0 | $8,448 | $8,448 |
56 |
December 31, 2012 | ||||
Quoted Prices | Other | |||
in Active | Observable | Unobservable | Total | |
Markets | Inputs | Inputs | Fair | |
(In Thousands) | (Level 1) | (Level 2) | (Level 3) | Value |
Recurring fair value measurements | ||||
AVAILABLE-FOR-SALE SECURITIES: | ||||
Obligations of U.S. Government agencies | $0 | $31,217 | $0 | $31,217 |
Obligations of states and political subdivisions: | ||||
Tax-exempt | 0 | 137,020 | 0 | 137,020 |
Taxable | 0 | 24,817 | 0 | 24,817 |
Mortgage-backed securities | 0 | 80,196 | 0 | 80,196 |
Collateralized mortgage obligations, | ||||
Issued by U.S. Government agencies | 0 | 183,510 | 0 | 183,510 |
Trust preferred securities issued by individual institutions | 0 | 5,171 | 0 | 5,171 |
Collateralized debt obligations: | ||||
Pooled trust preferred securities - senior tranches | 0 | 0 | 1,613 | 1,613 |
Other collateralized debt obligations | 0 | 660 | 0 | 660 |
Total debt securities | 0 | 462,591 | 1,613 | 464,204 |
Marketable equity securities | 8,373 | 0 | 0 | 8,373 |
Total available-for-sale securities | 8,373 | 462,591 | 1,613 | 472,577 |
Servicing rights | 0 | 0 | 605 | 605 |
Total recurring fair value measurements | $8,373 | $462,591 | $2,218 | $473,182 |
Nonrecurring fair value measurements | ||||
Impaired loans with a valuation allowance | $0 | $0 | $2,710 | $2,710 |
Valuation allowance | 0 | 0 | (623) | (623) |
Impaired loans, net | 0 | 0 | 2,087 | 2,087 |
Foreclosed assets held for sale | 0 | 0 | 879 | 879 |
Total nonrecurring fair value measurements | $0 | $0 | $2,966 | $2,966 |
December 31, 2015 | ||||||||||||||||
Quoted Prices | Other | |||||||||||||||
in Active | Observable | Unobservable | Total | |||||||||||||
Markets | Inputs | Inputs | Fair | |||||||||||||
(In Thousands) | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||||||
Recurring fair value measurements | ||||||||||||||||
AVAILABLE-FOR-SALE SECURITIES: | ||||||||||||||||
Obligations of U.S. Government agencies | $ | 0 | $ | 10,483 | $ | 0 | $ | 10,483 | ||||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 0 | 107,757 | 0 | 107,757 | ||||||||||||
Taxable | 0 | 34,597 | 0 | 34,597 | ||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 0 | 73,343 | 0 | 73,343 | ||||||||||||
Residential collateralized mortgage obligations | 0 | 191,715 | 0 | 191,715 | ||||||||||||
Collateralized debt obligations | 0 | 9 | 0 | 9 | ||||||||||||
Total debt securities | 0 | 417,904 | 0 | 417,904 | ||||||||||||
Marketable equity securities | 2,386 | 0 | 0 | 2,386 | ||||||||||||
Total available-for-sale securities | 2,386 | 417,904 | 0 | 420,290 | ||||||||||||
Servicing rights | 0 | 0 | 1,296 | 1,296 | ||||||||||||
Total recurring fair value measurements | $ | 2,386 | $ | 417,904 | $ | 1,296 | $ | 421,586 | ||||||||
Nonrecurring fair value measurements | ||||||||||||||||
Impaired loans with a valuation allowance | $ | 0 | $ | 0 | $ | 1,933 | $ | 1,933 | ||||||||
Valuation allowance | 0 | 0 | (820 | ) | (820 | ) | ||||||||||
Impaired loans, net | 0 | 0 | 1,113 | 1,113 | ||||||||||||
Foreclosed assets held for sale | 0 | 0 | 1,260 | 1,260 | ||||||||||||
Total nonrecurring fair value measurements | $ | 0 | $ | 0 | $ | 2,373 | $ | 2,373 |
Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals less estimated selling costs.
Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management. The following table shows quantitative information regarding significant techniques and inputs used at December 31, 20132016 and 20122015 for servicing rights assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:
Fair Value at | Fair Value at | |||||||||||||||||||||||
12/31/13 | Valuation | Unobservable | Method or Value As of | 12/31/16 | Valuation | Unobservable | Method or Value As of | |||||||||||||||||
Asset | (In Thousands) | Technique | Input(s) | 12/31/13 | (In Thousands) | Technique | Input(s) | 12/31/16 | ||||||||||||||||
Servicing rights | $1,123 | Discounted cash flow | Discount rate | 12.00% | Rate used through modeling period | $ | 1,262 | Discounted cash flow | Discount rate | 13.00 | % | Rate used through modeling period | ||||||||||||
Loan prepayment speeds | 152.00% | Weighted-average PSA | Loan prepayment speeds | 138.00 | % | Weighted-average PSA | ||||||||||||||||||
Servicing fees | 0.25% | of loan balances | Servicing fees | 0.25 | % | of loan balances | ||||||||||||||||||
4.00% | of payments are late | 4.00 | % | of payments are late | ||||||||||||||||||||
5.00% | late fees assessed | 5.00 | % | late fees assessed | ||||||||||||||||||||
$1.94 | Miscellaneous fees per account per month | $ | 1.94 | Miscellaneous fees per account per month | ||||||||||||||||||||
Servicing costs | $6.00 | Monthly servicing cost per account | Servicing costs | $ | 6.00 | Monthly servicing cost per account | ||||||||||||||||||
$24.00 | Additional monthly servicing cost per loan on loans more than 30 days delinquent | $ | 24.00 | Additional monthly servicing cost per loan on loans more than 30 days delinquent | ||||||||||||||||||||
1.50% | of loans more than 30 days delinquent | 1.50 | % | of loans more than 30 days delinquent | ||||||||||||||||||||
3.00% | annual increase in servicing costs | 3.00 | % | annual increase in servicing costs |
Fair Value at | ||||||||||
12/31/12 | Valuation | Unobservable | Method or Value As of | |||||||
Asset | (In Thousands) | Technique | Input(s) | 12/31/12 | ||||||
Pooled trust preferred securities - senior tranches | $1,613 | Discounted cash flow | Issuer defaults | 50.26% | Actual deferrals and defaults as % of outstanding collateral | |||||
19.73% | Expected additional net deferrals and defaults as % of performing collateral | |||||||||
Issuer prepayments | 41.24% | Expected issuer prepayments as % of performing collateral | ||||||||
Discount rate | 11.70% | Implied 7.57% discount rate at 12/31/07 plus 4.13% spread for credit and liquidity risk | ||||||||
Servicing rights | 605 | Discounted cash flow | Discount rate | 12.00% | Rate used through modeling period | |||||
Loan prepayment speeds | 288.00% | Weighted-average PSA | ||||||||
Servicing fees | 0.25% | of loan balances | ||||||||
5.00% | of payments are late | |||||||||
5.00% | late fees assessed | |||||||||
$1.94 | Miscellaneous fees per account per month | |||||||||
Servicing costs | $6.00 | Monthly servicing cost per account | ||||||||
$24.00 | Additional monthly servicing cost per loan on loans more than 30 days delinquent | |||||||||
1.50% | of loans more than 30 days delinquent | |||||||||
3.00% | annual increase in servicing costs |
57 |
Fair Value at | ||||||||||||||
12/31/15 | Valuation | Unobservable | Method or Value As of | |||||||||||
Asset | (In Thousands) | Technique | Input(s) | 12/31/15 | ||||||||||
Servicing rights | $ | 1,296 | Discounted cash flow | Discount rate | 10.00 | % | Rate used through modeling period | |||||||
Loan prepayment speeds | 146.00 | % | Weighted-average PSA | |||||||||||
Servicing fees | 0.25 | % | of loan balances | |||||||||||
4.00 | % | of payments are late | ||||||||||||
5.00 | % | late fees assessed | ||||||||||||
$ | 1.94 | Miscellaneous fees per account per month | ||||||||||||
Servicing costs | $ | 6.00 | Monthly servicing cost per account | |||||||||||
$ | 24.00 | Additional monthly servicing cost per loan on loans more than 30 days delinquent | ||||||||||||
1.50 | % | of loans more than 30 days delinquent | ||||||||||||
3.00 | % | annual increase in servicing costs |
The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans.
Following is a reconciliation of activity for Level 3 assets (servicing rights) measured at fair value on a recurring basis:
Year Ended December 31, 2013 | ||||
Pooled Trust | Pooled Trust | |||
Preferred | Preferred | |||
Securities - | Securities - | |||
(In Thousands) | Senior | Mezzanine | Servicing | |
Tranches | Tranches | Rights | Total | |
Balance, beginning of period | $1,613 | $0 | $605 | $2,218 |
Issuances of servicing rights | 0 | 0 | 673 | 673 |
Accretion and amortization, net | (2) | 0 | 0 | (2) |
Proceeds from sales and calls | (1,636) | (571) | 0 | (2,207) |
Realized gains, net | 23 | 571 | 0 | 594 |
Unrealized losses included in earnings | 0 | 0 | (155) | (155) |
Unrealized gains (losses) included in | ||||
other comprehensive income | 2 | 0 | 0 | 2 |
Balance, end of period | $0 | $0 | $1,123 | $1,123 |
Year Ended December 31, 2012 | ||||
Pooled Trust | Pooled Trust | |||
Preferred | Preferred | |||
Securities - | Securities - | |||
(In Thousands) | Senior | Mezzanine | Servicing | |
Tranches | Tranches | Rights | Total | |
Balance, beginning of period | $4,638 | $730 | $375 | $5,743 |
Issuances of servicing rights | 0 | 0 | 327 | 327 |
Accretion and amortization, net | (8) | 0 | 0 | (8) |
Proceeds from sales and calls | (3,429) | (1,835) | 0 | (5,264) |
Realized gains, net | 56 | 1,835 | 0 | 1,891 |
Unrealized losses included in earnings | 0 | 0 | (97) | (97) |
Unrealized gains (losses) included in | ||||
other comprehensive income | 356 | (730) | 0 | (374) |
Balance, end of period | $1,613 | $0 | $605 | $2,218 |
Year Ended December 31, 2011 | ||||
Pooled Trust | Pooled Trust | |||
Preferred | Preferred | |||
Securities - | Securities - | |||
Senior | Mezzanine | Servicing | ||
Tranches | Tranches | Rights | Total | |
Balance, beginning of period | $7,400 | $0 | $204 | $7,604 |
Issuances of servicing rights | 0 | 0 | 239 | 239 |
Accretion and amortization, net | (41) | 0 | 0 | (41) |
Proceeds from sales and calls | (5,001) | (98) | 0 | (5,099) |
Realized gains, net | 81 | 98 | 0 | 179 |
Unrealized losses included in earnings | 0 | 0 | (68) | (68) |
Unrealized gains included in | ||||
other comprehensive income | 2,199 | 730 | 0 | 2,929 |
Balance, end of period | $4,638 | $730 | $375 | $5,743 |
(In Thousands) | Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | ||||||||||
Balance, beginning of period | $ | 1,296 | $ | 1,281 | $ | 1,123 | ||||||
Issuances of servicing rights | 248 | 177 | 185 | |||||||||
Unrealized losses included in earnings | (282 | ) | (162 | ) | (27 | ) | ||||||
Balance, end of period | $ | 1,262 | $ | 1,296 | $ | 1,281 |
No other-than-temporary impairment lossesLoans are classified as impaired when, based on securities valuedcurrent information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using Levelvalues from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
At December 31, 2016 and 2015, quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (Level 3 methodologies were recorded in 2013, 2012 or 2011.methodologies) are as follows:
(In Thousands, Except | Value at | |||||||||||||||||||
Percentages) | Valuation | 12/31/16 | ||||||||||||||||||
Balance at | Allowance at | Fair Value at | Valuation | Unobservable | (Weighted | |||||||||||||||
Asset | 12/31/16 | 12/31/16 | 12/31/16 | Technique | Inputs | Average) | ||||||||||||||
Impaired loans: | ||||||||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial loans secured by real estate | $ | 2,773 | $ | 528 | $ | 2,245 | Sales comparison | Discount to appraised value | 7 | % | ||||||||||
Commercial and industrial | 95 | 95 | 0 | Sales comparison | Discount to appraised value | 100 | % | |||||||||||||
Loans secured by farmland | 504 | 51 | 453 | Sales comparison | Discount to appraised value | 55 | % | |||||||||||||
Total impaired loans | $ | 3,372 | $ | 674 | $ | 2,698 | ||||||||||||||
Foreclosed assets held for sale - real estate: | ||||||||||||||||||||
Residential (1-4 family) | $ | 1,102 | $ | 0 | $ | 1,102 | Sales comparison | Discount to appraised value | 35 | % | ||||||||||
Land | 650 | 0 | 650 | Sales comparison | Discount to appraised value | 33 | % | |||||||||||||
Commercial real estate | 428 | 0 | 428 | Sales comparison | Discount to appraised value | 50 | % | |||||||||||||
Total foreclosed assets held for sale | $ | 2,180 | $ | 0 | $ | 2,180 |
58 |
(In Thousands, Except | Value at | |||||||||||||||||||
Percentages) | Valuation | 12/31/15 | ||||||||||||||||||
Balance at | Allowance at | Fair Value at | Valuation | Unobservable | (Weighted | |||||||||||||||
Asset | 12/31/15 | 12/31/15 | 12/31/15 | Technique | Inputs | Average) | ||||||||||||||
Impaired loans: | ||||||||||||||||||||
Residential mortgage loans - first liens | $ | 42 | $ | 1 | $ | 41 | Sales comparison | Discount to appraised value | 31 | % | ||||||||||
Commercial: | ||||||||||||||||||||
Commercial loans secured by real estate | 317 | 97 | 220 | Sales comparison | Discount to appraised value | 46 | % | |||||||||||||
Commercial and industrial | 75 | 75 | 0 | Sales comparison | Discount to appraised value | 31 | % | |||||||||||||
Loans secured by farmland | 512 | 52 | 460 | Sales comparison | Discount to appraised value | 49 | % | |||||||||||||
Multi-family (5 or more) residential | 987 | 595 | 392 | Sales comparison | Discount to appraised value | 41 | % | |||||||||||||
Total impaired loans | $ | 1,933 | $ | 820 | $ | 1,113 | ||||||||||||||
Foreclosed assets held for sale - real estate: | ||||||||||||||||||||
Residential (1-4 family) | $ | 556 | $ | 0 | $ | 556 | Sales comparison | Discount to appraised value | 32 | % | ||||||||||
Land | 704 | 0 | 704 | Sales comparison | Discount to appraised value | 29 | % | |||||||||||||
Total foreclosed assets held for sale | $ | 1,260 | $ | 0 | $ | 1,260 |
Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.
The Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term instruments approximate fair values.
CERTIFICATES OF DEPOSIT - Fair values for certificates of deposit, included in cash and due from banks in the consolidated balance sheet,sheets, are based on quoted market prices for certificates of similar remaining maturities.
SECURITIES - Fair values for securities, excluding restricted equity securities, are based on quoted market prices or other methods as described above. The carrying value of restricted equity securities approximates fair value based on applicable redemption provisions.
LOANS HELD FOR SALE - Fair values of loans held for sale are determined based on applicable sale prices available under the Federal Home Loan Banks’ MPF Original or Xtra program.
LOANS - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed-rate and adjustable-rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for estimated prepayments based on historical experience, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. Fair value of nonperforming loans is based on recent appraisals or estimates prepared by the Corporation’s lending officers.
SERVICING RIGHTS - The fair value of servicing rights, included in other assets in the consolidated balance sheet, is determined through a discounted cash flow valuation. Significant inputs include expected net servicing income, the discount rate and the expected prepayment speeds of the underlying loans.
DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable at December 31, 20132016 and 2012.2015. The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
BORROWED FUNDS - The fair value of borrowings is estimated using discounted cash flow analyses based on rates currently available to the Corporation for similar types of borrowing arrangements.
59 |
ACCRUED INTEREST - The carrying amounts of accrued interest receivable and payable approximate fair values.
OFF-BALANCE SHEET COMMITMENTS - The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments are as follows:
(In Thousands) | Valuation | December 31, 2013 | December 31, 2012 | ||
Method(s) | Carrying | Fair | Carrying | Fair | |
Used | Amount | Value | Amount | Value | |
Financial assets: | |||||
Cash and cash equivalents | Level 1 | $38,591 | $38,591 | $55,016 | $55,016 |
Certificates of deposit | Level 2 | 6,028 | 6,057 | 4,860 | 4,860 |
Available-for-sale securities | See Above | 482,658 | 482,658 | 472,577 | 472,577 |
Restricted equity securities (included in Other Assets) | Level 2 | 3,786 | 3,786 | 4,842 | 4,842 |
Loans held for sale | Level 1 | 54 | 54 | 2,545 | 2,545 |
Loans, net | Level 3 | 635,640 | 634,937 | 677,053 | 693,047 |
Accrued interest receivable | Level 1 | 4,146 | 4,146 | 4,281 | 4,281 |
Servicing rights | Level 3 | 1,123 | 1,123 | 605 | 605 |
Financial liabilities: | |||||
Deposits with no stated maturity | Level 1 | 693,479 | 693,479 | 693,687 | 693,687 |
Time deposits | Level 3 | 261,037 | 262,376 | 312,419 | 315,005 |
Short-term borrowings | Level 3 | 23,385 | 23,356 | 5,567 | 5,527 |
Long-term borrowings | Level 3 | 73,338 | 79,400 | 83,812 | 96,032 |
Accrued interest payable | Level 1 | 120 | 120 | 137 | 137 |
(In Thousands) | Valuation | December 31, 2016 | December 31, 2015 | |||||||||||||||
Method(s) | Carrying | Fair | Carrying | Fair | ||||||||||||||
Used | Amount | Value | Amount | Value | ||||||||||||||
Financial assets: | ||||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 28,621 | $ | 28,621 | $ | 33,313 | $ | 33,313 | |||||||||
Certificates of deposit | Level 2 | 3,488 | 3,481 | 2,748 | 2,752 | |||||||||||||
Available-for-sale securities | See Above | 395,077 | 395,077 | 420,290 | 420,290 | |||||||||||||
Restricted equity securities (included in Other Assets) | Level 2 | 4,426 | 4,426 | 4,657 | 4,657 | |||||||||||||
Loans held for sale | Level 2 | 142 | 142 | 280 | 280 | |||||||||||||
Loans, net | Level 3 | 743,362 | 725,787 | 696,991 | 685,552 | |||||||||||||
Accrued interest receivable | Level 2 | 3,963 | 3,963 | 3,768 | 3,768 | |||||||||||||
Servicing rights | Level 3 | 1,262 | 1,262 | 1,296 | 1,296 | |||||||||||||
Financial liabilities: | ||||||||||||||||||
Deposits with no stated maturity | Level 2 | 771,625 | 771,625 | 713,931 | 713,931 | |||||||||||||
Time deposits | Level 2 | 212,218 | 212,274 | 221,684 | 221,891 | |||||||||||||
Short-term borrowings | Level 2 | 26,175 | 26,024 | 53,496 | 53,398 | |||||||||||||
Long-term borrowings | Level 2 | 38,454 | 39,062 | 38,767 | 40,166 | |||||||||||||
Accrued interest payable | Level 2 | 65 | 65 | 70 | 70 |
7. SECURITIES
Amortized cost and fair value of available-for-sale securities at December 31, 20132016 and 20122015 are summarized as follows:
December 31, 2013 | December 31, 2016 | |||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||
Amortized | Holding | Fair | Amortized | Holding | Holding | Fair | ||||||||||||||
(In Thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||
Obligations of U.S. Government agencies | $47,382 | $282 | ($1,787) | $45,877 | $ | 9,671 | $ | 5 | $ | (135 | ) | $ | 9,541 | |||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||
Tax-exempt | 127,748 | 2,766 | (2,088) | 128,426 | 118,140 | 2,592 | (1,695 | ) | 119,037 | |||||||||||
Taxable | 35,154 | 206 | (889) | 34,471 | 30,073 | 303 | (79 | ) | 30,297 | |||||||||||
Mortgage-backed securities | 84,849 | 1,819 | (460) | 86,208 | ||||||||||||||||
Collateralized mortgage obligations, | ||||||||||||||||||||
Issued by U.S. Government agencies | 182,372 | 761 | (5,041) | 178,092 | ||||||||||||||||
Collateralized debt obligations: | 660 | 0 | 660 | |||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||
Residential pass-through securities | 58,922 | 306 | (824 | ) | 58,404 | |||||||||||||||
Residential collateralized mortgage obligations | 147,915 | 408 | (1,715 | ) | 146,608 | |||||||||||||||
Commercial mortgage-backed securities | 30,817 | 0 | (598 | ) | 30,219 | |||||||||||||||
Total debt securities | 478,165 | 5,834 | (10,265) | 473,734 | 395,538 | 3,614 | (5,046 | ) | 394,106 | |||||||||||
Marketable equity securities | 6,038 | 2,886 | 0 | 8,924 | 1,000 | 0 | (29 | ) | 971 | |||||||||||
Total | $484,203 | $8,720 | ($10,265) | $482,658 | $ | 396,538 | $ | 3,614 | $ | (5,075 | ) | $ | 395,077 |
December 31, 2012 | ||||
Gross | Gross | |||
Unrealized | Unrealized | |||
Amortized | Holding | Holding | Fair | |
(In Thousands) | Cost | Gains | Losses | Value |
Obligations of U.S. Government agencies | $30,695 | $572 | ($50) | $31,217 |
Obligations of states and political subdivisions: | ||||
Tax-exempt | 130,168 | 7,030 | (178) | 137,020 |
Taxable | 24,426 | 462 | (71) | 24,817 |
Mortgage-backed securities | 76,368 | 3,828 | 0 | 80,196 |
Collateralized mortgage obligations, | ||||
Issued by U.S. Government agencies | 179,770 | 3,887 | (147) | 183,510 |
Trust preferred securities issued by individual institutions | 5,167 | 4 | 0 | 5,171 |
Collateralized debt obligations: | ||||
Pooled trust preferred securities - senior tranches | 1,615 | 0 | (2) | 1,613 |
Other collateralized debt obligations | 660 | 0 | 0 | 660 |
Total debt securities | 448,869 | 15,783 | (448) | 464,204 |
Marketable equity securities | 5,912 | 2,500 | (39) | 8,373 |
Total | $454,781 | $18,283 | ($487) | $472,577 |
60 |
December 31, 2015 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | Fair | |||||||||||||
(In Thousands) | Cost | Gains | Losses | Value | ||||||||||||
Obligations of U.S. Government agencies | $ | 10,663 | $ | 12 | $ | (192 | ) | $ | 10,483 | |||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 103,414 | 4,365 | (22 | ) | 107,757 | |||||||||||
Taxable | 34,317 | 381 | (101 | ) | 34,597 | |||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 73,227 | 486 | (370 | ) | 73,343 | |||||||||||
Residential collateralized mortgage obligations | 193,145 | 623 | (2,053 | ) | 191,715 | |||||||||||
Collateralized debt obligations: | 9 | 0 | 0 | 9 | ||||||||||||
Total debt securities | 414,775 | 5,867 | (2,738 | ) | 417,904 | |||||||||||
Marketable equity securities | 1,680 | 706 | 0 | 2,386 | ||||||||||||
Total | $ | 416,455 | $ | 6,573 | $ | (2,738 | ) | $ | 420,290 |
The following table presents gross unrealized losses and fair value of available-for-sale securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at December 31, 20132016 and 2012:2015:
December 31, 2013 | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
December 31, 2016 | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
(In Thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Obligations of U.S. Government agencies | $22,489 | ($1,337) | $4,598 | ($450) | $27,087 | ($1,787) | $ | 7,899 | $ | (135 | ) | $ | 0 | $ | 0 | $ | 7,899 | $ | (135 | ) | ||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||||||||
Tax-exempt | 44,285 | (1,425) | 5,808 | (663) | 50,093 | (2,088) | 54,479 | (1,676 | ) | 1,278 | (19 | ) | 55,757 | (1,695 | ) | |||||||||||||||
Taxable | 20,873 | (766) | 2,378 | (123) | 23,251 | (889) | 9,594 | (79 | ) | 0 | 0 | 9,594 | (79 | ) | ||||||||||||||||
Mortgage-backed securities | 34,377 | (460) | 0 | 34,377 | (460) | |||||||||||||||||||||||||
Collateralized mortgage obligations, | ||||||||||||||||||||||||||||||
Issued by U.S. Government agencies | 113,204 | (4,608) | 7,399 | (433) | 120,603 | (5,041) | ||||||||||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||||||||||||
Residential pass-through securities | 48,674 | (824 | ) | 0 | 0 | 48,674 | (824 | ) | ||||||||||||||||||||||
Residential collateralized mortgage obligations | 85,198 | (1,124 | ) | 16,073 | (591 | ) | 101,271 | (1,715 | ) | |||||||||||||||||||||
Commercial mortgage-backed securities | 30,219 | (598 | ) | 0 | 0 | 30,219 | (598 | ) | ||||||||||||||||||||||
Total debt securities | 236,063 | (4,436 | ) | 17,351 | (610 | ) | 253,414 | (5,046 | ) | |||||||||||||||||||||
Marketable equity securities | 1,000 | (29 | ) | 0 | 0 | 1,000 | (29 | ) | ||||||||||||||||||||||
Total temporarily impaired available-for-sale securities | $235,228 | ($8,596) | $20,183 | ($1,669) | $255,411 | ($10,265) | $ | 237,063 | $ | (4,465 | ) | $ | 17,351 | $ | (610 | ) | $ | 254,414 | $ | (5,075 | ) |
December 31, 2012 | Less Than 12 Months | 12 Months or More | Total | |||
(In Thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized |
Value | Losses | Value | Losses | Value | Losses | |
Obligations of U.S. Government agencies | $10,006 | ($50) | $0 | $0 | $10,006 | ($50) |
Obligations of states and political subdivisions: | ||||||
Tax-exempt | 7,082 | (92) | 3,285 | (86) | 10,367 | (178) |
Taxable | 4,149 | (71) | 0 | 0 | 4,149 | (71) |
Collateralized mortgage obligations, | ||||||
Issued by U.S. Government agencies | 16,755 | (146) | 454 | (1) | 17,209 | (147) |
Collateralized debt obligations, | ||||||
Pooled trust preferred securities - senior tranches | 0 | 0 | 1,613 | (2) | 1,613 | (2) |
Total debt securities | 37,992 | (359) | 5,352 | (89) | 43,344 | (448) |
Marketable equity securities | 95 | (6) | 67 | (33) | 162 | (39) |
Total temporarily impaired available-for-sale securities | $38,087 | ($365) | $5,419 | ($122) | $43,506 | ($487) |
December 31, 2015 | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
(In Thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
Obligations of U.S. Government agencies | $ | 0 | $ | 0 | $ | 7,850 | $ | (192 | ) | $ | 7,850 | $ | (192 | ) | ||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||
Tax-exempt | 5,200 | (19 | ) | 216 | (3 | ) | 5,416 | (22 | ) | |||||||||||||||
Taxable | 10,605 | (60 | ) | 2,910 | (41 | ) | 13,515 | (101 | ) | |||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||||||
Residential pass-through securities | 38,764 | (295 | ) | 3,503 | (75 | ) | 42,267 | (370 | ) | |||||||||||||||
Residential collateralized mortgage obligations | 88,355 | (648 | ) | 49,273 | (1,405 | ) | 137,628 | (2,053 | ) | |||||||||||||||
Total temporarily impaired available-for-sale securities | $ | 142,924 | $ | (1,022 | ) | $ | 63,752 | $ | (1,716 | ) | $ | 206,676 | $ | (2,738 | ) |
61 |
Gross realized gains and losses from available-for-sale securities (including OTTI losses in gross realized losses) and the related income tax provision were as follows:
(In Thousands) | |||||||||||||||
2013 | 2012 | 2011 | 2016 | 2015 | 2014 | ||||||||||
Gross realized gains from sales | $1,918 | $2,798 | $2,226 | $ | 1,392 | $ | 2,972 | $ | 1,328 | ||||||
Gross realized losses from sales | (175) | (49) | (10) | (234 | ) | (111 | ) | (224 | ) | ||||||
Losses from OTTI Impairment | (25) | (67) | 0 | ||||||||||||
Net realized gains | $1,718 | $2,682 | $2,216 | $ | 1,158 | $ | 2,861 | $ | 1,104 | ||||||
Income tax provision related to net realized gains | $601 | $939 | $753 | $ | 406 | $ | 1,002 | $ | 386 |
The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of December 31, 2013.2016. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2016 | ||||||||||
Amortized | Fair | Amortized | Fair | |||||||
(In Thousands) | Cost | Value | Cost | Value | ||||||
Due in one year or less | $25,738 | $25,925 | $ | 18,678 | $ | 18,832 | ||||
Due from one year through five years | 48,781 | 49,064 | 69,558 | 70,657 | ||||||
Due from five years through ten years | 75,719 | 73,454 | 44,527 | 43,979 | ||||||
Due after ten years | 60,705 | 60,990 | 25,121 | 25,407 | ||||||
Subtotal | 210,943 | 209,433 | ||||||||
Mortgage-backed securities | 84,849 | 86,208 | ||||||||
Collateralized mortgage obligations, | ||||||||||
Issued by U.S. Government agencies | 182,373 | 178,093 | ||||||||
Sub-total | 157,884 | 158,875 | ||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||
Residential pass-through securities | 58,922 | 58,404 | ||||||||
Residential collateralized mortgage obligations | 147,915 | 146,608 | ||||||||
Commercial mortgage-backed securities | 30,817 | 30,219 | ||||||||
Total | $478,165 | $473,734 | $ | 395,538 | $ | 394,106 |
The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.
Investment securities carried at $323,613,000$230,803,000 at December 31, 20132016 and $293,310,000$228,616,000 at December 31, 20122015 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 12 for information concerning securities pledged to secure borrowing arrangements.
Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery.
The Corporation recognized no net impairment losses in earnings as follows:for the years ended December 31, 2016, 2015 and 2014.
(In Thousands) | |||
2013 | 2012 | 2011 | |
Marketable equity securities (bank stocks) | ($25) | ($67) | $0 |
A summary of information management considered in evaluating debt and equity securities for OTTI at December 31, 20132016 is provided below.
Debt Securities
At December 31, 2013,2016 and 2015, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of these debt securities including municipal bonds with no external ratings, at December 31, 20132016 to be temporary.
At December 31, 2013, the total amortized cost basis of municipal bonds with no external credit ratings was $20,303,000, with an aggregate unrealized loss of $789,000. At the time of purchase, each of these bonds was considered investment grade and had been rated by at least one credit rating agency. Most of the bonds for which credit rating agencies have withdrawn their ratings were insured by an entity that has reported significant financial problems and declines in its regulatory capital ratios, and most of the ratings were removed in the fourth quarter 2009. However, the insurance remains in effect on the bonds. In the third quarter 2013, a credit rating agency withdrew its ratings on several bonds due to changes in its rating methodology related to credit enhancement programs provided by issuers’ state governments. However, the credit enhancement remains in effect on the bonds. None of the unrated municipal bonds has failed to make a scheduled payment.
The Corporation recognized OTTI charges in 2009 and 2010 related to its holding of a trust preferred security issued by Carolina First Mortgage Loan Trust, a subsidiary of The South Financial Group, Inc. In the fourth quarter 2010, The Toronto-Dominion Bank acquired The South Financial Group, Inc. After the acquisition, The Toronto-Dominion Bank made a payment for the full amount of previously deferred interest and resumed quarterly payments on the security. The Corporation recognized a material change in the expected cash flows in the fourth quarter 2010 and began recording accretion income (included in interest income) to offset the previous OTTI charges as an adjustment to the security’s yield over its remaining life. The security had a face amount of $2,000,000 and matured in May 2012. Because the security matured, the Corporation recorded no accretion income in 2013. The Corporation recorded accretion income totaling $855,000 in 2012 and $825,000 in 2011.
62 |
During the second quarter 2013, the Corporation’s holding of the senior tranche of MMCAPS Funding I, Ltd., a pooled trust preferred security, was fully redeemed primarily due to prepayments of debt by the underlying issuers in the pool. The Corporation received aggregate proceeds of $1,636,000, which included a realized pretax gain of $23,000. Also during the second quarter 2013, Astoria Financial Corporation redeemed (called) the trust preferred security held by the Corporation. The Corporation received aggregate proceeds of $5,171,000, which included a realized pretax gain of $13,000.
During the first quarter 2013, management sold the Corporation’s holding of the mezzanine tranche of ALESCO Preferred Funding IX, Ltd. for aggregate pretax proceeds of $571,000, which was recorded as a gain on the sale of securities. This security had an original face amount of $3,000,000. In 2009, the Corporation recognized other-than-temporary impairment on this security and wrote the carrying value down to zero.
During the third quarter 2012, management sold the Corporation’s holdings of the mezzanine tranches of U.S. Capital Funding II, Ltd. The securities were sold for aggregate pretax proceeds of $1,754,000, which was recorded as a gain on the sale of securities. During the first quarter 2011, management sold the Corporation’s holding of the mezzanine tranche of MMCAPS Funding I, Ltd. The security was sold for aggregate pretax proceeds of $1,485,000, which was recorded as a gain on the sale of securities.
Equity Securities
The Corporation’s marketable equity securities at December 31, 2013 and 20122016 consisted exclusively of one mutual fund. At December 31, 2015, the Corporation’s marketable equity securities consisted of stocks of banking companies. In 2013, the Corporation recognized an other-than-temporary impairment loss related to a bank stock of $25,000. In 2012, the Corporation recognized an other-than-temporary impairment loss related to a bank stock of $67,000. The Corporation recognized no other-than-temporary impairment losses related to bank stocksequities in 2011. Management’s decisions to recognize other-than-temporary impairment losses followed evaluations2016, 2015 or 2014. At December 31, 2016, the mutual fund held by the Corporation had an unrealized loss of the issuers’ published financial results in$29,000 for which management determined that the recovery of the Corporation’s cost basis within the foreseeable futurean OTTI charge was uncertain. As a result of this determination, the Corporation recognized impairment losses to write each stock down to the most recent trade price at the end of the quarter in which each loss was recognized. At December 31, 2013, none of the Corporation’s bank stock holdings were impaired.not required.
Realized gains from sales of bank stocksequity securities (bank stocks) totaled $1,018,000$1,125,000 in 2013, $538,0002016, $2,220,000 in 20122015 and $91,000$363,000 in 2011.2014.
C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 1211 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheet,sheets, was $3,656,000$4,296,000 at December 31, 20132016 and $4,712,000$4,527,000 at December 31, 2012.2015. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at December 31, 20132016 and December 31, 2012.2015. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.
8. LOANS
Loans outstanding at December 31, 20132016 and 20122015 are summarized as follows:
Summary of Loans by Type | ||||||||||
(In Thousands) | Dec. 31, | Dec. 31, | Dec. 31, | |||||||
2013 | 2012 | 2016 | 2015 | |||||||
Residential mortgage: | ||||||||||
Residential mortgage loans - first liens | $299,831 | $311,627 | $ | 334,102 | $ | 304,783 | ||||
Residential mortgage loans - junior liens | 23,040 | 26,748 | 23,706 | 21,146 | ||||||
Home equity lines of credit | 34,530 | 33,017 | 38,057 | 39,040 | ||||||
1-4 Family residential construction | 13,909 | 12,842 | 24,908 | 21,121 | ||||||
Total residential mortgage | 371,310 | 384,234 | 420,773 | 386,090 | ||||||
Commercial: | ||||||||||
Commercial loans secured by real estate | 147,215 | 158,413 | 150,468 | 154,779 | ||||||
Commercial and industrial | 42,387 | 48,442 | 83,854 | 75,196 | ||||||
Political subdivisions | 16,291 | 31,789 | 38,068 | 40,007 | ||||||
Commercial construction and land | 17,003 | 28,200 | 14,287 | 5,122 | ||||||
Loans secured by farmland | 10,468 | 11,403 | 7,294 | 7,019 | ||||||
Multi-family (5 or more) residential | 10,985 | 6,745 | 7,896 | 9,188 | ||||||
Agricultural loans | 3,251 | 3,053 | 3,998 | 4,671 | ||||||
Other commercial loans | 14,631 | 362 | 11,475 | 12,152 | ||||||
Total commercial | 262,231 | 288,407 | 317,340 | 308,134 | ||||||
Consumer | 10,762 | 11,269 | 13,722 | 10,656 | ||||||
Total | 644,303 | 683,910 | 751,835 | 704,880 | ||||||
Less: allowance for loan losses | (8,663) | (6,857) | (8,473 | ) | (7,889 | ) | ||||
Loans, net | $635,640 | $677,053 | $ | 743,362 | $ | 696,991 |
The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in the Pennsylvania and New York counties that make up the market serviced by Citizens & Northern Bank. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at December 31, 2013.2016.
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Transactions within the allowance for loan losses, summarized by segment and class, were as follows:
Year Ended December 31, 2013 | Dec. 31, | Dec. 31, | |||||||||||||||||||||||
Year Ended December 31, 2016 | Dec. 31 | Dec. 31 | |||||||||||||||||||||||
(In Thousands) | 2012 Balance | Charge-offs | Recoveries | Provision (Credit) | 2013 Balance | 2015 Balance | Charge- offs | Recoveries | Provision (Credit) | 2016 Balance | |||||||||||||||
Allowance for Loan Losses: | |||||||||||||||||||||||||
Residential mortgage: | |||||||||||||||||||||||||
Residential mortgage loans - first liens | $2,619 | ($84) | $24 | $415 | $2,974 | $ | 2,645 | $ | (73 | ) | $ | 3 | $ | 458 | $ | 3,033 | |||||||||
Residential mortgage loans - junior liens | 247 | 0 | 47 | 294 | 219 | 0 | 0 | 39 | 258 | ||||||||||||||||
Home equity lines of credit | 255 | 0 | 14 | 269 | 347 | 0 | 0 | 3 | 350 | ||||||||||||||||
1-4 Family residential construction | 96 | (11) | 0 | 83 | 168 | 207 | 0 | 0 | 42 | 249 | |||||||||||||||
Total residential mortgage | 3,217 | (95) | 24 | 559 | 3,705 | 3,418 | (73 | ) | 3 | 542 | 3,890 | ||||||||||||||
Commercial: | |||||||||||||||||||||||||
Commercial loans secured by real estate | 1,930 | (169) | 344 | 1,018 | 3,123 | 1,939 | 0 | 2 | 439 | 2,380 | |||||||||||||||
Commercial and industrial | 581 | (286) | 4 | 292 | 591 | 981 | (2 | ) | 3 | 17 | 999 | ||||||||||||||
Political subdivisions | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||
Commercial construction and land | 234 | (4) | 0 | 37 | 267 | 58 | 0 | 30 | 74 | 162 | |||||||||||||||
Loans secured by farmland | 129 | 0 | (14) | 115 | 106 | 0 | 0 | 4 | 110 | ||||||||||||||||
Multi-family (5 or more) residential | 67 | 0 | 36 | 103 | 675 | (595 | ) | 0 | 161 | 241 | |||||||||||||||
Agricultural loans | 27 | 0 | 3 | 30 | 45 | 0 | 0 | (5 | ) | 40 | |||||||||||||||
Other commercial loans | 3 | 0 | 135 | 138 | 118 | 0 | 0 | (3 | ) | 115 | |||||||||||||||
Total commercial | 2,971 | (459) | 348 | 1,507 | 4,367 | 3,922 | (597 | ) | 35 | 687 | 4,047 | ||||||||||||||
Consumer | 228 | (117) | 58 | 24 | 193 | 122 | (87 | ) | 82 | 21 | 138 | ||||||||||||||
Unallocated | 441 | 0 | (43) | 398 | 427 | 0 | 0 | (29 | ) | 398 | |||||||||||||||
Total Allowance for Loan Losses | $6,857 | ($671) | $430 | $2,047 | $8,663 | $ | 7,889 | $ | (757 | ) | $ | 120 | $ | 1,221 | $ | 8,473 |
Year Ended December 31, 2012 | Dec. 31, | Dec. 31, | |||
(In Thousands) | 2011 Balance | Charge-offs | Recoveries | Provision (Credit) | 2012 Balance |
Allowance for Loan Losses: | |||||
Residential mortgage: | |||||
Residential mortgage loans - first liens | $3,026 | ($543) | $18 | $118 | $2,619 |
Residential mortgage loans - junior liens | 266 | (9) | 0 | (10) | 247 |
Home equity lines of credit | 231 | 0 | 0 | 24 | 255 |
1-4 Family residential construction | 79 | 0 | 0 | 17 | 96 |
Total residential mortgage | 3,602 | (552) | 18 | 149 | 3,217 |
Commercial: | |||||
Commercial loans secured by real estate | 2,004 | 0 | 1 | (75) | 1,930 |
Commercial and industrial | 946 | (57) | 7 | (315) | 581 |
Political subdivisions | 0 | 0 | 0 | 0 | 0 |
Commercial construction and land | 267 | (441) | 0 | 408 | 234 |
Loans secured by farmland | 126 | 0 | 0 | 3 | 129 |
Multi-family (5 or more) residential | 66 | 0 | 0 | 1 | 67 |
Agricultural loans | 27 | 0 | 0 | 0 | 27 |
Other commercial loans | 5 | 0 | 0 | (2) | 3 |
Total commercial | 3,441 | (498) | 8 | 20 | 2,971 |
Consumer | 228 | (171) | 59 | 112 | 228 |
Unallocated | 434 | 0 | 0 | 7 | 441 |
Total Allowance for Loan Losses | $7,705 | ($1,221) | $85 | $288 | $6,857 |
December 31, | December 31, | ||||
(In Thousands) | 2010 Balance | Charge-offs | Recoveries | Provision (Credit) | 2011 Balance |
Allowance for Loan Losses: | |||||
Residential mortgage: | |||||
Residential mortgage loans - first liens | $2,745 | ($49) | $0 | $330 | $3,026 |
Residential mortgage loans - junior liens | 334 | (51) | 3 | (20) | 266 |
Home equity lines of credit | 218 | 0 | 0 | 13 | 231 |
1-4 Family residential construction | 208 | 0 | 0 | (129) | 79 |
Total residential mortgage | 3,505 | (100) | 3 | 194 | 3,602 |
Commercial: | |||||
Commercial loans secured by real estate | 3,314 | (973) | 1 | (338) | 2,004 |
Commercial and industrial | 862 | (216) | 254 | 46 | 946 |
Political subdivisions | 0 | 0 | 0 | 0 | 0 |
Commercial construction and land | 590 | 0 | 0 | (323) | 267 |
Loans secured by farmland | 139 | 0 | 0 | (13) | 126 |
Multi-family (5 or more) residential | 63 | 0 | 0 | 3 | 66 |
Agricultural loans | 32 | 0 | 0 | (5) | 27 |
Other commercial loans | 0 | 0 | 0 | 5 | 5 |
Total commercial | 5,000 | (1,189) | 255 | (625) | 3,441 |
Consumer | 289 | (157) | 71 | 25 | 228 |
Unallocated | 313 | 0 | 0 | 121 | 434 |
Total Allowance for Loan Losses | $9,107 | ($1,446) | $329 | ($285) | $7,705 |
Year Ended December 31, 2015 | Dec. 31, | Dec. 31, | ||||||||||||||||||
(In Thousands) | 2014 Balance | Charge- offs | Recoveries | Provision (Credit) | 2015 Balance | |||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||
Residential mortgage loans - first liens | $ | 2,941 | $ | (175 | ) | $ | 1 | $ | (122 | ) | $ | 2,645 | ||||||||
Residential mortgage loans - junior liens | 176 | (42 | ) | 0 | 85 | 219 | ||||||||||||||
Home equity lines of credit | 322 | 0 | 0 | 25 | 347 | |||||||||||||||
1-4 Family residential construction | 214 | 0 | 0 | (7 | ) | 207 | ||||||||||||||
Total residential mortgage | 3,653 | (217 | ) | 1 | (19 | ) | 3,418 | |||||||||||||
Commercial: | ||||||||||||||||||||
Commercial loans secured by real estate | 1,758 | (115 | ) | 208 | 88 | 1,939 | ||||||||||||||
Commercial and industrial | 688 | (21 | ) | 6 | 308 | 981 | ||||||||||||||
Political subdivisions | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial construction and land | 283 | (115 | ) | 0 | (110 | ) | 58 | |||||||||||||
Loans secured by farmland | 165 | 0 | 0 | (59 | ) | 106 | ||||||||||||||
Multi-family (5 or more) residential | 87 | 0 | 0 | 588 | 675 | |||||||||||||||
Agricultural loans | 31 | 0 | 0 | 14 | 45 | |||||||||||||||
Other commercial loans | 131 | 0 | 0 | (13 | ) | 118 | ||||||||||||||
Total commercial | 3,143 | (251 | ) | 214 | 816 | 3,922 | ||||||||||||||
Consumer | 145 | (94 | ) | 55 | 16 | 122 | ||||||||||||||
Unallocated | 395 | 0 | 0 | 32 | 427 | |||||||||||||||
Total Allowance for Loan Losses | $ | 7,336 | $ | (562 | ) | $ | 270 | $ | 845 | $ | 7,889 |
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Year Ended December 31, 2014 | Dec. 31, | Dec. 31, | ||||||||||||||||||
(In Thousands) | 2013 Balance | Charge- offs | Recoveries | Provision (Credit) | 2014 Balance | |||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||
Residential mortgage loans - first liens | $ | 2,974 | $ | (164 | ) | $ | 25 | $ | 106 | $ | 2,941 | |||||||||
Residential mortgage loans - junior liens | 294 | (101 | ) | 0 | (17 | ) | 176 | |||||||||||||
Home equity lines of credit | 269 | (62 | ) | 0 | 115 | 322 | ||||||||||||||
1-4 Family residential construction | 168 | 0 | 0 | 46 | 214 | |||||||||||||||
Total residential mortgage | 3,705 | (327 | ) | 25 | 250 | 3,653 | ||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial loans secured by real estate | 3,123 | (1,521 | ) | 250 | (94 | ) | 1,758 | |||||||||||||
Commercial and industrial | 591 | (24 | ) | 9 | 112 | 688 | ||||||||||||||
Political subdivisions | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial construction and land | 267 | (170 | ) | 5 | 181 | 283 | ||||||||||||||
Loans secured by farmland | 115 | 0 | 0 | 50 | 165 | |||||||||||||||
Multi-family (5 or more) residential | 103 | 0 | 0 | (16 | ) | 87 | ||||||||||||||
Agricultural loans | 30 | 0 | 0 | 1 | 31 | |||||||||||||||
Other commercial loans | 138 | 0 | 0 | (7 | ) | 131 | ||||||||||||||
Total commercial | 4,367 | (1,715 | ) | 264 | 227 | 3,143 | ||||||||||||||
Consumer | 193 | (97 | ) | 47 | 2 | 145 | ||||||||||||||
Unallocated | 398 | 0 | 0 | (3 | ) | 395 | ||||||||||||||
Total Allowance for Loan Losses | $ | 8,663 | $ | (2,139 | ) | $ | 336 | $ | 476 | $ | 7,336 |
In the evaluation of the loan portfolio, management determines two major components for the allowance for loan losses – (1) a specific component based on an assessment of certain larger relationships, mainly commercial purpose loans, on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio based on a collective evaluation of pools of loans with similar risk characteristics.
In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” column in the table below.
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The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of December 31, 20132016 and 2012:2015:
December 31, 2013: | Special | ||||||||||||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||
(In Thousands) | Pass | Mention | Substandard | Doubtful | Total | Special | |||||||||||||||||||
Residential mortgage: | |||||||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||||||||
Residential Mortgage: | |||||||||||||||||||||||||
Residential mortgage loans - first liens | $286,144 | $1,876 | $11,629 | $182 | $299,831 | $ | 324,377 | $ | 408 | $ | 9,258 | $ | 59 | $ | 334,102 | ||||||||||
Residential mortgage loans - junior liens | 21,694 | 351 | 995 | 0 | 23,040 | 23,274 | 132 | 300 | 0 | 23,706 | |||||||||||||||
Home equity lines of credit | 33,821 | 295 | 414 | 0 | 34,530 | 37,360 | 123 | 574 | 0 | 38,057 | |||||||||||||||
1-4 Family residential construction | 13,837 | 0 | 72 | 0 | 13,909 | 24,820 | 0 | 88 | 0 | 24,908 | |||||||||||||||
Total residential mortgage | 355,496 | 2,522 | 13,110 | 182 | 371,310 | 409,831 | 663 | 10,220 | 59 | 420,773 | |||||||||||||||
Commercial: | |||||||||||||||||||||||||
Commercial loans secured by real estate | 129,834 | 5,866 | 11,368 | 147 | 147,215 | 139,358 | 3,092 | 8,018 | 0 | 150,468 | |||||||||||||||
Commercial and Industrial | 32,317 | 6,697 | 3,138 | 235 | 42,387 | 79,202 | 4,180 | 461 | 11 | 83,854 | |||||||||||||||
Political subdivisions | 16,291 | 0 | 16,291 | 38,068 | 0 | 0 | 0 | 38,068 | |||||||||||||||||
Commercial construction and land | 13,792 | 427 | 2,036 | 748 | 17,003 | 14,136 | 70 | 81 | 0 | 14,287 | |||||||||||||||
Loans secured by farmland | 8,279 | 758 | 1,402 | 29 | 10,468 | 5,745 | 129 | 1,404 | 16 | 7,294 | |||||||||||||||
Multi-family (5 or more) residential | 10,665 | 316 | 4 | 0 | 10,985 | 7,277 | 0 | 619 | 0 | 7,896 | |||||||||||||||
Agricultural loans | 3,169 | 34 | 48 | 0 | 3,251 | 3,208 | 0 | 790 | 0 | 3,998 | |||||||||||||||
Other commercial loans | 14,532 | 99 | 0 | 14,631 | 11,401 | 0 | 74 | 0 | 11,475 | ||||||||||||||||
Total Commercial | 228,879 | 14,197 | 17,996 | 1,159 | 262,231 | ||||||||||||||||||||
Total commercial | 298,395 | 7,471 | 11,447 | 27 | 317,340 | ||||||||||||||||||||
Consumer | 10,587 | 6 | 169 | 0 | 10,762 | 13,546 | 0 | 176 | 0 | 13,722 | |||||||||||||||
Totals | $594,962 | $16,725 | $31,275 | $1,341 | $644,303 | $ | 721,772 | $ | 8,134 | $ | 21,843 | $ | 86 | $ | 751,835 |
December 31, 2012: | Special | ||||||||||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||||
(In Thousands) | Pass | Mention | Substandard | Doubtful | Total | Special | |||||||||||||||||||
Residential mortgage: | |||||||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||||||||
Residential Mortgage: | |||||||||||||||||||||||||
Residential mortgage loans - first liens | $295,929 | $3,633 | $11,872 | $193 | $311,627 | $ | 295,302 | $ | 407 | $ | 9,007 | $ | 67 | $ | 304,783 | ||||||||||
Residential mortgage loans - junior liens | 25,394 | 420 | 934 | 0 | 26,748 | 20,558 | 185 | 403 | 0 | 21,146 | |||||||||||||||
Home equity lines of credit | 32,374 | 130 | 513 | 0 | 33,017 | 38,071 | 543 | 426 | 0 | 39,040 | |||||||||||||||
1-4 Family residential construction | 12,759 | 0 | 83 | 0 | 12,842 | 21,104 | 17 | 0 | 0 | 21,121 | |||||||||||||||
Total residential mortgage | 366,456 | 4,183 | 13,402 | 193 | 384,234 | 375,035 | 1,152 | 9,836 | 67 | 386,090 | |||||||||||||||
Commercial: | |||||||||||||||||||||||||
Commercial loans secured by real estate | 146,381 | 6,994 | 5,038 | 0 | 158,413 | 140,381 | 5,862 | 8,536 | 0 | 154,779 | |||||||||||||||
Commercial and Industrial | 41,237 | 3,030 | 3,810 | 365 | 48,442 | 71,225 | 2,106 | 1,737 | 128 | 75,196 | |||||||||||||||
Political subdivisions | 31,679 | 110 | 0 | 31,789 | 40,007 | 0 | 0 | 0 | 40,007 | ||||||||||||||||
Commercial construction and land | 26,744 | 231 | 477 | 748 | 28,200 | 4,957 | 60 | 105 | 0 | 5,122 | |||||||||||||||
Loans secured by farmland | 9,102 | 751 | 1,517 | 33 | 11,403 | 5,084 | 483 | 1,432 | 20 | 7,019 | |||||||||||||||
Multi-family (5 or more) residential | 6,394 | 342 | 9 | 0 | 6,745 | 7,943 | 0 | 1,245 | 0 | 9,188 | |||||||||||||||
Agricultural loans | 2,963 | 28 | 62 | 0 | 3,053 | 4,655 | 0 | 16 | 0 | 4,671 | |||||||||||||||
Other commercial loans | 362 | 0 | 362 | 12,073 | 0 | 79 | 0 | 12,152 | |||||||||||||||||
Total Commercial | 264,862 | 11,486 | 10,913 | 1,146 | 288,407 | ||||||||||||||||||||
Total commercial | 286,325 | 8,511 | 13,150 | 148 | 308,134 | ||||||||||||||||||||
Consumer | 11,053 | 12 | 203 | 1 | 11,269 | 10,490 | 21 | 145 | 0 | 10,656 | |||||||||||||||
Totals | $642,371 | $15,681 | $24,518 | $1,340 | $683,910 | $ | 671,850 | $ | 9,684 | $ | 23,131 | $ | 215 | $ | 704,880 |
66 |
The scope of loans evaluatedreviewed individually for impairmenteach quarter to determine if they are impaired include all loan relationships greater than $200,000 for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Also, all loans classified as troubled debt restructurings (discussed in more detail below) and all loan relationships less than $200,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment. Loans that are individually evaluated for impairment,reviewed, but which are not determined to not be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance. The loans that have been individually evaluated,reviewed, but which have not been determined to not be impaired, are included in the “Collectively Evaluated” column in the table summarizing the allowance and associated loan balances as of December 31, 20132016 and 2012.2015. All loans classified as troubled debt restructurings (discussed in more detail below) and all loan relationships less than $200,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment.
The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of December 31, 20132016 and 2012:2015:
December 31, 2013 | Loans: | Allowance for Loan Losses: | |||||
(In Thousands) | |||||||
Individually | Collectively | Individually | Collectively | ||||
Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | ||
Residential mortgage: | |||||||
Residential mortgage loans - first liens | $2,727 | $297,104 | $299,831 | $449 | $2,525 | $2,974 | |
Residential mortgage loans - junior liens | 183 | 22,857 | 23,040 | 100 | 194 | 294 | |
Home equity lines of credit | 0 | 34,530 | 34,530 | 0 | 269 | 269 | |
1-4 Family residential construction | 0 | 13,909 | 13,909 | 0 | 168 | 168 | |
Total residential mortgage | 2,910 | 368,400 | 371,310 | 549 | 3,156 | 3,705 | |
Commercial: | |||||||
Commercial loans secured by real estate | 7,988 | 139,227 | 147,215 | 1,577 | 1,546 | 3,123 | |
Commercial and industrial | 1,276 | 41,111 | 42,387 | 106 | 485 | 591 | |
Political subdivisions | 0 | 16,291 | 16,291 | 0 | 0 | 0 | |
Commercial construction and land | 2,776 | 14,227 | 17,003 | 72 | 195 | 267 | |
Loans secured by farmland | 1,318 | 9,150 | 10,468 | 29 | 86 | 115 | |
Multi-family (5 or more) residential | 0 | 10,985 | 10,985 | 0 | 103 | 103 | |
Agricultural loans | 48 | 3,203 | 3,251 | 0 | 30 | 30 | |
Other commercial loans | 0 | 14,631 | 14,631 | 0 | 138 | 138 | |
Total commercial | 13,406 | 248,825 | 262,231 | 1,784 | 2,583 | 4,367 | |
Consumer | 5 | 10,757 | 10,762 | 0 | 193 | 193 | |
Unallocated | 398 | ||||||
Total | $16,321 | $627,982 | $644,303 | $2,333 | $5,932 | $8,663 |
December 31, 2016 | Loans: | Allowance for Loan Losses: | ||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Individually | Collectively | Individually | Collectively | |||||||||||||||||||||
Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | |||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 753 | $ | 333,349 | $ | 334,102 | $ | 0 | $ | 3,033 | $ | 3,033 | ||||||||||||
Residential mortgage loans - junior liens | 68 | 23,638 | 23,706 | 0 | 258 | 258 | ||||||||||||||||||
Home equity lines of credit | 0 | 38,057 | 38,057 | 0 | 350 | 350 | ||||||||||||||||||
1-4 Family residential construction | 0 | 24,908 | 24,908 | 0 | 249 | 249 | ||||||||||||||||||
Total residential mortgage | 821 | 419,952 | 420,773 | 0 | 3,890 | 3,890 | ||||||||||||||||||
Commercial: | ||||||||||||||||||||||||
Commercial loans secured by real estate | 8,005 | 142,463 | 150,468 | 528 | 1,852 | 2,380 | ||||||||||||||||||
Commercial and industrial | 212 | 83,642 | 83,854 | 95 | 904 | 999 | ||||||||||||||||||
Political subdivisions | 0 | 38,068 | 38,068 | 0 | 0 | 0 | ||||||||||||||||||
Commercial construction and land | 0 | 14,287 | 14,287 | 0 | 162 | 162 | ||||||||||||||||||
Loans secured by farmland | 1,394 | 5,900 | 7,294 | 51 | 59 | 110 | ||||||||||||||||||
Multi-family (5 or more) residential | 392 | 7,504 | 7,896 | 0 | 241 | 241 | ||||||||||||||||||
Agricultural loans | 13 | 3,985 | 3,998 | 0 | 40 | 40 | ||||||||||||||||||
Other commercial loans | 0 | 11,475 | 11,475 | 0 | 115 | 115 | ||||||||||||||||||
Total commercial | 10,016 | 307,324 | 317,340 | 674 | 3,373 | 4,047 | ||||||||||||||||||
Consumer | 23 | 13,699 | 13,722 | 0 | 138 | 138 | ||||||||||||||||||
Unallocated | 398 | |||||||||||||||||||||||
Total | $ | 10,860 | $ | 740,975 | $ | 751,835 | $ | 674 | $ | 7,401 | $ | 8,473 |
December 31, 2012 | Loans: | Allowance for Loan Losses: | |||||
(In Thousands) | |||||||
Individually | Collectively | Individually | Collectively | ||||
Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | ||
Residential mortgage: | |||||||
Residential mortgage loans - first liens | $2,341 | $309,286 | $311,627 | $206 | $2,413 | $2,619 | |
Residential mortgage loans - junior liens | 158 | 26,590 | 26,748 | 0 | 247 | 247 | |
Home equity lines of credit | 0 | 33,017 | 33,017 | 0 | 255 | 255 | |
1-4 Family residential construction | 0 | 12,842 | 12,842 | 0 | 96 | 96 | |
Total residential mortgage | 2,499 | 381,735 | 384,234 | 206 | 3,011 | 3,217 | |
Commercial: | |||||||
Commercial loans secured by real estate | 1,938 | 156,475 | 158,413 | 146 | 1,784 | 1,930 | |
Commercial and industrial | 939 | 47,503 | 48,442 | 197 | 384 | 581 | |
Political subdivisions | 0 | 31,789 | 31,789 | 0 | 0 | 0 | |
Commercial construction and land | 1,034 | 27,166 | 28,200 | 0 | 234 | 234 | |
Loans secured by farmland | 923 | 10,480 | 11,403 | 34 | 95 | 129 | |
Multi-family (5 or more) residential | 9 | 6,736 | 6,745 | 0 | 67 | 67 | |
Agricultural loans | 40 | 3,013 | 3,053 | 0 | 27 | 27 | |
Other commercial loans | 0 | 362 | 362 | 0 | 3 | 3 | |
Total commercial | 4,883 | 283,524 | 288,407 | 377 | 2,594 | 2,971 | |
Consumer | 47 | 11,222 | 11,269 | 40 | 188 | 228 | |
Unallocated | 441 | ||||||
Total | $7,429 | $676,481 | $683,910 | $623 | $5,793 | $6,857 |
67 |
December 31, 2015 | Loans: | Allowance for Loan Losses: | ||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Individually | Collectively | Individually | Collectively | |||||||||||||||||||||
Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | |||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 884 | $ | 303,899 | $ | 304,783 | $ | 1 | $ | 2,644 | $ | 2,645 | ||||||||||||
Residential mortgage loans - junior liens | 74 | 21,072 | 21,146 | 0 | 219 | 219 | ||||||||||||||||||
Home equity lines of credit | 0 | 39,040 | 39,040 | 0 | 347 | 347 | ||||||||||||||||||
1-4 Family residential construction | 0 | 21,121 | 21,121 | 0 | 207 | 207 | ||||||||||||||||||
Total residential mortgage | 958 | 385,132 | 386,090 | 1 | 3,417 | 3,418 | ||||||||||||||||||
Commercial: | ||||||||||||||||||||||||
Commercial loans secured by real estate | 6,262 | 148,517 | 154,779 | 97 | 1,842 | 1,939 | ||||||||||||||||||
Commercial and industrial | 324 | 74,872 | 75,196 | 75 | 906 | 981 | ||||||||||||||||||
Political subdivisions | 0 | 40,007 | 40,007 | 0 | 0 | 0 | ||||||||||||||||||
Commercial construction and land | 0 | 5,122 | 5,122 | 0 | 58 | 58 | ||||||||||||||||||
Loans secured by farmland | 1,427 | 5,592 | 7,019 | 52 | 54 | 106 | ||||||||||||||||||
Multi-family (5 or more) residential | 987 | 8,201 | 9,188 | 595 | 80 | 675 | ||||||||||||||||||
Agricultural loans | 16 | 4,655 | 4,671 | 0 | 45 | 45 | ||||||||||||||||||
Other commercial loans | 0 | 12,152 | 12,152 | 0 | 118 | 118 | ||||||||||||||||||
Total commercial | 9,016 | 299,118 | 308,134 | 819 | 3,103 | 3,922 | ||||||||||||||||||
Consumer | 0 | 10,656 | 10,656 | 0 | 122 | 122 | ||||||||||||||||||
Unallocated | 427 | |||||||||||||||||||||||
Total | $ | 9,974 | $ | 694,906 | $ | 704,880 | $ | 820 | $ | 6,642 | $ | 7,889 |
Summary information related to impaired loans as of December 31, 20132016 and 2012 is as follows:
(In Thousands) | 2013 | 2012 |
Impaired loans with a valuation allowance | $9,889 | $2,710 |
Impaired loans without a valuation allowance | 6,432 | 4,719 |
Total impaired loans | $16,321 | $7,429 |
Valuation allowance related to impaired loans | $2,333 | $623 |
Additional summary information related to impaired loans for 2013, 2012 and 20112015 is as follows:
(In Thousands) | 2013 | 2012 | 2011 |
Average investment in impaired loans | $9,690 | $7,209 | $7,455 |
Interest income recognized on impaired loans | $426 | $278 | $245 |
Interest income recognized on a cash basis on impaired loans | $426 | $278 | $245 |
(In Thousands) | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||
Unpaid | Unpaid | |||||||||||||||||||||||
Principal | Recorded | Related | Principal | Recorded | Related | |||||||||||||||||||
Balance | Investment | Allowance | Balance | Investment | Allowance | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 783 | $ | 753 | $ | 0 | $ | 842 | $ | 842 | $ | 0 | ||||||||||||
Residential mortgage loans - junior liens | 68 | 68 | 0 | 74 | 74 | 0 | ||||||||||||||||||
Commercial loans secured by real estate | 6,975 | 5,232 | 0 | 7,580 | 5,945 | 0 | ||||||||||||||||||
Commercial and industrial | 117 | 117 | 0 | 249 | 249 | 0 | ||||||||||||||||||
Loans secured by farmland | 890 | 890 | 0 | 915 | 915 | 0 | ||||||||||||||||||
Multi-family (5 or more) residential | 987 | 392 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Agricultural loans | 13 | 13 | 0 | 16 | 16 | 0 | ||||||||||||||||||
Consumer | 23 | 23 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total with no related allowance recorded | 9,856 | 7,488 | 0 | 9,676 | 8,041 | 0 | ||||||||||||||||||
With a related allowance recorded: | ||||||||||||||||||||||||
Residential mortgage loans - first liens | 0 | 0 | 0 | 42 | 42 | 1 | ||||||||||||||||||
Commercial loans secured by real estate | 2,773 | 2,773 | 528 | 317 | 317 | 97 | ||||||||||||||||||
Commercial and industrial | 95 | 95 | 95 | 75 | 75 | 75 | ||||||||||||||||||
Loans secured by farmland | 504 | 504 | 51 | 512 | 512 | 52 | ||||||||||||||||||
Multi-family (5 or more) residential | 0 | 0 | 0 | 987 | 987 | 595 | ||||||||||||||||||
Total with a related allowance recorded | 3,372 | 3,372 | 674 | 1,933 | 1,933 | 820 | ||||||||||||||||||
Total | $ | 13,228 | $ | 10,860 | $ | 674 | $ | 11,609 | $ | 9,974 | $ | 820 |
68 |
The average balance of impaired loans and interest income recognized on impaired loans is as follows:
Interest Income Recognized on | ||||||||||||||||||||||||
Average Investment in Impaired Loans | Impaired Loans on a Cash Basis | |||||||||||||||||||||||
(In Thousands) | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||
Residential mortgage loans - first lien | $ | 806 | $ | 2,206 | $ | 4,272 | $ | 43 | $ | 86 | $ | 81 | ||||||||||||
Residential mortgage loans - junior lien | 71 | 64 | 168 | 3 | 4 | 3 | ||||||||||||||||||
Total residential mortgage | 877 | 2,270 | 4,440 | 46 | 90 | 84 | ||||||||||||||||||
Commercial: | ||||||||||||||||||||||||
Commercial loans secured by real estate | 6,806 | 6,357 | 7,192 | 495 | 380 | 469 | ||||||||||||||||||
Commercial and industrial | 547 | 438 | 877 | 20 | 20 | 37 | ||||||||||||||||||
Commercial construction and land | 0 | 40 | 395 | 0 | 0 | 9 | ||||||||||||||||||
Loans secured by farmland | 1,409 | 1,459 | 1,413 | 94 | 103 | 101 | ||||||||||||||||||
Multi-family (5 or more) residential | 511 | 790 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Agricultural loans | 14 | 21 | 41 | 1 | 3 | 3 | ||||||||||||||||||
Total commercial | 9,287 | 9,105 | 9,918 | 610 | 506 | 619 | ||||||||||||||||||
Consumer | 21 | 0 | 1 | 1 | 0 | 0 | ||||||||||||||||||
Total | $ | 10,185 | $ | 11,375 | $ | 14,359 | $ | 657 | $ | 596 | $ | 703 |
The breakdown by portfolio segment and class of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:
(In Thousands) | December 31, 2013 | December 31, 2012 | December 31, 2016 | December 31, 2015 | |||||||||||||||||
Past Due | Past Due | Past Due | Past Due | ||||||||||||||||||
90+ Days and | 90+ Days and | 90+ Days and | 90+ Days and | ||||||||||||||||||
Accruing | Nonaccrual | Accruing | Nonaccrual | Accruing | Nonaccrual | Accruing | Nonaccrual | ||||||||||||||
Residential mortgage: | |||||||||||||||||||||
Residential mortgage loans - first liens | $2,016 | $3,533 | $1,900 | $3,064 | $ | 3,022 | $ | 3,770 | $ | 2,381 | $ | 3,044 | |||||||||
Residential mortgage loans - junior liens | 187 | 110 | 29 | 111 | 114 | 0 | 79 | 0 | |||||||||||||
Home equity lines of credit | 87 | 62 | 40 | 200 | 320 | 11 | 130 | 0 | |||||||||||||
1-4 Family residential construction | 0 | 72 | 0 | ||||||||||||||||||
Total residential mortgage | 2,290 | 3,777 | 1,969 | 3,375 | 3,456 | 3,781 | 2,590 | 3,044 | |||||||||||||
Commercial: | |||||||||||||||||||||
Commercial loans secured by real estate | 744 | 7,096 | 120 | 1,338 | 2,774 | 3,080 | 503 | 5,730 | |||||||||||||
Commercial and industrial | 17 | 434 | 68 | 761 | 286 | 119 | 65 | 313 | |||||||||||||
Commercial construction and land | 5 | 2,663 | 149 | 887 | |||||||||||||||||
Loans secured by farmland | 0 | 902 | 0 | 923 | 219 | 1,331 | 0 | 1,427 | |||||||||||||
Multi-family (5 or more) residential | 0 | 392 | 0 | 987 | |||||||||||||||||
Agricultural loans | 0 | 35 | 0 | 40 | 0 | 13 | 0 | 16 | |||||||||||||
Total commercial | 766 | 11,130 | 337 | 3,949 | 3,279 | 4,935 | 568 | 8,473 | |||||||||||||
Consumer | 75 | 27 | 5 | 29 | 103 | 20 | 71 | 0 | |||||||||||||
Totals | $3,131 | $14,934 | $2,311 | $7,353 | $ | 6,838 | $ | 8,736 | $ | 3,229 | $ | 11,517 |
The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are considered past due ninety days or more, or nonaccrual.
69 |
The tables below present a summary of the contractual aging of loans as of December 31, 20132016 and 2012:2015:
As of December 31, 2013 | As of December 31, 2012 | As of December 31, 2016 | As of December 31, 2015 | ||||||||||||||||||||||||||||||||||||||
Current & | Current & | Current & | Current & | ||||||||||||||||||||||||||||||||||||||
(In Thousands) | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | |||||||||||||||||||||||||||||||||
Less than | 30-89 | 90+ | Less than | 30-89 | 90+ | Less than | 30-89 | 90+ | Less than | 30-89 | 90+ | ||||||||||||||||||||||||||||||
30 Days | Days | Total | 30 Days | Days | Total | 30 Days | Days | Days | Total | 30 Days | Days | Days | Total | ||||||||||||||||||||||||||||
Residential mortgage: | |||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $289,483 | $6,776 | $3,572 | $299,831 | $302,373 | $6,228 | $3,026 | $311,627 | $ | 321,670 | $ | 6,695 | $ | 5,737 | $ | 334,102 | $ | 294,703 | $ | 6,156 | $ | 3,924 | $ | 304,783 | |||||||||||||||||
Residential mortgage loans - junior liens | 22,247 | 506 | 287 | 23,040 | 26,247 | 371 | 130 | 26,748 | 23,268 | 324 | 114 | 23,706 | 20,816 | 251 | 79 | 21,146 | |||||||||||||||||||||||||
Home equity lines of credit | 34,263 | 118 | 149 | 34,530 | 32,593 | 184 | 240 | 33,017 | 37,603 | 134 | 320 | 38,057 | 38,581 | 329 | 130 | 39,040 | |||||||||||||||||||||||||
1-4 Family residential construction | 13,837 | 0 | 72 | 13,909 | 12,627 | 215 | 0 | 12,842 | 24,567 | 341 | 0 | 24,908 | 21,121 | 0 | 0 | 21,121 | |||||||||||||||||||||||||
Total residential mortgage | 359,830 | 7,400 | 4,080 | 371,310 | 373,840 | 6,998 | 3,396 | 384,234 | 407,108 | 7,494 | 6,171 | 420,773 | 375,221 | 6,736 | 4,133 | 386,090 | |||||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 145,055 | 405 | 1,755 | 147,215 | 156,834 | 704 | 875 | 158,413 | 147,464 | 82 | 2,922 | 150,468 | 153,427 | 108 | 1,244 | 154,779 | |||||||||||||||||||||||||
Commercial and industrial | 41,730 | 434 | 223 | 42,387 | 47,569 | 317 | 556 | 48,442 | 83,364 | 185 | 305 | 83,854 | 75,002 | 118 | 76 | 75,196 | |||||||||||||||||||||||||
Political subdivisions | 16,291 | 0 | 16,291 | 31,789 | 0 | 31,789 | 38,068 | 0 | 0 | 38,068 | 40,007 | 0 | 0 | 40,007 | |||||||||||||||||||||||||||
Commercial construction and land | 14,303 | 32 | 2,668 | 17,003 | 26,944 | 248 | 1,008 | 28,200 | 14,199 | 88 | 0 | 14,287 | 5,018 | 104 | 0 | 5,122 | |||||||||||||||||||||||||
Loans secured by farmland | 9,267 | 329 | 872 | 10,468 | 10,438 | 75 | 890 | 11,403 | 6,181 | 83 | 1,030 | 7,294 | 5,970 | 223 | 826 | 7,019 | |||||||||||||||||||||||||
Multi-family (5 or more) residential | 10,985 | 0 | 10,985 | 6,743 | 2 | 0 | 6,745 | 7,439 | 65 | 392 | 7,896 | 8,201 | 0 | 987 | 9,188 | ||||||||||||||||||||||||||
Agricultural loans | 3,203 | 13 | 35 | 3,251 | 3,003 | 10 | 40 | 3,053 | 3,981 | 4 | 13 | 3,998 | 4,642 | 13 | 16 | 4,671 | |||||||||||||||||||||||||
Other commercial loans | 14,631 | 0 | 14,631 | 362 | 0 | 362 | 11,475 | 0 | 0 | 11,475 | 12,152 | 0 | 0 | 12,152 | |||||||||||||||||||||||||||
Total commercial | 255,465 | 1,213 | 5,553 | 262,231 | 283,682 | 1,356 | 3,369 | 288,407 | 312,171 | 507 | 4,662 | 317,340 | 304,419 | 566 | 3,149 | 308,134 | |||||||||||||||||||||||||
Consumer | 10,516 | 171 | 75 | 10,762 | 11,135 | 129 | 5 | 11,269 | 13,446 | 153 | 123 | 13,722 | 10,537 | 48 | 71 | 10,656 | |||||||||||||||||||||||||
Totals | $625,811 | $8,784 | $9,708 | $644,303 | $668,657 | $8,483 | $6,770 | $683,910 | $ | 732,725 | $ | 8,154 | $ | 10,956 | $ | 751,835 | $ | 690,177 | $ | 7,350 | $ | 7,353 | $ | 704,880 |
Nonaccrual loans are included in the contractual aging immediately above. A summary of the contractual aging of nonaccrual loans at December 31, 20132016 and 20122015 is as follows:
Current & | ||||
(In Thousands) | Past Due | Past Due | Past Due | |
Less than | 30-89 | 90+ | ||
30 Days | Days | Days | Total | |
December 31, 2013 Nonaccrual Totals | $7,878 | $479 | $6,577 | $14,934 |
December 31, 2012 Nonaccrual Totals | $2,167 | $727 | $4,459 | $7,353 |
Current & | ||||||||||||||||
(In Thousands) | Past Due | Past Due | Past Due | |||||||||||||
Less than | 30-89 | 90+ | ||||||||||||||
30 Days | Days | Days | Total | |||||||||||||
December 31, 2016 Nonaccrual Totals | $ | 4,199 | $ | 419 | $ | 4,118 | $ | 8,736 | ||||||||
December 31, 2015 Nonaccrual Totals | $ | 7,100 | $ | 293 | $ | 4,124 | $ | 11,517 |
Loans whose terms are modified are classified as Troubled Debt Restructurings (TDRs) if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired.impaired and reviewed each quarter to determine if a specific allowance for loan losses is required. The outstanding balance of loans subject to TDRs, as well as the contractual aging information at December 31, 20132016 and 20122015 is as follows:
Troubled Debt Restructurings (TDRs): | |||||||||||||||||||||||||
Current & | Current & | ||||||||||||||||||||||||
(In Thousands) | Past Due | Past Due | Past Due | Past Due | |||||||||||||||||||||
Less than | 30-89 | 90+ | Less than | 30-89 | 90+ | ||||||||||||||||||||
30 Days | Days | Nonaccrual | Total | 30 Days | Days | Days | Nonaccrual | Total | |||||||||||||||||
December 31, 2013 Totals | $3,254 | $13 | $0 | $908 | $4,175 | ||||||||||||||||||||
December 31, 2012 Totals | $785 | $121 | $0 | $1,155 | $2,061 | ||||||||||||||||||||
December 31, 2016 Totals | $ | 5,453 | $ | 350 | $ | 0 | $ | 2,874 | $ | 8,677 | |||||||||||||||
December 31, 2015 Totals | $ | 1,186 | $ | 0 | $ | 81 | $ | 5,097 | $ | 6,364 |
At December 31, 2016 and 2015, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.
70 |
A summary of TDRs that occurred during 2013, 20122016, 2015 and 20112014 is as follows:
Year Ended December 31, 2013 | Pre- | Post- | |
(Balances in Thousands) | Modification | Modification | |
Number | Outstanding | Outstanding | |
of | Recorded | Recorded | |
Contracts | Investment | Investment | |
Residential mortgage: | |||
Residential mortgage loans - first liens | 6 | $677 | $677 |
Residential mortgage loans - junior liens | 3 | 102 | 102 |
Commercial: | |||
Commercial loans secured by real estate | 2 | 866 | 866 |
Commercial and industrial | 3 | 701 | 701 |
Loans secured by farmland | 4 | 512 | 512 |
Agricultural loans | 1 | 13 | 13 |
Consumer | 1 | 6 | 6 |
Year Ended December 31, 2012 | Pre- | Post- | |
(Balances in Thousands) | Modification | Modification | |
Number | Outstanding | Outstanding | |
of | Recorded | Recorded | |
Contracts | Investment | Investment | |
Commercial, | |||
Commercial and industrial | 1 | $65 | $65 |
Year Ended December 31, 2011 | Pre- | Post- | |
(Balances in Thousands) | Modification | Modification | |
Number | Outstanding | Outstanding | |
Of | Recorded | Recorded | |
Contracts | Investment | Investment | |
Residential mortgage, | |||
Home equity lines of credit | 1 | $93 | $93 |
Commercial: | |||
Commercial loans secured by real estate | 11 | 1,941 | 1,941 |
Commercial and industrial | 3 | 14 | 14 |
Commercial construction and land | 5 | 1,238 | 1,238 |
Multi-family (5 or more) residential | 1 | 15 | 15 |
The TDRs that occurred in 2013 included interest only payments for an extended period of time (14 contracts), extensions of the final maturity date (3 contracts), reduction in interest rate (2 contracts) and reduction in payment amount for one year (1 contract). There was no allowance for loan losses on these loans at December 31, 2013 and no change in the allowance for loan losses resulting from these TDRs in the year ended December 31, 2013.
The TDR in 2012 was an extension of the final maturity and lowering of monthly payments required on a commercial loan. There was no allowance for loan losses on this loan at December 31, 2012. This loan was charged off in 2013, and there had been no allowance for loan losses on this loan prior to the charge-off.
(Balances in Thousands) | ||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
Post- | Post- | Post- | ||||||||||||||||||||||
Number | Modification | Number | Modification | Number | Modification | |||||||||||||||||||
of | Recorded | of | Recorded | Of | Recorded | |||||||||||||||||||
Loans | Investment | Loans | Investment | Loans | Investment | |||||||||||||||||||
Residential mortgage - first liens: | ||||||||||||||||||||||||
Extended maturity with interest rate reduction | 1 | $ | 71 | 1 | $ | 56 | 1 | $ | 83 | |||||||||||||||
Extended maturity with reduced monthly payments | 1 | 26 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Interest only payments for a period of one year | 0 | 0 | 0 | 0 | 1 | 34 | ||||||||||||||||||
Reduced monthly payments for a six-month period | 0 | 0 | 1 | 242 | 1 | 33 | ||||||||||||||||||
Residential mortgage - junior liens, | ||||||||||||||||||||||||
Interest rate and monthly payment reduction | 0 | 0 | 1 | 32 | 0 | 0 | ||||||||||||||||||
Commercial loans secured by real estate: | ||||||||||||||||||||||||
Interest only payments for a period of one year | 1 | 2,773 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Reduced monthly payments | 0 | 0 | 0 | 0 | 5 | 5,193 | ||||||||||||||||||
Commercial and industrial: | ||||||||||||||||||||||||
Extended maturity | 1 | 5 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Reduced monthly payments | 0 | 0 | 0 | 0 | 1 | 80 | ||||||||||||||||||
Consumer: | ||||||||||||||||||||||||
Interest rate and monthly payment reduction | 0 | 0 | 1 | 30 | 0 | 0 | ||||||||||||||||||
New unsecured loan after short-fall from sale of property | 1 | 24 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | 5 | $ | 2,899 | 4 | $ | 360 | 9 | $ | 5,423 |
In 2014, the table above, the 2011 TDR categoryTDRs for commercial loans secured by real estate includesrelate to six (6) contracts that stem fromassociated with one relationship. The Corporation entered into a forbearance agreement entered into with this commercial borrower which included a commercial customer.reduction in monthly payment amounts over a fifteen-month period. At the end of the fifteen-month period, the monthly payment amounts would revert to the original amounts, unless the forbearance agreement was extended or the payment requirements otherwise modified. The totalforbearance agreement was extended for two additional twelve-month periods, most recently in July 2016. The Corporation recorded a charge-off of $1,486,000 in 2014 as a result of these modifications, as the payment amounts based on the forbearance agreement were not sufficient to fully amortize the contractual amount of principal balanceoutstanding on the loans. The amount of loans includedthe charge-off was determined based on the excess of the contractual principal due over the present value of the payment amounts provided for in the forbearance agreement, was $1,588,000, of whichassuming the revised payment amounts would continue until maturity, at the contractual interest rates. In December 2016, the Corporation had charged off $663,000 inand the second quarter 2011 (prior to the forbearance agreement), and subsequently charged off an additional $438,000 in the fourth quarter 2011. Under the terms ofborrower entered into a modification agreement, terminating the forbearance agreement and establishing loan terms with essentially the Corporationsame interest rate and monthly payment amounts as had agreed to accept payment of less than the total principal amount of the loans, assuming payment was received by dates specified withinbeen in effect under the forbearance agreement. In 2012,The weighted average maturity of the loan contracts has been extended under the modification agreement as compared to the maturities provided for in the original loan contracts. At December 31, 2016, the outstanding contractual balances of these loans were not repaidtotal $6,529,000, and the forbearance agreement expired. Accordingly, the Corporation’s concession terminated, and therecorded investments total $4,786,000. These loans were notare still classified as TDRs at December 31, 2012. At December 31, 2012 and 2011,2016.
Except for the 2014 TDRs described in the immediately preceding paragraph, there were no differences between the outstanding balance of the loans was $466,000,contractual amounts and the Corporation had no related allowance for loan losses. In 2013, payments receivedrecorded investments in receivables resulting from this customer were applied to reduce the outstanding balance of the loans to $0, with $343,000 applied as a recovery (credited to the allowance for loan losses).
TDRs occurring in 2016, 2015 and 2014.
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Other TDRs in 2011 included extensions of terms and maturities at lower than current market rates and acceptance of interest-only payments for extended periods of time. Except for the fourth quarter 2011 charge-off of $438,000 related to commercial loans subject to the forbearance agreement described above, there were no changes in the allowance for loan losses in 2011 resulting from the TDRs that occurred in 2011.
In 2012, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months. For 20132016, 2015 and 2011,2014, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:
Number | ||
of | Recorded | |
Contracts | Investment | |
Year Ended December 31, 2013 | ||
(Balances in Thousands) | ||
Residential mortgage, | ||
Residential mortgage loans - first liens | 1 | $85 |
Commercial: | ||
Commercial loans secured by real estate | 2 | 588 |
Commercial construction and land | 1 | 110 |
Agricultural loans | 1 | 13 |
(Balances in Thousands)
Number | ||
of | Recorded | |
Contracts | Investment | |
Year Ended December 31, 2011 | ||
(Balances in Thousands) | ||
Residential mortgage, | ||
Home equity lines of credit | 1 | $93 |
Commercial: | ||
Commercial loans secured by real estate | 2 | 207 |
Commercial construction and land | 2 | 1,089 |
2016 | 2015 | 2014 | ||||||||||||||||||||||
Number | Number | Number | ||||||||||||||||||||||
of | Recorded | of | Recorded | of | Recorded | |||||||||||||||||||
Loans | Investment | Loans | Investment | Loans | Investment | |||||||||||||||||||
Residential mortgage - first liens | 2 | $ | 294 | 1 | $ | 32 | 3 | $ | 257 | |||||||||||||||
Residential mortgage - junior liens | 1 | 29 | 0 | 0 | 1 | 62 | ||||||||||||||||||
Commercial loans secured by real estate | 0 | 0 | 0 | 0 | 1 | 429 | ||||||||||||||||||
Commercial and industrial | 1 | 5 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Commercial construction and land | 0 | 0 | 0 | 0 | 1 | 25 | ||||||||||||||||||
Loans secured by farmland | 0 | 0 | 0 | 0 | 4 | 490 | ||||||||||||||||||
Agricultural loans | 0 | 0 | 0 | 0 | 1 | 13 | ||||||||||||||||||
Consumer | 1 | 27 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | 5 | $ | 355 | 1 | $ | 32 | 11 | $ | 1,276 |
The eventscarrying amount of default in 2013 in the table above included the borrowers’ failure to make timely payments under the following circumstances: (1) for the Residential mortgage loan, the monthly payment amount had been reduced, (2) for the two Commercial loans secured byforeclosed residential real estate monthly payments of interest only were missed, (3) for the Commercial construction and land loan, a monthly payment was missed after the term of the loan had been extended, and (4) for the Agricultural loan, payment at maturity was not made on a loan that had been in interest only status. There were no adjustments to the allowance for loan losses in 2013properties held as a result of these events of default.obtaining physical possession (included in Foreclosed assets held for sale in the consolidated balance sheets) is as follows:
(In Thousands) | Dec. 31, | Dec. 31, | ||||||
2016 | 2015 | |||||||
Foreclosed residential real estate | $ | 1,102 | $ | 555 |
The eventsrecorded investment of defaultconsumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in 2011 in the table above resulted from the borrowers’ failure to make payments due at maturity, based on loan maturity dates that had been extended from their original due dates. For one loan included in the Commercial construction and land class, with a balance of $950,000, the Corporation recorded a charge-off of $288,000 in 2012, leaving an outstanding balance of $662,000 at December 31, 2013 and 2012. The amount of the charge-off in 2012 exceeded the allowance for loan losses on the loan at December 31, 2011 by $223,000.process is as follows:
At December 31, 2013 and 2012, the Corporation evaluated loans to the borrowers who defaulted subsequent to restructurings, in determining the specific allowance for loan loss amounts related to the underlying loans. Based on the estimated value of the underlying collateral, net of estimated costs to sell the collateral, the Corporation determined that no allowance for loan losses was required at December 31, 2013 and 2012 for loans for which an event of default had occurred subsequent to restructuring.
(In Thousands) | Dec. 31, | Dec. 31, | ||||||
2016 | 2015 | |||||||
Residential real estate in process of foreclosure | $ | 2,738 | $ | 1,173 |
9. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
(In Thousands) | December 31, | December 31, | ||||||||
2013 | 2012 | 2016 | 2015 | |||||||
Land | $2,818 | $2,823 | $ | 2,818 | $ | 2,818 | ||||
Buildings and improvements | 26,869 | 26,850 | 27,619 | 27,092 | ||||||
Furniture and equipment | 17,087 | 17,057 | 18,741 | 17,922 | ||||||
Construction in progress | 2 | 40 | 392 | 243 | ||||||
Total | 46,776 | 46,770 | 49,570 | 48,075 | ||||||
Less: accumulated depreciation | (29,346) | (28,063) | (34,173 | ) | (32,669 | ) | ||||
Net | $17,430 | $18,707 | $ | 15,397 | $ | 15,406 |
Depreciation expense included in occupancy expense and furniture and equipment expense was as follows:
(In Thousands) | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||
Occupancy expense | $1,022 | $1,050 | $1,168 | $ | 804 | $ | 954 | $ | 998 | ||||||
Furniture and equipment expense | 998 | 889 | 909 | 785 | 934 | 942 | |||||||||
Total | $2,020 | $1,939 | $2,077 | $ | 1,589 | $ | 1,888 | $ | 1,940 |
10. INTANGIBLE ASSETS
There were no changes in the carrying amount of goodwill in 20132016 and 2012.2015. The balance in goodwill was $11,942,000 at December 31, 20132016 and 2012.2015. The Corporation did not complete any acquisitions in 20132016 or 2012.2015.
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The Corporation has adopted ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.
In testing goodwill for impairment as of December 31, 2013,2016, the Corporation assessed qualitative factors to determine whether it is more likely than not that the fair value of its only reporting unit, its community banking operation, is less than its carrying amount. The qualitative factors assessed included the Corporation’s recent financial performance, economic conditions in the Corporation’s market area, macroeconomic conditions and other factors. Based on the assessment of qualitative factors, the Corporation determined that it is not more likely than not that the fair value of the community banking operation has fallen below its carrying value, and therefore, the Corporation did not perform the more detailed, two-step goodwill impairment test described in Topic 350. Accordingly, there was no goodwill impairment as of December 31, 2013.2016.
Information related to the core deposit intangibles areis as follows:
December 31, | December 31, | |||||||||
(In Thousands) | 2013 | 2012 | 2016 | 2015 | ||||||
Gross amount | $2,034 | $ | 2,034 | $ | 2,034 | |||||
Less: accumulated amortization | (1,947) | (1,896) | (2,017 | ) | (2,004 | ) | ||||
Net | $87 | $138 | $ | 17 | $ | 30 |
Amortization expense was $51,000$13,000 in 2013, $74,0002016, $22,000 in 20122015 and $114,000. Estimated$35,000 in 2014. The amount of amortization expense forto be recognized each of the ensuing five years is as follows:not significant.
(In Thousands) | |
2014 | $35 |
2015 | 22 |
2016 | 12 |
2017 | 6 |
2018 | 4 |
11. DEPOSITS
At December 31, 2013,2016, the scheduled maturities of time deposits are as follows:
(In Thousands) | |
2014 | $147,316 |
2015 | 63,508 |
2016 | 26,052 |
2017 | 13,549 |
2018 | 10,612 |
$261,037 |
(In Thousands) | ||||||
2017 | $ | 113,974 | ||||
2018 | 51,526 | |||||
2019 | 25,302 | |||||
2020 | 14,458 | |||||
2021 | 6,710 | |||||
Thereafter | 248 | |||||
Total | $ | 212,218 |
Included in interest-bearing deposits are time deposits in the amount of $100,000 or more. As of December 31, 2013,2016, the remaining maturities or time to next re-pricing of time deposits of $100,000 or more are as follows:
(In Thousands) | ||||
Three months or less | $ | 32,987 | ||
Over 3 months through 12 months | 11,663 | |||
Over 1 year through 3 years | 11,508 | |||
Over 3 years | 7,605 | |||
Total | $ | 63,763 |
Interest expense from time deposits of $100,000 or more amounted to $721,000$524,000 in 2013, $1,846,0002016, $482,000 in 20122015 and $2,369,000$563,000 in 2011.2014.
Time deposits of more than $250,000 totaled $7,929,000 at December 31, 2016 and $6,531,000 at December 31, 2015.
12. BORROWED FUNDS
SHORT-TERM BORROWINGSShort-term borrowings (initial maturity within one year) include the following:
Short-term borrowings include the following: | ||||||||||
(In Thousands) | Dec. 31, | Dec. 31, | Dec. 31, | |||||||
2013 | 2012 | 2016 | 2015 | |||||||
FHLB-Pittsburgh borrowings | $20,000 | $0 | $ | 21,000 | $ | 48,581 | ||||
Customer repurchase agreements | 3,385 | 5,567 | 5,175 | 4,915 | ||||||
Total short-term borrowings | $23,385 | $5,567 | $ | 26,175 | $ | 53,496 |
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Short-term borrowings from FHLB-Pittsburgh are as follows:
(In Thousands) | Dec. 31, | Dec. 31 | ||||||
2016 | 2015 | |||||||
Overnight borrowing | $ | 21,000 | $ | 23,500 | ||||
Other short-term advances | 0 | 25,081 | ||||||
Total short-term FHLB-Pittsburgh borrowings | $ | 21,000 | $ | 48,581 |
The weighted average interest rate on total short-term borrowings outstanding was 0.22%0.61% at December 31, 20132016 and 0.10%0.60% at December 31, 2012.2015. The maximum amount of total short-term borrowings outstanding at any month-end was $23,385,000$47,005,000 in 2013, $20,120,0002016, $53,496,000 in 20122015 and $21,968,000$7,919,000 in 2011.
Overnight borrowings are available from the FHLB-Pittsburgh, federal funds purchased overnight from other banks, and from the Federal Reserve Bank of Philadelphia’s Discount Window. There were no overnight borrowings outstanding as of December 31, 2013 and 2012.2014.
The Corporation had available credit with other correspondent banks totaling $45,000,000 at December 31, 20132016 and 2012.2015. These lines of credit are primarily unsecured. No amounts were outstanding at December 31, 20132016 or December 31, 2012.2015.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At December 31, 2013,2016, the Corporation had available credit in the amount of $26,078,000$15,636,000 on this line with no outstanding advances. At December 31, 20122015, the Corporation had available credit in the amount of $27,367,000$19,606,000 on this line with no outstanding advances. As collateral for thethis line, the Corporation has pledged available-for-sale securities with a carrying value of $27,188,000$17,690,000 at December 31, 20132016 and $28,432,000$20,039,000 at December 31, 2012.2015.
The FHLB-Pittsburgh loan facilities arefacility is collateralized by qualifying loans secured by real estate with a book value totaling $453,792,000$471,454,000 at December 31, 20132016 and $471,731,000$450,883,000 at December 31, 2012.2015. Also, the FHLB-Pittsburgh loan facilities requirefacility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were $3,656,000$4,296,000 at December 31, 20132016 and $4,712,000$4,527,000 at December 31, 2012.2015. The Corporation’s total credit facility with FHLB-Pittsburgh was $339,221,000 at December 31, 2016, including an unused (available) amount of $306,767,000. At December 31, 2015, the Corporation’s total credit facility with FHLB-Pittsburgh was $322,709,000, including an unused (available) amount of $262,361,000.
The short-term
At December 31, 2016, the overnight borrowing from the FHLB-Pittsburgh matured in January 2014 andof $21,000,000 had an interest rate of 0.24%0.74%. At December 31, 2015, the overnight borrowing from FHLB-Pittsburgh of $23,500,000 had an interest rate of 0.43%, and the other short-term advances included 12 advances of $2,090,000 each maturing monthly throughout 2016, with a weighted average interest rate of 0.86% and rates ranging from 0.54% to 1.052%.
The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10% at December 31, 20132016 and December 31, 2012.2015. The carrying value of the underlying securities was $11,269,000$15,019,000 at December 31, 20132016 and $11,179,000$12,613,000 at December 31, 2012.2015.
LONG-TERM BORROWINGS
LONG-TERM BORROWINGS | ||||||||
Long-term borrowings (initial maturity of greater than one year) are as follows: | ||||||||
(In Thousands) | Dec. 31, | Dec. 31, | ||||||
2016 | 2015 | |||||||
FHLB-Pittsburgh borrowings | $ | 11,454 | $ | 11,767 | ||||
Repurchase agreements | 27,000 | 27,000 | ||||||
Total long-term borrowings | $ | 38,454 | $ | 38,767 | ||||
Long-term borrowings from FHLB - Pittsburgh are as follows: | ||||||||
(In Thousands) | Dec. 31, | Dec. 31, | ||||||
2016 | 2015 | |||||||
Loan maturing in 2016 with a rate of 6.86% | $ | 0 | $ | 57 | ||||
Loan maturing in 2017 with a rate of 6.83% | 4 | 10 | ||||||
Loan maturing in 2017 with a rate of 3.81% | 10,000 | 10,000 | ||||||
Loan maturing in 2020 with a rate of 4.79% | 646 | 821 | ||||||
Loan maturing in 2025 with a rate of 4.91% | 804 | 879 | ||||||
Total long-term FHLB-Pittsburgh borrowings | $ | 11,454 | $ | 11,767 |
Long-term borrowings are as follows:
(In Thousands) | Dec. 31, | Dec. 31, |
2013 | 2012 | |
FHLB-Pittsburgh borrowings | $12,338 | $15,812 |
Repurchase agreements | 61,000 | 68,000 |
Total long-term borrowings | $73,338 | $83,812 |
Long-term borrowings from FHLB-Pittsburgh are as follows:
(In Thousands) | At December 31, | |
2013 | 2012 | |
Loans matured in 2013 with rates ranging from 2.86% to 3.62% | $0 | $3,211 |
Loan maturing in 2016 with a rate of 6.86% | 153 | 196 |
Loan maturing in 2017 with a rate of 6.83% | 22 | 27 |
Loan maturing in 2017 with a rate of 3.81% | 10,000 | 10,000 |
Loan maturing in 2020 with a rate of 4.79% | 1,146 | 1,297 |
Loan maturing in 2025 with a rate of 4.91% | 1,017 | 1,081 |
Total long-term FHLB-Pittsburgh borrowings | $12,338 | $15,812 |
Repurchase agreementsThe repurchase agreement included in long-term borrowings are as follows:has an interest rate of 3.595% and an effective maturity date in December 2017.
(In Thousands) | At December 31, | |
2013 | 2012 | |
Agreement maturing in 2017 with a rate of 3.595% | $27,000 | $34,000 |
Agreement maturing in 2017 with a rate of 4.265% | 34,000 | 34,000 |
Total long-term repurchase agreements | $61,000 | $68,000 |
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TheIn 2015, the Corporation incurred a loss of $1,023,000 in 2013losses totaling $2,573,000 on prepayment of $7,000,000$34,000,000 of thea repurchase agreement with an interest rate of 3.595%4.265%. In 2012,
“The Repurchase Date,” as defined in the Master Repurchase Agreement between the Corporation incurred losses totaling $2,333,000 from prepayment and the broker-dealer, occurs quarterly on or about the 20thof repurchase agreement obligations, including a loss of $2,190,000each March, June, September and December until the “Final Repurchase Date” (as defined) on prepayment of a total $12,000,000 ofDecember 20, 2017. The Corporation pays interest, and the agreements shown in the table above.
In December 2007, the Corporation entered into the two repurchase agreements shown in the table above in the original amounts of $40,000,000 each. In 2012, the Corporation paid off principal totaling $6,000,000 on each of these agreements, incurring the loss from prepayment noted above and leaving a balance of $34,000,000 outstanding for each agreement at December 31, 2012. The borrowing with an interest rate of 3.595% becameis putable by the issuer, at quarterly intervals starting in December 2010, andon each Repurchase Date. The Final Repurchase Date is the borrowing with an interest rate of 4.265% became putable at quarterly intervals starting in December 2012. Each of these borrowings contained an embedded cap, providing that on the quarterly anniversaryeffective maturity date of the transaction settlement date, if three-month LIBOR were higher than 5.15%, the Corporation’s interest rate payable would decrease by twice the amount of the excess, down to a minimum rate of 0%. The embedded cap on one of the agreements expired in December 2010, and the embedded cap on the other agreement expired in December 2012.borrowing.
Securities sold under repurchase agreements were delivered to the broker-dealer who is the counter-party to the transactions. The broker-dealer may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and has agreed to resell to the Corporation substantially identical securities at the maturities of the agreements. The Master Repurchase Agreement between the Corporation and the broker-dealer provides that the Agreement constitutes a “netting contract,” as defined; however, the Corporation and the broker-dealer have no other obligations to one another and accordingly, no netting has occurred.
The carrying value of the underlying securities was $79,814,000$31,494,000 at December 31, 20132016 and $89,428,000$33,780,000 at December 31, 2012. 2015, as detailed in the following table:
(In Thousands) | Dec. 31, | Dec. 31, | ||||||
2016 | 2015 | |||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||
Residential pass-through securities | $ | 18,181 | $ | 15,772 | ||||
Residential collateralized mortgage obligations | 13,313 | 18,008 | ||||||
Total | $ | 31,494 | $ | 33,780 |
Two of the more significant risks associated with the repurchase agreement with the broker-dealer are as follows:
· | The borrowing is putable at quarterly intervals by the issuer. Accordingly, if interest rates were to rise to a sufficient level, the issuer would be expected to require the Corporation to pay off the borrowing. In this circumstance, the Corporation would be required to obtain new borrowing at a higher interest rate than the existing repurchase agreement or utilize cash from other sources to pay off the borrowing. If sales of available-for-sale securities were used to generate cash to pay off the borrowings, the value of such securities would be expected to have fallen, which could result in the Corporation recognizing a loss. |
· | As principal pay-downs of mortgage backed securities and CMOs occur, the Corporation must have available, unencumbered assets or purchase a sufficient amount of assets with credit quality suitable to the broker-dealer to replace the amounts being paid off. Since pre-payments of mortgages typically increase as interest rates fall, the Corporation may be required to purchase additional assets at times when market rates are lower than the rates paid on the borrowings. |
Average daily repurchase agreement borrowings amounted to $62,630,000$27,000,000 in 2013, $78,790,0002016, $54,304,000 in 2012,2015 and $90,644,000$61,000,000 in 2011.2014. The maximum amounts of outstanding borrowings under repurchase agreements with broker-dealers were $68,000,000$27,000,000 in 2013, $85,000,0002016 and $61,000,000 in 2012,2015 and $92,500,000 in 2011.2014. The weighted average interest rate on repurchase agreements was 4.01%3.60% in 2013, 3.97%2016, 3.99% in 2012,2015 and 3.93%4.02% in 2011.2014.
13. EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS
DEFINED BENEFIT PLANS
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. Effective January 1, 2013, this plan was amended so that full-timeFull-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. The plan was also amended effective January 1, 2013 to change some of the age and length-of-service requirements for participants to receive some of the benefits provided under the plan. This plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at December 31, 20132016 and December 31, 2012,2015, and are not expected to significantly affect the Corporation's future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.
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In an acquisition in 2007, the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan. This plan covers certain employees who were employed by Citizens Trust Company on December 31, 2002, when the plan was amended to discontinue admittance of any future participant and to freeze benefit accruals. Information related to the Citizens Trust Company Retirement Plan has been included in the tables that follow. The Corporation uses a December 31 measurement date for this plan.
The following table shows the funded status of the defined benefit plans:
(In Thousands)
Pension: | Postretirement: | Pension | Postretirement | |||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2016 | 2015 | 2016 | 2015 | |||||||||||||
CHANGE IN BENEFIT OBLIGATION: | ||||||||||||||||||||
Benefit obligation at beginning of year | $1,783 | $1,613 | $2,081 | $2,054 | $ | 722 | $ | 1,085 | $ | 1,539 | $ | 1,378 | ||||||||
Service cost | 0 | 41 | 91 | 0 | 0 | 37 | 38 | |||||||||||||
Interest cost | 71 | 72 | 55 | 81 | 26 | 36 | 62 | 57 | ||||||||||||
Plan participants' contributions | 0 | 208 | 199 | 0 | 0 | 215 | 203 | |||||||||||||
Actuarial (gain) loss | (104) | 128 | (171) | (87) | ||||||||||||||||
Plan amendments | 0 | (557) | 0 | |||||||||||||||||
Actuarial loss (gain) | 3 | (46 | ) | (30 | ) | 120 | ||||||||||||||
Benefits paid | (17) | (30) | (266) | (257) | (38 | ) | (16 | ) | (268 | ) | (257 | ) | ||||||||
Settlement of plan obligation | 0 | (337 | ) | 0 | 0 | |||||||||||||||
Benefit obligation at end of year | $1,733 | $1,783 | $1,391 | $2,081 | $ | 713 | $ | 722 | $ | 1,555 | $ | 1,539 | ||||||||
CHANGE IN PLAN ASSETS: | ||||||||||||||||||||
Fair value of plan assets at | ||||||||||||||||||||
beginning of year | $1,842 | $1,057 | $0 | |||||||||||||||||
Fair value of plan assets at beginning of year | $ | 839 | $ | 1,208 | $ | 0 | $ | 0 | ||||||||||||
Actual return on plan assets | 143 | 121 | 0 | 45 | (16 | ) | 0 | 0 | ||||||||||||
Employer contribution | 0 | 694 | 58 | 0 | 0 | 53 | 54 | |||||||||||||
Plan participants' contributions | 0 | 208 | 199 | 0 | 0 | 215 | 203 | |||||||||||||
Benefits paid | (17) | (30) | (266) | (257) | (38 | ) | (16 | ) | (268 | ) | (257 | ) | ||||||||
Settlement of plan obligation | 0 | (337 | ) | 0 | 0 | |||||||||||||||
Fair value of plan assets at end of year | $1,968 | $1,842 | $0 | $ | 846 | $ | 839 | $ | 0 | $ | 0 | |||||||||
Funded status at end of year | $235 | $59 | ($1,391) | ($2,081) | $ | 133 | $ | 117 | ($ | 1,555 | ) | ($ | 1,539 | ) |
At December 31, 20132016 and 2012,2015, the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance sheet:sheets:
Assets and liabilities: | ||||||||||||||||
(In Thousands) | Pension | Postretirement | ||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Other assets | $ | 133 | $ | 117 | ||||||||||||
Accrued interest and other liabilities | $ | 1,555 | $ | 1,539 |
Assets and liabilities:
(In Thousands) | Pension: | Postretirement: | ||
2013 | 2012 | 2013 | 2012 | |
Other assets | $235 | $59 | ||
Accrued interest and other liabilities | $1,391 | $2,081 |
At December 31, 20132016 and 2012,2015, the following items included in accumulated other comprehensive income (loss) had not been recognized as components of expense:
Items not yet recognized as a component | ||||||||||||||||||||
of net periodic benefit cost: | ||||||||||||||||||||
(In Thousands) | Pension: | Postretirement: | Pension | Postretirement | ||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2016 | 2015 | 2016 | 2015 | |||||||||||||
Net transition obligation | $0 | |||||||||||||||||||
Prior service cost | 0 | (433) | 94 | $ | 0 | $ | 0 | $ | (340 | ) | $ | (371 | ) | |||||||
Net actuarial loss (gain) | 357 | 546 | 59 | 230 | ||||||||||||||||
Net actuarial loss | 161 | 186 | 101 | 131 | ||||||||||||||||
Total | $357 | $546 | ($374) | $324 | $ | 161 | $ | 186 | $ | (239 | ) | $ | (240 | ) |
For the defined benefit pension plan, amortization of the net actuarial loss is expected to be $15,000$7,000 in 2014.2017. For the postretirement plan, the estimated amount of prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 20142017 is a reduction in expense of $31,000, and no net actuarial loss is expected to be amortized in 2014.2017.
The accumulated benefit obligation for the defined benefit pension plan was $1,733,000$713,000 at December 31, 20132016 and $1,783,000$722,000 at December 31, 2012.2015.
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The components of net periodic benefit costs from defined benefit plans are as follows:
(In Thousands) | Pension: | Postretirement: | Pension | Postretirement | ||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
Service cost | $0 | $41 | $91 | $83 | $ | 0 | $ | 0 | $ | 0 | $ | 37 | $ | 38 | $ | 34 | ||||||||||||||
Interest cost | 71 | 72 | 73 | 55 | 81 | 92 | 26 | 36 | 73 | 62 | 57 | 57 | ||||||||||||||||||
Expected return on plan assets | (90) | (72) | (73) | 0 | (26 | ) | (45 | ) | (88 | ) | 0 | 0 | 0 | |||||||||||||||||
Amortization of transition (asset) obligation | 0 | 37 | 36 | |||||||||||||||||||||||||||
Amortization of prior service cost | 0 | (31) | 13 | 14 | 0 | 0 | 0 | (31 | ) | (31 | ) | (31 | ) | |||||||||||||||||
Recognized net actuarial loss | 32 | 27 | 5 | 1 | 0 | 9 | 11 | 19 | 0 | 0 | 0 | |||||||||||||||||||
Loss on settlement | 0 | 87 | 196 | 0 | 0 | 0 | ||||||||||||||||||||||||
Total net periodic benefit cost | $13 | $27 | $5 | $66 | $222 | $225 | $ | 9 | $ | 89 | $ | 200 | $ | 68 | $ | 64 | $ | 60 |
In 2015, there was a distribution from the pension plan of $337,000, or 32% of the plan’s total accumulated benefit obligation prior to the distribution. The Corporation recognized a loss of $87,000 (included in net periodic benefit cost) in 2015 as a result of this settlement. In 2014, there was a distribution from the pension plan of $781,000, or 42% of the plan’s total accumulated benefit obligation prior to the distribution. The Corporation recognized a loss of $196,000 (included in net periodic benefit cost) in 2014 as a result of this settlement.
The weighted-average assumptions used to determine net periodic benefit cost are as follows:
Pension: | Postretirement: | Pension | Postretirement | |||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||
Citizens Trust Company Retirement Plan | ||||||||||||||||||||||||||||||
and postretirement plan: | ||||||||||||||||||||||||||||||
Discount rate | 4.00% | 4.50% | 5.50% | 4.00% | 4.50% | 5.50% | 4.30 | % | 3.75 | % | 4.50 | % | 4.25 | % | 4.00 | % | 4.00 | % | ||||||||||||
Expected return on plan assets | 5.31% | 7.50% | N/A | �� | 5.00 | % | 5.31 | % | 5.31 | % | N/A | N/A | N/A | |||||||||||||||||
Rate of compensation increase | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
The weighted-average assumptions used to determine benefit obligations as of December 31, 20132016 and 20122015 are as follows:
Pension: | Postretirement: | Pension | Postretirement | |||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2016 | 2015 | 2016 | 2015 | |||||||||||||
Discount rate | 4.50% | 4.00% | 4.75% | 4.00% | 4.05 | % | 4.30 | % | 4.25 | % | 4.25 | % | ||||||||
Rate of compensation increase | N/A | N/A | N/A | N/A | N/A |
Estimated future benefit payments, including only estimated employer contributions for the postretirement plan, which reflect expected future service, are as follows:
(In Thousands) | Pension | Postretirement |
2014 | $229 | $104 |
2015 | 20 | 98 |
2016 | 42 | 94 |
2017 | 19 | 94 |
2018 | 1,268 | 103 |
2019-2023 | 251 | 552 |
(In Thousands) | Pension | Postretirement | ||||||||
2017 | $ | 222 | $ | 99 | ||||||
2018 | 15 | 103 | ||||||||
2019 | 39 | 108 | ||||||||
2020 | 12 | 114 | ||||||||
2021 | 12 | 114 | ||||||||
2022-2026 | 220 | 563 |
No estimated minimum contribution to the defined benefit pension plan is required in 2014,2017, though the Corporation may make discretionary contributions.
The expected return on pension plan (Citizens Trust Company Retirement Plan) assets is a significant assumption used in the calculation of net periodic benefit cost. This assumption reflects the average long-term rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation.
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The fair values of pension plan assets at December 31, 20132016 and 20122015 are as follows:
2013 | 2012 | 2016 | 2015 | |||||||
Mutual funds invested principally in: | ||||||||||
Cash and cash equivalents | 36% | 37% | 2 | % | 2 | % | ||||
Debt securities | 24% | 38 | % | 38 | % | |||||
Equity securities | 30% | 27% | 44 | % | 46 | % | ||||
Alternative funds | 10% | 12% | 16 | % | 14 | % | ||||
Total | 100% | 100 | % | 100 | % |
C&N Bank’s Trust and Financial Management Department manages the investment of the Citizens Trust Company Retirement Plan (pension plan)pension plan assets. Most of theThe Plan’s securities are mutual funds, including mutual funds principally invested in debt securities,include mutual funds invested principally in debt securities, a diversified mix of large, mid- and small-capitalization U.S. stocks, foreign stocks and mutual funds invested in alternative asset classes such as real estate, commodities, and inflation-protected securities. The fair values of plan assets are determined based on Level 1 inputs (as described in Note 6). At December 31, 2013 and 2012,2016, the targeted asset allocation of mutual funds for the pension plan was 26%44% equity securities, 61%38% debt securities, 11%16% alternative assets, and 2% cash. The comparatively highAt December 31, 2015, the targeted asset allocation of mutual funds for the pension plan was 46% equity securities, 38% debt securities, 14% alternative assets to cash and cash equivalents at December 31, 2013 reflects possible lump sum distribution requirements within the next 2 to 3 years.2% cash. The pension plan’s assets do not include any shares of the Corporation’s common stock.
PROFIT SHARING AND DEFERRED COMPENSATION PLANS
The Corporation has a profit sharing plan that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation’s matching contributions to the Plan depend upon the tax deferred contributions of employees. The Corporation’s total basic and matching contributions were $557,000$646,000 in 2013, $587,0002016, $609,000 in 20122015 and $559,000$595,000 in 2011.2014.
The Corporation has an Employee Stock Ownership Plan (ESOP). Contributions to the ESOP are discretionary, and the ESOP uses funds contributed to purchase Corporation stock for the accounts of ESOP participants. These purchases are made on the market (not directly from the Corporation), and employees are not permitted to purchase Corporation stock under the ESOP. The ESOP includes a diversification feature, which allows participants, upon reaching age 55 and 10 years of service (as defined), to sell up to 50% of their Corporation shares back to the ESOP over a period of 6 years. As of December 31, 20132016 and 2012,2015, there were no shares allocated for repurchase by the ESOP.
Dividends paid on shares held by the ESOP are charged to retained earnings. All Corporation shares owned through the ESOP are included in the calculation of weighted-average shares outstanding for purposes of calculating earnings per share - basic and diluted. The ESOP held 362,888417,753 shares of Corporation stock at December 31, 20132016 and 346,218410,004 shares at December 31, 2012,2015, all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled $509,000$549,000 in 2013, $507,0002016, $522,000 in 20122015 and $496,000$512,000 in 2011.2014.
The Corporation also has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were $186,000$184,000 in 2013, $140,0002016, $167,000 in 20122015 and $108,000$138,000 in 2011.2014.
In December 2015, the Corporation established a nonqualified deferred compensation plan that allows selected officers, beginning in 2016, the option to defer receipt of cash compensation, including base salary and any cash bonuses or other cash incentives. This nonqualified deferred compensation plan does not provide for Corporation contributions.
STOCK-BASED COMPENSATION PLANS
The Corporation has a Stock Incentive Plan for a selected group of senior officers. A total of 850,000 shares of common stock may be issued under the Stock Incentive Plan. Awards may be made under the Stock Incentive Plan in the form of qualified options (“Incentive Stock Options,” as defined in the Internal Revenue Code), nonqualified options, stock appreciation rights or restricted stock. Historically through December 31, 2013,2016, all awards made under this Plan have consisted of Incentive Stock Options or restricted stock. Incentive Stock Options have an exercise price equal to the market value of the stock at the date of grant, vest after 6 months and expire after 10 years. Restricted stock awards issued under the Stock Incentive Plan vest ratably over terms ranging from 3-4 years, and the restricted stock awards issued under this Plan in 2013, 2012 and 2011 include a condition that the Corporation must meet an annual targeted return on average equity (“ROAE”) performance ratio, as defined, in order for participants to vest. The Corporation met the ROAE target for the 2013, 2012 and 2011 plan years. There are 300,092280,682 shares available for issuance under the Stock Incentive Plan as of December 31, 2013.2016.
Also, the Corporation has an Independent Directors Stock Incentive Plan. This plan permits awards of nonqualified stock options and/or restricted stock to non-employee directors. A total of 135,000 shares of common stock may be issued under the Independent Directors Stock Incentive Plan. The recipients’ rights to exercise stock options under this plan expire 10 years from the date of grant. The exercise prices of all stock options awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant. The restricted stock awards vest ratably over 3 years. There are 34,71821,868 shares available for issuance under the Independent Directors Stock Incentive Plan as of December 31, 2013.2016.
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Total stock-based compensation expense is as follows:
(In Thousands) | 2016 | 2015 | 2014 | |||||||||
Restricted stock | $ | 578 | $ | 606 | $ | 412 | ||||||
Stock options | 0 | 0 | 153 | |||||||||
Total | $ | 578 | $ | 606 | $ | 565 |
The following summarizes non-vested restricted stock activity for the year ended December 31, 2016:
Weighted | ||||||||
Average | ||||||||
Number | Grant Date | |||||||
of Shares | Fair Value | |||||||
Outstanding, December 31, 2015 | 62,212 | $ | 20.10 | |||||
Granted | 35,427 | $ | 20.42 | |||||
Vested | (30,846 | ) | $ | 19.90 | ||||
Forfeited | (3,431 | ) | $ | 20.41 | ||||
Outstanding, December 31, 2016 | 63,362 | $ | 20.35 |
Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. As of December 31, 2016, there was $662,000 total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted average period of 1.4 years.
In 2016, the Corporation recordsawarded a total of 27,593 shares of restricted stock under the Stock Incentive Plan. Restricted stock awards under the Stock Incentive Plan in 2016 included the following: (1) a total of 17,289 shares to Executive Officers, vesting over a three-year term, with vesting for half of the shares dependent on satisfactory performance (time vesting) and vesting for half of the shares based on time vesting and upon the Corporation meeting an annual return on average equity (“ROAE”) performance ratio, as defined; and (2) a total of 10,304 shares to other employees, with time vesting over a three-year term. The Corporation did not meet the performance condition defined in the 2016 awards, as the Corporation’s return on average equity (“ROAE”) was in the 47thpercentile of the defined Peer Group’s results for the 12-month period ended September 30, 2016. The minimum level for satisfying the performance condition defined in the 2016 awards was an ROAE at the 50th percentile of the Peer Group’s results. For purposes of the 2016 awards, the Peer Group included all publicly traded commercial banks and bank holding companies with headquarters in Pennsylvania, New York, New Jersey and Ohio, and total assets ranging between $750 million and $3.5 billion as of the beginning of the applicable period.
Restricted stock awards in 2015 included the following: (1) a total of 20,298 shares to employees, vesting over a four-year term, with vesting of all of the applicable shares contingent upon the Corporation meeting an annual ROAE performance ratio, as defined; (2) a total of 2,198 shares to employees, with time vesting over a four-year term; and (3) an award to the Chief Executive Officer of 5,174 shares, with time vesting over a three-year term. Most of the restricted stock awards issued under this Plan in 2015, 2014 and 2013 include a condition that the Corporation must meet an annual targeted ROAE performance ratio, as defined, in order for participants to vest. In 2016, 2015 and 2014, the Corporation met the ROAE target applicable to awards granted prior to 2016, which is based on the Corporation’s ROAE for 12-month periods ended September 30 of each year as compared to the applicable peer group of bank holding companies based in Pennsylvania and one local competitor based in New York with total assets of $750 million to $2 billion as of the beginning of each applicable period. For 2016, 2015 and 2014 restricted stock awards to individuals who are substantially involved in mortgage lending, vesting is not dependent on the Corporation’s ROAE.
In 2016, a total of 7,834 restricted shares were granted under the Independent Directors Stock Incentive Plan, subject to time vesting over a term of one year. In 2015, a total of 7,130 restricted shares were granted under the Independent Directors Stock Incentive Plan, also with time vesting over a term of one year.
There were no stock options granted in 2016 or 2015. The Corporation recorded stock option expense in 2014 based on estimated fair value calculated using the Black-Scholes-Merton option-pricing model with the following assumptions:
2013 | 2012 | 2011 | |
Volatility | 41% | 41% | 37% |
Expected option lives | 8 Years | 7 Years | 8 Years |
Risk-free interest rate | 1.60% | 1.53% | 3.10% |
Dividend yield | 3.69% | 3.97% | 3.86% |
2014 | ||||
Volatility | 39 | % | ||
Expected option lives | 8 Years | |||
Risk-free interest rate | 2.85 | % | ||
Dividend yield | 4.33 | % |
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Management estimated the lives for options based on the Corporation’s average historical experience with both plans. The Corporation utilized its historical volatility and dividend yield over the immediately prior 8-year period to estimate future levels of volatility and dividend yield for the 2013 and 2011 awards, and utilized its historical volatility and dividend yield over the immediately prior 7-year period in estimating the value of the 20122014 awards. The risk-free interest rate was based on the published yield of zero-coupon U.S. Treasury strips as of the grant date, with a maturity coinciding with the estimated option lives.
Total stock-based compensation expense is as follows:
(In Thousands) | 2013 | 2012 | 2011 |
Stock options | $242 | $247 | $279 |
Restricted stock | 454 | 320 | 144 |
Total | $696 | $567 | $423 |
A summary of stock option activity is presented below:
2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||
Exercise | Exercise | Exercise | Exercise | Exercise | Exercise | |||||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding, beginning of year | 337,670 | $19.08 | 301,797 | $19.05 | 226,894 | $20.54 | 248,486 | $ | 18.59 | 316,157 | $ | 19.05 | 358,176 | $ | 19.03 | |||||||||||||||
Granted | 64,050 | $19.21 | 64,757 | $18.54 | 93,674 | $15.06 | 0 | 0 | 39,027 | $ | 20.45 | |||||||||||||||||||
Exercised | (10,656) | $17.22 | (17,284) | $16.20 | (13,042) | $16.71 | (35,880 | ) | $ | 18.86 | (29,557 | ) | $ | 17.56 | (50,415 | ) | $ | 17.57 | ||||||||||||
Forfeited | (14,135) | $20.13 | (6,830) | $21.51 | (5,501) | $18.30 | (10,569 | ) | $ | 18.03 | (20,211 | ) | $ | 19.76 | (16,424 | ) | $ | 20.03 | ||||||||||||
Expired | (18,753) | $20.73 | (4,770) | $17.00 | (228) | $14.17 | 0 | (17,903 | ) | $ | 27.00 | (14,207 | ) | $ | 26.59 | |||||||||||||||
Outstanding, end of year | 358,176 | $19.03 | 337,670 | $19.08 | 301,797 | $19.05 | 202,037 | $ | 18.58 | 248,486 | $ | 18.59 | 316,157 | $ | 19.05 | |||||||||||||||
Options exercisable at year-end | 358,176 | $19.03 | 337,670 | $19.08 | 301,797 | $19.05 | 202,037 | $ | 18.58 | 248,486 | $ | 18.59 | 316,157 | $ | 19.05 | |||||||||||||||
Weighted-average fair value of options granted | $5.56 | $5.15 | $4.26 | N/A | N/A | $ | 5.50 | |||||||||||||||||||||||
Weighted-average fair value of options forfeited | $3.77 | $4.03 | $3.95 | $ | 4.04 | $ | 4.86 | $ | 4.89 |
The weighted-average remaining contractual term of outstanding stock options at December 31, 20132016 was 5.94.0 years. The aggregate intrinsic value of stock options outstanding (excluding options issued at exercise prices greater than the final closing price of the Corporation’s stock in 2013) was $815,000$1,540,000 at December 31, 2013.2016. The total intrinsic value of options exercised was $29,000$183,000 in 2013, $72,0002016, $77,000 in 20122015 and $17,000$90,000 in 2011.
The following summarizes non-vested stock options and restricted stock activity as of and for the year ended December 31, 2013:
Stock Options | Restricted Stock | |||
Weighted | Weighted | |||
Average | Average | |||
Number | Grant Date | Number | Grant Date | |
of Shares | Fair Value | of Shares | Fair Value | |
Outstanding, December 31, 2012 | 0 | 59,058 | $16.95 | |
Granted | 64,050 | $5.56 | 37,886 | $19.21 |
Vested | (64,050) | $5.56 | (25,423) | $15.49 |
Forfeited | 0 | (3,643) | $18.61 | |
Outstanding, December 31, 2013 | 0 | 67,878 | $18.67 |
Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. As of December 31, 2013, there was $819,000 total unrecognized compensation costs related to restricted stock, which is expected to be recognized over a weighted average period of 1.7 years.
Effective January 3, 2014, the Corporation granted options to purchase a total of 39,027 shares of common stock through the Stock Incentive and Independent Directors Stock Incentive Plans. The exercise price for these options is $20.45 per share, which was the market price at the date of grant, as determined under the Plans. The Corporation’s preliminary estimate of stock option compensation expense in 2014 is approximately $152,000. Management expects to use the Black-Scholes-Merton option-pricing model to measure compensation cost for these options. Also, effective in January 2014, the Corporation awarded a total of 16,711 shares of restricted stock under the Stock Incentive and Independent Directors Stock Incentive Plans. Total estimated restricted stock expense for 2014 is $477,000. The stock options and restricted stock awards made in January 2014 are not included in the tables above.2014.
The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2013.2016. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2013.2017.
In January 2017, the Corporation awarded 22,312 shares of restricted stock under the Stock Incentive Plan and 8,470 shares of restricted stock under the Independent Directors Stock Incentive Plans. The 2017 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and vesting for one-half of the 14,897 restricted shares awarded to Executive Officers depends on the Corporation meeting a ROAE target each year. The 2017 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Total estimated stock-based compensation for 2017 is $652,000. The restricted stock awards made in January 2017 are not included in the tables above.
14. INCOME TAXES
The net deferred tax asset at December 31, 20132016 and 20122015 represents the following temporary difference components:
December 31, | December 31, | December 31, | ||||||||
(In Thousands) | 2013 | 2012 | 2016 | 2015 | ||||||
Deferred tax assets: | ||||||||||
Unrealized holding losses on securities | $541 | $0 | $ | 512 | $ | 0 | ||||
Defined benefit plans - ASC 835 | 0 | 305 | ||||||||
Net realized losses on securities | 91 | 1,254 | 0 | 69 | ||||||
Allowance for loan losses | 3,032 | 2,400 | 2,998 | 2,761 | ||||||
Credit for alternative minimum tax paid | 1,905 | 3,609 | ||||||||
Other deferred tax assets | 2,332 | 2,019 | 2,658 | 2,634 | ||||||
Total deferred tax assets | 7,901 | 9,587 | 6,168 | 5,464 | ||||||
Deferred tax liabilities: | ||||||||||
Unrealized holding gains on securities | 0 | 6,228 | 0 | 1,342 | ||||||
Defined benefit plans - ASC 835 | 6 | 0 | 27 | 19 | ||||||
Bank premises and equipment | 1,314 | 1,337 | 913 | 869 | ||||||
Core deposit intangibles | 30 | 48 | 6 | 11 | ||||||
Other deferred tax liabilities | 207 | 249 | 105 | 108 | ||||||
Total deferred tax liabilities | 1,557 | 7,862 | 1,051 | 2,349 | ||||||
Deferred tax asset, net | $6,344 | $1,725 | $ | 5,117 | $ | 3,115 |
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The provision for income taxes includes the following:
(In thousands) | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||
Currently payable | $4,125 | $4,545 | $4,792 | $ | 5,328 | $ | 5,097 | $ | 4,280 | ||||||
Tax expense resulting from allocations | |||||||||||||||
of certain tax benefits to equity or as a | |||||||||||||||
reduction in other assets | 219 | 121 | 104 | ||||||||||||
Tax expense resulting from allocations of certain tax benefits to equity or as a reduction in other assets | 175 | 161 | 158 | ||||||||||||
Deferred | 1,839 | 3,760 | 3,818 | (156 | ) | 79 | 1,254 | ||||||||
Total provision | $6,183 | $8,426 | $8,714 | $ | 5,347 | $ | 5,337 | $ | 5,692 |
A reconciliation of income tax at the statutory rate to the Corporation’s effective rate is as follows (amounts in thousands):
(Amounts in thousands) | 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Expected provision | $8,672 | 35.00 | $10,896 | 35.00 | $11,229 | 35.00 | $ | 7,388 | 35.00 | $ | 7,633 | 35.00 | $ | 7,972 | 35.00 | |||||||||||||||
Tax-exempt interest income | (2,137) | (8.62) | (2,287) | (7.35) | (2,292) | (7.14) | (1,801 | ) | (8.53 | ) | (1,914 | ) | (8.78 | ) | (1,982 | ) | (8.70 | ) | ||||||||||||
Nondeductible interest expense | 60 | 0.24 | 92 | 0.30 | 129 | 0.40 | 40 | 0.19 | 51 | 0.23 | 56 | 0.25 | ||||||||||||||||||
Dividends received deduction | (76) | (0.31) | (78) | (0.25) | (66) | (0.21) | (22 | ) | (0.10 | ) | (75 | ) | (0.34 | ) | (79 | ) | (0.35 | ) | ||||||||||||
Increase in cash surrender value of life insurance | (140) | (0.57) | (159) | (0.51) | (178) | (0.55) | (134 | ) | (0.63 | ) | (135 | ) | (0.62 | ) | (132 | ) | (0.58 | ) | ||||||||||||
Employee stock option compensation | 67 | 0.27 | 62 | 0.20 | 85 | 0.26 | 0 | 0.00 | 0 | 0.00 | 41 | 0.18 | ||||||||||||||||||
Tax benefit from limited partnership investment | (85) | (0.34) | 0 | 0.00 | 0 | 0.00 | (76 | ) | (0.36 | ) | (80 | ) | (0.37 | ) | (83 | ) | (0.36 | ) | ||||||||||||
Other, net | (178) | (0.72) | (100) | (0.32) | 60 | 0.19 | (48 | ) | (0.23 | ) | (143 | ) | (0.66 | ) | (101 | ) | (0.44 | ) | ||||||||||||
Surtax exemption | 0 | 0.00 | 0 | 0.00 | (253) | (0.79) | ||||||||||||||||||||||||
Effective income tax provision | $6,183 | 24.95 | $8,426 | 27.07 | $8,714 | 27.16 | $ | 5,347 | 25.33 | $ | 5,337 | 24.47 | $ | 5,692 | 24.99 |
The Corporation has investments in three limited partnerships that manage affordable housing projects that have qualified for the federal low-income housing tax credit. The Corporation’s expected return from these investments is based on the receipt of tax credits and tax benefits from deductions of operating losses. The Corporation uses the effective yield method to account for these investments, with the benefits recognized as a reduction of the provision for income taxes. For two of the three limited partnership investments, the tax credits have been received in full in prior years, and the Corporation has fully realized the benefits of the credits and amortized its initial investments in the partnerships. The most recent affordable housing project was completed in 2013, and the Corporation received tax credits in 2013 through 2015 and expects to continue to receive tax credits over a 10-year period beginning in 2013. At December 31, 2013, theannually through 2022. The carrying amount of the Corporation’s investment is $996,000$713,000 at December 31, 2016 and $812,000 at December 31, 2015 (included in Other Assets in the consolidated balance sheets). TheFor 2016, the estimated amount of tax credits and other tax benefits to be received for 2013 is $160,000,$158,000 and the amount recognized as a reduction of the provision for income taxes is $76,000. In 2015, the Corporation received tax credits and other tax benefits totaling $160,000, and recognized a reduction of the provision for 2013 is $85,000.income tax of $80,000. In 2014, the Corporation received tax credits and other tax benefits totaling $159,000, and recognized a reduction of the provision for income tax of $83,000.
The Corporation has no unrecognized tax benefits, nor pending examination issues related to tax positions taken in preparation of its income tax returns. With limited exceptions, the Corporation is no longer subject to examination by the Internal Revenue Service for years prior to 2010.2013.
15. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiaries and any associates of the foregoing persons are as follows:
(In Thousands) | Beginning | New | Other | Ending | |
Balance | Loans | Repayments | Changes | Balance | |
11 directors, 8 executive officers 2013 | $14,125 | $1,110 | ($2,723) | $35 | $12,547 |
11 directors, 7 executive officers 2012 | 12,997 | 2,517 | (1,424) | 35 | 14,125 |
12 directors, 6 executive officers 2011 | 11,345 | 2,756 | (1,107) | 3 | 12,997 |
(In Thousands) | Beginning | New | Other | Ending | ||||||||||||||||
Balance | Loans | Repayments | Changes | Balance | ||||||||||||||||
12 directors, 7 executive officers 2016 | $ | 10,246 | $ | 307 | $ | (1,160 | ) | $ | 2,021 | $ | 11,414 | |||||||||
11 directors, 7 executive officers 2015 | 12,023 | 52 | (808 | ) | (1,021 | ) | 10,246 | |||||||||||||
12 directors, 8 executive officers 2014 | 12,547 | 188 | (1,358 | ) | 646 | 12,023 |
TheIn the table above, transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risks of collectability. Other changes represent net increaseschanges in the balance of existing lines of credit and transfers in and out of the related party category.
Deposits from related parties held by the Corporation amounted to $3,897,000$2,899,000 at December 31, 20132016 and $4,505,000$3,194,000 at December 31, 2012.2015.
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16. OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet.sheets. The contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at December 31, 20132016 and 20122015 are as follows:
(In Thousands) | 2013 | 2012 | 2016 | 2015 | ||||||
Commitments to extend credit | $139,866 | $165,972 | $ | 180,768 | $ | 156,407 | ||||
Standby letters of credit | 21,590 | 22,108 | 9,025 | 13,340 |
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, for extensions of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the Corporation guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Some of the standby letters of credit are collateralized by real estate or other assets, and others are unsecured. The extent to which proceeds from liquidation of collateral would be expected to cover the maximum potential amount of future payments related to standby letters of credit is not estimable. The Corporation has recorded no liability associated with standby letters of credit as of December 31, 20132016 and 2012.2015.
Standby letters of credit as of December 31, 20132016 expire as follows:
Amount | |
Year of Expiration | (In Thousands) |
2014 | $15,832 |
2015 | 760 |
2016 | 2,535 |
2018 | 108 |
2019 and Thereafter | 2,355 |
Total | $21,590 |
Year of Expiration | (In Thousands) | |||||
2017 | $ | 7,612 | ||||
2018 | 387 | |||||
2019 | 193 | |||||
2020 | 64 | |||||
2021 | 0 | |||||
Thereafter | 769 | |||||
Total | $ | 9,025 |
17. CONTINGENCIES
In the normal course of business, the Corporation is subject to pending and threatened litigation in which claims for monetary damages are asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of these legal proceedings.
18. REGULATORY MATTERS
The Corporation (on a consolidated basis) and C&N Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and C&N Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
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Quantitative measures established by regulation to ensure capital adequacy require the Corporation and C&N Bank to maintain minimum amounts and ratios (set forth in the following table) of total andcapital, Tier I capital (as defined in the regulations) and Common equity Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 20132016 and 2012,2015, that the Corporation and C&N Bank meet all capital adequacy requirements (described in more detail below) to which they are subject.subject and maintain capital conservation buffers that allow the Corporation and C&N Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to certain executive officers.
To be categorized as well capitalized, an institution must maintain minimum total risk based, Tier I risk based, Common equity risk based and Tier I leverage ratios as set forth in the following table. The Corporation’s and C&N Bank’s actual capital amounts and ratios are also presented in the following table:
Minimum To Be Well | ||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in Thousands) | Minimum | Capitalized Under | Minimum To Be Well | |||||||||||||||||||||||||||||||||||||||||||
Capital | Prompt Corrective | Minimum | Minimum To Maintain | Capitalized Under | Minimum To Meet | |||||||||||||||||||||||||||||||||||||||||
Actual | Requirement | Action Provisions | Capital | Capital Conservation | Prompt Corrective | the Corporation's | ||||||||||||||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Actual | Requirement | Buffer at Reporting Date | Action Provisions | Policy Thresholds | ||||||||||||||||||||||||||||||||||||
December 31, 2013: | ||||||||||||||||||||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||||||||
December 31, 2016: | ||||||||||||||||||||||||||||||||||||||||||||||
Total capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $177,693 | 26.60% | $53,449 | ³8% | n/a | $ | 183,597 | 23.60 | % | $ | 62,245 | ³8 | % | $ | 67,108 | ³8.625 | % | $ | 77,806 | ³10 | % | $ | 81,697 | ³10.5 | % | |||||||||||||||||||||
C&N Bank | 160,216 | 24.12% | 53,143 | ³8% | $66,429 | ³10% | 162,705 | 21.03 | % | 61,894 | ³8 | % | 66,730 | ³8.625 | % | 77,368 | ³10 | % | 81,236 | ³10.5 | % | |||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 168,039 | 25.15% | 26,724 | ³4% | n/a | 174,928 | 22.48 | % | 31,122 | ³6 | % | 51,547 | ³6.625 | % | 62,245 | ³8 | % | 66,135 | ³8.5 | % | ||||||||||||||||||||||||||
C&N Bank | 153,063 | 23.04% | 26,572 | ³4% | 39,857 | ³6% | 154,036 | 19.91 | % | 30,947 | ³6 | % | 51,256 | ³6.625 | % | 61,894 | ³8 | % | 65,762 | ³8.5 | % | |||||||||||||||||||||||||
Common equity tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 174,928 | 22.48 | % | 31,122 | ³4.5 | % | 39,876 | ³5.125 | % | 50,574 | ³6.5 | % | 54,464 | ³7 | % | |||||||||||||||||||||||||||||||
C&N Bank | 154,036 | 19.91 | % | 30,947 | ³4.5 | % | 39,651 | ³5.125 | % | 50,289 | ³6.5 | % | 54,157 | ³7 | % | |||||||||||||||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 168,039 | 13.78% | 48,783 | ³4% | n/a | 174,928 | 14.27 | % | 49,026 | ³4 | % | N/A | N/A | 61,282 | ³5 | % | 61,282 | ³5 | % | |||||||||||||||||||||||||||
C&N Bank | 153,063 | 12.70% | 48,191 | ³4% | 60,239 | ³5% | 154,036 | 12.73 | % | 48,404 | ³4 | % | N/A | N/A | 60,506 | ³5 | % | 60,506 | ³5 | % | ||||||||||||||||||||||||||
December 31, 2012: | ||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2015: | ||||||||||||||||||||||||||||||||||||||||||||||
Total capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $165,972 | 24.01% | $55,299 | ³8% | n/a | $ | 181,216 | 24.40 | % | $ | 59,424 | ³8 | % | N/A | N/A | $ | 74,281 | ³10 | % | $ | 77,995 | ³10.5 | % | |||||||||||||||||||||||
C&N Bank | 152,462 | 22.31% | 54,665 | ³8% | $68,331 | ³10% | 161,187 | 21.83 | % | 59,058 | ³8 | % | N/A | N/A | 73,823 | ³10 | % | 77,514 | ³10.5 | % | ||||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 158,008 | 22.86% | 27,650 | ³4% | n/a | 173,009 | 23.29 | % | 29,712 | ³6 | % | N/A | N/A | 59,424 | ³8 | % | 63,139 | ³8.5 | % | |||||||||||||||||||||||||||
C&N Bank | 145,596 | 21.31% | 27,332 | ³4% | 40,998 | ³6% | 153,298 | 20.77 | % | 29,529 | ³6 | % | N/A | N/A | 59,058 | ³8 | % | 62,749 | ³8.5 | % | ||||||||||||||||||||||||||
Common equity tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 173,009 | 23.29 | % | 29,712 | ³4.5 | % | N/A | N/A | 48,282 | ³6.5 | % | 51,996 | ³7 | % | ||||||||||||||||||||||||||||||||
C&N Bank | 153,298 | 20.77 | % | 29,529 | ³4.5 | % | N/A | N/A | 47,985 | ³6.5 | % | 51,676 | ³7 | % | ||||||||||||||||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | 158,008 | 12.53% | 50,459 | ³4% | n/a | 173,009 | 14.31 | % | 48,355 | ³4 | % | N/A | N/A | 60,444 | ³5 | % | 60,444 | ³5 | % | |||||||||||||||||||||||||||
C&N Bank | 145,596 | 11.64% | 50,053 | ³4% | 62,567 | ³5% | 153,298 | 12.81 | % | 47,861 | ³4 | % | N/A | N/A | 59,826 | ³5 | % | 59,826 | ³5 | % |
In July 2013, the federal regulatory authorities issued a new capital rule based, in part, on revisions developed by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). The Corporation and C&N Bank became subject to the new rule effective January 1, 2015. Generally, the new rule implements higher minimum capital requirements, revises the definition of regulatory capital components and related calculations, adds a new common equity tier 1 capital ratio, implements a new capital conservation buffer, increases the risk weighting for past due loans and provides a transition period for several aspects of the new rule.
The current (new) capital rule provides that, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. Phase-in of the capital conservation buffer requirements became effective January 1, 2016. The transition schedule for new ratios, including the capital conservation buffer, is as follows:
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As of January 1: | ||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||
Minimum common equity tier 1 capital ratio | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | 4.5 | % | ||||||||||
Common equity tier 1 capital conservation buffer | N/A | 0.625 | % | 1.25 | % | 1.875 | % | 2.5 | % | |||||||||||
Minimum common equity tier 1 capital ratio plus capital conservation buffer | 4.5 | % | 5.125 | % | 5.75 | % | 6.375 | % | 7.0 | % | ||||||||||
Phase-in of most deductions from common equity tier 1 capital | 40 | % | 60 | % | 80 | % | 100 | % | 100 | % | ||||||||||
Minimum tier 1 capital ratio | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | ||||||||||
Minimum tier 1 capital ratio plus capital conservation buffer | N/A | 6.625 | % | 7.25 | % | 7.875 | % | 8.5 | % | |||||||||||
Minimum total capital ratio | 8.0 | % | 8.0 | % | 8.0 | % | 8.0 | % | 8.0 | % | ||||||||||
Minimum total capital ratio plus capital conservation buffer | N/A | 8.625 | % | 9.25 | % | 9.875 | % | 10.5 | % |
As fully phased in, a banking organization with a buffer greater than 2.5% would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer | Maximum Payout | |||
(as a % of risk-weighted assets) | (as a % of eligible retained income) | |||
Greater than 2.5% | No payout limitation applies | |||
≤2.5% and >1.875% | 60 | % | ||
≤1.875% and >1.25% | 40 | % | ||
≤1.25% and >0.625% | 20 | % | ||
≤0.625% | 0 | % |
At December 31, 2016, the Corporation’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 15.60%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 13.03%.
Banking regulators limit the amount of dividends that may be paid by the Citizens & NorthernC&N Bank to the Corporation. Retained earnings against which dividends may be paid without prior approval of the banking regulators amounted to approximately $89,955,000$87,631,000 at December 31, 2013,2016, subject to the minimum capital ratio requirements noted above.
Restrictions imposed by federal law prohibit the Corporation from borrowing from C&N Bank unless the loans are secured in specific amounts. Such secured loans to the Corporation are generally limited to 10% of C&N Bank’s tangible stockholder’s equity (excluding accumulated other comprehensive income) or $15,438,000$15,404,000 at December 31, 2013.2016.
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19. PARENT COMPANY ONLY
The following is condensed financial information for Citizens & Northern Corporation:
CONDENSED BALANCE SHEET | December 31, | |||||||
(In Thousands) | 2016 | 2015 | ||||||
ASSETS | ||||||||
Cash | $ | 6,033 | $ | 5,847 | ||||
Investment in subsidiaries: | ||||||||
Citizens & Northern Bank | 165,397 | 167,277 | ||||||
Citizens & Northern Investment Corporation | 11,168 | 10,966 | ||||||
Bucktail Life Insurance Company | 3,419 | 3,392 | ||||||
Other assets | 4 | 24 | ||||||
TOTAL ASSETS | $ | 186,021 | $ | 187,506 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Other liabilities | $ | 13 | $ | 19 | ||||
Stockholders' equity | 186,008 | 187,487 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 186,021 | $ | 187,506 |
CONDENSED BALANCE SHEETS | December 31, | |
(In Thousands) | 2013 | 2012 |
ASSETS | ||
Cash | $2,297 | $1,895 |
Investment in subsidiaries: | ||
Citizens & Northern Bank | 163,711 | 168,542 |
Citizens & Northern Investment Corporation | 10,216 | 9,081 |
Bucktail Life Insurance Company | 3,254 | 3,267 |
Other assets | 0 | 7 |
TOTAL ASSETS | $179,478 | $182,792 |
LIABILITIES AND STOCKHOLDERS' EQUITY | ||
Other liabilities | $6 | $6 |
Stockholders' equity | 179,472 | 182,786 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $179,478 | $182,792 |
CONDENSED INCOME STATEMENT | ||||||||||||
(In Thousands) | 2016 | 2015 | 2014 | |||||||||
Dividends from Citizens & Northern Bank | $ | 14,960 | $ | 11,569 | $ | 22,608 | ||||||
Expenses | (367 | ) | (234 | ) | (112 | ) | ||||||
Income before equity in undistributed income of subsidiaries | 14,593 | 11,335 | 22,496 | |||||||||
Equity in undistributed income of subsidiaries | 1,169 | 5,136 | (5,410 | ) | ||||||||
NET INCOME | $ | 15,762 | $ | 16,471 | $ | 17,086 |
CONDENSED INCOME STATEMENTS | |||
(In Thousands) | 2013 | 2012 | 2011 |
Dividends from Citizens & Northern Bank | $11,108 | $9,245 | $7,856 |
Expenses | (108) | (105) | (94) |
Income before equity in undistributed income | |||
of subsidiaries | 11,000 | 9,140 | 7,762 |
Equity in undistributed income of subsidiaries | 7,594 | 13,565 | 15,606 |
NET INCOME | $18,594 | $22,705 | $23,368 |
CONDENSED STATEMENT OF CASH FLOWS | ||||||||||||
(In Thousands) | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 15,762 | $ | 16,471 | $ | 17,086 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Equity in undistributed net income of Subsidiaries | (1,169 | ) | (5,136 | ) | 5,410 | |||||||
Decrease (increase) in other assets | 20 | 12 | (36 | ) | ||||||||
(Decrease) increase in other liabilities | (6 | ) | 12 | 1 | ||||||||
Net Cash Provided by Operating Activities | 14,607 | 11,359 | 22,461 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Proceeds from sale of treasury stock | 263 | 381 | 123 | |||||||||
Tax benefit from compensation plans, net | 151 | 143 | 137 | |||||||||
Purchase of treasury stock | (3,723 | ) | (4,415 | ) | (4,002 | ) | ||||||
Dividends paid | (11,112 | ) | (11,245 | ) | (11,392 | ) | ||||||
Net Cash Used in Financing Activities | (14,421 | ) | (15,136 | ) | (15,134 | ) | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 186 | (3,777 | ) | 7,327 | ||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 5,847 | 9,624 | 2,297 | |||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 6,033 | $ | 5,847 | $ | 9,624 |
CONDENSED STATEMENTS OF CASH FLOWS | |||
(In Thousands) | |||
2013 | 2012 | 2011 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |||
Net income | $18,594 | $22,705 | $23,368 |
Adjustments to reconcile net income to net | |||
cash provided by operating activities: | |||
Equity in undistributed income of subsidiaries | (7,594) | (13,565) | (15,606) |
Decrease (increase) in other assets | 7 | 116 | 11 |
Increase (decrease) in other liabilities | 0 | 6 | (62) |
Net Cash Provided by Operating Activities | 11,007 | 9,262 | 7,711 |
CASH FLOWS FROM FINANCING ACTIVITIES: | |||
Proceeds from sale of treasury stock | 184 | 229 | 71 |
Tax benefit from compensation plans, net | 127 | 104 | 67 |
Purchase of treasury stock | 0 | 0 | (1,022) |
Dividends paid | (10,916) | (9,061) | (6,224) |
Net Cash Used in Financing Activities | (10,605) | (8,728) | (7,108) |
INCREASE IN CASH AND CASH EQUIVALENTS | 402 | 534 | 603 |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 1,895 | 1,361 | 758 |
CASH AND CASH EQUIVALENTS, END OF YEAR | $2,297 | $1,895 | $1,361 |
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20. SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
The following table presents summarized quarterly financial data for 20132016 and 2012:2015:
(In Thousands Except Per Share Data) (Unaudited)
2013 Quarter Ended | ||||||||||||||||||||
2016 Quarter Ended | ||||||||||||||||||||
Mar. 31, | June 30, | Sept. 30, | Dec. 31, | Mar. 31, | June 30, | Sept. 30, | Dec. 31, | |||||||||||||
Interest income | $12,647 | $12,355 | $12,027 | $11,885 | $ | 10,937 | $ | 10,924 | $ | 11,131 | $ | 11,106 | ||||||||
Interest expense | 1,600 | 1,415 | 1,396 | 1,354 | 904 | 925 | 944 | 920 | ||||||||||||
Net interest income | 11,047 | 10,940 | 10,631 | 10,531 | 10,033 | 9,999 | 10,187 | 10,186 | ||||||||||||
Provision for loan losses | 183 | 66 | 239 | 1,559 | ||||||||||||||||
Net interest income after provision for loan losses | 10,864 | 10,874 | 10,392 | 8,972 | ||||||||||||||||
Provision (credit) for loan losses | 368 | 318 | 538 | (3 | ) | |||||||||||||||
Net interest income after provision (credit) for loan losses | 9,665 | 9,681 | 9,649 | 10,189 | ||||||||||||||||
Other income | 3,843 | 4,191 | 4,293 | 4,124 | 3,690 | 3,906 | 3,884 | 4,031 | ||||||||||||
Net gains on available-for-sale securities | 1,159 | 100 | 193 | 266 | 383 | 122 | 584 | 69 | ||||||||||||
Loss on prepayment of debt | 1,023 | 0 | ||||||||||||||||||
Other expenses | 8,553 | 8,520 | 8,610 | 7,788 | 9,072 | 8,535 | 8,579 | 8,558 | ||||||||||||
Income before income tax provision | 6,290 | 6,645 | 6,268 | 5,574 | 4,666 | 5,174 | 5,538 | 5,731 | ||||||||||||
Income tax provision | 1,584 | 1,671 | 1,579 | 1,349 | 1,093 | 1,303 | 1,451 | 1,500 | ||||||||||||
Net income available to common shareholders | $4,706 | $4,974 | $4,689 | $4,225 | ||||||||||||||||
Net income | $ | 3,573 | $ | 3,871 | $ | 4,087 | $ | 4,231 | ||||||||||||
Net income per share – basic | $0.38 | $0.40 | $0.38 | $0.34 | $ | 0.29 | $ | 0.32 | $ | 0.34 | $ | 0.35 | ||||||||
Net income per share – diluted | $0.38 | $0.40 | $0.38 | $0.34 | $ | 0.29 | $ | 0.32 | $ | 0.34 | $ | 0.35 |
2012 Quarter Ended | ||||||||||||||||||||
2015 Quarter Ended | ||||||||||||||||||||
Mar. 31, | June 30, | Sept. 30, | Dec. 31, | Mar. 31, | June 30, | Sept. 30, | Dec. 31, | |||||||||||||
Interest income | $14,776 | $14,529 | $13,836 | $13,491 | $ | 11,163 | $ | 11,186 | $ | 11,134 | $ | 11,036 | ||||||||
Interest expense | 2,502 | 2,401 | 2,228 | 1,900 | 1,213 | 1,176 | 1,126 | 1,087 | ||||||||||||
Net interest income | 12,274 | 12,128 | 11,608 | 11,591 | 9,950 | 10,010 | 10,008 | 9,949 | ||||||||||||
(Credit) provision for loan losses | (182) | 367 | 236 | (133) | ||||||||||||||||
Net interest income after (credit) provision for loan losses | 12,456 | 11,761 | 11,372 | 11,724 | ||||||||||||||||
Provision for loan losses | 3 | 221 | 302 | 319 | ||||||||||||||||
Net interest income after provision for loan losses | 9,947 | 9,789 | 9,706 | 9,630 | ||||||||||||||||
Other income | 3,655 | 4,279 | 4,122 | 4,327 | 3,556 | 3,962 | 3,961 | 3,999 | ||||||||||||
Net (losses) gains on available-for-sale securities | (2) | 203 | 2,430 | 51 | ||||||||||||||||
Loss on prepayment of debt | 0 | 143 | 2,190 | 0 | ||||||||||||||||
Net gains on available-for-sale securities | 74 | 932 | 79 | 1,776 | ||||||||||||||||
Loss on prepayment of borrowings | 0 | 910 | 0 | 1,663 | ||||||||||||||||
Other expenses | 8,413 | 8,321 | 8,226 | 7,954 | 8,533 | 7,964 | 8,117 | 8,416 | ||||||||||||
Income before income tax provision | 7,696 | 7,779 | 7,508 | 8,148 | 5,044 | 5,809 | 5,629 | 5,326 | ||||||||||||
Income tax provision | 2,109 | 2,094 | 2,014 | 2,209 | 1,229 | 1,452 | 1,395 | 1,261 | ||||||||||||
Net income available to common shareholders | $5,587 | $5,685 | $5,494 | $5,939 | ||||||||||||||||
Net income | $ | 3,815 | $ | 4,357 | $ | 4,234 | $ | 4,065 | ||||||||||||
Net income per share – basic | $0.46 | $0.45 | $0.48 | $ | 0.31 | $ | 0.36 | $ | 0.35 | $ | 0.33 | |||||||||
Net income per share – diluted | $0.46 | $0.45 | $0.48 | $ | 0.31 | $ | 0.36 | $ | 0.35 | $ | 0.33 |
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors of Citizens & Northern Corporation:
We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries as of December 31, 20132016 and 20122015 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013.2016. Citizens & Northern Corporation and subsidiaries’ management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens & Northern Corporation and subsidiaries as of December 31, 20132016 and 2012,2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 20132016 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2013,2016, based on criteria established inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 20, 201416, 2017 expressed an unqualified opinion.
/s/ | |
Williamsport, Pennsylvania
February 16, 2017
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation’s management, under the supervision of and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensure that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no significant changes in the Corporation’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or that is reasonably likely to affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Corporation’s management is responsible for establishing and maintaining adequateeffective internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Corporation’s system of internal control over financial reporting has been designed to provide reasonable assurance to the Corporation’s management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Any system of The Corporation’s internal control over financial reporting no matter how well designed, hasincludes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Corporation’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of the Corporation’s management and directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, includinginternal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the possibilityrisk that a control can be circumvented or overridden and misstatements due to error or fraudcontrols may occur and not be detected. Also,become inadequate because of changes in conditions, internal control effectivenessor that the degree of compliance with the policies and procedures may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation and presentation.deteriorate.
The Corporation’s management has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2013. To make this assessment, we used2016, based on the criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework, issuedframework set forth by the Committee of Sponsoring Organizations of the Treadway Commission.Commission inInternal Control – Integrated Framework(2013). Based on ourthat assessment, and based on such criteria, we believeconcluded that, as of December 31, 2013,2016, the Corporation’s internal control over financial reporting was effective.is effective based on the criteria established inInternal Control – Integrated Framework(2013).
ParenteBeard LLC,Baker Tilly Virchow Krause, LLP, the independent registered public accounting firm that audited the Corporation’s consolidated financial statements, has issued an audit report on the Corporation’s internal control over financial reporting as of December 31, 2013.2016. That report appears below.
February | By: | /s/ |
Date | President and Chief Executive Officer | |
February | By: | /s/ Mark A. Hughes |
Date | Treasurer and Chief Financial Officer |
88 |
Report Of Independent Registered Public Accounting Firm
Stockholders and Board of Directors of Citizens & Northern Corporation:
We have audited Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2013,2016, based on criteria established inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Citizens & Northern Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted accounting principles.in the United States of America. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Citizens and& Northern Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2016, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows of Citizens & Northern Corporation and subsidiaries, and our report dated February 20, 201416, 2017 expressed an unqualified opinion.
Williamsport, Pennsylvania
February 16, 2017
90 |
There was no information the Corporation was required to disclose in a report on Form 8-K during the fourth quarter 20132016 that was not disclosed.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning Directors and Executive Officers is incorporated herein by reference to disclosure under the captions “Proposal 1 - Election of Directors,” “Executive Officers,” “Information Concerning Security Ownership” and “Meetings and Committees of the Board of Directors” of the Corporation’s proxy statement dated March 7, 201410, 2017 for the annual meeting of stockholders to be held on April 17, 2014.20, 2017.
The Corporation’s Board of Directors has adopted a Code of Ethics, available on the Corporation’s web site atwww.cnbankpa.com for the Corporation’s employees, officers and directors. (The provisions of the Code of Ethics are also included in the Corporation’s employee handbook.)
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by reference to disclosure under the captions “Compensation Discussion and Analysis” and “Executive Compensation Tables” of the Corporation’s proxy statement dated March 7, 201410, 2017 for the annual meeting of stockholders to be held on April 17, 2014.20, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to disclosure under the caption “Beneficial Ownership of Executive Officers and Directors” of the Corporation’s proxy statement dated March 7, 201410, 2017 for the annual meeting of stockholders to be held on April 17, 2014.20, 2017.
“Equity Compensation Plan Information” as required by Item 201(d) of Regulation S-K is incorporated by reference herein from Item 5 (Market for Registrant’s Common Equity and Related Stockholder Matters) of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning loans and depositsdeposit balances with Directors and Executive Officers is provided in Note 15 to the Consolidated Financial Statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K. Additional information, including information concerning director independence, is incorporated herein by reference to disclosure appearing under the captions “Director Independence” and "Related Person Transaction and Policies" of the Corporation's proxy statement dated March 7, 201410, 2017 for the annual meeting of stockholders to be held on April 17, 2014.20, 2017.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning services provided by the Corporation’s independent auditors, ParenteBeard LLC,auditor Baker Tilly Virchow Krause, LLP, the audit committee’s pre-approval policies and procedures for such services, and fees paid by the Corporation to that firm, is incorporated herein by reference to disclosure under the caption “Fees of Independent Public Accountants” of the Corporation’s proxy statement dated March 7, 201410, 2017 for the annual meeting of stockholders to be held on April 17, 2014.20, 2017.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1). The following consolidated financial statements are set forth in Part II, Item 8:
Page | |
Report of Independent Registered Public Accounting Firm | |
Financial Statements: | |
Consolidated Balance Sheets - December 31, | 41 |
Consolidated Statements of Income - Years Ended | |
December 31, | 42 |
Consolidated Statements of Comprehensive Income - Years | |
Ended December 31, | 43 |
Consolidated Statements of Changes in Stockholders' Equity | |
44 | |
Consolidated Statements of Cash Flows - Years Ended | |
December 31, | 45 |
Notes to Consolidated Financial Statements |
(a)(2) Financial statement schedules are not applicable or included in the financial statements or related notes.
2. Plan of acquisition, reorganization, arrangement, | ||
liquidation or succession | Not applicable | |
3. (i) Articles of Incorporation | Incorporated by reference to Exhibit 3.1 of | |
the Corporation's Form 8-K filed | ||
September 21, 2009 | ||
3. (ii) By-laws | Incorporated by reference to Exhibit 3.1 of the | |
Corporation's Form 8-K filed April 19, 2013 | ||
4. Instruments defining the rights of Security holders, including | ||
Indentures | Not applicable | |
9. Voting trust agreement | Not applicable | |
10. Material contracts: | ||
10.1 Form of Restricted Stock agreement dated January | ||
4, 2017 between the Corporation and | ||
to the Citizens & Northern Corporation Stock Incentive Plan | Filed herewith | |
4, 2017 between the Corporation and | ||
the Citizens & Northern Corporation Stock Incentive Plan | Filed herewith | |
4, 2017 between the Corporation and | ||
the Citizens & Northern Corporation Independent Directors Stock Incentive Plan |
Filed herewith | ||
Filed herewith | ||
10.5 2017 Annual Performance Incentive Award Plan - Mortgage Lenders | Filed herewith |
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10.6 Employment agreement dated | Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on February 9, 2015 | |
10.7 Employment agreement dated September 19, 2013 between the Corporation and | Incorporated by reference to Exhibit 10.2 filed with Corporation’s Form 8-K on September 19, 2013 | |
10.8 Employment agreement dated September 19, 2013 between the Corporation and Harold F. Hoose, III | Incorporated by reference to Exhibit | |
Corporation’s Form 8-K on September 19, 2013 | ||
10.9 Employment agreement dated September 19, 2013 between the Corporation and Deborah E. Scott | Incorporated by reference to Exhibit | |
Corporation’s Form 8-K on September 19, 2013 | ||
10.10 | Incorporated by reference to Exhibit | |
Corporation’s Form | ||
10.11 Form of Indemnification Agreement dated January 2, 2013 between the Corporation and Shelley L. D'Haene | Incorporated by reference to Exhibit 10.5 filed with | |
Corporation’s Form 10-K on February 21, 2013 | ||
10.12 Form of Indemnification Agreement dated January 19, | ||
2011 between the Corporation and John M. Reber | Incorporated by reference to Exhibit 10.6 filed with Corporation's Form 10-K on Feb. 28, 2011 | |
10.13 Form of Indemnification Agreements dated May 2004 between the Corporation and the Directors and certain officers | Incorporated by reference to Exhibit 10.1 filed with Corporation’s 10-K on March 14, 2005 | |
10.14 Change in Control Agreement dated March 17, 2015 between the Corporation and Stan R. Dunsmore | Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on May 8, 2015 | |
10.15 Change in Control Agreement dated January 2, 2013 between the Corporation and Shelley L. D'Haene | Incorporated by reference to Exhibit 10.7 filed with | |
Corporation’s Form 10-K on February 21, 2013 | ||
Incorporated by reference to Exhibit | ||
10.18 filed with | ||
on | ||
between the Corporation and Thomas L. Rudy, Jr. | Incorporated by reference to Exhibit 10.2 filed with the Corporation's Form 10-K | |
on March | ||
10.18 Third Amendment to Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit A to | |
the Corporation's proxy statement | ||
dated March 18, 2008 for the annual meeting | ||
of stockholders held on April 15, 2008 | ||
10.19 Second Amendment to Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.5 | |
filed with the Corporation's Form 10-K | ||
on March 10, 2004 | ||
10.20 First Amendment to Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.6 | |
filed with the Corporation's Form 10-K | ||
on March 10, 2004 | ||
10.21 Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.7 | |
filed with the Corporation's Form 10-K | ||
on March 10, 2004 | ||
10.22 First Amendment to Citizens & Northern Corporation Independent Directors Stock Incentive Plan | Incorporated by reference to Exhibit B to | |
the Corporation's proxy statement | ||
dated March 18, 2008 for the annual | ||
meeting of stockholders held on April 15, 2008 |
93 |
10.23 Citizens & Northern Corporation Independent Directors Stock Incentive Plan | Incorporated by reference to Exhibit A to | |
the Corporation's proxy statement | ||
dated March 19, 2001 for the annual | ||
meeting of stockholders held on | ||
April 17, 2001. | ||
10.24 Citizens & Northern Corporation Supplemental Executive Retirement Plan (as amended and restated) | Incorporated by reference to Exhibit 10.21 | |
filed with the Corporation's Form 10-K | ||
on March 6, 2009 | ||
11. Statement re: computation of per share earnings | Information concerning the computation of | |
earnings per share is provided in Note 4 | ||
to the Consolidated Financial Statements, | ||
which is included in Part II, Item 8 of Form 10-K | ||
12. Statements re: computation of ratios | Not applicable | |
13. Annual report to security holders, Form 10-Q or | ||
quarterly report to security holders | Not applicable | |
14. Code of ethics | The Code of Ethics is available through the | |
Corporation's website at www.cnbankpa.com. | ||
To access the Code of Ethics, click on | ||
“Pages within Investor Relations,” “Corporate Governance | ||
16. Letter re: change in certifying accountant | Not applicable | |
18. Letter re: change in accounting principles | Not applicable | |
21. Subsidiaries of the registrant | Filed herewith | |
22. Published report regarding matters submitted to | ||
vote of security holders | Not applicable | |
23. | Filed herewith | |
24. Power of attorney | Not applicable | |
31. Rule 13a-14(a)/15d-14(a) certifications: | ||
31.1 Certification of Chief Executive Officer | Filed herewith | |
31.2 Certification of Chief Financial Officer | Filed herewith | |
32. Section 1350 certifications | Filed herewith | |
33. Report on assessment of compliance with servicing criteria for | ||
asset-backed securities | Not applicable | |
34. Attestation report on assessment of compliance with servicing | ||
criteria for asset-backed securities | Not applicable | |
35. Service compliance statement | Not applicable | |
99. Additional exhibits: | ||
99.1 Additional information mailed or made available online to | ||
shareholders with proxy statement and Form 10-K on March 10, 2017 | Filed herewith | |
100. XBRL-related documents | Not applicable | |
101. Interactive data file | Filed herewith |
94 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Citizens & Northern Corporation has duly caused this report to behas been signed on its behalfbelow by the undersigned, thereunto duly authorized:following persons on behalf of the registrant and in the capacities indicated.
By: /s/ | |
President and Chief Executive Officer | |
Date: February | |
By: /s/ Mark A. Hughes | |
Treasurer and Principal Accounting Officer | |
Date: February |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
BOARD OF DIRECTORS
/s/ | Dennis F. Beardslee | /s/ | Edward H. Owlett, III |
Dennis F. Beardslee | Edward H. Owlett, III | ||
Date: February | Date: February | ||
/s/ | Jan E. Fisher | /s/ | |
Jan E. Fisher | |||
Date: February | Date: February | ||
/s/ | R. Bruce Haner | /s/ | |
R. Bruce Haner | |||
Date: February | Date: February | ||
/s/ | Susan E. Hartley | /s/ | |
Susan E. Hartley | |||
Date: February | Date: February | ||
/s/ | Leo F. Lambert | /s/ | |
Leo F. Lambert | |||
Date: February | Date: February | ||
/s/ | /s/ | Frank G. Pellegrino | |
Frank G. Pellegrino | |||
Date: February | |||
Date: February 16, 2017 |
95 |