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

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

For the fiscal year endedDecember 31, 20142017

OR

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

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

For the transition period from ____________________________ to _________________________._____________.

Commission file number: 0-16084

 

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

 

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

 

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant'sRegistrant’s telephone number including area code)

 

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

 

Title of Each ClassName of Exchange Where Registered
CommonCommon Stock Par Value $1.00The 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. Yesx  No¨

 

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'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨x

 

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

(Check one:)one):    Large accelerated filer¨    Accelerated filerx    Non-accelerated filer¨    Smaller reporting company¨    Emerging growth company¨

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

 

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

Yes¨  Nox

 

The aggregate market value of the registrant'sregistrant’s common stock held by non-affiliates at June 30, 2014,2017, the registrant’s most recently completed second fiscal quarter, was $236,364,605.$274,571,344.

 

The number of shares of common stock outstanding at February 20, 20158, 2018 was 12,263,02712,246,834.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 23, 201519, 2018 are incorporated by reference into Parts III and IV of this report.

 

TABLE OF CONTENTS

Page(s)
Part I:
Item 1. Business3-4
Item 1A. Risk Factors4-7
Item 1B. Unresolved Staff Comments7
Item 2. Properties7
Item 3. Legal Proceedings8
Item 4. Mine Safety Disclosure8
Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities8-10
Item 6. Selected Financial Data11-12
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations13-38
Item 7A. Quantitative and Qualitative Disclosures About Market   Risk38-40
Item 8. Financial Statements and Supplementary Data41-87
Item 9. Changes in and Disagreements with Accountants on   Accounting and Financial Disclosure88
Item 9A. Controls and Procedures88
Item 9B. Other Information89
Part III:
Item 10. Directors, Executive Officers and Corporate Governance89
Item 11. Executive Compensation89
Item 12. Security Ownership of Certain Beneficial Owners and   Management and Related Stockholder Matters89
Item 13. Certain Relationships and Related Transactions, and   Director Independence89
Item 14. Principal Accountant Fees and Services89
Part IV:
Item 15. Exhibits and Financial Statement Schedules90-93
Signatures94

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PART I

 

ITEM 1. BUSINESS

 

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

 

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

 

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

 

In December 2017, C&N Bank established a new entity, Northern Tier Holding LLC, for the purpose of acquiring, holding and disposing of real property acquired by the Bank. C&N Bank is the sole member of Northern Tier Holding LLC, which had no transactions in 2017.

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 AlleganyChemung 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 2010, repurchased preferred stock of $26.440 million and redeemed a warrant from the TARP Capital Purchase Program;

·merged the operations of First State Bank into C&N Bank and Canisteo Valley Corporation into Citizens & Northern Corporation in 2010;

·in 2011, sold the banking facility at 130 Court Street, Williamsport, PA, and entered into a leasing arrangement to continue to offer banking and trust services from the facility, resulting in an estimated $122,000 (pre-tax) reduction in operating expenses in 2012;

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

·in 2013, worked with consultants on projects which resulted in ongoing increases in revenues from service charges on deposit accounts, starting primarily in the fourth quarter 2013, and ongoing reductions in electronic funds processing expenses and other benefits over approximately the next five years; andexpenses;

·in 2014, approved a new treasury stock repurchase program. Under the new program the Corporation is authorized tofor repurchase of 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 2014, 208,300total, 622,500 shares hadwere repurchased for a total cost of $12,140,000, at an average price of $19.50 per share;

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

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·in 2016, approved a new treasury stock repurchase program authorizing repurchase of up to 600,000 shares of the Corporation’s common stock. Through December 31, 2017, there have been repurchased.no repurchases of shares under this program; and

·in March 2017, opened a loan production office in Elmira, New York.

 

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. After a surge of activity in 2009 through most of 2011, the market price of natural gas declined, causing Marcellus Shale natural gas exploration activity to slow, though some activity has continued to occur throughout the Corporation’s market area and this activity continues to havearea. Through December 31, 2017, the Corporation has not experienced significant credit issues as a significant impact on economic opportunities throughout the area. Over approximately the past five years, a significant portionresult of the Corporation’s new business opportunitiesexpansion and subsequent reduction in lending, Trust and other services arose either directly or indirectly from Marcellus Shale-related activity. Due to its pervasive nature, it is virtually impossible to quantify the aggregate impact of Marcellus Shale-related activity on the Corporation’s financial position at December 31, 2014 and results of operations.

 

At December 31, 2014,2017, C&N Bank had total assets of $1,228,210,000,$1,262,642,000, total deposits of $978,232,000,$1,016,035,000, net loans outstanding of $623,209,000$806,857,000 and 278full-time296 full-time equivalent employees.

 

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

 

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

 

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

 

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

 

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

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

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Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. For additional information regarding interest rate risk, see Part II, Item 7A, "Quantitative“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 AlleganyChemung 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 has slowed somewhat from the level in 2009 through 2011, 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'sCorporation’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation'sCorporation’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'sCorporation’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'sCorporation’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'sCorporation’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'sCorporation’s financial condition, results of operations or liquidity.

 

4

Mortgage BankingIn SeptemberSince 2009, the Corporation entered into an agreement to originatehas originated and sellsold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation’s mortgage sales activity under this program was not significant in 2009, but has subsequently increased. Inprogram. Since 2014, the Corporation entered into an agreementhas also originated and in June 2014 began to originate and sellsold residential mortgage loans to the secondary market through the MPFXMPF Original program, which is alsoprogram. Both of these programs are administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, 2014,2017, the total outstanding balance of residential mortgages sold and serviced through the two programs amounted to $152,505,000.$169,725,000. The Corporation must strictly adhere to the MPF Xtra and MPFXMPF Original program guidelines for origination, underwriting and servicing loans, and failure to do so may result in the Corporation being forced to repurchase loans or being dropped from the program. As of December 31, 2014,2017, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,802,000.$1,805,000. If the volume of such forced repurchases of loans were to increase significantly, or if the Corporation were to be dropped from the programs, it could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

 

5

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 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 RiskMarketsIn 2009, the Corporation’s earnings were materially impaired by securities losses. MuchThe fair value of the Corporation’s 2009 lossesavailable-for-sale securities, as well as the revenues the Corporation earns from trust-preferredits Trust and Financial Management and brokerage services, are sensitive to price fluctuations and market events.

Declines in the values of the Corporation’s securities and other securities stemholdings, combined with adverse changes in the expected cash flows 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 fromthese investments, could result in obligations of states and political subdivisions (also known as municipal bonds) and other debt securities. other-than-temporary impairment charges.

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

 

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

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'sCorporation’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.

FDIC Insurance Assessments -In 2008 and 2009, higher levels of bank failures dramatically increased the resolution costs of the Federal Deposit Insurance Corporation, or the FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress increased federal deposit insurance coverage, placing additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, in 2009 the FDIC increased assessment rates. As a result of lowering assessment levels for the Corporation and other US banks, the Corporation’s 2017 FDIC assessment expense decreased to $376,000 from $488,000 in 2016 and from $603,000 in 2015. Although ourthe Corporation’s total expenses from FDIC assessments have steadily decreased – to $600,000 in 2014 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.

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Bank Secrecy Act and Related Laws and Regulations -These laws and regulations have significant implications for all financial institutions. They increaseIn recent years, they have increased due diligence requirements and reporting obligations for financial institutions, createcreated new crimes and penalties, and requirerequired 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'sCorporation’s financial condition, results of operations or liquidity.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

 

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. All of the properties are in good condition. None of the owned properties are subject to encumbrance.

 

A listing of properties is as follows:

 

Main administrative offices:

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

 

Branch offices – Citizens & Northern Bank:

428 S. Main Street 514 Main Street 2 East Mountain Avenue **
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 

 

Loan production office of Citizens & Northern Bank:

250 East Water Street

Elmira, NY 14901

 

Facilities management office:

13 Water Street

Wellsboro, PA 16901

** designates leased branch facility

 

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ITEM 3. LEGAL PROCEEDINGS

 

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

 

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT'SREGISTRANT’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, 2014,2017, there were 2,3972,206 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 20142017 and 2013.2016.

 

 2014  2013     2017       2016    
 Dividend Dividend      Dividend       Dividend 
 Declared Declared      Declared       Declared 
 per per      per       per 
HighLowQuarter HighLowQuarter High  Low  Quarter  High  Low  Quarter 
First quarter$20.74$18.19$0.26 $20.00$18.65$0.25 $26.50  $22.31  $0.26  $20.99  $19.26  $0.26 
Second quarter20.1017.940.26 20.4618.510.25  24.40   22.00   0.26   21.00   19.40   0.26 
Third quarter20.1018.500.26 21.4519.080.25  25.42   22.01   0.26   22.67   20.00   0.26 
Fourth quarter21.4918.830.26 21.0019.370.25  26.75   23.02   0.26   26.57   20.54   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.

 

Effective July 17, 2014,April 21, 2016, the Corporation terminated its existing treasury stock repurchase programs andCorporation’s Board of Directors approved a new treasury stock repurchase program. Under the newthis program, the Corporation is authorized to repurchase up to 622,500600,000 shares of the Corporation’s common stock or approximatelyslightly less than 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 new program may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.

Consistent with previous programs, theApril 19, 2016. The Board of Directors’ July 17, 2014April 21, 2016 authorization provides that: (1) the new treasury stock repurchase program shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to

the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. Through December 31, 2014, 208,300 shares hadTo date, no purchases have been repurchased at a cost of $4,002,000.made under this repurchase program.

8

The following table sets forth a summary of purchases by the Corporation, onin the open market, of its equity securities during the fourth quarter 2014:2017:

 

PeriodTotal 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, 201448,200$19.34177,200 445,300
November 1 - 30, 201410,600$19.46187,800 434,700
December 1 - 31, 201420,500$19.49208,300 414,200
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, 2017  0  $-   0   600,000 
November 1 - 30, 2017  0  $-   0   600,000 
December 1 - 31, 2017  0  $-   0   600,000 

 

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, 20092012 and ended December 31, 2014.2017. 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.

 

 

9

  Period Ending 
Index 12/31/12  12/31/13  12/31/14  12/31/15  12/31/16  12/31/17 
Citizens & Northern Corporation  100.00   114.68   121.20   129.69   170.12   162.63 
Russell 2000 Index  100.00   138.82   145.62   139.19   168.85   193.58 
Peer Group  100.00   125.12   137.72   145.57   199.56   229.49 

Peer Group includes all publicly traded SEC filing Commercial Banks & Thrifts within NJ, NY, OH and PA with assets between $750M and $3.5B as of 9/30/2017

Source: S&P Global Market Intelligence © 2017

 

       
Index12/31/0912/31/1012/31/1112/31/1212/31/1312/31/14
Citizens & Northern Corporation100.00160.82206.97221.11253.58267.98
Russell 2000100.00126.86121.56141.43196.34205.95
CZNC Peer Group Index*100.00113.13106.47126.35158.15181.07

The Corporation’s peer group consists of banks headquartered in Pennsylvania with total assets of $700 million to $2 billion as of September 30, 2014. This peer group consists of ACNB Corporation, Gettysburg; AmeriServ Financial, Inc., Johnstown; Citizens Financial Services, Inc., Mansfield; 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;1st Summit Bancorp of Johnstown, Inc., Johnstown; Mid Penn Bancorp, Inc., Millersburg; Embassy Bancorp, Inc., Bethlehem.

The data for this graph was obtained from SNL Financial LC, Charlottesville, VA.

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, 2014.2017.

 

   Number of
 Number ofWeighted-Securities
 Securities to beaverageRemaining
 Issued UponExercisefor Future
 Exercise ofPrice ofIssuance Under
 OutstandingOutstandingEquity Compen-
 OptionsOptionssation Plans
Equity compensation plans   
 approved by shareholders 316,157$19.05 317,161
    
Equity compensation plans   
 not approved by shareholders0N/A0
        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  165,660  $18.49  287,575
           
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)20142013201220112010
Interest and fee income$46,009$48,914$56,632$61,256$62,114
Interest expense5,1225,7659,03113,55619,245
Net interest income40,88743,14947,60147,70042,869
Provision (credit) for loan losses4762,047288(285)1,191
Net interest income after provision (credit) for loan losses40,41141,10247,31347,98541,678
Noninterest income excluding securities gains15,42016,45116,38313,89713,809
Net impairment losses recognized in earnings from     
 available-for-sale securities0(25)(67)0(433)
Net realized gains on available-for-sale securities1,1041,7432,7492,2161,262
Loss on prepayment of debt01,0232,33300
Noninterest expense excluding loss on prepayment of debt34,15733,47132,91432,01631,461
Income before income tax provision22,77824,77731,13132,08224,855
Income tax provision5,6926,1838,4268,7145,800
Net income17,08618,59422,70523,36819,055
U.S. Treasury preferred dividends00001,474
Net income available to common shareholders$17,086$18,594$22,705$23,368$17,581
      
PER COMMON SHARE:     
Basic earnings per share$1.38$1.51$1.86$1.92$1.45
Diluted earnings per share$1.38$1.50$1.85$1.92$1.45
Cash dividends declared per share$1.04$1.00$0.84$0.58$0.39
Book value per common share at period-end$15.34$14.49$14.89$13.77$11.43
Tangible book value per common share at period-end$14.36$13.51$13.91$12.77$10.42
Weighted average common shares outstanding - basic12,390,06712,352,38312,235,74812,162,04512,131,039
Weighted average common shares outstanding - diluted12,412,05012,382,79012,260,20812,166,76812,131,039
      
END OF PERIOD BALANCES (Dollars In Thousands)     
Available-for-sale securities$516,807$482,658$472,577$481,685$443,956
Gross loans630,545644,303683,910708,315730,411
Allowance for loan losses7,3368,6636,8577,7059,107
Total assets1,241,9631,237,6951,286,9071,323,7351,316,588
Deposits967,989954,5161,006,1061,018,2061,004,348
Borrowings78,59796,72389,379130,313166,908
Stockholders' equity188,362179,472182,786167,385138,944
Common shares outstanding12,279,98012,390,06312,274,03512,155,52912,153,598
      
AVERAGE BALANCES (In Thousands)     
Total assets1,239,8971,237,0961,305,1631,313,4451,326,145
Earning assets1,155,4011,145,3401,199,5381,208,5841,205,608
Gross loans627,753656,495700,241714,421721,997
Deposits965,418964,0311,008,4691,001,125965,615
Stockholders' equity185,469181,412175,822152,718150,133

 

 As of or for the Year Ended December 31,  
 20142013201220112010
KEY RATIOS     
Return on average assets1.38%1.50%1.74%1.78%1.44%
Return on average equity9.21%10.25%12.91%15.30%12.69%
Average equity to average assets14.96%14.66%13.47%11.63%11.32%
Net interest margin (1)3.80%4.05%4.26%4.22%3.81%
Efficiency (2)57.59%53.27%48.82%49.37%52.64%
Cash dividends as a % of diluted earnings per share75.36%66.67%45.41%30.21%26.90%
Tier 1 leverage13.89%13.78%12.53%10.93%9.20%
Tier 1 risk-based capital26.26%25.15%22.86%19.95%15.87%
Total risk-based capital27.60%26.60%24.01%21.17%17.17%
Tangible common equity/tangible assets14.34%13.66%13.39%11.84%9.71%
Nonperforming assets/total assets1.34%1.53%0.82%0.73%0.92%
Nonperforming loans/total loans2.45%2.80%1.41%1.19%1.58%
Allowance for loan losses/total loans1.16%1.34%1.00%1.09%1.25%
Net charge-offs/average loans0.29%0.04%0.16%0.16%0.05%
10

ITEM 6. SELECTED FINANCIAL DATA

  As of or for the Year Ended December 31, 
INCOME STATEMENT (In Thousands) 2017  2016  2015  2014  2013 
Interest and fee income $45,863  $44,098  $44,519  $46,009  $48,914 
Interest expense  3,915   3,693   4,602   5,122   5,765 
Net interest income  41,948   40,405   39,917   40,887   43,149 
Provision for loan losses  801   1,221   845   476   2,047 
Net interest income after provision for loan losses  41,147   39,184   39,072   40,411   41,102 
Noninterest income excluding securities gains  16,153   15,511   15,478   15,420   16,451 
Realized gains on available-for-sale securities, net  257   1,158   2,861   1,104   1,718 
Loss on prepayment of debt  0   0   2,573   0   1,023 
Noninterest expense excluding loss on prepayment of debt  36,967   34,744   33,030   34,157   33,471 
Income before income tax provision  20,590   21,109   21,808   22,778   24,777 
Income tax provision  7,156   5,347   5,337   5,692   6,183 
Net income $13,434  $15,762  $16,471  $17,086  $18,594 
Net income attributable to common shares $13,365  $15,677  $16,387  $17,009  $18,490 
                     
PER COMMON SHARE:                    
Basic earnings per share $1.10  $1.30  $1.35  $1.38  $1.51 
Diluted earnings per share $1.10  $1.30  $1.35  $1.38  $1.50 
Cash dividends declared per share $1.04  $1.04  $1.04  $1.04  $1.00 
Book value per common share at period-end $15.43  $15.36  $15.39  $15.34  $14.49 
Tangible book value per common share at period-end $14.45  $14.37  $14.41  $14.36  $13.51 
Weighted average common shares outstanding - basic  12,115,840   12,032,820   12,149,252   12,333,933   12,283,426 
Weighted average common shares outstanding - diluted  12,155,136   12,063,055   12,171,084   12,355,916   12,313,833 
END OF PERIOD BALANCES (Dollars In Thousands)                    
Available-for-sale securities $356,908  $395,077  $420,290  $516,807  $482,658 
Gross loans  815,713   751,835   704,880   630,545   644,303 
Allowance for loan losses  8,856   8,473   7,889   7,336   8,663 
Total assets  1,276,959   1,242,292   1,223,417   1,241,963   1,237,695 
Deposits  1,008,449   983,843   935,615   967,989   954,516 
Borrowings  70,955   64,629   92,263   78,597   96,723 
Stockholders’ equity  188,443   186,008   187,487   188,362   179,472 
Common shares outstanding  12,214,525   12,113,228   12,180,623   12,279,980   12,390,063 
AVERAGE BALANCES (In Thousands)                    
Total assets  1,247,759   1,229,866   1,243,209   1,239,897   1,237,096 
Earning assets  1,169,569   1,147,549   1,159,298   1,155,401   1,145,340 
Gross loans  780,640   723,076   657,727   627,753   656,495 
Deposits  990,917   970,447   968,201   965,418   964,031 
Stockholders’ equity  188,958   188,373   188,905   185,469   181,412 

11

ITEM 6. SELECTED FINANCIAL DATA (Continued)

  As of or for the Year Ended December 31, 
  2017  2016  2015  2014  2013 
KEY RATIOS                    
Return on average assets  1.08%  1.28%  1.32%  1.38%  1.50%
Return on average equity  7.11%  8.37%  8.72%  9.21%  10.25%
Average equity to average assets  15.14%  15.32%  15.19%  14.96%  14.66%
Net interest margin (1)  3.82%  3.76%  3.69%  3.80%  4.05%
Efficiency (2)  60.74%  59.22%  56.66%  57.59%  53.27%
Cash dividends as a % of diluted earnings per share  94.55%  80.00%  77.04%  75.36%  66.67%
Tier 1 leverage  14.23%  14.27%  14.31%  13.89%  13.78%
Tier 1 risk-based capital  21.95%  22.48%  23.29%  26.26%  25.15%
Total risk-based capital  23.07%  23.60%  24.40%  27.60%  26.60%
Tangible common equity/tangible assets  13.95%  14.15%  14.49%  14.34%  13.66%
Nonperforming assets/total assets  1.47%  1.43%  1.31%  1.34%  1.53%
Nonperforming loans/total loans  2.10%  2.07%  2.09%  2.45%  2.80%
Allowance for loan losses/total loans  1.09%  1.13%  1.12%  1.16%  1.34%
Net charge-offs/average loans  0.05%  0.09%  0.04%  0.29%  0.04%

 

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

 

(2) The efficiency ratio is calculated by dividing: (a) total noninterest expense excluding 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.

 

11
12 

 

ITEM 7. MANAGEMENT'SMANAGEMENT’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"“should”, “likely”, "expect"“expect”, “plan”, "anticipate"“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 2014,2017, net income totaled $17,086,000,$13,434,000, or $1.38$1.10 per common share - basic and diluted, as compared to $1.51$1.30 per share – basic and $1.50diluted in 2016 and $1.35 per share – basic and diluted in 2013 and $1.86 per share basic and $1.85 per share – diluted in 2012.2015. The results for 20142017 represented a return on average assets of 1.38%1.08% and a return on average equity of 9.21%7.11%. As described below, 2017 earnings were reduced for a tax charge in 2017 attributable to the recent reduction in the marginal corporate income tax rate.

 

20142017 vs. 20132016

 

NetIn December 2017, the federal corporate income per share – diluted for 2014tax rate was 8.0% lower thanlowered to 21% effective January 1, 2018, from the 35% marginal rate in 2013. Someeffect throughout 2017 and 2016. As a result of the morereduction in the income tax rate, the 2017 results include an additional income tax provision (expense) of $2,159,000 ($0.18 per share) related to a reduction in the carrying value of the net deferred tax asset. Management expects the Corporation’s income tax provision will be significantly lower in 2018 and on an ongoing basis as a result of the lower tax rate.

Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, and are valued using currently enacted tax rates. The reduction in the deferred tax asset in 2017 reflects the reduced expected future net benefit from these differences, and was recognized upon the new tax bill being signed into law in December 2017.

The table below provides a reconciliation of the Corporation’s annual earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to the comparative results excluding the additional tax charge referred to above. Management believes disclosure of 2017 earnings results, adjusted to exclude the additional income tax provision resulting from the change in the tax rate, provides useful information to investors for purposes of comparison with 2016 results.

13

RECONCILIATION OF NON-U.S. GAAP MEASURE

(Dollars in Thousands, Except Per Share Data)

  Year Ended Dec. 31, 2017  Year Ended Dec. 31, 2016 
     Diluted     Diluted 
     Earnings per     Earnings per 
  Earnings  Share  Earnings  Share 
Net Income $13,434  $1.10  $15,762  $1.30 
Additional Income Tax Provision Resulting from Change in Tax Rate  2,159       0     
                 
Net Income, Excluding Effect of Change in Tax Rate $15,593  $1.28  $15,762  $1.30 

The effective tax rate (income tax provision as a percentage of income before tax) for the year ended December 31, 2017 was 34.75% as compared to 25.33% for 2016. The higher effective tax rate for 2017 resulted mainly from the additional tax provision related to the change in the tax rate. Management estimates the effective tax rate for 2018 to be approximately 15%, reflecting the benefit of a lower corporate rate.

In addition to the income tax provision fluctuation discussed above, significant highlights related to annual earnings in 20142017 as compared to 20132016 are as follows:

 

·Net interest income totaled $40,887,000was $1,543,000 (3.8%) higher in 2014, down $2,262,000 (5.2%) from 2013. In 2014, yields earned on securities and loans fell by more than the corresponding drop in interest rates paid on deposits and borrowings. Also, average total loans outstanding were 4.3% lower in 20142017 as compared to 2013.2016. The net interest margin was 3.80%3.82% for 2017, up from 3.76% for 2016. Average total loans outstanding were up $57.6 million (8.0%) in 2014, down from 4.05%2017 as compared to 2016, while average total available-for-sale securities were lower by $33.2 million. Average total deposits were $20.5 million (2.1%) higher in 2013.2017 as compared to 2016.

 

·The provision for loan losses was $476,000$801,000 in 2014, down from $2,047,0002017, which was $420,000 lower than the amount in 2013.2016. In 2017, the provision included $1,023,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period and a $101,000 increase in the unallocated portion of the allowance, with a reduction in the provision of $323,000 related to the reduction in the collectively determined allowance for loan losses. The higher levelsreduction in the collectively determined allowance included the effects of expensean improvement in 2013the Corporation’s aggregate net charge-off experience and a reduction in the qualitative factors used to estimate the allowance as of December 31, 2017, partially offset by the effects of loan growth. The net increase in specific allowances in 2017 included a charge of $1,552,000 from loansan increase in the allowance related to one real estate secured commercial customer.loan of $391,000 to $919,000 at December 31, 2017 as compared to $528,000 at December 31, 2016. The increase in the specific allowance for this loan was based on an updated appraisal. In comparison, the provision of $1,221,000 for 2016 included $491,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, a $29,000 decrease in the unallocated portion of the allowance and an increase in the provision of $759,000 related to an increase in the collectively determined allowance for loan losses. The increase in the collectively determined portion of the allowance at December 31, 2016 as compared to the end of the preceding year resulted from loan growth and slight increases in the net charge-off and qualitative factors used to estimate the allowance.

 

·In 2014, noninterestNoninterest revenue excludingincreased $642,000 (4.1%) in 2017 as compared to 2016. Trust and financial management revenue increased $639,000 (13.4%), reflecting growth in assets under management resulting from market appreciation and new business, as well as a recent increase in fee levels and an estimated $215,000 of additional revenue from changing the frequency of billings to monthly for certain services. Interchange revenue from debit card transactions increased $278,000 (14.3%), reflecting improvements in card-related volumes and processing. Loan servicing fees, net, realizedincreased $141,000, as the fair value of mortgage servicing rights decreased by $168,000 in 2017 as compared to a reduction of $282,000 in 2016. Net gains from sales of loans decreased $211,000 (20.5%) due to a lower volume of sales. Service charges on deposit accounts decreased $207,000 (4.4%), as revenue from consumer overdrafts declined due to lower volume.

14

·Net gains on available-for-sale securities totaled $15,420,000, which was lower than the 2013 amount by $1,031,000 (6.3%). Gains$257,000 in 2017, a reduction of $901,000 from $1,158,000 in 2016. In 2016, gains from sales of residential mortgage loansbank stocks totaled $768,000$1,125,000, as the Corporation completed its program of bank stock sales that had begun in 2014, down from $1,969,0002015. The Corporation had no remaining investments in 2013, reflecting lower volume from refinancing activity. Service charges on deposit accounts fell $221,000 in 2014 as compared to 2013, a decline of 4.2%, primarily as a result of lower net overdraft fees. Total Trust and brokerage revenue of $5,391,000 in 2014 was $520,000 (10.7%) higher than in 2013.bank stocks throughout 2017.

 

·Realized gains from available-for-sale securities totaled $1,104,000 in 2014, while in 2013 realized gains from securities totaled $1,718,000 and losses from prepayment of borrowings totaled $1,023,000.
·In 2014,Total noninterest expenses totaled $34,157,000, which was $686,000 (2.0%increased $2,223,000 (6.4%) in 2017 as compared to 2016. Other operating expense increased $808,000. Within other operating expense, the largest variances included increases of $208,000 in loan collection expenses, $149,000 in accounting and auditing expense stemming from increased internal audit outsourcing and $130,000 in attorney fees (mainly related to a commercial loan workout situation). Employee benefits expense increased $657,000, including an increase of $594,000 from higher than total 2013 noninteresthealth care expenses excludingon the loss on prepayment of borrowings.Corporation’s partially self-insured plan. Salaries and wages expense increased $915,000$395,000 (2.6%), reflecting the net effects of annual merit-based salary increases, an increase to an average of 292 FTEs in 2014 as compared to 2013, mainly as2017 from 287 in 2016 and a resultnet decrease in officers’ incentive compensation from corporate plans of severance benefits, and pensions and other employee benefit expenses increased $619,000, mainly due to higher health care costs and the fourth quarter charge related to a distribution from a defined benefit pension plan. Professional fees expense was $835,000 lower in 2014 as compared to 2013, as the total in 2013 included fees associated with projects designed to identify sources of noninterest revenue and reductions in debit card and ATM processing expense.$166,000.

 

20132016 vs. 20122015

 

In 2013, netNet income per share – diluted of $1.50for 2016 was down 18.4% from 2012.3.7% lower than in 2015. Some of the more significant earnings-related varianceshighlights related to annual earnings in 20132016 as compared to 20122015 are as follows:

 

·Net interest income of $43,149,000 in 2013 was down $4,452,000 (9.4%$488,000 (1.2%) from 2012.higher than the comparable total for 2015. The fully taxable equivalent net interest margin was 3.76%, which was 0.07% higher than the margin for 2015, reflecting the benefits of 4.05% in 2013a lower cost of borrowed funds and a more favorable mix of earning assets. The average balance of total borrowed funds was down 0.21% from 2012, and the$62,516,000 at an average interest rate spread (excess of the yield on earning assets over the2.57% in 2016, down from average borrowings of $77,642,000 at an average interest rate incurred on interest-bearing liabilities) shrunk by 0.16%.of 3.45% in 2015. Average earning assets declined in 2013 by $54.2 million, reflecting a reduction in averagetotal loans outstanding of $43.7were higher by $65.3 million and(9.9%) in 2016 as compared to 2015, while average total available-for-sale securities were lower by $74.2 million. Average total deposits decreased $44.4 million. Also, net interest income in 2012 was enhanced by the recovery of a security that had been written down in prior years, resulting in income (accretion) of $855,000.increased $2.2 million (0.2%).

 

·The provision for loan losses was $2,047,000$1,221,000 in 2013,2016, 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 $288,0002015 from changes in 2012. Thespecific 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 $28,000 (2.2%), 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. Loan servicing fees, net, decreased $113,000 in 2016 as compared to 2015, including a decrease in the provisionfair value of mortgage servicing rights of $282,000 in 2013 included2016, which was a larger decrease by $120,000 as compared to 2015. Brokerage revenue decreased $83,000 (9.9%), as the effectsvolume of establishing an allowancesales of $1,552,000 on loans to one commercial borrower.annuities declined.

 

·In 2013, noninterest revenue, excluding net2016, realized gains on available-for-salefrom securities totaled $16,451,000, which exceeded the total 2012 amount by $68,000. Total Trust and brokerage revenue$1,158,000, including gains from sales of $4,871,000 in 2013 was $223,000 (4.8%) higher than the total for 2012.bank stocks of $1,125,000. In 2013, the fair value of servicing rights increased $67,000, while the fair value of servicing rights decreased $188,000 in 2012. In 2013, the net loss from disposals of premises and equipment totaled ($16,000) as compared to net gains of $270,000 in 2012, mainly from an insurance recovery in 2012 associated with a flood-related claim.

·In 2013 and 2012,2015, 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 prepaymentprepayments of borrowings. Realized gains from securities totaled $1,718,000a borrowing in the year endedsecond 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, 2013 as compared to $2,682,000 in 2012, while losses from prepayment of borrowings amounted to $1,023,000 in 2013 as compared to $2,333,000 in 2012.2016.

 

·Noninterest expenses, excluding losses fromon prepayment of borrowings, totaled $33,471,000 in 2013, an increase2016 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 $557,000 (1.7%) over the corresponding total2015 and early 2016, including new positions established for 2012. In 2013, the Corporation incurred professionallending, lending support, information technology, training, human resources and marketing functions. Professional fees expense of $724,000increased $488,000, including increases related to a consulting engagement in which the consulting firm identified recommendations for potentialemployee sales and service training, information technology and marketing. Other operating expense increased $399,000 (7.8%), including increases in revenues, mainly related to service charges on deposit accounts.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 2013, the Corporation incurred professional fees expense of $315,000 from a consulting project related to debit card operations and electronic funds processing, for which reductions in electronic funds processing expenses and other benefits are expected to be realized over approximately the next five years. Mainly2015 by $69,000 as a result of a recovery of sales tax previously paid.

15

·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 consulting engagements described above, professional fees expense was $1,048,000provision for income tax of $5,337,000 in 2015 represented a 24.5% effective rate. The higher effective tax rate in 2013 as compared2016 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 2012. Pensions and other employee benefit costs were $347,000 lowerincrease New York State taxes for the effect of changes in 2013 thanthe tax methodology that first became effective in 2012, including a reduction of $171,000 in health insurance expense associated with the Corporation’s partially self-insured plan due to a lower amount of claims.2015.

 

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

 

CRITICAL ACCOUNTING POLICIES

 

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

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

 

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 2014, 2013,2017, 2016, and 2012.2015. 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.

 

2014The calculations of fully taxable-equivalent yields on tax-exempt loans and securities in Tables I, II and III reflect inherent tax benefit based on the Corporation’s marginal federal income tax rate of 35% for all periods presented. In 2018, the tax benefit from tax-exempt loans and securities will be reduced as a result of the change to a 21% federal income tax rate. The overall yield on tax-exempt assets, however, in 2018 and future periods will depend on market conditions for new assets originated or purchased and the pace of principal repayments on assets held as of December 31, 2017.

16

2017 vs. 20132016

 

Fully taxable equivalent net interest income was $43,893,000$44,708,000 in 2014, which was $2,491,000 (5.3%2017, $1,551,000 (3.6%) lowerhigher than in 2013. As shown2016. Interest income was $1,773,000 higher in Table III, in 20142017 as compared to 2013, interest rate changes had the effect of decreasing net interest income $1,622000, and net changes in volume had the effect of decreasing net interest income $869,000. The most significant component of the rate-related change in net interest income in 2014 was a decrease in interest income of $1,718,000 attributable to lower rates earned on loans receivable. The most significant components of the volume-related decrease in net interest income in 2014 were a decrease in interest income of $1,602,000 attributable to a decline in the balance of loans receivable, partially offset by a volume-related increase in interest income on available-for-securities of $499,000, a decrease in2016; interest expense of $161,000 attributable to a reductionwas also higher by $222,000 in comparing the balance of interest-bearing deposits (primarily certificates of deposit) and a decrease in interest expense of $109,000 attributable to a reduction in the balance of borrowed funds.same periods. As presented in Table II, the Net Interest Margin was 3.82% in 2017 as compared to 3.76% in 2016, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) wasincreased to 3.68% in 2017 from 3.63% in 2014 as compared to 3.88% in 2013.2016.

 

INTEREST INCOME AND EARNING ASSETS

 

Interest income totaled $49,015,000$48,623,000 in 2014,2017, an increase of 3.8% from 2016. Although the average yield on loans fell, the overall yield on earning assets increased to 4.16% in 2017 from 4.08% in 2016 due to a decreasechange in mix of 6.0% from 2013.earning assets, as loans increased while available-for-sale securities decreased. Interest and fees on loans receivable increased $2,466,000, or 6.9%, while interest on available-for-sale securities decreased $3,320,000,$765,000, or 8.8%6.9%. The average balance of gross loans receivable increased 8.0% to $780,640,000 in 2017 from $723,076,000 in 2016. The Corporation experienced significant growth in both residential mortgages and commercial loans. The Corporation’s average rate of return on loans receivable declined to 4.87% in 2017 from 4.92% in 2016 as average interest rates on new loans have been lower than the average rates on loans that have been fully or partially paid off.

As indicated in Table II, average available-for-sale securities (at amortized cost) totaled $494,934,000$371,825,000 in 2014, an increase2017, a decrease of $33,370,000 (7.2%$33,154,000 (8.2%) from 2013. Net increase2016. 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 collateralized mortgage obligations. This increase was partially offset by decreaseswere used, in part, to fund the balances of U.S. Government agency bonds. The Corporation’s yield on securities was lower in 2014 than in 2013, primarily because of low market interest rates.loan growth described above. The average rate of return on available-for-sale securities was 2.95% for 2014 and 3.12%2.79% in 2013.2017, up from 2.75% in 2016.

 

The average balance of gross loans receivable decreased 4.3% to $627,753,000 in 2014 from $656,495,000 in 2013. 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 5.46% in 2014 from 5.73% in 2013.

The average balance of interest-bearing due from banks decreased to $16,634,000 in 2017 from $19,022,000 in 2016, while the average yield increased to $32,510,0001.14% in 20142017 from $26,159,0000.61% in 2013.2016. This category 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 $643,000,rose $222,000, or 11.1%6.0%, to $5,122,000$3,915,000 in 20142017 from $5,765,000$3,693,000 in 2013.2016. Table II shows that the overall cost of funds on interest-bearing liabilities fellincreased to 0.61%0.48% in 20142017 from 0.67%0.45% in 2013.2016.

 

Total average deposits (interest-bearing and noninterest-bearing) increased 0.1%,2.1% to $965,418,000$990,917,000 in 20142017 from $964,031,000$970,447,000 in 2013. Decreases2016. Increases in the average balances of certificates of deposit, Individual Retirement Accounts,noninterest-bearing demand deposits, savings and money market accountsinterest checking were partially offset by increasesdecreases in average balances of interest checking, savings accountsmoney market and non-interest bearing demand deposits. Consistent with continuing low short-term market interestIndividual Retirement Accounts. The average rate paid on interest-bearing deposits increased to 0.32% in 2017 from 0.28% in 2016. The increase in average rate is mainly due to increases in rates the average rates incurredpaid on certificates of depositdeposits and Individual Retirement Accounts have continued to decrease in 2014 as compared to 2013.interest checking accounts.

 

Total average borrowed funds decreased $2,388,000$3,097,000 to $79,940,000$59,419,000 in 20142017 from $82,328,000$62,516,000 in 2013.2016. The average rate on borrowed funds was 3.70%2.54% in 2014,2017, down slightly from 2.57% in 2016. Interest expense on short-term borrowings increased $58,000 in 2017 as compared to 3.72%2016, reflecting an increase in 2013.average rate to 0.90% in 2017 from 0.65% in 2016. Interest expense on long-term borrowings decreased $154,000, as the overall reduction in average balance of $2,952,000 included the impact of repayments of two higher-cost borrowings that had been originated in 2007. These borrowings included a $10 million FHLB advance with an interest rate of 3.81% that matured in September 2017 and repurchase agreements with a broker dealer totaling $27 million with an interest rate of 3.595% that matured in December 2017.

 

20132016 vs. 20122015

 

Fully taxable equivalent net interest income was $46,384,000$43,157,000 in 2013, $4,657,000 (9.1%2016, $338,000 (0.8%) lowerhigher than in 2012. As shown2015. Interest income was $571,000 lower in Table III, in 20132016 as compared to 2012, 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. The most significant components of the rate change in net interest income in 2013 were a decrease in interest income of $2,615,000 attributable to lower rates earned on loans receivable and a decrease in interest income of $2,554,000 attributable to lower rates earned on available-for-sale securities, partially offset by a decrease in2015; interest expense of $1,413,000 due towas also lower rates paid on interest-bearing deposits. The most significant components ofby $909,000 in comparing 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).same periods. As presented in Table II, the Net Interest Margin was 3.76% in 2016 as compared to 3.69% in 2015, and 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%increased to 3.63% in 2013, as compared to 4.04%2016 from 3.54% in 2012.2015.

17

 

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 both residential and commercial loans. The Corporation’s average rate of return on loans receivable declined to 4.92% in 2016 from 5.15% in 2015.

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, which had2016 than in 2015, primarily due to higher-yielding securities maturing as the effect of increasing the volume of calls on municipal bonds and trust preferred securities, and prepayments on mortgage-backed securities and collateralized mortgage obligations, with new purchases made at lower yields than the yields on the securities being replaced. Also, the yield on available-for-sale securitiesportfolio size was enhanced in 2012 by accretion income of $855,000 from a security for which principal was fully paid in 2012 after OTTI write-downs had been recorded in prior periods.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 2012.2015.

 

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.

The average balance of interest-bearing due from banks decreased to $26,159,000 in 2013 from $32,337,000 in 2012. 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) decreased 4.4%,increased slightly (0.2%) to $964,031,000$970,447,000 in 20132016 from $1,008,469,000$968,201,000 in 2012.2015. Decreases in the average balances of certificates of deposit and Individual Retirement Accounts and money market accounts were partially offset by increases in average balances of interest checking, money market accounts, savings accounts and savings accounts. Consistent with continuing low short-term market interest rates, thenoninterest-bearing demand deposits. The average rates incurredrate paid on certificates of deposit and Individual Retirement Accounts have decreased significantlyinterest-bearing deposits increased slightly to 0.28% in 2013 as compared to 2012.2016 from 0.26% in 2015.

 

Total average borrowed funds decreased $29,723,000$15,126,000 to $82,328,000$62,516,000 in 20132016 from $112,051,000$77,642,000 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, 2013.2015. The average rate on borrowed funds was 3.72%2.57% in 2013,2016 compared to 3.77%3.45% in 2012.2015, 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.

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE   
      
      
 Years Ended December 31, Increase/(Decrease)
(In Thousands)2014201320122014/20132013/2012
      
INTEREST INCOME     
Available-for-sale securities:     
 Taxable$8,028$7,105$9,334$923($2,229)
 Tax-exempt6,5777,2967,725(719)(429)
 Total available-for-sale securities14,60514,40117,059204(2,658)
Interest-bearing due from banks12510511420(9)
Loans held for sale1654107(38)(53)
Loans receivable:     
 Taxable32,12735,48440,453(3,357)(4,969)
 Tax-exempt2,1422,1052,33937(234)
 Total loans receivable34,26937,58942,792(3,320)(5,203)
Total Interest Income49,01552,14960,072(3,134)(7,923)
      
INTEREST EXPENSE     
Interest-bearing deposits:     
 Interest checking21621120655
 Money market286290354(4)(64)
 Savings12111710849
 Certificates of deposit1,0691,5223,002(453)(1,480)
 Individual Retirement Accounts4705621,136(92)(574)
 Other time deposits11100
 Total interest-bearing deposits2,1632,7034,807(540)(2,104)
Borrowed funds:     
 Short-term99100(1)
 Long-term2,9503,0534,214(103)(1,161)
 Total borrowed funds2,9593,0624,224(103)(1,162)
Total Interest Expense5,1225,7659,031(643)(3,266)
      
Net Interest Income$43,893$46,384$51,041($2,491)($4,657)

18

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

  Years Ended December 31,  Increase/(Decrease) 
(In Thousands) 2017  2016  2015  2017/2016  2016/2015 
                
INTEREST INCOME                    
Available-for-sale securities:                    
Taxable $5,499  $5,916  $7,587  $(417) $(1,671)
Tax-exempt  4,892   5,240   5,869   (348)  (629)
Total available-for-sale securities  10,391   11,156   13,456   (765)  (2,300)
Interest-bearing due from banks  190   116   93   74   23 
Loans held for sale  25   27   16   (2)  11 
Loans receivable:                    
Taxable  34,907   32,827   31,311   2,080   1,516 
Tax-exempt  3,110   2,724   2,545   386   179 
Total loans receivable  38,017   35,551   33,856   2,466   1,695 
Total Interest Income  48,623   46,850   47,421   1,773   (571)
                     
INTEREST EXPENSE                    
Interest-bearing deposits:                    
Interest checking  474   293   214   181   79 
Money market  355   342   299   13   43 
Savings  143   133   128   10   5 
Certificates of deposit  996   882   831   114   51 
Individual Retirement Accounts  434   434   451   0   (17)
Other time deposits  1   1   1   0   0 
Total interest-bearing deposits  2,403   2,085   1,924   318   161 
Borrowed funds:                    
Short-term  213   155   32   58   123 
Long-term  1,299   1,453   2,646   (154)  (1,193)
Total borrowed funds  1,512   1,608   2,678   (96)  (1,070)
Total Interest Expense  3,915   3,693   4,602   222   (909)
                     
Net Interest Income $44,708  $43,157  $42,819  $1,551  $338 

 

(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 $1,013,000 in 2014, $1,338,000 in 2013 and $1,427,000 in 2012.

TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES    
(Dollars in Thousands)      
 Year Year Year 
 EndedRate ofEndedRate ofEndedRate of
 12/31/2014Return/12/31/2013Return/12/31/2012Return/
 AverageCost ofAverageCost ofAverageCost of
 BalanceFunds %BalanceFunds %BalanceFunds %
EARNING ASSETS      
Available-for-sale securities,      
at amortized cost:      
Taxable$371,1252.16%$330,9802.15%$332,9112.80%
Tax-exempt123,8095.31%130,5845.59%131,4385.88%
 Total available-for-sale securities494,9342.95%461,5643.12%464,3493.67%
Interest-bearing due from banks32,5100.39%26,1590.40%32,3370.35%
Federal funds sold00.00%40.00%00.00%
Loans held for sale2047.84%1,1184.83%2,6114.10%
Loans receivable:      
Taxable589,1205.45%620,4125.72%662,7516.10%
Tax-exempt38,6335.54%36,0835.83%37,4906.24%
 Total loans receivable627,7535.46%656,4955.73%700,2416.11%
 Total Earning Assets1,155,4014.24%1,145,3404.55%1,199,5385.01%
Cash16,865 16,854 17,408 
Unrealized gain/loss on securities6,350 8,875 18,444 
Allowance for loan losses(7,992) (7,204) (7,688) 
Bank premises and equipment16,789 18,154 18,956 
Intangible Asset - Core Deposit Intangible70 113 176 
Intangible Asset – Goodwill11,942 11,942 11,942 
Other assets40,472 43,022 46,387 
Total Assets$1,239,897 $1,237,096 $1,305,163 
       
INTEREST-BEARING LIABILITIES      
Interest-bearing deposits:      
Interest checking$183,8740.12%$174,7900.12%$163,8400.13%
Money market198,9900.14%203,0230.14%208,8140.17%
Savings121,6850.10%117,0550.10%108,2180.10%
Certificates of deposit134,7320.79%148,5981.02%194,1751.55%
Individual Retirement Accounts120,0160.39%129,2550.43%142,3150.80%
 Other time deposits1,0390.10%1,0620.09%1,1910.08%
 Total interest-bearing deposits760,3360.28%773,7830.35%818,5530.59%
Borrowed funds:      
 Short-term6,7440.13%6,4220.14%6,8310.15%
 Long-term73,1964.03%75,9064.02%105,2204.00%
 Total borrowed funds79,9403.70%82,3283.72%112,0513.77%
 Total Interest-bearing Liabilities840,2760.61%856,1110.67%930,6040.97%
Demand deposits205,082 190,248 189,916 
Other liabilities9,070 9,325 8,821 
Total Liabilities1,054,428 1,055,684 1,129,341 
Stockholders' equity, excluding      
 other comprehensive income/loss181,271 175,893 164,316 
Other comprehensive income/loss4,198 5,519 11,506 
Total Stockholders' Equity185,469 181,412 175,822 
Total Liabilities and Stockholders' Equity$1,239,897 $1,237,096 $1,305,163 
Interest Rate Spread 3.63% 3.88% 4.04%
Net Interest Income/Earning Assets 3.80% 4.05% 4.26%
       
Total Deposits (Interest-bearing      
 and Demand)$965,418 $964,031 $1,008,469 
(2)Fees on loans are included with interest on loans and amounted to $883,000 in 2017, $1,000,000 in 2016, and $1,004,000 in 2015.

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 
  12/31/2017  Return/  12/31/2016  Return/  12/31/2015  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 $259,079   2.12% $293,636   2.01% $366,448   2.07%
Tax-exempt  112,746   4.34%  111,343   4.71%  112,700   5.21%
Total available-for-sale securities  371,825   2.79%  404,979   2.75%  479,148   2.81%
Interest-bearing due from banks  16,634   1.14%  19,022   0.61%  22,201   0.42%
Loans held for sale  470   5.32%  472   5.72%  222   7.21%
Loans receivable:                        
Taxable  711,901   4.90%  662,769   4.95%  603,771   5.19%
Tax-exempt  68,739   4.52%  60,307   4.52%  53,956   4.72%
Total loans receivable  780,640   4.87%  723,076   4.92%  657,727   5.15%
Total Earning Assets  1,169,569   4.16%  1,147,549   4.08%  1,159,298   4.09%
Cash  17,322       16,570       16,639     
Unrealized gain/loss on securities  88       7,166       8,871     
Allowance for loan losses  (8,820)      (8,082)      (7,380)    
Bank premises and equipment  15,541       15,413       15,911     
Intangible Assets  11,957       11,966       11,983     
Other assets  42,102       39,284       37,887     
Total Assets $1,247,759      $1,229,866      $1,243,209     
                         
INTEREST-BEARING LIABILITIES                        
Interest-bearing deposits:                        
Interest checking $209,893   0.23% $201,357   0.15% $195,940   0.11%
Money market  191,356   0.19%  199,405   0.17%  196,585   0.15%
Savings  143,575   0.10%  132,679   0.10%  128,355   0.10%
Certificates of deposit  117,366   0.85%  117,130   0.75%  121,803   0.68%
Individual Retirement Accounts  97,519   0.45%  103,467   0.42%  110,659   0.41%
Other time deposits  1,014   0.10%  1,036   0.10%  1,031   0.10%
Total interest-bearing deposits  760,723   0.32%  755,074   0.28%  754,373   0.26%
Borrowed funds:                        
Short-term  23,761   0.90%  23,906   0.65%  11,428   0.28%
Long-term  35,658   3.64%  38,610   3.76%  66,214   4.00%
Total borrowed funds  59,419   2.54%  62,516   2.57%  77,642   3.45%
Total Interest-bearing Liabilities  820,142   0.48%  817,590   0.45%  832,015   0.55%
Demand deposits  230,194       215,373       213,828     
Other liabilities  8,465       8,530       8,461     
Total Liabilities  1,058,801       1,041,493       1,054,304     
Stockholders’ equity, excluding other comprehensive income/loss  188,756       183,671       183,125     
Other comprehensive income/loss  202       4,702       5,780     
Total Stockholders’ Equity  188,958       188,373       188,905     
Total Liabilities and Stockholders’ Equity $1,247,759      $1,229,866      $1,243,209     
Interest Rate Spread      3.68%      3.63%      3.54%
Net Interest Income/Earning Assets      3.82%      3.76%      3.69%
                         
Total Deposits (Interest-bearing and Demand) $990,917      $970,447      $968,201     

 

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

(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 12/31/14 vs. 12/31/13Year Ended 12/31/13 vs. 12/31/12
 Change inChange inTotalChange inChange inTotal
 VolumeRateChangeVolumeRateChange
EARNING ASSETS      
Available-for-sale securities:      
 Taxable$868$55$923($54)($2,175)($2,229)
 Tax-exempt(369)(350)(719)(50)(379)(429)
 Total available-for-sale securities499(295)204(104)(2,554)(2,658)
Interest-bearing due from banks24(4)20(24)15(9)
Loans held for sale(60)22(38)(69)16(53)
Loans receivable:      
 Taxable(1,746)(1,611)(3,357)(2,502)(2,467)(4,969)
 Tax-exempt144(107)37(86)(148)(234)
 Total loans receivable(1,602)(1,718)(3,320)(2,588)(2,615)(5,203)
Total Interest Income(1,139)(1,995)(3,134)(2,785)(5,138)(7,923)
       
INTEREST-BEARING LIABILITIES      
Interest-bearing deposits:      
 Interest checking11(6)513(8)5
 Money market(6)2(4)(10)(54)(64)
 Savings5(1)4909
 Certificates of deposit(133)(320)(453)(607)(873)(1,480)
 Individual Retirement Accounts(38)(54)(92)(96)(478)(574)
 Other time deposits000000
 Total interest-bearing deposits(161)(379)(540)(691)(1,413)(2,104)
Borrowed funds:      
 Short-term000(1)0(1)
 Long-term(109)6(103)(1,179)18(1,161)
 Total borrowed funds(109)6(103)(1,180)18(1,162)
Total Interest Expense(270)(373)(643)(1,871)(1,395)(3,266)
       
Net Interest Income($869)($1,622)($2,491)($914)($3,743)($4,657)

20

TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands) Year Ended 12/31/17 vs. 12/31/16  Year Ended 12/31/16 vs. 12/31/15 
  Change in  Change in  Total  Change in  Change in  Total 
  Volume  Rate  Change  Volume  Rate  Change 
EARNING ASSETS                        
Available-for-sale securities:                        
Taxable $(721) $304  $(417) $(1,472) $(199)$(1,671)
Tax-exempt  65   (413)  (348)  (70)  (559)  (629)
Total available-for-sale securities  (656)  (109)  (765)  (1,542)  (758)  (2,300)
Interest-bearing due from banks  (17)  91   74   (14)  37   23 
Loans held for sale  0   (2)  (2)  15   (4)  11 
Loans receivable:                        
Taxable  2,412   (332)  2,080   2,965   (1,449)  1,516 
Tax-exempt  381   5   386   290   (111)  179 
Total loans receivable  2,793   (327)  2,466   3,255   (1,560)  1,695 
Total Interest Income  2,120   (347)  1,773   1,714   (2,285)  (571)
                         
INTEREST-BEARING LIABILITIES                        
Interest-bearing deposits:                        
Interest checking  12   169   181   6   73   79 
Money market  (14)  27   13   4   39   43 
Savings  11   (1)  10   4   1   5 
Certificates of deposit  2   112   114   (33)  84   51 
Individual Retirement Accounts  (25)  25   0   (30)  13   (17)
Other time deposits  0   0   0   0   0   0 
Total interest-bearing deposits  (14)  332   318   (49)  210   161 
Borrowed funds:                        
Short-term  (1)  59   58   56   67   123 
Long-term  (109)  (45)  (154)  (1,047)  (146)  (1,193)
Total borrowed funds  (110)  14   (96)  (991)  (79)  (1,070)
Total Interest Expense  (124)  346   222   (1,040)  131   (909)
                         
Net Interest Income $2,244  $(693) $1,551  $2,754  $(2,416) $338 

 

(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, 2014, 20132017, 2016 and 20122015

 

The table below presents a comparison of noninterest income and excludes realized gains on available-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)    
  Years Ended  
  December 31,$%
 20142013 Change Change
Service charges on deposit accounts$5,025$5,246($221)(4.2)
Service charges and fees538597(59)(9.9)
Trust and financial management revenue4,4904,0874039.9
Brokerage revenue90178411714.9
Insurance commissions, fees and premiums118170(52)(30.6)
Interchange revenue from debit card transactions1,9591,941180.9
Net gains from sales of loans7681,969(1,201)(61.0)
(Decrease) increase in fair value of servicing rights(27)67(94)(140.3)
Increase in cash surrender value of life insurance376399(23)(5.8)
Net gain (loss) from premises and equipment8(16)24(150.0)
Other operating income1,2641,207574.7
 Total other operating income before realized gains    
 on available-for-sale securities, net$15,420$16,451($1,031)(6.3)

TABLE IV - COMPARISON OF NONINTEREST INCOME

(Dollars In Thousands)

 

 Years Ended  Years Ended      
 December 31,$% December 31, $ % 
20132012 Change 2017 2016 Change Change 
Service charges on deposit accounts$5,246$5,322($76)(1.4) $4,488  $4,695  $(207)  (4.4)
Service charges and fees597643(46)(7.2)  417   439   (22)  (5.0)
Trust and financial management revenue4,0873,8472406.2  5,399   4,760   639   13.4 
Brokerage revenue784801(17)(2.1)  797   756   41   5.4 
Insurance commissions, fees and premiums170221(51)(23.1)  115   102   13   12.7 
Interchange revenue from debit card transactions1,9411,93830.2  2,221   1,943   278   14.3 
Net gains from sales of loans1,9692,016(47)(2.3)  818   1,029   (211)  (20.5)
Increase (decrease) in fair value of servicing rights67(188)255(135.6)
Loan servicing fees, net  244   103   141   136.9 
Increase in cash surrender value of life insurance399455(56)(12.3)  379   382   (3)  (0.8)
Net (loss) gain from premises and equipment(16)270(286)(105.9)
Other operating income1,2071,05814914.1  1,275   1,302   (27)  (2.1)
Total other operating income before realized gains   
on available-for-sale securities, net$16,451$16,383$680.4
Total noninterest income before realized gains on available-for-sale securities, net $16,153  $15,511  $642   4.1 

  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 
Loan servicing fees, net  103   216   (113)  (52.3)
Increase in cash surrender value of life insurance  382   386   (4)  (1.0)
Other operating income  1,302   1,274   28   2.2 
Total noninterest income before realized gains on available-for-sale securities, net $15,511  $15,478  $33   0.2 

 

Total noninterest income, excluding realized gains on available-for-sale securities, decreased $1,031,000 or 6.3%increased $642,000 in 20142017 compared to 2013.2016. In 2013,2016, total noninterest income increased $68,000 (0.4%)$33,000 from 2012.2015. Changes of significance are discussed in the narrative that follows.

 

20142017 vs. 20132016

Trust and financial management revenue increased $639,000 (13.4%), reflecting growth in assets under management resulting from market appreciation and new business, as well as an increase in fee levels and an estimated $215,000 of additional revenue from changing the frequency of billings to monthly for certain services.

Interchange revenue from debit card transactions increased $278,000 (14.3%), reflecting improvements in card-related volumes and processing.

Loan servicing fees, net, increased $141,000. This category includes fees received from servicing residential mortgage loans that have been originated and sold, adjusted for the change in the fair value of servicing rights. The fair value of mortgage servicing rights decreased by $168,000 in 2017 as compared to a reduction of $282,000 in 2016.

22

 

Net gains from sales of loans decreased $1,201,000 in 2014. Since December 2009, the Corporation has sold$211,000 (20.5%) due to a significant amountlower volume of residential mortgage loans into the secondary market through the MPF Xtra and Original programs administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Volume remained brisk throughout most of 2013, slowing somewhat in the fourth quarter 2013 with a continued slowdown throughout 2014 reflecting a decrease in refinancing activity.sales.

Service charges on deposit accounts were $221,000decreased $207,000 (4.4%). Revenue from consumer overdrafts declined $133,000 due to lower volume. Also, fees on noninterest-bearing, business-related checking accounts decreased $53,000 as the earnings crediting rate used to offset the cost of services increased over the year, consistent with increases in 2014 than 2013. Consumer and business overdraft fees decreased $543,000the Fed Funds rate.

2016 vs. 2015

Net gains from sales of loans increased $294,000 (40.0%), reflecting higher volume of sales. The increase in 2014volume in 2016 included the impact of employing one additional mortgage lender in a dedicated, full-time capacity throughout most of 2016 as compared to 2013. Changes made as a result2015.

Trust and Financial Management revenue increased $134,000 (2.9%). The increase in Trust revenue in 2016 reflected, in part, the effect of recommendations made by a consulting firmhigher value of U.S. equity markets in 2013 resulted in servicethe latter portion of the year.

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 $611,000 in 2014 as compared to $229,000 in 2013, as most of the recommendations were implemented in the fourth quarter 2013.overdrafts.

 

In 2014, Trust and financial management revenue increased $403,000, or 9.9%. The increaseLoan servicing fees, net, decreased $113,000 in trust revenue in 2014 reflects the impact of new business obtained as well as higher valuations of U.S. equity securities throughout most of the period. Assets under management by the Corporation’s Trust and financial management group totaled $825,918,000 at December 31, 2014, an increase of 3.7% over the total one year earlier.

As a result of increased annuity sales, brokerage revenue increased $117,000 or 14.9% in 2014 over 2013.

2013 vs. 2012

2016. 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 $67,000 in 2013 as compared to a decrease of $188,000 in 2012. Management’s estimated prepayment speeds on mortgage loans sold and serviced were lower at December 31, 2013 than at December 31, 2012, which had the effect of increasing the estimated fair value of the related servicing rights. Conversely, estimated prepayment speeds at December 31, 2012 were higher than the corresponding speeds at the end of 2011, causingtheir risk-based capital weighting. In comparison, the fair value of mortgage servicing rights to declinedecreased $162,000 in 2012.2015.

 

In 2013, Trust and financial managementBrokerage revenue increased $240,000, or 6.2%. Trust revenue from employee benefit and retirement services was $121,000 higher in 2013decreased $83,000 (9.9%), as compared to 2012. The increase in trust revenue in 2013 reflects the impactvolume of new business obtained as well as higher valuationssales 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.annuities declined.

 

Other operating income increased $149,000, or 14.1%, in 2013 as compared to 2012, as mortgage servicing revenue increased $127,000 due to a higher volume of mortgage loans sold and serviced.

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

NONINTEREST EXPENSE

Years Ended December 31, 2014, 20132017, 2016 and 20122015

 

As shownTotal noninterest expenses increased $2,223,000 (6.4%) in Table V below, total2017 as compared to 2016. Total noninterest expense decreased $859,000, or 2.4%, in 2016 as compared to 2015; however, excluding losses from prepayment of debt, increased $686,000borrowings in 20142015, noninterest expense was $1,714,000 (5.2%) higher in 2016 as compared to 2013. Excluding losses from prepayment of debt, total noninterest expense was $557,000 (16.9%) higher in 2013 as compared to 2012.2015. In 2013,2015, the Corporation incurred losses totaling $1,023,000 and, in 2012, losses totaling $2,333,000$2,573,000 from prepayment of borrowings (repurchase agreements). There were no losses from prepayment of borrowings incurred in 2014.2017 or 2016. 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)   
    $ %
 20142013 Change Change
 Salaries and wages$15,121$14,206$9156.4
 Pensions and other employee benefits4,7694,15061914.9
 Occupancy expense, net2,6282,4731556.3
 Furniture and equipment expense1,8591,948(89)(4.6)
 FDIC Assessments600604(4)(0.7)
 Pennsylvania shares tax1,3501,402(52)(3.7)
 Professional fees6991,534(835)(54.4)
 Automated teller machine and interchange expense9241,020(96)(9.4)
 Software subscriptions784836(52)(6.2)
 Loss on prepayment of debt01,023(1,023)(100.0)
 Other operating expense5,4235,2981252.4
     
 Total Other Expense$34,157$34,494($337)(1.0)

TABLE V - COMPARISON OF NONINTEREST EXPENSE

(Dollars In Thousands)

 

 Years Ended      
  $ % December 31, $ % 
20132012 Change 2017 2016 Change Change 
Salaries and wages$14,206$14,370($164)(1.1) $15,806  $15,411  $395   2.6 
Pensions and other employee benefits4,1504,497(347)(7.7)  5,374   4,717   657   13.9 
Occupancy expense, net2,4732,476(3)(0.1)  2,340   2,340   0   0.0 
Furniture and equipment expense1,9481,887613.2  1,834   1,730   104   6.0 
FDIC Assessments604633(29)(4.6)  376   488   (112)  (23.0)
Pennsylvania shares tax1,4021,312906.9  1,329   1,274   55   4.3 
Professional fees1,5344861,048215.6  1,086   1,126   (40)  (3.6)
Automated teller machine and interchange expense1,0201,136(116)(10.2)  1,284   1,137   147   12.9 
Software subscriptions836890(54)(6.1)  1,190   981   209   21.3 
Loss on prepayment of debt1,0232,333(1,310)(56.2)
Other operating expense5,2985,227711.4  6,348   5,540   808   14.6 
Total Other Expense$34,494$35,247($753)(2.1) $36,967  $34,744  $2,223   6.4 

23

  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)

 

2014 vs. 20132017 vs 2016

 

SalariesOther operating expense increased $808,000. Within other operating expense, the largest variances included increases of $208,000 in loan collection expenses, $149,000 in accounting and wagesauditing expense stemming from increased $915,000, or 6.4%internal audit outsourcing and $130,000 in attorney fees (mainly related to a commercial loan workout situation). As notedThe increased loan collection expenses in 2017 included payments of delinquent property taxes associated with mortgage loans on properties located in New York State and $32,000 for the Earnings Overview section, this increase is primarily the resultCorporation’s share of severance benefits incurredcollection expenses on a Multi-family residential participation loan that has been classified as impaired at December 31, 2017 and paid in 20142016.

 

Pensions and other employeeEmployee benefits increased $619,000, or 14.9%. Health care expense increased $415,000 as$657,000, including an increase of $594,000 from higher health care expenses from the amount of claims incurred during 2014 was higher than 2013.Corporation’s partially self-insured plan. The Corporation is self-insured for health insurance, up to a cap for catastrophic levels of losses, which are insured by a third party In addition, the Corporation incurred a $196,000 charge related to a distribution from a defined benefit plan.party.

 

OccupancySalaries and wages expense increased $155,000, or 6.3%$395,000 (2.6%), primarily duereflecting the net effects of annual merit-based salary increases, an increase to increased weather related costs such as snow removal, fuel, utilitiesan average of 292 FTEs in 2017 from 287 in 2016 and maintenance.a net decrease in officers’ incentive compensation from corporate plans of $166,000.

 

Professional fees decreased $835,000, or 54.4%. As noted below, the Corporation incurred professional fee expense of $1,039,000 in 2013 for two large consulting engagements. Similar size engagements did not occur during 2014.Software subscriptions increased $209,000, including costs associated with new applications as well as annual licensing increases.

 

Automated teller machine and interchange expenses decreased $96,000, or 9.4%, mainly resulting from benefits derived from consulting project noted below.expense increased $147,000, including increases in volume-related costs and fraud monitoring costs.

 

2013 vs. 2012

Professional feesFurniture and equipment expenses in 2017 increased $1,048,000, or 215.6%. As noted in the Earnings Overview section, the Corporation incurred professional fee expense of $315,000 in 2013 for a consulting project related to debit card operations 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, mainly related to service charges on deposit accounts.

Pensions and other employee benefits decreased $347,000, or 7.7%. Health care expense decreased $171,000 as the amount of claims incurred during 2013 was lower than 2012. 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 amendments to the plan that include elimination 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$104,000 primarily as a result of a decreasehigher depreciation and repair costs.

FDIC insurance decreased $112,000 in 2017 reflecting lower assessment levels beginning in the Corporation’s experience-based Pennsylvania rate in 2013.third quarter of 2016.

2016 vs 2015

 

Salaries and wages decreased $164,000, or 1.1%expense increased $729,000 (5.0%), reflecting an increase in number of employees. The average number of full-time equivalent employees was 287 in 2016, up from 281 in 2015, including new positions established for lending, lending support, information technology, training and marketing functions.

Pension and other employee benefits expense increased $297,000 (6.7%). The increase resulted mainly from an increase of $214,000 in healthcare expense as a result of reduced incentive bonus compensation.increased healthcare claims. Payroll taxes and other expenses within this category increased in 2016, as well, due to the increase in number of employees described above.

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

24

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

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

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

Occupancy expenses in 2016 were $234,000 under 2015 primarily as a result of 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 $116,000, or 10.2%, mainly resulting from benefits derived from$115,000 in 2016 reflecting lower assessment levels beginning in the consulting project previously noted.third quarter of 2016.

INCOME TAXES

 

The effective income tax rate was approximately 25%34.8% of pre-tax income in 20142017, up from 25.3% in 2016 and 2013, down from approximately 27%24.5% in 2012.2015. The Corporation’s effective tax rates differdiffered from the statutory rate of 35% in 2016 and 2015 principally because of the effects of tax-exempt interest income. In 2017, the Corporation realized an increase in the income tax provision (expense) due to the write-down of the net deferred tax asset as a result of the recently enacted Tax Cuts and Jobs Act of 2017 that, among other things, lowered the federal corporate income tax rate to 21% effective January 1, 2018, from the 35% marginal tax rate in effect for prior periods. Excluding the effect of the write-down of the deferred tax asset resulting from the change in the federal corporate income tax rate, the effective income tax rate for the year ended December 31, 2017 would have been 24.3%. Further, management estimates that had the recently enacted 21% federal tax rate been in effect throughout 2017 and 2016, the effective federal tax rate would have been 14.5% in 2017 and 15% in 2016. Management estimates the effective tax rate for 2018 will be approximately 15%. In developing these estimates, no adjustments have been made to 2017 and 2016 historical data for reinvestment of additional funds or for any changes to the composition of the Corporation’s assets and liabilities.

 

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, 2014,2017, the net deferred tax asset was $1,668,000, down$3,289,000, a decrease from the balance at December 31, 20132016 of $6,344,000.$5,117,000. The largest changesprimary reason for the decrease was the write-down of the deferred tax asset based on the decrease in temporary difference components werethe federal tax rate as follows:described above. The total amount of the write-down of the net deferred tax asset was $2,159,000, including $325,000 associated with items included in Accumulated Other Comprehensive Loss in the consolidated balance sheet.

·At December 31, 2014, net unrealized gains on available-for-securities resulted in a deferred tax liability of $2,844,000. In contrast, at December 31, 2013, the deferred tax asset associated with unrealized losses on available-for-sale securities was $541,000. The increase in fair value of available-for-securities in 2014 was caused primarily by decreases in long-term interest rates.

·The deferred tax asset representing the credit for alternative minimum tax paid fell to $537,000 at December 31, 2014, a reduction of $1,368,000 from December 31, 2013, as the Corporation’s federal taxable income in 2014 exceeded alternative minimum taxable income.

 

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, the value of the benefit from realization of deferred tax assets would be impacted if income tax rates were changed from currently enacted levels.

Management believes the recorded net deferred tax asset at December 31, 20142017 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, 2014, 20132017, 2016 and 2012.2015. Comparison of the amortized cost totals of available-for-sale securities at each year-end presented reflects an increasea decrease of $29,422,000$19,917,000 to $484,203,000$396,538,000 at December 31, 20132016 from December 31, 2012.2015. This change was followed by an increasea decrease of $24,479,000$37,221,000 to $508,682,000$359,317,000 at December 31, 2014.2017. The continued decrease in securities in 2017 reflects the use of cash generated from the investment portfolio to help fund the increase in securities over this period reflects, in part, the reinvestmentloans outstanding. The Corporation’s holdings of cash received due to the reduction in loans outstanding (discussed below). Over the two-year period, the largest change in the composition of the portfolio was an increase of $59,850,000 in collateralized mortgage-backed obligations (CMOs)securities issued or guaranteed by U.S. Government agencies. The increaseagencies or sponsored agencies have decreased to $221,187,000 at December 31, 2017 from $237,654,000 at December 31, 2016 and $266,372,000 at December 31, 2015. Within that overall category, in CMOs reflects management’s effort to maintain a monthly return of cash flow from the portfolio that is somewhat consistent in order to provide ongoing opportunities to reinvest at higher interest rates if rates were to rise. As discussed in more detail in Note 7 to the financial statements,2017, the Corporation reported net realized gains from available-for-salehad some commercial mortgage-backed securities for which the underlying collateral consists of $1,104,000 in 2014, $1,718,000 in 2013, and $2,682,000 in 2012.multi-family properties. The total amortized cost of commercial mortgage-backed securities held at December 31, 2017 was $33,881,000.

25

 

As reflected in Table VI, the fair value of available-for-sale securities as of December 31, 20142017 was $8,125,000,$2,409,000, or 1.6%0.67%, higherless than the total amortized cost basis. TheIn comparison, the aggregate unrealized loss position at December 31, 2016 was $1,461,000, or 0.37% of the total amortized cost basis. .. Modest increases in intermediate-term and long-term interest rates over the course of 2016 and 2017, as well as market expectations of further rate increases, have contributed to the decrease in fair values of debt securities. Also, the fair values of tax-exempt municipal bonds have been negatively impacted by the reduced benefit of their tax-exempt nature as a result of the reduction in the federal corporate income tax rate. At December 31, 2015, the aggregate unrealized gain position at December 31, 2014 includedwas $3,835,000, or 0.92% of total amortized cost, including an unrealized gain of $5,076,000 on debt securities as well as an unrealized gain of $3,049,000$706,000 on marketable equity securities (bank stocks). DecreasesThe Corporation liquidated its investments in intermediate-termbank stocks in 2015 and long-term interest rates2016, and held no investments in 2014 led to an increasebank stocks in the aggregate fair value2017. The Corporation reported net realized gains from sales of debtavailable-for-sale securities of $257,000 in 20142017. In comparison, net realized gains from sales of available-for-sale securities totaled $1,158,000 in comparison to historical cost basis. 2016 and $2,861,000 in 2015, including realized gains from sales of bank stocks of $1,125,000 in 2016 and $2,220,000 in 2015.

Management has reviewed the Corporation’s holdings as of December 31, 20142017 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. Management will continue to closely monitor the status of impaired securities in 2015.2018.

TABLE VI - INVESTMENT SECURITIES      
   As of December 31,  
 201420132012
 AmortizedFairAmortizedFairAmortizedFair
(In Thousands)CostValueCostValueCostValue
       
AVAILABLE-FOR-SALE SECURITIES:      
Obligations of U.S. Government agencies$27,221$26,676$47,382$45,877$30,695$31,217
Obligations of states and political subdivisions:      
Tax-exempt120,086124,839127,748128,426130,168137,020
Taxable33,63733,87835,15434,47124,42624,817
Mortgage-backed securities82,47983,90384,84986,20876,36880,196
Collateralized mortgage obligations,      
 Issued by U.S. Government agencies239,620238,823182,372178,092179,770183,510
Trust preferred securities issued by individual institutions00005,1675,171
Collateralized debt obligations:      
 Pooled trust preferred securities - senior tranches00001,6151,613
 Other collateralized debt obligations3434660660660660
Total debt securities503,077508,153478,165473,734448,869464,204
Marketable equity securities5,6058,6546,0388,9245,9128,373
Total$508,682$516,807$484,203$482,658$454,781$472,577

TABLE VI - INVESTMENT SECURITIES

        As of December 31,       
  2017  2016  2015 
  Amortized  Fair  Amortized  Fair  Amortized  Fair 
(In Thousands) Cost  Value  Cost  Value  Cost  Value 
                   
AVAILABLE-FOR-SALE SECURITIES:                        
Obligations of U.S. Government agencies $8,026  $7,873  $9,671  $9,541  $10,663  $10,483 
Obligations of states and political subdivisions:                        
Tax-exempt  103,673   105,111   118,140   119,037   103,414   107,757 
Taxable  25,431   25,573   30,073   30,297   34,317   34,597 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                        
Residential pass-through securities  52,992   52,347   58,922   58,404   73,227   73,343 
Residential collateralized mortgage obligations  134,314   131,814   147,915   146,608   193,145   191,715 
Commercial mortgage-backed securities  33,881   33,219   30,817   30,219   0   0 
Other collateralized debt obligations  0   0   0   0   9   9 
Total debt securities  358,317   355,937   395,538   394,106   414,775   417,904 
Marketable equity securities  1,000   971   1,000   971   1,680   2,386 
Total $359,317  $356,908  $396,538  $395,077  $416,455  $420,290 

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The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2014.2017. 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        
YearYieldYearsYieldYearsYieldYearsYieldTotalYield Year Yield Years Yield Years Yield Years Yield Total Yield 
                      
AVAILABLE-FOR-SALE SECURITIES:                                         
Obligations of U.S. Government agencies$00.00%$14,1711.34%$13,0501.49%$00.00%$27,2211.41% $0   0.00% $8,026   1.42% $0   0.00% $0   0.00% $8,026   1.42%
Obligations of states and political subdivisions:                                         
Tax-exempt5,4643.50%26,9181.92%32,4702.68%55,2344.61%120,0863.43%  6,247   1.55%  45,184   3.00%  32,822   2.21%  19,420   3.60%  103,673   2.78%
Taxable2,4452.39%14,4101.99%16,2172.79%5653.60%33,6372.43%  5,103   1.97%  16,064   2.51%  4,264   3.12%  0   0.00%  25,431   2.51%
Other collateralized debt obligations00.00%00.00%00.00%340.00%340.00%
Subtotal$7,9093.16%$55,4991.79%$61,7372.46%$55,8334.59%$180,9782.94%
Mortgage-backed securities 82,4792.33%
Collateralized mortgage obligations, 
Issued by U.S. Government agencies 239,6202.05%
Sub-total $11,350   1.74% $69,274   2.71% $37,086   2.32% $19,420   3.60%  137,130   2.65%
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                                        
Residential pass-through securities                                  52,992   2.24%
Residential collateralized mortgage obligations                                  134,314   2.12%
Commercial mortgage-backed securities                                  33,881   2.39%
Total $503,0772.42%                                 $358,317   2.36%

 

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.

 

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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, 2014, 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 $815,713,000 at December 31, 2014 reflects a total decrease of $99,866,000 (13.7%)2017, up 8.5% from the balance$751,835,000 at December 31, 2010 to the2016. The total outstanding balances of $630,545,000residential mortgage segment loans at December 31, 2014. 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 2010, the Corporation experienced a net decrease in total loans outstanding under the residential mortgage segment ($39,418,000) with more residential mortgage originations than in previous years sold into the secondary market. In 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. In 2014, the Corporation initiated participation in the MPF Original program, which is also a Federal Home Loan Bank program. At December 31, 2014, the outstanding balance of residential mortgage loans originated by the Corporation, and sold with servicing retained under these two programs was $152,505,000. Total commercial segment loans outstanding decreased ($55,686,000) at December 31, 20142017 increased $26,513,000 (6.3%) as compared to December 31, 2010, including a reduction2016, and the total outstanding balances of $8,336,000commercial segment loans at December 31, 20142017 increased $36,148,000 (11.4%) as compared to December 31, 2016. The 2017 loan growth followed growth in loans outstanding in 2016 of 6.7% from year-end 2013December 31, 2015. Total outstanding commercial loans were higher by $9,206,000 (3.0%), and a reduction of $26,176,000residential mortgage segment loans were up $34,683,000 (9.0%), at December 31, 2013 from year-end 2012. Also,2016 as compared to December 31, 2015.

The increases in loans outstanding in 2016 and 2017 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 ($4,762,000)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$61,245,000 at December 31, 20142017, up from $47,508,000 at December 31, 2016. At December 31, 2017, the balance of $10,234,000.participation loans outstanding includes a total of $53,756,000 to businesses located outside of the Corporation’s market area, including $10,063,000 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 at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. At December 31, 2017, total leveraged participation loans, including loans originated through the network and four loans to two borrowers originated through another lead institution, totaled $15,328,000, up slightly from $15,207,000 at December 31, 2016. At December 31, 2017, there was a leveraged loan with an outstanding balance of $324,000 classified as impaired with a specific allowance for loan losses of $96,000. With the exception of the loan identified in the preceding sentence, there were no loans classified as impaired at December 31, 2017 and 2016, and all of the leveraged loans (including the loan classified as impaired) were current as to payments of principal and interest as of December 31, 2017 and 2016.

27

 

Table VIII presents loan maturity data as of December 31, 2014.2017. The interest rate simulation model used to prepare Table VIII 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 37%38% of the loan portfolio. Of the 63%62% of the portfolio made up of variable-rate loans, a significant portion (45%(42%) 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.

 

Short-term borrowings totaled $61,766,000 at December 31, 2017, up from $26,175,000 at December 31, 2016. Within this category, overnight borrowing from FHLB-Pittsburgh of $29,000,000 was up from $21,000,000 at December 31, 2016. Also at December 31, 2017, the balance of short-term borrowings included a series of advances from FHLB-Pittsburgh totaling $29,000,000, including advances maturing monthly from January through October 2018 with a weighted average interest rate of 1.69% and rates ranging from 1.23% to 1.89%.

Long-term borrowings of $9,189,000 at December 31, 2017 were down from the balance at December 31, 2016 of $38,454,000. In 2017, the Corporation paid off two higher-cost borrowings totaling $37,000,000, including an advance from FHLB-Pittsburgh of $10,000,000 with a rate of 3.81% in October and repurchase agreements totaling $27,000,000 with a rate of 3.595% in December. Repayment of these borrowings was funded by advances from FHLB-Pittsburgh, including the short-term advances described above and an additional $8,000,000 of advances included in long-term borrowings at December 31, 2017. The advances included in long-term borrowings at December 31, 2017 had initial maturities of greater than one year, with varying maturities through February 2019 and interest rates ranging from 1.35% to 1.83%.

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 20152018 are estimated at approximately $2.6$3.0 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 2015.in 2018.

 

TABLE VII - Five-year Summary of Loans by Type

         
(In Thousands)          
 2014%2013%2012%2011%2010%
Residential mortgage:          
 Residential mortgage loans - first liens$291,88246.3$299,83146.5$311,62745.6$331,01546.7$333,01245.6
 Residential mortgage loans - junior liens21,1663.423,0403.626,7483.928,8514.131,5904.3
 Home equity lines of credit36,6295.834,5305.433,0174.830,0374.226,8533.7
 1-4 Family residential construction16,7392.713,9092.212,8421.99,9591.414,3792.0
Total residential mortgage366,41658.1371,31057.6384,23456.2399,86256.5405,83455.6
Commercial:          
 Commercial loans secured by real estate145,87823.1147,21522.8158,41323.2156,38822.1167,09422.9
 Commercial and industrial50,1578.042,3876.648,4427.157,1918.159,0058.1
 Political subdivisions17,5342.816,2912.531,7894.637,6205.336,4805.0
 Commercial construction6,9381.117,0032.628,2004.123,5183.324,0043.3
 Loans secured by farmland7,9161.310,4681.611,4031.710,9491.511,3531.6
 Multi-family (5 or more) residential8,9171.410,9851.76,7451.06,5830.97,7811.1
 Agricultural loans3,2210.53,2510.53,0530.42,9870.43,4720.5
 Other commercial loans13,3342.114,6312.33620.15520.13920.1
Total commercial253,89540.3262,23140.7288,40742.2295,78841.8309,58142.4
Consumer10,2341.610,7621.711,2691.612,6651.814,9962.1
Total630,545100.0644,303100.0683,910100.0708,315100.0730,411100.0
Less: allowance for loan losses(7,336) (8,663) (6,857) (7,705) (9,107) 
Loans, net$623,209 $635,640 $677,053 $700,610 $721,304 

Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh.

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, 2017, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,805,000, and the corresponding total outstanding balance repurchased at December 31, 2016 was $1,852,000.

At December 31, 2017, outstanding balances of loans sold and serviced through the two programs totaled $169,725,000, including loans sold through the MPF Xtra program of $107,117,000 and loans sold through the Original program of $62,608,000. 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. 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, 2017 and December 31, 2016.

 

25
28 

 

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, 2017, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $5,742,000, and the Corporation has recorded a related allowance for credit losses in the amount of $260,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets. At December 31, 2016, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,664,000, and the related allowance for credit losses was $196,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

 

TABLE VII - Five-year Summary of Loans by Type

(Dollars In Thousands)

  2017  %  2016  %  2015  %  2014  %  2013  % 
Residential mortgage:                                        
Residential mortgage loans - first liens $359,987   44.1  $334,102   44.4  $304,783   43.2  $291,882   46.3  $299,831   46.5 
Residential mortgage loans - junior liens  25,325   3.1   23,706   3.2   21,146   3.0   21,166   3.4   23,040   3.6 
Home equity lines of credit  35,758   4.4   38,057   5.1   39,040   5.5   36,629   5.8   34,530   5.4 
1-4 Family residential construction  26,216   3.2   24,908   3.3   21,121   3.0   16,739   2.7   13,909   2.2 
Total residential mortgage  447,286   54.8   420,773   56.0   386,090   54.8   366,416   58.1   371,310   57.6 
Commercial:                                        
Commercial loans secured by real estate  159,266   19.5   150,468   20.0   154,779   22.0   145,878   23.1   147,215   22.8 
Commercial and industrial  88,276   10.8   83,854   11.2   75,196   10.7   50,157   8.0   42,387   6.6 
Political subdivisions  59,287   7.3   38,068   5.1   40,007   5.7   17,534   2.8   16,291   2.5 
Commercial construction  14,527   1.8   14,287   1.9   5,122   0.7   6,938   1.1   17,003   2.6 
Loans secured by farmland  7,255   0.9   7,294   1.0   7,019   1.0   7,916   1.3   10,468   1.6 
Multi-family (5 or more) residential  7,713   0.9   7,896   1.1   9,188   1.3   8,917   1.4   10,985   1.7 
Agricultural loans  6,178   0.8   3,998   0.5   4,671   0.7   3,221   0.5   3,251   0.5 
Other commercial loans  10,986   1.3   11,475   1.5   12,152   1.7   13,334   2.1   14,631   2.3 
Total commercial  353,488   43.3   317,340   42.2   308,134   43.7   253,895   40.3   262,231   40.7 
Consumer  14,939   1.8   13,722   1.8   10,656   1.5   10,234   1.6   10,762   1.7 
Total  815,713   100.0   751,835   100.0   704,880   100.0   630,545   100.0   644,303   100.0 
Less: allowance for loan losses  (8,856)      (8,473)      (7,889)      (7,336)      (8,663)    
Loans, net $806,857      $743,362      $696,991      $623,209      $635,640     

TABLE VIII – LOAN MATURITY DISTRIBUTION

(In Thousands)As of December 31, 2014

 

  Fixed-Rate Loans Variable- or Adjustable-Rate Loans
  1 Year 1-5 >5  1 Year 1-5 >5 
  or Less Years Years Total or Less Years Years Total
Real Estate$644$16,154$161,132$177,930$69,359$194,051$61,178$324,588
Commercial11,37119,75711,47042,59847,17827,08974075,007
Consumer2,6304,5413,07410,245567348177
Total$14,645$40,452$175,676$230,773$116,593$221,213$61,966$399,772

(In Thousands) As of December 31, 2017 
       
  Fixed-Rate Loans  Variable- or Adjustable-Rate Loans 
  1 Year  1-5  >5     1 Year  1-5  >5    
  or Less  Years  Years  Total  or Less  Years  Years  Total 
Real Estate $6,076  $25,336  $174,902  $206,314  $122,028  $172,436  $123,684  $418,148 
Commercial  12,724   34,971   40,389   88,084   55,832   29,152   3,511   88,495 
Consumer  1,842   9,589   3,188   14,619   45   0   8   53 
Total $20,642  $69,896  $218,479  $309,017  $177,905  $201,588  $127,203  $506,696 

 

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.

 

29

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 $7,336,000$8,856,000 at December 31, 2014, down2017, up from $8,663,000$8,473,000 at December 31, 2013. As shown in2016. Table X shows total specific allowances on impaired loans totaled $769,000increased $605,000 to $1,279,000 at December 31, 2014, which was $1,564,000 lower than the total of specific allowances on impaired loans2017 from $674,000 at December 31, 2013.2016. The net increase in specific allowances on impaired loans in 20132017 included an increase of $391,000 in the allowance of $1,552,000 established on loansrelated to one real estate secured commercial borrower.loan. The increase in the specific allowance for this loan was based on an updated appraisal received in 2017 as well as principal reductions from scheduled payments. At December 31, 2017, the outstanding balance of this loan was $2,641,000, and the related allowance was $919,000.

Table X also shows that the collectively determined portion of the allowance related to commercial loans decreased $295,000, to $3,078,000 at December 31, 2017 from $3,373,000 at December 31, 2016. The decrease in the allowance in 2014 included the effect of a charge-off of $1,486,000 on these loans in 2014. Table X also shows the collectively determined component of the allowance foron commercial loans was $149,000 higher and for residential mortgages was $139,000 higher at December 31, 2014 than at December 31, 2013. The allowance for the commercial and residential mortgage loan segments were affected by increasesresulted from an aggregate improvement (reduction) in the net charge-off percentageexperience and qualitative factors used to determine a portionvalue the allowance on commercial loans, partially offset by the impact of an increase in outstanding loans. The aggregate net charge-off experience factor used in the collectively determined allowance whichcalculation on commercial loans was higher0.09% lower at December 31, 2014 than at December 31, 2013. In addition, the collectively evaluated components of the allowance for the residential and commercial segments were also affected by increases in qualitative factors at December 31, 20142017 as compared to December 31, 2013, while2016. The Corporation’s aggregate net charge-off rate on commercial loans has been improving over the past several quarters, as the effects on the overall rate of a large ($1,486,000) charge-off in 2014 on a commercial loan secured by real estate has gradually diminished. The qualitative factors used in the allowance calculation for commercial loans were 0.07% lower at December 31, 2017 as compared to December 31, 2016, reflecting a pattern of overall improvement in loan balances haddelinquency levels and a reduction in the effect of decreasing the collectively evaluated componentsunemployment rate throughout most of the allowanceCorporation’s market area over the previous 12-18 months.

Throughout 2016 and at March 31, 2017, a rolling three-year average net charge-off rate was used for all segments.loan classes. Beginning with the quarter ending June 30, 2017, a five-year average net charge-off rate was used for commercial loans secured by real estate and for multi-family residential loans, while a three-year average net charge-off rate was used for all other loan classes. The change in time period for these two loan classes was based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio.

 

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 2014, 20132017, 2016 and 20122015 is as follows:

 

(In Thousands)         
  2017  2016  2015 
Residential mortgage $251  $542  $(19)
Commercial  316   687   816 
Consumer  133   21   16 
Unallocated  101   (29)  32 
Total $801  $1,221  $845 

(In Thousands)   
 201420132012
Residential mortgage$250$559$149
Commercial2271,50720
Consumer224112
Unallocated(3)(43)7
Total$476$2,047$288
30

 

The provision for loan losses for the two largest lending segments, Residential mortgage and Commercial, is further detailed as follows:

Residential mortgage segment         
(In thousands)         
  2017  2016  2015 
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs $300  $69  $(141)
             
Increase (decrease) in collectively determined portion of the allowance attributable to:            
Loan growth  233   325   196 
Changes in historical loss experience factors  (53)  (6)  (111)
Changes in qualitative factors  (229)  154   37 
            
Total provision (credit) for loan losses - Residential mortgage segment $251  $542  $(19)

Commercial segment         
(In thousands)         
  2017  2016  2015 
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs $611  $417  $445 
             
Increase (decrease) in collectively determined portion of the allowance attributable to:            
Loan growth  183   114   437 
Changes in historical loss experience factors  (268)  75   (42)
Changes in qualitative factors  (210)  81   (24)
            
Total provision for loan losses - Commercial segment $316  $687  $816 

For each year shown in the table immediately above, the provision related to increases or decreases in specific allowances on impaired loans was $476,000affected by changes in 2014,the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off.

In the table immediately above, the portion of the net change in comparisonthe collectively determined allowance attributable to aloan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding year to the net increase in loans outstanding (excluding loans specifically evaluated for impairment) for the year. The table shows that the provision for both the Residential mortgage and Commercial segments included the effects of loan lossesgrowth in 2017, 2016 and 2015.

The effect on the provision of $2,047,000changes in 2013historical loss experience and aqualitative factors, as shown in the table above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the year as compared to the preceding year, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding year (excluding loans specifically evaluated for impairment).

As discussed above, the Corporation’s overall net charge-off experience has improved in 2017, consistent with the reductions in the provision for loan losses of $288,000 in 2012. As shown inboth the Residential mortgage and Commercial segments. Table XII shows the average provision for loan losses forrate of net charge-offs as a percentage of loans was 0.05% in 2017, with an average over the five-year period ended December 31, 2014 was $743,000. 2017 of 0.10%, and annual average rates ranging from lows of 0.04% in 2013 and 2015 to a high of 0.29% in 2014.

31

The total amount oftable above also shows the provision for loan losses for each period is determined based onboth the amount required to maintain an appropriate allowanceResidential mortgage and Commercial segments in light of all of the factors described above.

In 2014, the provision for loan losses related to the commercial segment was $227,000 compared to $1,507,000 in 2013 and $20,000 in 2012. In 2014, the provision for the commercial segment included the effects of increases in average net charge-offs (based on historical experience over the previous thirty-six months) and qualitative factors used to estimate a portion of the collectively determined allowance, partially offset by lower loan balances. The 2013 provision for loan losses related to the commercial segment included a provision of $1,552,000 from the establishment of an allowance on loans to one borrower. In 2012, the Corporation’s 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 provision2017 was reduced by the net decreaseeffect of a reduction in qualitative factors. As discussed above, the reduced qualitative factors is consistent with the overall pattern of improving loan delinquency and charge-off levels and an improved local economy as evidenced by a reduction in the collectively evaluated portionunemployment rate throughout most of the allowance for loan losses as a result of a lower balance of outstanding loans.Corporation’s market area. In 2014,2016, the provision for both the residentialResidential mortgage segmentand Commercial segments included the effect of slight increases in average net charge-offs and qualitative factors used to estimate a portion of the collectively determined allowance, partially offset by lower loan balances. The provision for loan losses for the residential mortgage segment increased in 2013, mainly as a result of the increase in average net charge-offs used to estimate a portion of the collectively determined allowance.factors.

 

Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 2.10% at December 31, 2017, up slightly from 2.07% at December 31, 2016. Nonperforming assets as a percentage of total assets was 1.47% at December 31, 2017, also up slightly from 1.43% at December 31, 2016. Table XI showspresents data at the end of each of the years ended December 31, 2013 through 2017. For the range of dates presented in Table XI, total nonperforming loans as a percentage of loans has ranged from a low of 2.07% at December 31, 2016 to a high of 2.80% at December 31, 2013, and total nonperforming assets as a percentage of assets has ranged from a low of 1.31% at December 31, 2015 to a high of 1.53% at December 31, 2013.

Total impaired loans of $12,316,000$9,511,000 at December 31, 2014,2017, are down $1,349,000 from the corresponding amount at December 31, 20132016 of $16,321,000. Though down$10,860,000. Table XI shows that over the period 2013-2017, the year-end total outstanding balance of impaired loans has ranged from year-end 2013,a low of $9,511,000 in 2017 to a high of $16,321,000 in 2013.

Total nonperforming assets of $18,726,000 at December 31, 2017 are up $972,000 from the corresponding amount at December 31, 2016. The total amount of nonperforming assets exceeds the amount of total impaired loans (as well asbecause the nonperforming category includes, in addition to impaired loans, as reflectedforeclosed assets held for sale and loans 90 days or more past due or in nonaccrual status with outstanding balances lower than the minimum amounts that are individually evaluated for impairment. A summary of changes in the table)components of nonperforming assets at December 31, 2014 is significantly higher than it was from 2010 through 2012. The increase in impaired and nonperforming loans at December 31, 2014 and December 31, 20132017 as compared to the other periods presented reflected the classification as nonperforming of two large commercial loan relationships with outstanding balances totaling $6,995,000 at December 31, 2014 and $7,599,000 at December 31, 2013. The total of the specific allowance for loan losses on those two relationships amounted to $211,000 at December 31, 2014 and $1,624,000 at December 31, 2013. As described in the following paragraph, during the second quarter 2014, a charge-off of $1,486,000 was made related to one of these2016 is as follows:

commercial loan relationships resulting in the decrease in the specific allowance as well as total impaired loans with a valuation allowance.

·Nonaccrual loans totaled $13,404,000 at December 31, 2017, up from $8,736,000 at December 31, 2016. The net increase in nonaccrual loans included the effect of classifying a commercial loan with a recorded investment of $2,811,000 at December 31, 2017 as nonaccrual in 2017. The increase also included the effect of an increase in total residential mortgage loans in nonaccrual status to $5,417,000 at December 31, 2017 from $3,781,000 at December 31, 2016.

·Total loans past due 90 days or more and still accruing interest amounted to $3,724,000 at December 31, 2017, a decrease of $3,114,000 from $6,838,000 at December 31, 2016. The decrease in 2017 in the balance of loans past due 90 days or more and still accruing interest included the commercial loan described above moving to nonaccrual status. At December 31, 2017, 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 $2,648,000, down from $3,456,000 at December 31, 2016. 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 $1,598,000 at December 31, 2017, a decrease of $582,000 from $2,180,000 at December 31, 2016. At December 31, 2017, the Corporation held 16 such properties for sale, with total carrying values of $721,000 related to residential real estate, $632,000 of land and $245,000 related to commercial real estate. 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. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property.

32

 

As shown in Table XI, loans classified as TDRs increaseddecreased to $7,195,000$3,663,000 at December 31, 20142017 from $4,175,000$8,677,000 at December 31, 2013. This increase relates mainly to2016. The decrease resulted primarily from removing one commercial borrower. Therelationship from TDR status in 2017. At December 31, 2017, the outstanding contractual balances of loans to this borrower totaled $6,425,000, and the recorded investments totaled $4,593,000. In 2014, the Corporation entered into a forbearance agreement with this commercial borrower which includes a reductionwas extended for two additional twelve-month periods, most recently 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 is extended or the payment requirements are otherwise modified.July 2016. The Corporation recorded a charge-off of $1,486,000 in the second quarter 2014 as a result of these modifications, as the payment amounts based on the forbearance agreement arewere not sufficient to fully amortize the contractual amount of principal outstanding on the loans. The amount ofIn December 2016, the charge-off was determined based onCorporation and the excess ofborrower entered into a modification agreement, terminating the contractual principal due overforbearance agreement and establishing loan terms with essentially the present value of thesame interest rate and monthly payment amounts as had been in effect under the forbearance agreement. The interest rates provided for in the modification agreement were equal to or greater than rates the Corporation would be willing to accept for loans with comparable terms to borrowers with a comparable risk profile at the time of modification. The borrower has made all required payments on the loans in accordance with the terms of the forbearance agreement, assumingas extended, and the revised payment amounts would continue until maturity, atmodification agreement. Accordingly, the contractual interest rates.

Table XI reflects a lower amount of total loans past due 30-89 days and still accruing interestwere restored to full accrual status at December 31, 2014 of $7,121,0002016 and are no longer included in the amounts reported as compared to the December 31, 2013 total of $8,305,000, mainly due to a lower amount of past due residential mortgage loans. Total loans past due 90 days or more and still in accrual status decreased to $2,843,000TDRs at December 31, 20142017. Table XI shows that over the period 2013-2017, the year-end total outstanding balance of TDRs has ranged from $3,131,000 at December 31, 2013. Interest continuesa low of $3,663,000 in 2017 to be accrued on loans 90 days or more past due that management deems to be well secured anda high of $8,677,000 in the process of collection, and for which no loss is anticipated. 2016.

Over the period 2010-2014,2013-2017, 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, 2014.2017. 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.

TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

 

(In Thousands)Years Ended December 31,
 20142013201220112010
Balance, beginning of year$8,663$6,857$7,705$9,107$8,265
Charge-offs:     
Residential mortgage(327)(95)(552)(100)(340)
Commercial(1,715)(459)(498)(1,189)(91)
Consumer(97)(117)(171)(157)(188)
Total charge-offs(2,139)(671)(1,221)(1,446)(619)
Recoveries:     
Residential mortgage252418355
Commercial2643488255113
Consumer47585971102
Total recoveries33643085329270
Net charge-offs(1,803)(241)(1,136)(1,117)(349)
Provision (credit) for loan losses4762,047288(285)1,191
Balance, end of period$7,336$8,663$6,857$7,705$9,107
      
Net charge-offs as a % ofaverage loans0.29%0.04%0.16%0.16%0.05%

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)

 As of December 31,
 20142013201220112010
ASC 310 - Impaired loans$769$2,333$623$1,126$2,288
ASC 450 - Collective segments:     
Commercial2,7322,5832,5942,8113,047
Residential mortgage3,2953,1563,0113,1303,227
Consumer145193188204232
Unallocated395398441434313
Total Allowance$7,336$8,663$6,857$7,705$9,107
(Dollars In Thousands)    Years Ended December 31,    
  2017  2016  2015  2014  2013 
Balance, beginning of year $8,473  $7,889  $7,336  $8,663  $6,857 
Charge-offs:                    
Residential mortgage  (197)  (73)  (217)  (327)  (95)
Commercial  (132)  (597)  (251)  (1,715)  (459)
Consumer  (150)  (87)  (94)  (97)  (117)
Total charge-offs  (479)  (757)  (562)  (2,139)  (671)
Recoveries:                    
Residential mortgage  19   3   1   25   24 
Commercial  4   35   214   264   348 
Consumer  38   82   55   47   58 
Total recoveries  61   120   270   336   430 
Net charge-offs  (418)  (637)  (292)  (1,803)  (241)
Provision for loan losses  801   1,221   845   476   2,047 
Balance, end of period $8,856  $8,473  $7,889  $7,336  $8,663 
                     
Net charge-offs as a % of average loans  0.05%  0.09%  0.04%  0.29%  0.04%

 

2833

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)               
  As of December 31, 
  2017  2016  2015  2014  2013 
ASC 310 - Impaired loans $1,279  $674  $820  $769  $2,333 
ASC 450 - Collective segments:                    
Commercial  3,078   3,373   3,103   2,732   2,583 
Residential mortgage  3,841   3,890   3,417   3,295   3,156 
Consumer  159   138   122   145   193 
Unallocated  499   398   427   395   398 
Total Allowance $8,856  $8,473  $7,889  $7,336  $8,663 

TABLE XI  - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS      
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)               
(Dollars In Thousands)               
  As of December 31, 
  2017  2016  2015  2014  2013 
Impaired loans with a valuation allowance $4,100  $3,372  $1,933  $3,241  $9,889 
Impaired loans without a valuation allowance  5,411   7,488   8,041   9,075   6,432 
Total impaired loans $9,511  $10,860  $9,974  $12,316  $16,321 
Total loans past due 30-89 days and still accruing $9,449  $7,735  $7,057  $7,121  $8,305 
                     
Nonperforming assets:                    
Total nonaccrual loans $13,404  $8,736  $11,517  $12,610  $14,934 
Total loans past due 90 days or more and still accruing  3,724   6,838   3,229   2,843   3,131 
Total nonperforming loans  17,128   15,574   14,746   15,453   18,065 
Foreclosed assets held for sale (real estate)  1,598   2,180   1,260   1,189   892 
Total nonperforming assets $18,726  $17,754  $16,006  $16,642  $18,957 
                     
Loans subject to troubled debt restructurings (TDRs):                    
Performing $636  $5,803  $1,186  $1,807  $3,267 
Nonperforming  3,027   2,874   5,178   5,388   908 
Total TDRs $3,663  $8,677  $6,364  $7,195  $4,175 
                     
Total nonperforming loans as a % of loans  2.10%  2.07%  2.09%  2.45%  2.80%
Total nonperforming assets as a % of assets  1.47%  1.43%  1.31%  1.34%  1.53%
Allowance for loan losses as a % of total loans  1.09%  1.13%  1.12%  1.16%  1.34%
Allowance for loan losses as a % of nonperforming loans  51.70%  54.40%  53.50%  47.47%  47.95%

 

TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

(In Thousands)

 As of December 31,
 20142013201220112010
Impaired loans with a valuation allowance$3,241$9,889$2,710$3,433$5,457
Impaired loans without a valuation allowance9,0756,4324,7194,4313,191
Total impaired loans$12,316$16,321$7,429$7,864$8,648
      
Total loans past due 30-89 days and still accruing$7,121$8,305$7,756$7,898$7,125
      
Nonperforming assets:     
Total nonaccrual loans$12,610$14,934$7,353$7,197$10,809
Total loans past due 90 days or more and still accruing2,8433,1312,3111,267727
Total nonperforming loans15,45318,0659,6648,46411,536
Foreclosed assets held for sale (real estate)1,1898928791,235537
Total nonperforming assets$16,642$18,957$10,543$9,699$12,073
      
Loans subject to troubled debt restructurings (TDRs):     
Performing$1,807$3,267$906$1,064$645
Nonperforming5,3889081,1552,4130
Total TDRs$7,195$4,175$2,061$3,477$645
      
Total nonperforming loans as a % of loans2.45%2.80%1.41%1.19%1.58%
Total nonperforming assets as a % of assets1.34%1.53%0.82%0.73%0.92%
Allowance for loan losses as a % of total loans1.16%1.34%1.00%1.09%1.25%
Allowance for loan losses as a % of nonperforming loans47.47%47.95%70.95%91.03%78.94%

TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES

(In Thousands)

 20142013201220112010Average
Average gross loans$627,753$656,495$700,241$714,421$721,997$684,181
Year-end gross loans630,545644,303683,910708,315730,411679,497
Year-end allowance for loan losses7,3368,6636,8577,7059,1077,934
Year-end nonaccrual loans12,61014,9347,3537,19710,80910,581
Year-end loans 90 days or more      
  past due and still accruing2,8433,1312,3111,2677272,056
Net charge-offs1,8032411,1361,117349929
Provision (credit) for loan losses4762,047288(285)1,191743
Earnings coverage of charge-offs97720215522
Allowance coverage of charge-offs43667269
Net charge-offs as a % of      
  provision (credit) for loan losses378.78%11.77%394.44%-391.93%29.30%125.03%
Net charge-offs as a % of      
  average gross loans0.29%0.04%0.16%0.16%0.05%0.14%
Net income17,08618,59422,70523,36819,05520,162

2934
 

TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES            
(Dollars In Thousands)                  
  2017  2016  2015  2014  2013  Average 
Average gross loans $780,640  $723,076  $657,727  $627,753  $656,495  $689,138 
Year-end gross loans  815,713   751,835   704,880   630,545   644,303  $709,455 
Year-end allowance for loan losses  8,856   8,473   7,889   7,336   8,663  $8,243 
Year-end nonaccrual loans  13,404   8,736   11,517   12,610   14,934  $12,240 
Year-end loans 90 days or more past due and still accruing  3,724   6,838   3,229   2,843   3,131   3,953 
Net charge-offs  418   637   292   1,803   241   678 
Provision for loan losses  801   1,221   845   476   2,047   1,078 
Earnings coverage of charge-offs  56x  37x  85x  14x  116x  37x
Allowance coverage of charge-offs  21x  13x  27x  4x  36x  12x
Net charge-offs as a % of provision for loan losses  52.18%  52.17%  34.56%  378.78%  11.77%  62.89%
Net charge-offs as a % of average gross loans  0.05%  0.09%  0.04%  0.29%  0.04%  0.10%
Income before income taxes on a fully taxable equivalent basis  23,350   23,861   24,710   25,784   28,012   25,143 

 

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

 

Table XIII presents the Corporation’s significant fixed and determinable contractual obligations as of December 31, 20142017 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 Year1-33-5Over 5  1 Year 1-3 3-5 Over 5    
or LessYearsTotal or Less  Years  Years  Years  Total 
Time deposits$128,966$84,704$20,837$4,430$238,937 $112,563  $79,933  $18,459  $2,716  $213,671 
Short-term borrowings:                     
Federal Home Loan Bank of Pittsburgh0  58,000   0   0   0   58,000 
Customer repurchase agreements5,53705,537  3,766   0   0   0   3,766 
Long-term borrowings:                     
Federal Home Loan Bank of Pittsburgh010,12301,93712,060  6,000   2,463   0   726   9,189 
Repurchase agreements061,000061,000
Total$134,503$155,827$20,837$6,367$317,534 $180,329  $82,396  $18,459  $3,442  $284,626 

 

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 $729,052,000$794,778,000 at December 31, 2014.2017.

 

The Corporation’s operating lease and other commitments at December 31, 20142017 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, 2017, outstanding balances of such loans sold totaled $169,725,000.

Also, for loans sold under the MPF Original program, the Corporation provides a credit enhancement. At December 31, 2017, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $5,742,000, and the Corporation has recorded a related allowance for credit losses in the amount of $260,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets.

35

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, 2014,2017, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $26,084,000.$11,340,000.

 

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 $26,092,000$16,301,000 at December 31, 2014.2017.

 

The Corporation’s outstanding, available, and total credit facilities at December 31, 20142017 and December 31, 20132016 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, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 
201420132014201320142013 2017 2016 2017 2016 2017 2016 
Federal Home Loan Bank of Pittsburgh$12,060$34,335$311,007$304,875$323,067$339,210 $67,189  $32,454  $295,441  $306,767  $362,630  $339,221 
Federal Reserve Bank Discount Window025,36726,07825,36726,078  0   0   15,877   15,636   15,877   15,636 
Other correspondent banks045,000  0   0   45,000   45,000   45,000   45,000 
Total credit facilities$12,060$34,335$381,374$375,953$393,434$410,288 $67,189  $32,454  $356,318  $367,403  $423,507  $399,857 

 

At December 31, 2014,2017, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $29,000,000, short-term borrowings of $29,000,000 and long-term borrowings with a total amount of $12,060,000.$9,189,000. At December 31, 2013,2016, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of a short-term borrowingovernight borrowings of $20,000,000,$21,000,000 and long-term borrowings with a total amount of $12,338,000 and a letter of credit in the amount of $1,997,000.$11,454,000. 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, 2014,2017, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $282,456,000.$196,810,000.

 

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, 20142017 and 2013, 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,2016, 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 gains (losses) on available-for-sale securities, net of deferred income tax, amounted to $5,281,000 at December 31, 2014 and ($1,004,000) at December 31, 2013. 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, 2014.

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 related to defined benefit plans, net of deferred income tax, was $79,000 at December 31, 2014 and $11,000 at December 31, 2013.

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:

36

 

 Current General 
 Risk-Based 
 Capital RuleNew Capital Rule
Minimum regulatory capital ratios:  
Common equity tier 1 capital/
risk-weighted assets (RWA)
N/A4.5%
Tier 1 capital / RWA4%6%
Total capital / RWA8%8%
Tier 1 capital / Average assets  
(Leverage ratio)4%4%
   
Capital buffers:  
Capital conservation bufferN/A  2.5% of RWA; composed of
common equity tier 1 capital
   
Prompt correction action levels -
Common equity tier 1 capital ratio:
  
Well capitalizedN/A³6.5%
Adequately capitalizedN/A³4.5%
UndercapitalizedN/A<4.5%
Significantly undercapitalizedN/A<3%
   
Prompt correction action levels -
Tier 1 capital ratio:
  
Well capitalized³6%³8%
Adequately capitalized³4%³6%
Undercapitalized<4%<6%
Significantly undercapitalized<3%<4%
   
Prompt correction action levels -
Total capital ratio:
  
Well capitalized³10%³10%
Adequately capitalized³8%³8%
Undercapitalized<8%<8%
Significantly undercapitalized<6%<6%
   
Prompt correction action levels -
Leverage ratio:
  
Well capitalized³5%³5%
Adequately capitalized³4%³4%
Undercapitalized<4%<4%
Significantly undercapitalized<3%<3%
   
Prompt correction action levels -
Critically undercapitalized:
  
Tangible equity to total assets≤2%≤2%

The newcurrent (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 ofassets and is added to the minimum required risk-based capital ratios (as defined) for common equity tier 1 capital, tier 1 capital and total capital. The minimum capital conservation buffer requirements will begin January 1, 2016. Theneeded in 2017 in order to fully avoid limitations on capital distributions, along with the remaining transition schedule, for new ratios, including the capital conservation buffer, is as follows:

 

 As of January 1:   
 20152016201720182019
Minimum common equity tier 1 capital ratio4.5%4.5%4.5%4.5%4.5%
Common equity tier 1 capital conservation bufferN/A0.625%1.25%1.875%2.5%
Minimum common equity tier 1 capital ratio plus     
  capital conservation buffer4.5%5.125%5.75%6.375%7.0%
Phase-in of most deductions from common equity     
  tier 1 capital40%60%80%100%100%
Minimum tier 1 capital ratio6.0%6.0%6.0%6.0%6.0%
Minimum tier 1 capital ratio plus capital     
  conservation bufferN/A6.625%7.25%7.875%8.5%
Minimum total capital ratio8.0%8.0%8.0%8.0%8.0%
Minimum total capital ratio plus capital     
  conservation bufferN/A8.625%9.25%9.875%10.5%
  As of January 1: 
  2017  2018  2019 
Common equity tier 1 capital conservation buffer  1.25%  1.875%  2.5%

 

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 BufferMaximum 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, 2017, the Corporation’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 15.07%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 12.47%.

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.

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 ($1,566,000) at December 31, 2017, ($949,000) at December 31, 2016 and $2,493,000 at December 31, 2015. 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, 2017.

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 $59,000 at December 31, 2017, $51,000 at December 31, 2016 and $35,000 at December 31, 2015.

37

 

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 $23,439,000$12,825,000 in 20142017 as compared to $6,598,000$12,336,000 in 2013,2016 and $23,548,000$13,639,000 in 2012.2015. In 2014,2017, Comprehensive Income included: (1) Net Income of $17,086,000,$13,434,000, which was $1,508,000$2,328,000 lower than in 20132016 and $5,619,000$3,037,000 lower than in 2012;2015; (2) Other Comprehensive GainLoss from unrealized gainslosses on available-for-sale securities, net of deferred income tax, of $6,285,000($617,000) as compared to Other Comprehensive Loss of ($12,572,000)3,442,000) in 20132016 and Other Comprehensive GainLoss of $777,000($2,788,000) in 2012;2015; and (3) Other Comprehensive Income from defined benefit plans of $68,000$8,000 in 20142017 as compared to Other Comprehensive Income of $576,000$16,000 in 20132016 and Other Comprehensive IncomeLoss of $66,000($44,000) in 2012.2015. Fluctuations in interest rates significantly affected fair values of available-for-sale securities in 20122015 through 2014,2017, and accordingly havehad an effect on Other Comprehensive Income (Loss) in 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 inSince September 2007, in response to concerns about weakness in the U.S. economy, the Federal Reserve loweredhas maintained the fed funds target rate numerous times; in December 2008, it established a target rangeat extremely low levels by historical standards. Further, throughout the period of 0% to 0.25%, which it has maintained through 2014. Also,low interest rates, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. TheSince late 2015, the Federal Reserve has purchased large amounts of securitiesbegun to move its fed funds target rate higher, in an effort to keep interest rates lowre-establish a more normalized level by historical standards, with 0.25% increases in December 2015 and stimulate economic growth. Beginning2016, March 2017, June 2017 and December 2017, resulting in late 2013,the current range of 1.25% to 1.50%. Inflation has remained subdued, measured for most of 2016 and through 2017 at levels below the Federal Reserve began reducingOpen Market Committee’s 2% longer run objective, though there have been some reports of wage pressure as the amount of securities purchased under its asset purchase program and then endedU.S. employment picture has gradually improved over the program in October 2014, though still reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and continued to roll over maturing Treasury securities at auction. The Federal Reserve is expected to continue its highly accommodative monetary policy in the form of low short-term interest rates for the foreseeable future, though many observers believe the fed funds target rate may be raised above its current level in 2015.past several years.

 

Despite the current low short-term rate environment, 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.

 

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 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.

38

 

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 October 31, 2014 and December 31, 2013. The table2017 and 2016. Table XIV reflects two significant changes to the analysis using December 31, 2017 data as compared to the analysis based on December 31, 2016 data, as follows:

·Management lowered assumptions of sensitivity of market interest rate changes on some types of the Corporation’s deposits. This change resulted in a reduction in the amount of increase in interest expense in the rising rate scenarios presented in Table XIV. The reduction in estimated sensitivity was based on data showing the Corporation’s prior sensitivity assumptions were higher than may be expected based on industry norms.

·The policy limits for present value of equity volatility were lowered based on a determination that the prior levels were so high they would be unlikely to be approached, thereby limiting their effectiveness as a tool for timely identification of long-term interest rate risk.

Table XIV 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.

 

3539

 

TABLE XIV - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

 

October 31, 2014 Data    
(In Thousands) Period Ending October 31, 2015 
      
Basis PointInterestInterestNet InterestNIINII
Change in RatesIncomeExpenseIncome (NII) % ChangeRisk Limit
+400$55,351$23,123$32,228-20.3%25.0%
+30052,97518,22334,752-14.1%20.0%
+20050,54613,61836,928-8.7%15.0%
+10047,9779,33038,647-4.4%10.0%
045,4785,04340,4350.0%0.0%
-10042,8694,79438,075-5.8%10.0%
-20041,0954,72936,366-10.1%15.0%
-30040,1234,70735,416-12.4%20.0%
-40039,9984,70735,291-12.7%25.0%
      
  Market Value of Portfolio Equity at October 31, 2014 
      
 PresentPresentPresent  
Basis PointValueValueValue  
Change in RatesEquity % ChangeRisk Limit  
+400$176,447-24.4%50.0%  
+300189,184-18.9%45.0%  
+200203,838-12.6%35.0%  
+100218,314-6.4%25.0%  
0233,2550.0%0.0%  
-100232,818-0.2%25.0%  
-200232,294-0.4%35.0%  
-300251,7917.9%45.0%  
-400288,05923.5%50.0%  
      
December 31, 2013 Data     
(In Thousands) Period Ending December 31, 2014 
      
Basis PointInterestInterestNet InterestNIINII
Change in RatesIncomeExpenseIncome (NII) % ChangeRisk Limit
+400$53,993$23,975$30,018-24.4%25.0%
+30051,74818,97532,773-17.4%20.0%
+20049,49614,09135,405-10.8%15.0%
+10047,1469,55237,594-5.3%10.0%
044,8215,12339,6980.0%0.0%
-10042,4324,89737,535-5.4%10.0%
-20040,7474,89535,852-9.7%15.0%
-30040,0594,89535,164-11.4%20.0%
-40039,9684,89535,073-11.7%25.0%
      
  Market Value of Portfolio Equity at December 31, 2013 
      
 PresentPresentPresent  
Basis PointValueValueValue  
Change in RatesEquity % ChangeRisk Limit  
+400$161,652-28.5%50.0%  
+300175,176-22.6%45.0%  
+200192,513-14.9%35.0%  
+100209,428-7.4%25.0%  
0226,2040.0%0.0%  
-100230,1891.8%25.0%  
-200233,9023.4%35.0%  
-300250,45110.7%45.0%  

EQUITY SECURITIES RISK

December 31, 2017 Data
(Dollars In Thousands)Period Ending December 31, 2018

 

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 7 of the consolidated financial statements, the Corporation had no other-than-temporary impairment losses related to bank stocks in 2014. The Corporation recognized OTTI losses of $25,000 in 2013 and $67,000 in 2012.

Basis Point Interest  Interest  Net Interest  NII  NII 
Change in Rates Income  Expense  Income (NII)  % Change  Risk Limit 
+400 $57,619  $19,730  $37,889   -10.8%  25.0%
+300  54,978   15,852   39,126   -7.9%  20.0%
+200  52,334   11,974   40,360   -5.0%  15.0%
+100  49,620   8,095   41,525   -2.2%  10.0%
0  46,717   4,243   42,474   0.0%  0.0%
-100  43,581   2,781   40,800   -3.9%  10.0%
-200  41,290   2,216   39,074   -8.0%  15.0%
-300  40,463   2,191   38,272   -9.9%  20.0%
-400  40,194   2,191   38,003   -10.5%  25.0%

 

Equity securities held as of December 31, 2014 and 2013 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, 2014.

Market Value of Portfolio Equity at December 31, 2017

 

TABLE XV - EQUITY SECURITIES RISK

(In Thousands)

  Present  Present  Present 
Basis Point Value  Value  Value 
Change in Rates Equity  % Change  Risk Limit 
+400 $195,385   -16.8%  40.0%
+300  203,648   -13.3%  30.0%
+200  213,689   -9.0%  25.0%
+100  224,389   -4.4%  15.0%
0  234,759   0.0%  0.0%
-100  236,030   0.5%  15.0%
-200  234,863   0.0%  25.0%
-300  252,464   7.5%  30.0%
-400  292,124   24.4%  40.0%

 

 Dec. 31,Dec. 31,
 20142013
Cost$5,605$6,038
Fair Value8,6548,924
Hypothetical 10% Decline In Market Value(865)(892)
Hypothetical 20% Decline In Market Value(1,731)(1,785)
ITEM 8. FINANCIAL STATEMENTS  
CONSOLIDATED BALANCE SHEETS  
(In Thousands, Except Share and Per Share Data)December 31,December 31,
 20142013
ASSETS  
Cash and due from banks:  
Noninterest-bearing$14,812$15,917
Interest-bearing21,23528,702
Total cash and due from banks36,04744,619
Available-for-sale securities, at fair value516,807482,658
Loans held for sale054
   
Loans receivable630,545644,303
Allowance for loan losses(7,336)(8,663)
Loans, net623,209635,640
Bank-owned life insurance22,11921,743
Accrued interest receivable3,9084,146
Bank premises and equipment, net16,25617,430
Foreclosed assets held for sale1,189892
Deferred tax asset, net1,6686,344
Intangible asset - Core deposit intangibles5287
Intangible asset – Goodwill11,94211,942
Other assets8,76612,140
TOTAL ASSETS$1,241,963$1,237,695
   
LIABILITIES  
Deposits:  
Noninterest-bearing$212,439$191,245
Interest-bearing755,550763,271
Total deposits967,989954,516
Short-term borrowings5,53723,385
Long-term borrowings73,06073,338
Accrued interest and other liabilities7,0156,984
TOTAL LIABILITIES1,053,6011,058,223
   
STOCKHOLDERS' EQUITY  
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference  
per share; no shares issued at December 31, 2014 and December 31, 201300
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2014 and  
2013; issued 12,655,171 at December 31, 2014 and 12,596,540 at December 31, 201312,65512,596
Paid-in capital71,54170,105
Retained earnings105,550101,216
Treasury stock, at cost; 375,191 shares at December 31, 2014  
and 206,477 shares at December 31, 2013(6,744)(3,452)
Sub-total183,002180,465
Accumulated other comprehensive income (loss):  
Unrealized gain (loss) on available-for-sale securities5,281(1,004)
Defined benefit plans gain7911
Total accumulated other comprehensive income (loss)5,360(993)
TOTAL STOCKHOLDERS' EQUITY188,362179,472
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY$1,241,963$1,237,695
December 31, 2016 Data
(Dollars In Thousands)Period Ending December 31, 2017

 

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

Consolidated Statements of Income Years Ended December 31,
 (In Thousands Except Per Share Data)  
 INTEREST INCOME201420132012
 Interest and fees on loans$32,127$35,484$40,453
 Interest on balances with depository institutions125105114
 Interest on loans to political subdivisions1,4031,3811,539
 Interest on mortgages held for sale1654107
 Income from available-for-sale securities:   
      Taxable7,7216,8109,029
      Tax-exempt4,3104,7855,085
      Dividends307295305
 Total interest and dividend income46,00948,91456,632
 INTEREST EXPENSE   
 Interest on deposits2,1632,7034,807
 Interest on short-term borrowings9910
 Interest on long-term borrowings2,9503,0534,214
 Total interest expense5,1225,7659,031
 Net interest income40,88743,14947,601
 Provision for loan losses4762,047288
 Net interest income after provision for loan losses40,41141,10247,313
 OTHER INCOME   
 Service charges on deposit accounts5,0255,2465,322
 Service charges and fees538597643
 Trust and financial management revenue4,4904,0873,847
 Brokerage revenue901784801
 Insurance commissions, fees and premiums118170221
 Interchange revenue from debit card transactions1,9591,9411,938
 Net gains from sale of loans7681,9692,016
 (Decrease) increase in fair value of servicing rights(27)67(188)
 Increase in cash surrender value of life insurance376399455
 Net gain (loss) from premises and equipment8(16)270
 Other operating income1,2641,2071,058
 Sub-total15,42016,45116,383
 Total other-than-temporary impairment losses on available-for-sale securities0(25)(67)
  Portion of (gain) recognized in other comprehensive loss (before taxes)000
 Net impairment losses recognized in earnings0(25)(67)
 Realized gains on available-for-sale securities, net1,1041,7432,749
 Total other income16,52418,16919,065
 OTHER EXPENSES   
 Salaries and wages15,12114,20614,370
 Pensions and other employee benefits4,7694,1504,497
 Occupancy expense, net2,6282,4732,476
 Furniture and equipment expense1,8591,9481,887
 FDIC Assessments600604633
 Pennsylvania shares tax1,3501,4021,312
 Professional fees6991,534486
 Automated teller machine and interchange expense9241,0201,136
 Software subscriptions784836890
 Loss on prepayment of debt01,0232,333
 Other operating expense5,4235,2985,227
 Total other expenses34,15734,49435,247
 Income before income tax provision22,77824,77731,131
 Income tax provision5,6926,1838,426
 NET INCOME$17,086$18,594$22,705
 NET INCOME PER SHARE - BASIC$1.38$1.51$1.86
 NET INCOME PER SHARE - DILUTED$1.38$1.50$1.85
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 part of the consolidated financial statements.

39Market Value of Portfolio Equity at December 31, 2016

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

 40

 

Consolidated Statements of Comprehensive Income  
(In Thousands)Years Ended December 31,
 201420132012
Net income$17,086$18,594$22,705
    
Unrealized gains (losses) on available-for-sale securities:   
Unrealized holding gains (losses) on available-for-sale securities10,774(17,623)4,128
Reclassification adjustment for gains realized in income(1,104)(1,718)(2,682)
Other comprehensive gain (loss) on available-for-sale securities9,670(19,341)1,446
    
Unfunded pension and postretirement obligations:   
Changes from plan amendments and actuarial gains and losses   
included in accumulated other comprehensive (loss) gain(79)8858
Amortization of net transition obligation, prior service cost, net   
actuarial loss and loss on settlement included in net periodic benefit cost184277
Other comprehensive gain on unfunded retirement obligations10588785
    
Other comprehensive income (loss) before income tax9,775(18,454)1,531
Income tax related to other comprehensive (income) loss(3,422)6,458(688)
    
Net other comprehensive income (loss)6,353(11,996)843
    
Comprehensive income$23,439$6,598$23,548

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

Consolidated Statements of Changes in Stockholders' Equity

(In Thousands Except Share and Per Share Data)

     Accumulated  
      Other  
 CommonTreasuryCommonPaid-inRetainedComprehensiveTreasury 
 SharesSharesStockCapitalEarningsIncomeStockTotal
      (Loss)  
Balance, January 1, 201212,460,920305,391$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        
     Plan64,491 641,147   1,211
Shares issued from treasury related to        
     exercise of stock options (15,023) (22)  251229
Restricted stock granted (42,552) (711)  7110
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, 201212,525,411251,37612,52568,62294,83911,003(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        
     Plan71,129 711,356   1,427
Shares issued from treasury related to        
     exercise of stock options (10,656) 5  179184
Restricted stock granted (37,886) (633)  6330
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, 201312,596,540206,47712,59670,105101,216(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        
     Plan59,498(18,473)601,069  3681,497
Treasury stock purchased 208,300    (4,002)(4,002)
Shares issued from treasury and redeemed        
     related to exercise of stock options(867)(11,860)(1)(64)  188123
Restricted stock granted (16,711) (279)  2790
Forfeiture of restricted stock 7,458 125  (125)0
Stock-based compensation expense   565   565
Tax effect of stock option exercises   (1)   (1)
Tax benefit from dividends on restricted stock   21   21
Tax benefit from employee benefit plan    137  137
Balance, December 31, 201412,655,171375,191$12,655$71,541$105,550$5,360($6,744)$188,362

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

CONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31,
(In Thousands)201420132012
 CASH FLOWS FROM OPERATING ACTIVITIES:   
Net income$17,086$18,594$22,705
Adjustments to reconcile net income to net cash provided by operating activities:   
Provision for loan losses4762,047288
Realized gains on available-for-sale securities, net(1,104)(1,718)(2,682)
Loss on prepayment of debt01,0232,333
Realized (gain) loss on foreclosed assets(136)7166
(Gain) loss on disposition of premises and equipment(8)16(270)
Depreciation expense1,9402,0201,939
Accretion and amortization on securities, net1,3751,8361,581
Accretion and amortization on loans and deposits, net(27)(32)(49)
Decrease (increase) in fair value of servicing rights27(67)188
Increase in cash surrender value of life insurance(376)(399)(455)
Stock-based compensation565696567
Amortization of core deposit intangibles355174
Deferred income taxes1,2541,8393,760
Gains on sales of loans, net(768)(1,969)(2,016)
Origination of loans for sale(21,680)(58,427)(62,829)
Proceeds from sales of loans22,31762,43662,821
Decrease (increase) in accrued interest receivable and other assets1,3953,234(1,043)
(Decrease) increase in accrued interest payable and other liabilities(90)(679)674
Net Cash Provided by Operating Activities22,28130,57227,652
 CASH FLOWS FROM INVESTING ACTIVITIES:   
Proceeds from maturities of certificates of deposit2,5604800
Purchase of certificates of deposit(960)(1,688)(1,060)
Proceeds from sales of available-for-sale securities56,26925,50024,228
Proceeds from calls and maturities of available-for-sale securities78,10197,123114,247
Purchase of available-for-sale securities(158,894)(152,163)(126,820)
Redemption of Federal Home Loan Bank of Pittsburgh stock2,8042,6801,931
Purchase of Federal Home Loan Bank of Pittsburgh stock(602)(1,624)0
Net decrease in loans10,31739,05922,320
Purchase of premises and equipment(801)(801)(1,622)
Proceeds from disposition of premises and equipment4342456
Purchase of investment in limited liability entity0(147)(538)
Return of principal on limited liability entity investments173164114
Proceeds from sale of foreclosed assets1,5042551,380
Net Cash (Used in) Provided by Investing Activities(9,486)8,88034,636
 CASH FLOWS FROM FINANCING ACTIVITIES:   
Net increase (decrease) in deposits13,473(51,590)(12,106)
Net (decrease) increase in short-term borrowings(17,848)17,818617
Repayments of long-term borrowings(278)(11,497)(43,884)
Purchase of treasury stock(4,002)00
Sale of treasury stock123184229
Tax benefit from compensation plans157124118
Common dividends paid(11,392)(10,916)(9,061)
Net Cash Used in Financing Activities(19,767)(55,877)(64,087)
(DECREASE) IN CASH AND CASH EQUIVALENTS(6,972)(16,425)(1,799)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR38,59155,01656,815
CASH AND CASH EQUIVALENTS, END OF YEAR$31,619$38,591$55,016
    
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:   
Assets acquired through foreclosure of real estate loans$1,665$339$1,004
Accrued purchase of available-for-sale securities$226$0$0
Interest paid$5,138$5,782$9,246
Income taxes paid$4,432$4,213$4,250
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      
CONSOLIDATED BALANCE SHEETS      
       
(In Thousands, Except Share and Per Share Data) December 31,  December 31, 
  2017  2016 
ASSETS        
Cash and due from banks:        
Noninterest-bearing $25,664  $17,551 
Interest-bearing  14,580   14,558 
Total cash and due from banks  40,244   32,109 
Available-for-sale securities, at fair value  356,908   395,077 
Loans held for sale  765   142 
         
Loans receivable  815,713   751,835 
Allowance for loan losses  (8,856)  (8,473)
Loans, net  806,857   743,362 
         
Bank-owned life insurance  20,083   19,704 
Accrued interest receivable  4,048   3,963 
Bank premises and equipment, net  15,432   15,397 
Foreclosed assets held for sale  1,598   2,180 
Deferred tax asset, net  3,289   5,117 
Intangible assets - Goodwill and core deposit intangibles  11,954   11,959 
Other assets  15,781   13,282 
TOTAL ASSETS $1,276,959  $1,242,292 
         
LIABILITIES        
Deposits:        
Noninterest-bearing $241,214  $224,175 
Interest-bearing  767,235   759,668 
Total deposits  1,008,449   983,843 
Short-term borrowings  61,766   26,175 
Long-term borrowings  9,189   38,454 
Accrued interest and other liabilities  9,112   7,812 
TOTAL LIABILITIES  1,088,516   1,056,284 
         
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 12,214,525 at December 31, 2017 and
12,113,228 December 31, 2016
  12,655   12,655 
Paid-in capital  72,035   71,730 
Retained earnings  113,608   112,790 
Treasury stock, at cost; 440,646 shares at December 31, 2017 and 541,943 shares at December 31, 2016  (8,348)  (10,269)
Accumulated other comprehensive loss  (1,507)  (898)
TOTAL STOCKHOLDERS’ EQUITY  188,443   186,008 
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $1,276,959  $1,242,292 

 

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

 

4241

Consolidated Statements of Income      
       
(In Thousands Except Per Share Data) Years Ended December 31, 
 2017  2016  2015 
INTEREST INCOME         
Interest and fees on loans:            
Taxable $34,907  $32,827  $31,311 
Tax-exempt  2,037   1,783   1,668 
Interest on mortgages held for sale  25   27   16 
Interest on balances with depository institutions  190   116   93 
Income from available-for-sale securities:            
Taxable  5,478   5,846   7,303 
Tax-exempt  3,205   3,429   3,844 
Dividends  21   70   284 
Total interest and dividend income  45,863   44,098   44,519 
INTEREST EXPENSE            
Interest on deposits  2,403   2,085   1,924 
Interest on short-term borrowings  213   155   32 
Interest on long-term borrowings  1,299   1,453   2,646 
Total interest expense  3,915   3,693   4,602 
Net interest income  41,948   40,405   39,917 
Provision for loan losses  801   1,221   845 
Net interest income after provision for loan losses  41,147   39,184   39,072 
OTHER INCOME            
Service charges on deposit accounts  4,488   4,695   4,864 
Service charges and fees  417   439   494 
Trust and financial management revenue  5,399   4,760   4,626 
Brokerage revenue  797   756   839 
Insurance commissions, fees and premiums  115   102   109 
Interchange revenue from debit card transactions  2,221   1,943   1,935 
Net gains from sale of loans  818   1,029   735 
Loan servicing fees, net  244   103   216 
Increase in cash surrender value of life insurance  379   382   386 
Other operating income  1,275   1,302   1,274 
Sub-total  16,153   15,511   15,478 
Realized gains on available-for-sale securities, net  257   1,158   2,861 
Total other income  16,410   16,669   18,339 
OTHER EXPENSES            
Salaries and wages  15,806   15,411   14,682 
Pensions and other employee benefits  5,374   4,717   4,420 
Occupancy expense, net  2,340   2,340   2,574 
Furniture and equipment expense  1,834   1,730   1,860 
FDIC Assessments  376   488   603 
Pennsylvania shares tax  1,329   1,274   1,248 
Professional fees  1,086   1,126   638 
Automated teller machine and interchange expense  1,284   1,137   988 
Software subscriptions  1,190   981   876 
Loss on prepayment of debt  0   0   2,573 
Other operating expense  6,348   5,540   5,141 
Total other expenses  36,967   34,744   35,603 
Income before income tax provision  20,590   21,109   21,808 
Income tax provision  7,156   5,347   5,337 
NET INCOME $13,434  $15,762  $16,471 
EARNINGS PER COMMON SHARE - BASIC $1.10  $1.30  $1.35 
EARNINGS PER COMMON SHARE - DILUTED $1.10  $1.30  $1.35 

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

 42

Consolidated Statements of Comprehensive Income      
       
(In Thousands)Years Ended December 31,
  2017  2016  2015 
Net income $13,434  $15,762  $16,471 
             
Unrealized losses on available-for-sale securities:            
Unrealized holding losses on available-for-sale securities  (691)  (4,138)  (1,429)
Reclassification adjustment for gains realized in income  (257)  (1,158)  (2,861)
Other comprehensive loss on available-for-sale securities  (948)  (5,296)  (4,290)
             
Unfunded pension and postretirement obligations:            
Changes from plan amendments and actuarial gains and losses
included in accumulated other comprehensive gain (loss)
  36   46   (135)
Amortization of net transition obligation, prior service cost, net
actuarial (gain) loss and loss on settlement included in
net periodic benefit cost
  (24)  (22)  67 
Other comprehensive gain (loss) on unfunded retirement obligations  12   24   (68)
             
Other comprehensive loss before income tax  (936)  (5,272)  (4,358)
Income tax related to other comprehensive loss  327   1,846   1,526 
             
Net other comprehensive loss  (609)  (3,426)  (2,832)
             
Comprehensive income $12,825  $12,336  $13,639 
             

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, 2015  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 
Net income                  13,434           13,434 
Other comprehensive loss, net                      (609)      (609)
Cash dividends declared on common stock, $1.04 per share                  (12,616)          (12,616)
Shares issued for dividend reinvestment plan      (63,066)      276           1,195   1,471 
Shares issued from treasury related to exercise of stock options      (11,780)      (100)          227   127 
Restricted stock granted      (30,782)      (583)          583   0 
Forfeiture of restricted stock      4,406       85           (85)  0 
Stock-based compensation expense              627               627 
Other stock-based expense      (75)                  1   1 
Balance, December 31, 2017  12,655,171   440,646  $12,655  $72,035  $113,608  $(1,507) $(8,348) $188,443 

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS         
          
(In Thousands) Years Ended December 31, 
  2017  2016  2015 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income $13,434  $15,762  $16,471 
Adjustments to reconcile net income to net cash provided by operating activities:            
Provision for loan losses  801   1,221   845 
Realized gains on available-for-sale securities, net  (257)  (1,158)  (2,861)
Loss on prepayment of debt  0   0   2,573 
Depreciation expense  1,639   1,589   1,888 
Accretion and amortization on securities, net  1,157   1,462   1,562 
Increase in cash surrender value of life insurance  (379)  (382)  (386)
Gain on life insurance benefits  0   0   (212)
Stock-based compensation and other expense  628   582   606 
Deferred income taxes  2,155   (156)  79 
Decrease in fair value of servicing rights  168   282   162 
Gains on sales of loans, net  (818)  (1,029)  (735)
Origination of loans for sale  (25,129)  (29,296)  (21,823)
Proceeds from sales of loans  25,119   30,215   22,101 
Increase in accrued interest receivable and other assets  (595)  (410)  (1,697)
Increase (decrease) in accrued interest payable and other liabilities  1,312   (216)  1,195 
Other  139   44   (82)
Net Cash Provided by Operating Activities  19,374   18,510   19,686 
CASH FLOWS FROM INVESTING ACTIVITIES:            
Proceeds from maturities of certificates of deposit  348   1,540   1,780 
Purchase of certificates of deposit  (100)  (2,280)  (100)
Proceeds from sales of available-for-sale securities  24,118   37,032   44,504 
Proceeds from calls and maturities of available-for-sale securities  63,679   74,477   89,159 
Purchase of available-for-sale securities  (51,476)  (91,896)  (40,363)
Redemption of Federal Home Loan Bank of Pittsburgh stock  7,288   5,277   5,029 
Purchase of Federal Home Loan Bank of Pittsburgh stock  (9,418)  (5,046)  (8,102)
Net increase in loans  (65,225)  (49,085)  (77,129)
Proceeds from bank owned life insurance  0   1,442   1,953 
Purchase of premises and equipment  (1,697)  (1,580)  (1,039)
Proceeds from sale of foreclosed assets  1,387   539   2,536 
Other  191   181   181 
Net Cash (Used in) Provided by Investing Activities  (30,905)  (29,399)  18,409 
CASH FLOWS FROM FINANCING ACTIVITIES:            
Net increase (decrease) in deposits  24,606   48,228   (32,374)
Net increase (decrease) in short-term borrowings  35,591   (27,321)  47,959 
Proceeds from long-term borrowings  8,000   0   0 
Repayments of long-term borrowings  (37,265)  (313)  (36,866)
Purchase of treasury stock  0   (3,723)  (4,415)
Sale of treasury stock  127   263   381 
Tax benefit from compensation plans  0   175   159 
Common dividends paid  (11,145)  (11,112)  (11,245)
Net Cash Provided by (Used in) Financing Activities  19,914   6,197   (36,401)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  8,383   (4,692)  1,694 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR  28,621   33,313   31,619 
CASH AND CASH EQUIVALENTS, END OF PERIOD $37,004  $28,621  $33,313 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:         
Assets acquired through foreclosure of real estate loans $940  $1,508  $2,523 
Interest paid $3,934  $3,698  $4,636 
Income taxes paid $4,913  $5,129  $4,827 

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF CONSOLIDATION -The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”), as well as C&N Bank’s wholly-owned subsidiary, C&N Financial Services Corporation. In December 2017, C&N Bank established a new entity, Northern Tier Holding LLC, for the purpose of acquiring, holding and disposing of real property acquired by the Bank. C&N Bank is the sole member of Northern Tier Holding LLC, which had no transactions in 2017. 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) assessment of impaired securities to determine whether or not the securities are other-than-temporarily impaired, (4) valuation of deferred tax assets and (5) valuation of obligations from defined benefit plans.

 

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– Credit-related 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.

 

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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– 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– 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, 20142017 and 2013,2016, 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.

47

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. The time period used in determining the average historical net charge-off rate for each loan class is based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio. Qualitative risk factors (described in the following paragraph) are evaluated for the impact on each of the three distinct segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. Any adjustments to the factors are supported by a narrative documentation of changes in conditions accompanying the allowance for loan 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 67%53% at December 31, 2014)2017) 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. 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 are currentis not in doubt, and there has been a period (generally, for at least six consecutive monthsmonths) of satisfactory payment performance by the borrower either immediately before or after modification. Loans classified as troubled debt restructurings are designated as impaired.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.

 

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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.

 

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 2014, 2013, and 2012 was not significant.

45

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 IncomeLoan Servicing Fees, Net, 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 $1,281,000 at December 31, 2014 and $1,123,000 at December 31, 2013.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 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 were effective beginning in the first quarter 2014. The Corporation will be affected by these amendments if unrecognized tax benefits arise in future periods.

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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 or the cost method. Generally, investors in qualified affordable housing project investments expect to receive all of their return through the receipt of tax credits and tax deductions from operating losses, and 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. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2015, and are to be applied retrospectively. Information concerning the Corporation’s investments in qualified affordable housing projects is provided in Note 14 to these consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of 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 title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to the requirements of the applicable jurisdiction. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. Under the modified retrospective transition method, 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 period 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. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2015, and the Corporation is in the process of determining how it will apply the amendments to its accounting and reporting practices.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a principles-based framework for revenue recognition that supersedes virtually all previously issued revenue recognition guidance under U.S. GAAP. Additionally, the ASU requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The core principle of the five-step revenue recognition framework is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. TheSeveral additional ASUs have been issued subsequent to ASU will be2014-09 to provide clarifying guidance related to various revenue recognition areas and to defer the effective date of the standard by a year, making it applicable for all annual and interim periods beginningthe Corporation in the first quarter 2017.2018 and for the annual period ending December 31, 2018. More than 70% of the Corporation’s revenue comes from net interest income and is explicitly out of the scope of ASU 2014-09. The amendments inCorporation’s largest sources of noninterest revenue which are subject to the guidance include Trust and financial management revenue, service charges on deposit accounts and interchange revenue from debit card transactions. Management has evaluated the Corporation’s noninterest revenue streams and adoption of ASU 2014-09 using the modified retrospective method had no effect on the Corporation’s revenue recognition practices. Additionally, the ASU should be applied either retrospectivelyrequires expanded disclosures to each prior reporting period presented or retrospectively withhelp users of financial statements better understand the cumulative effectnature, amount, timing, and uncertainty of initially applying this ASU recognized at the date of initial application. The Corporationrevenue that is recognized. Management is in the process of evaluatingreviewing the potential impact of adopting this ASU, including determining which transition methodCorporation’s business processes, systems and controls to apply.support the expanded disclosure requirements that will be effective in the first quarter 2018.

 

In June 2014,January 2016, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings,2016-01, Recognition and Disclosures. In additionMeasurement of Financial Assets and Liabilities. This makes significant changes in U.S. GAAP related to various other amendmentscertain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes provided for in this Update that will affect accounting and disclosures for transactions in whichare applicable to the Corporation has not engaged to date, this Update requires expanded disclosures for repurchase agreements that are as follows: (1) require equity investments (except those accounted for as secured borrowings, including: (1) a disaggregationunder the equity method of accounting or those that result in consolidation of the gross obligation byinvestee) 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 class of collateral pledged, (2) the remaining contractual tenoridentical or a similar investment of the agreementssame 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) a discussioneliminate 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 potential risks associated with the agreements and the related collateral pledged, including obligations arising from a declinetotal change in the fair value of the collateral pledged and how those risks are managed. The expanded disclosure requirements associated with repurchase agreements are effective for the Corporation for annual and interim periods beginninga liability resulting from a change in the second quarter 2015. Information concerninginstrument-specific credit risk when the Corporation’s repurchase agreements is providedentity has elected to measure the liability at fair value in Note 12 to these consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructuring by Creditors, which requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under the claim and (3) at the time of foreclosure, any amount of the claim that is determined on the basis ofaccordance with the fair value option for financial instruments (at December 31, 2017 and 2016, 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 real estate is fixed.balance sheet or the accompanying notes to the financial statements; and (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update arewill become effective for the Corporation for annual and interim periods beginning in the first quarter 2015.2018. With limited exceptions, early adoption of the amendments in this Update is not permitted. Amendments are to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively. The Corporation’s current exposure related to investments in marketable equity securities and other issues considered in ASU 2016-01 is limited, and accordingly, initial adoption of this ASU had no effect on the Corporation’s financial position. Management is in the process of reviewing the changes in disclosure requirements that will become effective in the first quarter 2018.

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

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

50

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. This ASU changes several aspects of accounting for share-based payment transactions, and includes some changes that apply only to nonpublic companies. This Update includes amendments that currently apply, or may apply in the future, to the Corporation related to the following: (1) accounting for the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments in this Update were effective for the Corporation for annual and interim periods beginning in the first quarter 2017. 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 Corporation will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

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

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

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the 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 fair 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 interim goodwill impairment tests beginning in the first quarter of 2020.

51

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). This Update will shorten the amortization period for certain callable debt securities held at a premium. Under current U.S. GAAP, entities generally amortize the premium over the contractual life of the instrument. This Update requires the premium be amortized to the earliest call date. Discounts will continue to be amortized to maturity. The Corporation expects to adopt the amendments in this Update through a cumulative-effect adjustment directly to retained earnings in 2018, and does not expect the amount of the adjustment to be significant.

 

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-TaxIncome TaxNet-of-Tax
 AmountEffectAmount
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 securities9,670(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 cost184(65)119
Other comprehensive  income on unfunded retirement obligations105(37)68
    
Total other comprehensive  income$9,775($3,422)$6,353
(In Thousands) Before-Tax  Income Tax  Net-of-Tax 
  Amount  Effect  Amount 
2017            
Unrealized losses on available-for-sale securities:            
Unrealized holding losses on available-for-sale securities $(691) $242  $449)
Reclassification adjustment for (gains) realized in income  (257)  89   (168)
Other comprehensive loss on available-for-sale securities  (948)  331   (617)
             
Unfunded pension and postretirement obligations:            
Changes from plan amendments and actuarial gains and losses included in other comprehensive income  36   (12)  24 
Amortization of net transition obligation, prior service cost and net actuarial gain included in net periodic benefit cost  (24)  8   (16)
Other comprehensive income on unfunded retirement obligations  12   (4)  8 
Total other comprehensive loss $(936) $327  $609)

 

(In Thousands)Before-TaxIncome TaxNet-of-Tax
 AmountEffectAmount
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 income885(310)575
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost2(1)1
Other comprehensive incomeon unfunded retirement obligations887(311)576
    
Total other comprehensive loss($18,454)$6,458($11,996)
(In Thousands)Before-
Tax
Income
Tax
Net-of-
Tax
 AmountEffectAmount
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 securities1,446(669)777
    
Unfunded pension and postretirement obligations:   
Changes from plan amendments and actuarial gains and losses included in other comprehensive income8(2)6
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost77(17)60
Other comprehensive gain on unfunded retirement obligations85(19)66
    
Total other comprehensive income$1,531($688)$843
(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)

52

(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 period 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)

 

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

 

(In Thousands)UnrealizedUnfundedAccumulated
 Holding GainsPension andOther
 (Losses)PostretirementComprehensive
 on SecuritiesObligationsIncome (Loss)
2014   
Balance, beginning of period($1,004)$11($993)
Other comprehensive income before reclassifications7,003(51)6,952
Amounts reclassified from accumulated other     comprehensive income(718)119(599)
Other comprehensive income6,285686,353
Balance, end of period$5,281$79$5,360
    
2013   
Balance, beginning of period$11,568($565)$11,003
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) income(12,572)576(11,996)
Balance, end of period($1,004)$11($993)
    
2012   
Balance, beginning of period$10,791($631)$10,160
Other comprehensive income before reclassifications2,52062,526
Amounts reclassified from accumulated other comprehensive income(1,743)60(1,683)
Other comprehensive income   77766843
Balance, end of period$11,568($565)$11,003
(In Thousands) Unrealized     Accumulated 
  Holding (Losses)  Unfunded  Other 
  Gains on  Retirement  Comprehensive 
  Securities  Obligations  (Loss) Income 
2017            
Balance, beginning of period $(949) $51  $(898)
Change during year ended December 31, 2017  (617)  8   (609)
Balance, end of period $(1,566) $59  $(1,507)
             
2016            
Balance, beginning of period $2,493  $35  $2,528 
Change during year ended December 31, 2016  (3,442)  16   (3,426)
Balance, end of period $(949) $51  $(898)
             
2015            
Balance, beginning of period $5,281  $79  $5,360 
Change during year ended December 31, 2015  (2,788)  (44)  (2,832)
Balance, end of period $2,493  $35  $2,528 

 

Items reclassified out of each component of accumulated other comprehensive (loss) income are as follows:

 

For the Year Ended December 31, 2017     
(In Thousands)     
  Reclassified from   
Details about Accumulated Other Accumulated Other  Affected Line Item in the Consolidated
Comprehensive Loss Components Comprehensive Loss  Statements of Income
Unrealized gains and losses on available-for-sale securities $(257) Realized gains on available-for-sale securities, net
   89  Income tax provision
   (168) Net of tax
Amortization of defined benefit pension and postretirement items:      
Prior service cost  (31) Pensions and other employee benefits
Actuarial loss  7  Pensions and other employee benefits
   (24) Total before tax
   8  Income tax provision
   (16) Net of tax
Total reclassifications for the period $(184)  

For the Year Ended December 31, 2014
(In Thousands)
 Reclassified from
Details about Accumulated OtherAccumulated OtherAffected Line Item in the Consolidated
Comprehensive Income ComponentsComprehensive IncomeStatements of Income
Unrealized gains and losses on available-for-sale
Securities($1,104)Realized gains on available-for-sale securities, net
386Income tax provision
(718)Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost(31)Pensions and other employee benefits
Actuarial loss19Pensions and other employee benefits
Loss on settlement196Pensions and other employee benefits
184Total before tax
(65)Income tax provision
119Net of tax
Total reclassifications for the period($599)53 

 

For the Year Ended December 31, 2013
(In Thousands)
Reclassified from
Details about Accumulated OtherAccumulated OtherAffected Line Item in the Consolidated
Comprehensive Income ComponentsComprehensive IncomeStatements of Income
Unrealized gains and losses on available-for-sale
Securities$25Total other-than-temporary impairment losses on
 available-for-sale securities
(1,743)Realized gains on available-for-sale securities, net
(1,718)Total before tax
601Income tax provision
(1,117)Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost(31)Pensions and other employee benefits
Actuarial loss33Pensions and other employee benefits
2Total before tax
(1)Income tax provision
1Net of tax
Total reclassifications for the period($1,116)

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, 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)  

4. PER SHARE DATA

 

NetBasic earnings per common share are calculated using the two-class method to determine income per share is based onattributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the weighted-average numbertwo-class method. Distributed dividends and an allocation of shares of common stock outstanding. The following data show the amounts used in computing basic and dilutedundistributed net income per share. As shown into participating securities reduce the table that follows, dilutedamount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.

Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using weighted averageweighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation'sCorporation’s common stock during the period.

 

  Weighted- 
  AverageEarnings
 NetCommonPer
 IncomeSharesShare
2014   
Earnings per share – basic$17,086,00012,390,067$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$17,086,00012,412,050$1.38
    
2013   
Earnings per share – basic$18,594,00012,352,383$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$18,594,00012,382,790$1.50
    
2012   
Earnings per share – basic$22,705,00012,235,748$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$22,705,00012,260,208$1.85
54

  Years Ended 
  Dec. 31,  Dec. 31,  Dec. 31, 
  2017  2016  2015 
Basic            
Net income $13,434,000  $15,762,000  $16,471,000 
Less: Dividends and undistributed earnings allocated to participating securities  (69,000)  (85,000)  (84,000)
Net income attributable to common shares $13,365,000  $15,677,000  $16,387,000 
Basic weighted-average common shares outstanding  12,115,840   12,032,820   12,149,252 
Basic earnings per common share (a) $1.10  $1.30  $1.35 
             
Diluted            
Net income attributable to common shares $13,365,000  $15,677,000  $16,387,000 
Basic weighted-average common shares outstanding  12,115,840   12,032,820   12,149,252 
Dilutive effect of potential common stock arising from stock options  39,296   30,235   21,832 
Diluted weighted-average common shares outstanding  12,155,136   12,063,055   12,171,084 
Diluted earnings per common share (a) $1.10  $1.30  $1.35 

(a)Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares with nonforfeitable dividends (participating securities).

The weighted-average number of nonvested restricted shares outstanding was 62,329 shares in 2017, 65,309 shares in 2016 and 62,689 shares in 2015.

 

Stock options that were anti-dilutive were excluded from net income per share calculations. There were no anti-dilutive instruments in 2017. Weighted-average common shares available from anti-dilutive instruments totaled 151,31031,153 shares in 2014, 88,5212016 and 61,590 shares in 2013 and 145,333 shares in 2012.2015.

 

5. CASH AND DUE FROM BANKS

 

Cash and due from banks at December 31, 20142017 and 20132016 include the following:

 

(In thousands)Dec. 31, Dec. 31, Dec. 31, 
20142013 2017 2016 
Cash and cash equivalents$31,619$38,591 $37,004  $28,621 
Certificates of deposit4,4286,028  3,240   3,488 
Total cash and due from banks$36,047$44,619 $40,244  $32,109 

 

Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.

The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $16,853,000$17,178,000 at December 31, 20142017 and $15,318,000$16,654,000 at December 31, 2013.2016.

 

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, 20142017 and 2013,2016, assets measured at fair value and the valuation methods used are as follows:

 

 December 31, 2014
 Quoted
Prices
Other  
 in ActiveObservableUnobservableTotal
 MarketsInputsInputsFair
(In Thousands)(Level 1)(Level 2)(Level 3)Value
     
Recurring fair value measurements    
AVAILABLE-FOR-SALE SECURITIES:    
Obligations of U.S. Government agencies$0$26,676$0$26,676
Obligations of states and political subdivisions:    
Tax-exempt0124,8390124,839
Taxable033,878033,878
Mortgage-backed securities083,903083,903
Collateralized mortgage obligations,      Issued by U.S. Government agencies0238,8230238,823
Collateralized debt obligations034034
Total debt securities0508,1530508,153
Marketable equity securities8,654008,654
Total available-for-sale securities8,654508,1530516,807
Servicing rights001,2811,281
Total recurring fair value measurements$8,654$508,153$1,281$518,088
     
Nonrecurring fair value measurements    
Impaired loans with a valuation allowance$0$0$3,241$3,241
Valuation allowance00(769)(769)
Impaired loans, net002,4722,472
Foreclosed assets held for sale001,1891,189
Total nonrecurring fair value measurements$0$0$3,661$3,661
 December 31, 2013
 Quoted
Prices
Other  
 in ActiveObservableUnobservableTotal
 MarketsInputsInputsFair
(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-exempt0128,4260128,426
Taxable034,471034,471
Mortgage-backed securities086,208086,208
Collateralized mortgage obligations, Issued by U.S. Government agencies0178,0920178,092
Collateralized debt obligations06600660
Total debt securities0473,7340473,734
Marketable equity securities8,924008,924
Total available-for-sale securities8,924473,7340482,658
Servicing rights001,1231,123
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 allowance00(2,333)(2,333)
Impaired loans, net007,5567,556
Foreclosed assets held for sale00892892
Total nonrecurring fair value measurements$0$0$8,448$8,448
     December 31, 2017    
  

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  $7,873  $0  $7,873 
Obligations of states and political subdivisions:                
Tax-exempt  0   105,111   0   105,111 
Taxable  0   25,573   0   25,573 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                
Residential pass-through securities  0   52,347   0   52,347 
Residential collateralized mortgage obligations  0   131,814   0   131,814 
Commercial mortgage-backed securities  0   33,219   0   33,219 
Total debt securities  0   355,937   0   355,937 
Marketable equity securities  971   0   0   971 
Total available-for-sale securities  971   355,937   0   356,908 
Servicing rights  0   0   1,299   1,299 
Total recurring fair value measurements $971  $355,937  $1,299  $358,207 
                 
Nonrecurring fair value measurements                
Impaired loans with a valuation allowance $0  $0  $3,776  $3,776 
Valuation allowance  0   0   (1,183)  (1,183)
Impaired loans, net  0   0   2,593   2,593 
Foreclosed assets held for sale  0   0   1,598   1,598 
Total nonrecurring fair value measurements $0  $0  $4,191  $4,191 

56

     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 

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, 2017 and 2016 for servicing rights assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:

  Fair Value at          
  12/31/17  Valuation Unobservable    Method or Value As of
Asset (In Thousands)  Technique Input(s)    12/31/17
Servicing rights $1,299  Discounted cash flow Discount rate  13.00% Rate used through modeling period
        Loan prepayment speeds  140.00% Weighted-average PSA
        Servicing fees  0.25% of loan balances
           4.00% of payments are late
           5.00% late fees assessed
          $1.94  Miscellaneous fees per account per month
        Servicing costs $6.00  Monthly servicing cost per account
          $24.00  Additional monthly servicing cost per loan on loans more than 30 days delinquent
           1.50% of loans more than 30 days delinquent
           3.00% annual increase in servicing costs

57

  Fair Value at          
  12/31/16  Valuation Unobservable    Method or Value As of
Asset (In Thousands)  Technique Input(s)    12/31/16
Servicing rights $1,262  Discounted cash flow Discount rate  13.00% Rate used through modeling period
        Loan prepayment speeds  138.00% Weighted-average PSA
        Servicing fees  0.25% of loan balances
           4.00% of payments are late
           5.00% late fees assessed
          $1.94  Miscellaneous fees per account per month
        Servicing costs $6.00  Monthly servicing cost per account
          $24.00  Additional monthly servicing cost per loan on loans more than 30 days delinquent
           1.50% of loans more than 30 days delinquent
           3.00% annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans.

Following is a reconciliation of activity for Level 3 assets (servicing rights) measured at fair value on a recurring basis:

(In Thousands) Years Ended December 31, 
  2017  2016  2015 
Balance, beginning of period $1,262  $1,296  $1,281 
Issuances of servicing rights  205   248   177 
Unrealized losses included in earnings  (168)  (282)  (162)
Balance, end of period $1,299  $1,262  $1,296 

 

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 lessappraisals. Appraised values are discounted to arrive at the estimated selling costs.price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

 

Management’s evaluationAt December 31, 2017 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 shows2016, quantitative information regarding significant techniques and inputs used at December 31, 2014 and 2013 for servicing rights assets measurednonrecurring fair value measurements using unobservable inputs (Level 3 methodologies) on a recurring basis:

 Fair Value at    
 12/31/14ValuationUnobservableMethod or Value As of
Asset(In Thousands)TechniqueInput(s)12/31/14
Servicing rights$1,281Discounted cash flowDiscount rate10.00%Rate used through modeling period
      
   Loan prepayment speeds156.00%Weighted-average PSA
   Servicing fees0.25%of loan balances
    4.00%of payments are late
    5.00%late fees assessed
    $1.94Miscellaneous fees per account per month
   Servicing costs$6.00Monthly servicing cost per account
    $24.00Additional 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

 Fair Value at    
 12/31/13ValuationUnobservableMethod or Value As of
Asset(In Thousands)TechniqueInput(s)12/31/13
Servicing rights$1,123Discounted cash flowDiscount rate12.00%Rate used through modeling period
      
   Loan prepayment speeds152.00%Weighted-average PSA
   Servicing fees0.25%of loan balances
    4.00%of payments are late
    5.00%late fees assessed
    $1.94Miscellaneous fees per account per month
   Servicing costs$6.00Monthly servicing cost per account
    $24.00Additional 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.are as follows:

 

Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:

(In Thousands, Except              Weighted- 
Percentages)    Valuation         Average 
  Balance at  Allowance at  Fair Value at  Valuation Unobservable Discount at 
Asset 12/31/17  12/31/17  12/31/17  Technique Inputs 12/31/17 
                 
Impaired loans:                    
Residential mortgage loans - first liens $515  $122  $393  Sales comparison Discount to appraised value  26%
Commercial:                    
Commercial loans secured by real estate  2,641   919   1,722  Sales comparison Discount to appraised value  16%
Commercial and industrial  126   92   34  Sales comparison Discount to appraised value  72%
Loans secured by farmland  494   50   444  Sales comparison Discount to appraised value  53%
Total impaired loans $3,776  $1,183  $2,593         
Foreclosed assets held for sale - real estate:                    
Residential (1-4 family) $721  $0  $721  Sales comparison Discount to appraised value  37%
Land  632   0   632  Sales comparison Discount to appraised value  35%
Commercial real estate  245   0   245  Sales comparison Discount to appraised value  71%
Total foreclosed assets held for sale $1,598  $0  $1,598         

 

 Year Ended
December 31,
2014
58
(In Thousands)Servicing
 Rights
Balance, beginning of period$1,123
Issuances of servicing rights185
Unrealized losses included in earnings(27)
Balance, end of period$1,281
 Year Ended December 31, 2013
 Pooled TrustPooled Trust  
  Preferred Preferred  
 Securities -Securities -  
(In Thousands)SeniorMezzanineServicing 
 TranchesTranchesRightsTotal
Balance, beginning of period$1,613$0$605$2,218
Issuances of servicing rights00451451
Accretion and amortization, net(2)00(2)
Proceeds from sales and calls(1,636)(571)0(2,207)
Realized gains, net235710594
Unrealized gains included in earnings006767
Unrealized gains included in other comprehensive income2002
Balance, end of period$0$0$1,123$1,123

 

 Year Ended December 31, 2012
 Pooled TrustPooled Trust  
  Preferred Preferred  
 Securities -Securities -  
 SeniorMezzanineServicing 
 TranchesTranchesRightsTotal
Balance, beginning of period$4,638$730$375$5,743
Issuances of servicing rights00418418
Accretion and amortization, net(8)00(8)
Proceeds from sales and calls(3,429)(1,835)0(5,264)
Realized gains, net561,83501,891
Unrealized losses included in earnings00(188)(188)
Unrealized gains (losses) included in other comprehensive income356(730)0(374)
Balance, end of period$1,613$0$605$2,218

 

No other-than-temporary impairment losses on securities valued using Level 3 methodologies were recorded in 2014, 2013 or 2012.

(In Thousands, Except              Weighted- 
Percentages)    Valuation         Average 
  Balance at  Allowance at  Fair Value at  Valuation Unobservable Discount at 
Asset 12/31/16  12/31/16  12/31/16  Technique Inputs 12/31/16 
                 
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         

 

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, 20142017 and 2013.2016. 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.

 

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

 

59

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)ValuationDecember 31, 2014December 31, 2014
 Method(s)CarryingFairCarryingFair
 UsedAmountValueAmountValue
Financial assets:     
Cash and cash equivalentsLevel 1$31,619$31,619$38,591$38,591
Certificates of depositLevel 24,4284,4436,0286,057
Available-for-sale securitiesSee Above516,807516,807482,658482,658
Restricted equity securities (included in Other Assets)Level 21,5841,5843,7863,786
Loans held for saleLevel 2005454
Loans, netLevel 3623,209629,267635,640634,937
Accrued interest receivableLevel 23,9083,9084,1464,146
Servicing rightsLevel 31,2811,2811,1231,123
      
Financial liabilities:     
Deposits with no stated maturityLevel 2729,052729,052693,479693,479
Time depositsLevel 2238,937239,712261,037262,376
Short-term borrowingsLevel 25,5375,47323,38523,356
Long-term borrowingsLevel 273,06078,86673,33879,400
Accrued interest payableLevel 2104104120120

56
(In Thousands) Valuation December 31, 2017  December 31, 2016 
  Method(s) Carrying  Fair  Carrying  Fair 
  Used Amount  Value  Amount  Value 
Financial assets:                  
Cash and cash equivalents Level 1 $37,004  $37,004  $28,621  $28,621 
Certificates of deposit Level 2  3,240   3,234   3,488   3,481 
Available-for-sale securities See Above  356,908   356,908   395,077   395,077 
Restricted equity securities (included in Other Assets) Level 2  6,556   6,556   4,426   4,426 
Loans held for sale Level 2  765   765   142   142 
Loans, net Level 3  806,857   789,891   743,362   725,787 
Accrued interest receivable Level 2  4,048   4,048   3,963   3,963 
Servicing rights Level 3  1,299   1,299   1,262   1,262 
                   
Financial liabilities:                  
Deposits with no stated maturity Level 2  794,778   794,778   771,625   771,625 
Time deposits Level 2  213,671   213,734   212,218   212,274 
Short-term borrowings Level 2  61,766   61,643   26,175   26,024 
Long-term borrowings Level 2  9,189   9,256   38,454   39,062 
Accrued interest payable Level 2  46   46   65   65 

 

7. SECURITIES

 

Amortized cost and fair value of available-for-sale securities at December 31, 20142017 and 20132016 are summarized as follows:

 

December 31, 2014    December 31, 2017    
 Gross     Gross Gross    
 Unrealized     Unrealized Unrealized    
AmortizedHoldingFair Amortized Holding Holding Fair 
(In Thousands)CostGainsLossesValue Cost Gains Losses Value 
          
Obligations of U.S. Government agencies$27,221$38($583)$26,676 $8,026  $0  $(153) $7,873 
Obligations of states and political subdivisions:                 
Tax-exempt120,0865,134(381)124,839  103,673   2,291   (853)  105,111 
Taxable33,637415(174)33,878  25,431   226   (84)  25,573 
Mortgage-backed securities82,4791,493(69)83,903
Collateralized mortgage obligations, Issued by U.S. Government agencies239,6201,239(2,036)238,823
Collateralized debt obligations:34034
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                
Residential pass-through securities  52,992   79   (724)  52,347 
Residential collateralized mortgage obligations  134,314   110   (2,610)  131,814 
Commercial mortgage-backed securities  33,881   4   (666)  33,219 
Total debt securities503,0778,319(3,243)508,153  358,317   2,710   (5,090)  355,937 
Marketable equity securities5,6053,058(9)8,654  1,000   0   (29)  971 
Total$508,682$11,377($3,252)$516,807 $359,317  $2,710  $(5,119) $356,908 

 

 December 31, 2013
  GrossGross 
  UnrealizedUnrealized 
 AmortizedHoldingHoldingFair
(In Thousands)CostGainsLossesValue
     
Obligations of U.S. Government agencies$47,382$282($1,787)$45,877
Obligations of states and political subdivisions:    
Tax-exempt127,7482,766(2,088)128,426
Taxable35,154206(889)34,471
Mortgage-backed securities84,8491,819(460)86,208
Collateralized mortgage obligations,  Issued by U.S. Government agencies182,372761(5,041)178,092
Collateralized debt obligations:66000660
Total debt securities478,1655,834(10,265)473,734
Marketable equity securities6,0382,88608,924
Total$484,203$8,720($10,265)$482,658
60

     December 31, 2016    
     Gross  Gross    
     Unrealized  Unrealized    
  Amortized  Holding  Holding  Fair 
(In Thousands) Cost  Gains  Losses  Value 
             
Obligations of U.S. Government agencies $9,671  $5  $(135) $9,541 
Obligations of states and political subdivisions:                
Tax-exempt  118,140   2,592   (1,695)  119,037 
Taxable  30,073   303   (79)  30,297 
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  395,538   3,614   (5,046)  394,106 
Marketable equity securities  1,000   0   (29)  971 
Total $396,538  $3,614  $(5,075) $395,077 

 

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, 20142017 and 2013:2016:

 

December 31, 2014Less Than 12 Months12 Months or MoreTotal
(In Thousands)FairUnrealizedFairUnrealizedFairUnrealized
 ValueLossesValueLossesValueLosses
       
Obligations of U.S. Government agencies$0$0$24,020($583)$24,020($583)
Obligations of states and political subdivisions:      
Tax-exempt11,898(289)6,991(92)18,889(381)
Taxable4,240(22)9,159(152)13,399(174)
Mortgage-backed securities004,160(69)4,160(69)
Collateralized mortgage obligations, Issued by U.S. Government agencies58,812(396)60,897(1,640)119,709(2,036)
Total debt securities74,950(707)105,227(2,536)180,177(3,243)
Marketable equity securities134(9)00134(9)
Total temporarily impaired available-for-sale securities$75,084($716)$105,227($2,536)$180,311($3,252)
          
December 31, 2013Less Than 12 Months12 Months or MoreTotal
(In Thousands)FairUnrealizedFairUnrealizedFairUnrealized
 ValueLossesValueLossesValueLosses
       
Obligations of U.S. Government agencies$22,489($1,337)$4,598($450)$27,087($1,787)
Obligations of states and political subdivisions:      
Tax-exempt44,285(1,425)5,808(663)50,093(2,088)
Taxable20,873(766)2,378(123)23,251(889)
Mortgage-backed securities34,377(460)0034,377(460)
Collateralized debt obligations, Issued by U.S. Government agencies113,204(4,608)7,399(433)120,603(5,041)
Total temporarily impaired available-for-sale securities$235,228($8,596)$20,183($1,669)$255,411($10,265)
December 31, 2017 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  $7,873  $(153) $7,873  $(153)
Obligations of states and political subdivisions:                        
Tax-exempt  19,050   (135)  24,391   (718)  43,441   (853)
Taxable  9,279   (45)  2,116   (39)  11,395   (84)
Mortgage-backed securities issued or guaranteed  by U.S. Government agencies or sponsored  agencies:                        
Residential pass-through securities  25,255   (242)  22,549   (482)  47,804   (724)
Residential collateralized mortgage obligations  50,812   (589)  68,558   (2,021)  119,370   (2,610)
Commercial mortgage-backed securities  14,713   (173)  14,569   (493)  29,282   (666)
Total debt securities  119,109   (1,184)  140,056   (3,906)  259,165   (5,090)
Marketable equity securities  0   0   971   (29)  971   (29)
Total temporarily impaired available-for-sale securities $119,109  $(1,184) $141,027  $(3,935) $260,136  $(5,119)

December 31, 2016 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 $7,899  $(135) $0  $0  $7,899  $(135)
Obligations of states and political subdivisions:                        
Tax-exempt  54,479   (1,676)  1,278   (19)  55,757   (1,695)
Taxable  9,594   (79)  0   0   9,594   (79)
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 $237,063  $(4,465) $17,351  $(610) $254,414  $(5,075)

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)        
201420132012 2017 2016 2015 
Gross realized gains from sales$1,328$1,918$2,798 $315  $1,392  $2,972 
Gross realized losses from sales(224)(175)(49)  (58)  (234)  (111)
Losses from OTTI Impairment0(25)(67)
Net realized gains$1,104$1,718$2,682 $257  $1,158  $2,861 
Income tax provision related to net realized gains$386$601$939 $89  $406  $1,002 

 

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, 2014.2017. 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, 2017 
AmortizedFair Amortized Fair 
(In Thousands)CostValue Cost Value 
      
Due in one year or less$7,909$7,992 $11,350  $11,347 
Due from one year through five years55,49955,826  69,274   70,016 
Due from five years through ten years61,73762,306  37,086   37,089 
Due after ten years55,83359,303  19,420   20,105 
Subtotal180,978185,427
Mortgage-backed securities82,47983,903
Collateralized mortgage obligations, Issued by U.S. Government agencies239,620238,823
Sub-total  137,130   138,557 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:        
Residential pass-through securities  52,992   52,347 
Residential collateralized mortgage obligations  134,314   131,814 
Commercial mortgage-backed securities  33,881   33,219 
Total$503,077$508,153 $358,317  $355,937 

 

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 $369,945,000$217,925,000 at December 31, 20142017 and $323,613,000$230,803,000 at December 31, 20132016 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, 2017, 2016 and 2015.

(In Thousands)   
 201420132012
Marketable equity securities (bank stocks)$0($25)($67)

 

A summary of information management considered in evaluating debt and equity securities for OTTI at December 31, 20142017 and 2016 is provided below.

 

Debt Securities

 

At December 31, 2014,2017 and 2016, 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, 20142017 and 2016 to be temporary.

 

At December 31, 2014, the total amortized cost basis of municipal bonds with no external credit ratings was $15,854,000, with an aggregate unrealized gain of $1,000. 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.

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.

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.

Equity Securities

 

The Corporation’s marketable equity securities at December 31, 20142017 and 20132016 consisted exclusively of stocks of banking companies.one mutual fund. The Corporation recognized no other-than-temporary impairment losses related to bank stocksequities in 2014. 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. Management’s decisions to recognize other-than-temporary impairment losses followed evaluations of the issuers’ published financial results in which management determined that the recovery of the Corporation’s cost basis within the foreseeable future 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.2017, 2016 or 2015. At December 31, 2014,2017, the mutual fund held by the Corporation held three stocks withhad an aggregate unrealized loss of $9,000$29,000 for which management determined an OTTI charge was not required.

 

There were no realized gains or losses on equity securities in 2017. Realized gains from sales of bank stocksequity securities (bank stocks) totaled $363,000$1,125,000 in 2014, $1,018,0002016 and $2,220,000 in 2013, and $538,000 in 2012.2015.

 

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 $1,454,000$6,426,000 at December 31, 20142017 and $3,656,000$4,296,000 at December 31, 2013.2016. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at December 31, 20142017 and December 31, 2013.2016. 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, 20142017 and 20132016 are summarized as follows:

 

Summary of Loans by Type      
(In Thousands)Dec. 31,Dec. 31, Dec. 31, Dec. 31, 
20142013 2017 2016 
Residential mortgage:          
Residential mortgage loans - first liens$291,882$299,831 $359,987  $334,102 
Residential mortgage loans - junior liens21,16623,040  25,325   23,706 
Home equity lines of credit36,62934,530  35,758   38,057 
1-4 Family residential construction16,73913,909  26,216   24,908 
Total residential mortgage366,416371,310  447,286   420,773 
Commercial:          
Commercial loans secured by real estate145,878147,215  159,266   150,468 
Commercial and industrial50,15742,387  88,276   83,854 
Political subdivisions17,53416,291  59,287   38,068 
Commercial construction and land6,93817,003  14,527   14,287 
Loans secured by farmland7,91610,468  7,255   7,294 
Multi-family (5 or more) residential8,91710,985  7,713   7,896 
Agricultural loans3,2213,251  6,178   3,998 
Other commercial loans13,33414,631  10,986   11,475 
Total commercial253,895262,231  353,488   317,340 
Consumer10,23410,762  14,939   13,722 
Total630,545644,303  815,713   751,835 
Less: allowance for loan losses(7,336)(8,663)  (8,856)  (8,473)
Loans, net$623,209$635,640 $806,857  $743,362 

 

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, 2014.2017.

63

 

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

 

Year Ended December 31, 2014Dec. 31, Dec. 31,
Year Ended December 31, 2017 Dec. 31,         Dec. 31, 
 2016       Provision 2017 
(In Thousands)2013
Balance
Charge-offsRecoveriesProvision
(Credit)
2014
Balance
 Balance Charge-offs Recoveries (Credit) Balance 
Allowance for Loan Losses:                     
Residential mortgage:                     
Residential mortgage loans - first liens$2,974($164)$25$106$2,941 $3,033  $(167) $15  $319  $3,200 
Residential mortgage loans - junior liens294(101)0(17)176  258   (16)  4   (22)  224 
Home equity lines of credit269(62)0115322  350   (14)  0   (40)  296 
1-4 Family residential construction168046214  249   0   0   (6)  243 
Total residential mortgage3,705(327)252503,653  3,890   (197)  19   251   3,963 
Commercial:                     
Commercial loans secured by real estate3,123(1,521)250(94)1,758  2,380   (96)  0   300   2,584 
Commercial and industrial591(24)9112688  999   (36)  4   98   1,065 
Political subdivisions0
Commercial construction and land267(170)5181283  162   0   0   (12)  150 
Loans secured by farmland115050165  110   0   0   (5)  105 
Multi-family (5 or more) residential1030(16)87  241   0   0   (69)  172 
Agricultural loans300131  40   0   0   17   57 
Other commercial loans1380(7)131  115   0   0   (13)  102 
Total commercial4,367(1,715)2642273,143  4,047   (132)  4   316   4,235 
Consumer193(97)472145  138   (150)  38   133   159 
Unallocated3980(3)395  398   0   0   101   499 
 
Total Allowance for Loan Losses$8,663($2,139)$336$476$7,336 $8,473  $(479) $61  $801  $8,856 

 

Year Ended December 31, 2013     
(In Thousands)Dec. 31,   Dec. 31,
 2012  Provision2013
 BalanceCharge-offsRecoveries(Credit)Balance
Allowance for Loan Losses:     
Residential mortgage:     
Residential mortgage loans - first liens$2,619($84)$24$415$2,974
Residential mortgage loans - junior liens2470047294
Home equity lines of credit2550014269
1-4 Family residential construction96(11)083168
Total residential mortgage3,217(95)245593,705
Commercial:     
Commercial loans secured by real estate1,930(169)3441,0183,123
Commercial and industrial581(286)4292591
Political subdivisions00000
Commercial construction and land234(4)037267
Loans secured by farmland12900(14)115
Multi-family (5 or more) residential670036103
Agricultural loans2700330
Other commercial loans300135138
Total commercial2,971(459)3481,5074,367
Consumer228(117)5824193
Unallocated44100(43)398
      
Total Allowance for Loan Losses$6,857($671)$430$2,047$8,663
Year Ended December 31, 2012     
(In Thousands)Dec. 31,   Dec. 31,
 2011  Provision2012
 BalanceCharge-offsRecoveries(Credit)Balance
Allowance for Loan Losses:     
Residential mortgage:     
Residential mortgage loans - first liens$3,026($543)$18$118$2,619
Residential mortgage loans - junior liens266(9)0(10)247
Home equity lines of credit2310024255
1-4 Family residential construction79001796
Total residential mortgage3,602(552)181493,217
Commercial:     
Commercial loans secured by real estate2,00401(75)1,930
Commercial and industrial946(57)7(315)581
Political subdivisions00000
Commercial construction and land267(441)0408234
Loans secured by farmland126003129
Multi-family (5 or more) residential6600167
Agricultural loans2700027
Other commercial loans500(2)3
Total commercial3,441(498)8202,971
Consumer228(171)59112228
Unallocated434007441
      
Total Allowance for Loan Losses$7,705($1,221)$85$288$6,857
Year Ended December 31, 2016 Dec. 31           Dec. 31 
  2015        Provision  2016 
(In Thousands) Balance  Charge-offs  Recoveries  (Credit)  Balance 
Allowance for Loan Losses:                    
Residential mortgage:                    
Residential mortgage loans - first liens $2,645  $(73) $3  $458  $3,033 
Residential mortgage loans - junior liens  219   0   0   39   258 
Home equity lines of credit  347   0   0   3   350 
1-4 Family residential construction  207   0   0   42   249 
Total residential mortgage  3,418   (73)  3   542   3,890 
Commercial:                    
Commercial loans secured by real estate  1,939   0   2   439   2,380 
Commercial and industrial  981   (2)  3   17   999 
Political subdivisions  0   0   0   0   0 
Commercial construction and land  58   0   30   74   162 
Loans secured by farmland  106   0   0   4   110 
Multi-family (5 or more) residential  675   (595)  0   161   241 
Agricultural loans  45   0   0   (5)  40 
Other commercial loans  118   0   0   (3)  115 
Total commercial  3,922   (597) ��35   687   4,047 
Consumer  122   (87)  82   21   138 
Unallocated  427   0   0   (29)  398 
Total Allowance for Loan Losses $7,889  $(757) $120  $1,221  $8,473 

64

Year Ended December 31, 2015 Dec. 31,           Dec. 31, 
  2014        Provision  2015 
(In Thousands) Balance  Charge-offs  Recoveries  (Credit)  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 

 

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.

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of December 31, 20142017 and 2013:2016:

 

December 31, 2014     
(In Thousands) Special   
 PassMentionSubstandardDoubtfulTotal
Residential Mortgage:     
Residential mortgage loans - first liens$280,094$1,246$10,464$78$291,882
Residential mortgage loans - junior liens20,502112552021,166
Home equity lines of credit35,935294400036,629
1-4 Family residential construction16,719200016,739
Total residential mortgage353,2501,67211,41678366,416
Commercial:     
Commercial loans secured by real estate133,2042,7759,8990145,878
Commercial and Industrial41,7517,2461,04211850,157
Political subdivisions17,53400017,534
Commercial construction and land4,6502662,02206,938
Loans secured by farmland5,9904331,468257,916
Multi-family (5 or more) residential8,629288008,917
Agricultural loans3,19602503,221
Other commercial loans13,248860013,334
Total commercial228,20211,09414,456143253,895
Consumer10,09522117010,234
Totals$591,547$12,788$25,989$221$630,545
65

 

December 31, 2013     
(In Thousands) Special   
 PassMentionSubstandardDoubtfulTotal
Residential Mortgage:     
Residential mortgage loans - first liens$286,144$1,876$11,629$182$299,831
Residential mortgage loans - junior liens21,694351995023,040
Home equity lines of credit33,821295414034,530
1-4 Family residential construction13,837072013,909
Total residential mortgage355,4962,52213,110182371,310
Commercial:     
Commercial loans secured by real estate129,8345,86611,368147147,215
Commercial and Industrial32,3176,6973,13823542,387
Political subdivisions16,29100016,291
Commercial construction and land13,7924272,03674817,003
Loans secured by farmland8,2797581,4022910,468
Multi-family (5 or more) residential10,6653164010,985
Agricultural loans3,169344803,251
Other commercial loans14,532990014,631
Total commercial228,87914,19717,9961,159262,231
Consumer10,5876169010,762
Totals$594,962$16,725$31,275$1,341$644,303

December 31, 2017               
(In Thousands)    Special          
  Pass  Mention  Substandard  Doubtful  Total 
Residential Mortgage:                    
Residential mortgage loans - first liens $350,609  $307  $9,019  $52  $359,987 
Residential mortgage loans - junior liens  24,795   104   426   0   25,325 
Home equity lines of credit  35,233   61   464   0   35,758 
1-4 Family residential construction  26,216   0   0   0   26,216 
Total residential mortgage  436,853   472   9,909   52   447,286 
Commercial:                    
Commercial loans secured by real estate  150,806   936   7,524   0   159,266 
Commercial and Industrial  82,724   3,896   1,645   11   88,276 
Political subdivisions  59,287   0   0   0   59,287 
Commercial construction and land  14,449   0   78   0   14,527 
Loans secured by farmland  5,283   581   1,379   12   7,255 
Multi-family (5 or more) residential  7,130   0   583   0   7,713 
Agricultural loans  5,203   270   705   0   6,178 
Other commercial loans  10,913   0   73   0   10,986 
Total commercial  335,795   5,683   11,987   23   353,488 
Consumer  14,853   0   86   0   14,939 
Totals $787,501  $6,155  $21,982  $75  $815,713 

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

The scope of loans evaluatedreviewed individually for impairmenteach quarter to determine if they are impaired include all commercial loan relationships greater than $200,000 for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Also, allIn the fourth quarter 2017, the scope was expanded to include any residential mortgage or consumer 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$400,000 or more are individually evaluated for impairment.with a credit grade of Special Mention, Substandard or Doubtful. 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, 20142017 and 2013.2016. All loans classified as troubled debt restructurings (discussed in more detail below) and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment.

66

 

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, 20142017 and 2013:2016:

 

December 31, 2014Loans:   Allowance for Loan Losses:
(In Thousands)       
 IndividuallyCollectively  IndividuallyCollectively 
 EvaluatedEvaluatedTotals EvaluatedEvaluatedTotals
Residential mortgage:       
Residential mortgage loans - first liens$1,665$290,217$291,882 $358$2,583$2,941
Residential mortgage loans - junior liens1721,14921,166 0176176
Home equity lines of credit036,62936,629 0322322
1-4 Family residential construction016,73916,739 0214214
        
Total residential mortgage1,682364,734366,416 3583,2953,653
Commercial:       
Commercial loans secured by real estate6,537139,341145,878 161,7421,758
Commercial and industrial66349,49450,157 82606688
Political subdivisions017,53417,534 000
Commercial construction and land1,9394,9996,938 21172283
Loans secured by farmland1,4706,4467,916 10263165
Multi-family (5 or more) residential08,9178,917 08787
Agricultural loans253,1963,221 03131
Other commercial loans013,33413,334 0131131
        
Total commercial10,634243,261253,895 4112,7323,143
Consumer010,23410,234 0145145
Unallocated      395
        
Total$12,316$618,229$630,545 $769$6,172$7,336
December 31, 2013Loans:   Allowance for Loan Losses:
(In Thousands)       
 IndividuallyCollectively  IndividuallyCollectively 
 EvaluatedEvaluatedTotals EvaluatedEvaluatedTotals
Residential mortgage:       
Residential mortgage loans - first liens$2,727$297,104$299,831 $449$2,525$2,974
Residential mortgage loans - junior liens18322,85723,040 100194294
Home equity lines of credit034,53034,530 0269269
1-4 Family residential construction013,90913,909 0168168
        
Total residential mortgage2,910368,400371,310 5493,1563,705
Commercial:       
Commercial loans secured by real estate7,988139,227147,215 1,5771,5463,123
Commercial and industrial1,27641,11142,387 106485591
Political subdivisions016,29116,291 000
Commercial construction and land2,77614,22717,003 72195267
Loans secured by farmland1,3189,15010,468 2986115
Multi-family (5 or more) residential010,98510,985 0103103
Agricultural loans483,2033,251 03030
Other commercial loans014,63114,631 0138138
        
Total commercial13,406248,825262,231 1,7842,5834,367
Consumer510,75710,762 0193193
Unallocated      398
        
Total$16,321$627,982$644,303 $2,333$5,932$8,663
December 31, 2017 Loans:  Allowance for Loan Losses: 
(In Thousands)                  
  Individually  Collectively     Individually  Collectively    
  Evaluated  Evaluated  Totals  Evaluated  Evaluated  Totals 
Residential mortgage:                        
Residential mortgage loans - first liens $984  $359,003  $359,987  $0  $3,200  $3,200 
Residential mortgage loans - junior liens  302   25,023   25,325   122   102   224 
Home equity lines of credit  0   35,758   35,758   0   296   296 
1-4 Family residential construction  0   26,216   26,216   0   243   243 
Total residential mortgage  1,286   446,000   447,286   122   3,841   3,963 
Commercial:                        
Commercial loans secured by real estate  5,873   153,393   159,266   919   1,665   2,584 
Commercial and industrial  568   87,708   88,276   188   877   1,065 
Political subdivisions  0   59,287   59,287   0   0   0 
Commercial construction and land  0   14,527   14,527   0   150   150 
Loans secured by farmland  1,365   5,890   7,255   50   55   105 
Multi-family (5 or more) residential  392   7,321   7,713   0   172   172 
Agricultural loans  7   6,171   6,178   0   57   57 
Other commercial loans  0   10,986   10,986   0   102   102 
Total commercial  8,205   345,283   353,488   1,157   3,078   4,235 
Consumer  20   14,919   14,939   0   159   159 
Unallocated                      499 
                         
Total $9,511  $806,202  $815,713  $1,279  $7,078  $8,856 

67

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 

 

Summary information related to impaired loans as of December 31, 20142017 and 20132016 is as follows:

 

(In Thousands)20142013
Impaired loans with a valuation allowance$3,241$9,889
Impaired loans without a valuation allowance9,0756,432
Total impaired loans$12,316$16,321
   
Valuation allowance related to impaired loans$769$2,333
(In Thousands) December 31, 2017  December 31, 2016 
  Unpaid        Unpaid       
  Principal  Recorded  Related  Principal  Recorded  Related 
  Balance  Investment  Allowance  Balance  Investment  Allowance 
With no related allowance recorded:                        
Residential mortgage loans - first liens $740  $711  $0  $783  $753  $0 
Residential mortgage loans - junior liens  60   60   0   68   68   0 
Commercial loans secured by real estate  3,230   3,230   0   6,975   5,232   0 
Commercial and industrial  119   119   0   117   117   0 
Loans secured by farmland  871   871   0   890   890   0 
Multi-family (5 or more) residential  987   392   0   987   392   0 
Agricultural loans  8   8   0   13   13   0 
Consumer  20   20   0   23   23   0 
Total with no related allowance recorded  6,035   5,411   0   9,856   7,488   0 
                         
With a related allowance recorded:                        
Residential mortgage loans - first liens  273   273   0   0   0   0 
Residential mortgage loans - junior liens  242   242   122   0   0   0 
Commercial loans secured by real estate  2,641   2,641   919   2,773   2,773   528 
Commercial and industrial  449   449   188   95   95   95 
Loans secured by farmland  495   495   50   504   504   51 
Total with a related allowance recorded  4,100   4,100   1,279   3,372   3,372   674 
Total $10,135  $9,511  $1,279  $13,228  $10,860  $674 

 

Additional summary information relatedIn the table immediately above, two loans to one borrower are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. These loans are collateralized by one property, and the allowance associated with these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property.

68

The average balance of impaired loans for 2014, 2013 and 2012interest income recognized on impaired loans is as follows:

 

(In Thousands)201420132012
Average investment in impaired loans$14,359$9,690$7,209
Interest income recognized on impaired loans$703$426$278
Interest income recognized on a cash basis on impaired loans$703$426$278
           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, 
  2017  2016  2015  2017  2016  2015 
Residential mortgage:                        
Residential mortgage loans - first lien $857  $806  $2,206  $52  $43  $86 
Residential mortgage loans - junior lien  112   71   64   15   3   4 
Total residential mortgage  969   877   2,270   67   46   90 
Commercial:                        
Commercial loans secured by real estate  6,272   6,806   6,357   173   495   380 
Commercial and industrial  301   547   438   24   20   20 
Commercial construction and land  0   0   40   0   0   0 
Loans secured by farmland  1,379   1,409   1,459   45   94   103 
Multi-family (5 or more) residential  392   511   790   0   0   0 
Agricultural loans  10   14   21   1   1   3 
Total commercial  8,354   9,287   9,105   243   610   506 
Consumer  26   21   0   1   1   0 
Total $9,349  $10,185  $11,375  $311  $657  $596 

 

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, 2014 December 31, 2013 December 31, 2017  December 31, 2016 
Past Due Past Due  Past Due     Past Due    
90+ Days and 90+ Days and  90+ Days and     90+ Days and    
AccruingNonaccrual AccruingNonaccrual Accruing Nonaccrual Accruing Nonaccrual 
Residential mortgage:                 
Residential mortgage loans - first liens$1,989$3,440 $2,016$3,533 $2,340  $5,131  $3,022  $3,770 
Residential mortgage loans - junior liens8250 187110  105   242   114   0 
Home equity lines of credit4922 8762  203   44   320   11 
1-4 Family residential construction0 072
Total residential mortgage2,1203,512 2,2903,777  2,648   5,417   3,456   3,781 
Commercial:                  
Commercial loans secured by real estate6535,804 7447,096  175   5,645   2,774   3,080 
Commercial and industrial5379 17434  603   517   286   119 
Commercial construction and land351,915 52,663  26   52   0   0 
Loans secured by farmland0951 0902  271   1,308   219   1,331 
Multi-family (5 or more) residential  0   392   0   392 
Agricultural loans025 035  0   7   0   13 
Total commercial6939,074 76611,130  1,075   7,921   3,279   4,935 
Consumer3024 7527  1   66   103   20 
                  
Totals$2,843$12,610 $3,131$14,934 $3,724  $13,404  $6,838  $8,736 

 

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, 20142017 and 2013:2016:

 

As of December 31, 2014 As of December 31, 2013 As of December 31, 2017  As of December 31, 2016 
Current & Current &  Current &         Current &        
(In Thousands)Past Due Past Due  Past Due Past Due Past Due     Past Due Past Due Past Due    
Less than30-8990+ Less than30-8990+  Less than 30-89 90+     Less than 30-89 90+    
30 DaysDaysTotal 30 DaysDaysTotal 30 Days Days Days Total 30 Days Days Days Total 
Residential mortgage:                                 
Residential mortgage loans - first liens$282,766$5,443$3,673$291,882 $289,483$6,776$3,572$299,831 $347,032  $7,967  $4,988  $359,987  $321,670  $6,695  $5,737  $334,102 
Residential mortgage loans - junior liens20,85319012321,166 22,24750628723,040  25,133   87   105   25,325   23,268   324   114   23,706 
Home equity lines of credit36,3002587136,629 34,26311814934,530  34,789   732   237   35,758   37,603   134   320   38,057 
1-4 Family residential construction16,739016,739 13,83707213,909  25,667   549   0   26,216   24,567   341   0   24,908 
Total residential mortgage356,6585,8913,867366,416 359,8307,4004,080371,310  432,621   9,335   5,330   447,286   407,108   7,494   6,171   420,773 
                                  
Commercial:                                  
Commercial loans secured by real estate143,7138831,282145,878 145,0554051,755147,215  155,917   311   3,038   159,266   147,464   82   2,922   150,468 
Commercial and industrial49,9944312050,157 41,73043422342,387  87,306   303   667   88,276   83,364   185   305   83,854 
Political subdivisions17,534017,534 16,291016,291  59,287   0   0   59,287   38,068   0   0   38,068 
Commercial construction and land4,897911,9506,938 14,303322,66817,003  14,400   49   78   14,527   14,199   88   0   14,287 
Loans secured by farmland6,8112548517,916 9,26732987210,468  6,226   12   1,017   7,255   6,181   83   1,030   7,294 
Multi-family (5 or more) residential8,72019708,917 10,985010,985  7,321   0   392   7,713   7,439   65   392   7,896 
Agricultural loans3,10591253,221 3,20313353,251  6,114   57   7   6,178   3,981   4   13   3,998 
Other commercial loans13,334013,334 14,631014,631  10,986   0   0   10,986   11,475   0   0   11,475 
Total commercial248,1081,5594,228253,895 255,4651,2135,553262,231  347,557   732   5,199   353,488   312,171   507   4,662   317,340 
Consumer10,164403010,234 10,5161717510,762  14,760   123   56   14,939   13,446   153   123   13,722 
                                  
Totals$614,930$7,490$8,125$630,545 $625,811$8,784$9,708$644,303 $794,938  $10,190  $10,585  $815,713  $732,725  $8,154  $10,956  $751,835 

Nonaccrual loans are included in the contractual aging immediately above. A summary of the contractual aging of nonaccrual loans at December 31, 20142017 and 20132016 is as follows:

 

 Current &   
(In Thousands)Past DuePast DuePast Due 
 Less than30-8990+ 
 30 DaysDaysDaysTotal
December 31, 2014 Nonaccrual Totals$6,959$369$5,282$12,610
December 31, 2013 Nonaccrual Totals$7,878$479$6,577$14,934
  Current &          
(In Thousands) Past Due  Past Due  Past Due    
  Less than  30-89  90+    
  30 Days  Days  Days  Total 
December 31, 2017 Nonaccrual Totals $5,802  $741  $6,861  $13,404 
December 31, 2016 Nonaccrual Totals $4,199  $419  $4,118  $8,736 

 

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, 20142017 and 20132016 is as follows:

 

Troubled Debt Restructurings (TDRs):            
Current &  Current &          
(In Thousands)Past Due  Past Due Past Due Past Due      
Less than30-8990+  Less than 30-89 90+      
30 DaysDaysNonaccrualTotal 30 Days Days Days Nonaccrual Total 
December 31, 2014 Totals$1,725$82$0$5,388$7,195
December 31, 2013 Totals$3,254$13$0$908$4,175
December 31, 2017 Totals $636  $0  $0  $3,027  $3,663 
December 31, 2016 Totals $5,453  $350  $0  $2,874  $8,677 

 

At December 31, 2017 and 2016, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

70

There were no TDRs that occurred during 2017. A summary of TDRs that occurred during 2014, 20132016 and 20122015 is as follows:

 

Year Ended December 31, 2014 Pre-Post-
(Balances in Thousands) ModificationModification
 NumberOutstandingOutstanding
 ofRecordedRecorded
 ContractsInvestmentInvestment
Residential mortgage,   
Residential mortgage loans - first liens3$150$150
Commercial:   
Commercial loans secured by real estate56,6795,193
Commercial and industrial18080
    
Year Ended December 31, 2013 Pre-Post-
(Balances in Thousands) ModificationModification
 NumberOutstandingOutstanding
 ofRecordedRecorded
 ContractsInvestmentInvestment
Residential mortgage:   
Residential mortgage loans - first liens6$677$677
Residential mortgage loans - junior liens3102102
Commercial:   
Commercial loans secured by real estate2866866
Commercial and industrial3701701
Loans secured by farmland4512512
Agricultural loans11313
Consumer166
Year Ended December 31, 2012 Pre-Post-
(Balances in Thousands) ModificationModification
 NumberOutstandingOutstanding
 ofRecordedRecorded
 ContractsInvestmentInvestment
Commercial,   
Commercial and industrial1$65$65
(Balances in Thousands)      
  2016  2015 
     Post-     Post- 
  Number  Modification  Number  Modification 
  of  Recorded  of  Recorded 
  Loans  Investment  Loans  Investment 
Residential mortgage - first liens:                
Extended maturity with interest rate reduction  1  $71   1  $56 
Extended maturity with reduced monthly payments  1   26   0   0 
Reduced monthly payments for a six-month period  0   0   1   242 
Residential mortgage - junior liens,                
Interest rate and monthly payment reduction  0   0   1   32 
Commercial loans secured by real estate,                
Interest only payments for a period of one year  1   2,773   0   0 
Commercial and industrial,                
Extended maturity  1   5   0   0 
Consumer:                
Interest rate and monthly payment reduction  0   0   1   30 
New unsecured loan after short-fall from sale                
of property  1   24   0   0 
Total  5  $2,899   4  $360 

 

TheThere were no differences between the outstanding contractual amounts and the recorded investments in receivables resulting from TDRs that occurred in 2014 related to residential mortgage loans that included a reduction in payment amount on one contract, an interest only period on one contract2016 and a reduction in interest rate and payment on one contract. The TDRs related to commercial loans in the period ended December 31, 2014 relate to six contracts associated with one relationship. The Corporation entered into a forbearance agreement with this commercial borrower which includes 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 is extended or the payment requirements are otherwise modified. The Corporation recorded a charge-off of $1,486,000 in the second quarter 2014 as a result of these modifications, as the payment amounts based on the forbearance agreement are not sufficient to fully amortize the contractual amount of principal outstanding on the loans. The amount of the charge-off was determined based on the excess of the contractual principal due over the present value of the payment amounts provided for in the forbearance agreement, assuming the revised payment amounts would continue until maturity, at the contractual interest rates. After the effect of the $1,486,000 charge-off related to loans to one commercial borrower described above, there was no allowance for loan losses on loans to that borrower at December 31, 2014, while the allowance on the loans amounted to $1,552,000 at December 31, 2013. There were no other changes in the allowance for loan losses related to TDRs that occurred during the year ended December 31, 2014.2015.

 

The TDRs in 2013 included interest only payments for an extended period of time on fourteen contracts, extensions of the final maturity date on three contracts, reduction in interest rate on two contracts, and reduction in payment amount for one year on one 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 date and reduction of monthly payments required on the 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 charge-off.

In 2012,For 2017, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months. For 20142016 and 2013,2015, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:

 Number 
 OfRecorded
 ContractsInvestment
Year Ended December 31, 2014  
(Balances in Thousands)  
Residential mortgage:  
Residential mortgage loans - first liens3$257
Residential mortgage loans - junior liens162
Commercial:  
Commercial loans secured by real estate1429
Commercial construction and land125
Loans secured by farmland4490
Agricultural loans113
 Number 
 OfRecorded
 ContractsInvestment
Year Ended December 31, 2013  
(Balances in Thousands)  
Residential mortgage,  
Residential mortgage loans - first liens1$85
Commercial,  
Commercial loans secured by real estate2588
Commercial construction and land1110
Agricultural loans113

The events of default in 2014 in the table listed above included the borrowers’ failure to make timely payments under the following circumstances: (1) for one customer relationship including one of the first lien Residential mortgages, the junior lien Residential mortgage, the Loans secured by farmland and the Agricultural loan, monthly payments of interest only were missed; however, in the fourth quarter 2014, the total principal balance of all of the loans except one of the Loans secured by farmland were fully paid off, and the balance on that loan was paid down to a balance at December 31, 2014 of $75,000; (2) for one of the Residential mortgage loans, monthly payments were missed after the interest rate and monthly payment amount had been reduced; (3) for one of the Residential mortgage loans and the Commercial loan secured by real estate, monthly payments of interest only were missed; and (4) for the Commercial construction and land loan, a monthly payment was missed after the term of the loan had been extended. There were no allowances for loan losses recorded on these loans at December 31, 2014.

(Balances in Thousands)      
  2016  2015 
  Number     Number    
  of  Recorded  of  Recorded 
  Loans  Investment  Loans  Investment 
Residential mortgage - first liens  2  $294   1  $32 
Residential mortgage - junior liens  1   29   0   0 
Commercial and industrial  1   5   0   0 
Consumer  1   27   0   0 
Total  5  $355   1  $32 

 

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, 
  2017  2016 
Foreclosed residential real estate $721  $1,102 

At December 31, 2014 and 2013, the Corporation evaluated

The recorded investment of consumer mortgage 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, 2014 and 2013 for loanssecured by residential real properties for which an event of default had occurred subsequent to restructuring.formal foreclosure proceedings were in process is as follows:

(In Thousands) Dec. 31,  Dec. 31, 
  2017  2016 
Residential real estate in process of foreclosure $1,789  $2,738 

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9. BANK PREMISES AND EQUIPMENT

 

Bank premises and equipment are summarized as follows:

(In Thousands)             December 31,    December 31, 
    2014   2013    2017 2016 
Land $2,818     $2,818  $2,818 
Buildings and improvements 26,97326,869      28,285   27,619 
Furniture and equipment 17,41217,087      15,578   18,741 
Construction in progress 982      268   392 
Total 47,30146,776      46,949   49,570 
Less: accumulated depreciation (31,045)(29,346)      (31,517)  (34,173)
Net $16,256$17,430     $15,432  $15,397 

 

Depreciation expense included in occupancy expense and furniture and equipment expense was as follows:

 

(In Thousands)201420132012 2017 2016 2015 
Occupancy expense$998$1,022$1,050 $801  $804  $954 
Furniture and equipment expense942998889  838   785   934 
Total$1,940$2,020$1,939 $1,639  $1,589  $1,888 

 

10. INTANGIBLE ASSETS

 

There were no changes in the carrying amount of goodwill in 20142017 and 2013.2016. The balance in goodwill was $11,942,000 at December 31, 20142017 and 2013.2016. The Corporation did not complete any acquisitions in 20142017 or 2013.2016.

 

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, 2014,2017, 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, 2014.

2017.

 

Information related to the core deposit intangibles is as follows:

December 31, December 31, 
(In Thousands)20142013 2017 2016 
Gross amount$2,034 $2,034  $2,034 
Less: accumulated amortization(1,982)(1,947)  (2,022)  (2,017)
Net$52$87 $12  $17 

 

Amortization expense was $35,000$5,000 in 2014, $51,0002017, $13,000 in 20132016 and $74,000$22,000 in 2012. Estimated2015. The amount of amortization expense forto be recognized each of the ensuing five years is as follows:not significant.

(In Thousands)
  
2015$22
201612
20176
20184
20193

 

11. DEPOSITS

 

At December 31, 2014,2017, the scheduled maturities of time deposits are as follows:

 

(In Thousands)  
 2015$128,966
 201664,850
 201719,854
 201812,128
 20198,709
 Thereafter4,430
  $238,937
(In Thousands)   
2018 $112,563 
2019  57,097 
2020  22,836 
2021  7,975 
2022  10,484 
Thereafter  2,716 
Total $213,671 

72

 

Included in interest-bearingTime deposits are time deposits in the amount of $100,000 or more.more than $250,000 totaled $12,653,000 at December 31, 2017 and $7,929,000 at December 31, 2016. As of December 31, 2014,2017, the remaining maturities or time to next re-pricing of time deposits of $100,000 or more arethan $250,000 was as follows:

 

(In Thousands)
Three months or less$38,620
Over 3 months through 12 months8,910
Over 1 year through 3 years11,478
Over 3 years8,786
Total$67,794

Interest expense from time deposits of $100,000 or more amounted to $563,000 in 2014, $721,000 in 2013 and $1,846,000 in 2012.

(In Thousands)   
Three months or less $4,833 
Over 3 months through 12 months  5,375 
Over 1 year through 3 years  1,148 
Over 3 years  1,297 
Total $12,653 

 

12. BORROWED FUNDS

 

SHORT-TERM BORROWINGS  
   
Short-term borrowings include the following:  
   
(In Thousands)Dec. 31,Dec. 31,
 20142013
FHLB-Pittsburgh borrowings$0$20,000
Customer repurchase agreements5,5373,385
Total short-term borrowings$5,537$23,385

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

(In Thousands) Dec. 31,  Dec. 31, 
  2017  2016 
FHLB-Pittsburgh borrowings $58,000  $21,000 
Customer repurchase agreements  3,766   5,175 
Total short-term borrowings $61,766  $26,175 

Short-term borrowings from FHLB-Pittsburgh are as follows:

(In Thousands) Dec. 31,  Dec. 31 
  2017  2016 
Overnight borrowing $29,000  $21,000 
Other short-term advances  29,000   0 
Total short-term FHLB-Pittsburgh borrowings $58,000  $21,000 

The weighted average interest rate on total short-term borrowings outstanding was 0.10%1.52% at December 31, 20142017 and 0.22%0.61% at December 31, 2013.2016. The maximum amount of total short-term borrowings outstanding at any month-end was $7,919,000$61,766,000 in 2014, $23,385,0002017, $47,005,000 in 20132016 and $20,120,000$53,496,000 in 2012.2015.

 

The Corporation had available credit with other correspondent banks totaling $45,000,000 at December 31, 20142017 and 2013.2016. These lines of credit are primarily unsecured. No amounts were outstanding at December 31, 20142017 or December 31, 2013.2016.

 

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At December 31, 2014,2017, the Corporation had available credit in the amount of $25,367,000$15,877,000 on this line with no outstanding advances. At December 31, 20132016, the Corporation had available credit in the amount of $26,078,000$15,636,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with thea carrying value of $26,092,000$16,301,000 at December 31, 20142017 and $27,188,000$17,690,000 at December 31, 2013.2016.

 

The FHLB-Pittsburgh loan facilities arefacility is collateralized by qualifying loans secured by real estate with a book value totaling $446,780,000$488,889,000 at December 31, 20142017 and $453,792,000$471,454,000 at December 31, 2013.2016. 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 $1,454,000$6,426,000 at December 31, 20142017 and $3,656,000$4,296,000 at December 31, 2013.

2016. The Corporation’s total credit facility with FHLB-Pittsburgh was $362,630,000 at December 31, 2017, including an unused (available) amount of $295,441,000. At December 31, 2013,2016, the Corporation had a short-term borrowingCorporation’s total credit facility with FHLB-Pittsburgh was $339,221,000, including an unused (available) amount of $306,767,000.

Overnight borrowings from the FHLB-Pittsburgh of $20,000,000. This borrowing matured in January 2014 and had an interest rate of 0.24%1.54% at December 31, 2017 and 0.74% at December 31, 2016. At December 31, 2017, the other short-term advances included 9 advances of $3,000,000 and 1 advance of $2,000,000, each maturing monthly from January through October 2018, with a weighted average interest rate of 1.69% and rates ranging from 1.23% to 1.89%.

 

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, 20142017 and December 31, 2013.2016. The carrying value of the underlying securities was $15,229,000$12,158,000 at December 31, 20142017 and $11,269,000$15,019,000 at December 31, 2013.2016.

 

LONG-TERM BORROWINGS

  
   
Long-term borrowings are as follows:  
(In Thousands)Dec. 31,Dec. 31,
 20142013
FHLB-Pittsburgh borrowings$12,060$12,338
Repurchase agreements61,00061,000
Total long-term borrowings$73,060$73,338
   
Long-term borrowings from FHLB - Pittsburgh are as follows:  
(In Thousands)Dec. 31,Dec. 31,
 20142013
Loan maturing in 2016 with a rate of 6.86%$107$153
Loan maturing in 2017 with a rate of 6.83%1622
Loan maturing in 2017 with a rate of 3.81%10,00010,000
Loan maturing in 2020 with a rate of 4.79%9871,146
Loan maturing in 2025 with a rate of 4.91%9501,017
Total long-term FHLB-Pittsburgh borrowings$12,060$12,338
   
Repurchase agreements included in long-term borrowings are as follows:  
   
(In Thousands)Dec. 31,Dec. 31,
 20142013
Agreement maturing in 2017 with a rate of 3.595%$27,000$27,000
Agreement maturing in 2017 with a rate of 4.265%34,00034,000
Total long-term repurchase agreements$61,000$61,000
73

 

EachLONG-TERM BORROWINGS

Long-term borrowings (initial maturity of thegreater than one year) are as follows:

(In Thousands) Dec. 31,  Dec. 31, 
  2017  2016 
FHLB-Pittsburgh borrowings $9,189  $11,454 
Repurchase agreements  0   27,000 
Total long-term borrowings $9,189  $38,454 

Long-term borrowings from FHLB - Pittsburgh are as follows:

(In Thousands) Dec. 31,  Dec. 31, 
  2017  2016 
Loan matured in 2017 with a rate of 6.83% $0  $4 
Loan matured in 2017 with a rate of 3.81%  0   10,000 
Loan maturing in 2018 with a rate of 1.63%  3,000   0 
Loan maturing in 2018 with a rate of 1.35%  3,000   0 
Loan maturing in 2019 with a rate of 1.83%  2,000   0 
Loan maturing in 2020 with a rate of 4.79%  463   646 
Loan maturing in 2025 with a rate of 4.91%  726   804 
Total long-term FHLB-Pittsburgh borrowings $9,189  $11,454 

The repurchase agreements is putable by the issuer at quarterly intervals. The Corporation incurred a loss of $1,023,000agreement included in 2013 on prepayment of $7,000,000 of the agreement withlong-term borrowings had an interest rate of 3.595%. In 2012, the Corporation incurred losses totaling $2,333,000 from prepayment of repurchase agreement obligations, including a loss of $2,190,000 on prepayment of a total $12,000,000 of the agreements shown and matured in the table above.December 2017.

Securities sold under repurchase agreements were delivered to the broker-dealer who iswas 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 resellresold 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 sold under the repurchase agreements with the broker dealer was $70,982,000$0 at December 31, 20142017 and $79,814,000$31,494,000 at December 31, 2013. 2016, as detailed in the following table:

(In Thousands) Dec. 31,  Dec. 31, 
  2017  2016 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:        
Residential pass-through securities $0  $18,181 
Residential collateralized mortgage obligations  0   13,313 
Total $0  $31,494 

Average daily repurchase agreement borrowings amounted to $61,000,000$26,112,000 in 2014, $62,630,0002017, $27,000,000 in 20132016 and $78,790,000$54,304,000 in 2012.2015. The maximum amounts of outstanding borrowings under repurchase agreements with broker-dealers were $27,000,000 in 2017 and 2016, and $61,000,000 in 2014, $68,000,000 in 2013 and $85,000,000 in 2012.2015. The weighted average interest rate on repurchase agreements was 4.02%3.60% in 2014, 4.01%2017 and 2016, and 3.99% in 2013 and 3.97% in 2012.2015.

 

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, 20142017 and December 31, 2013,2016, and are not expected to significantly affect the Corporation'sCorporation’s future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.

74

 

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)

(In Thousands)            
  Pension  Postretirement 
  2017  2016  2017  2016 
CHANGE IN BENEFIT OBLIGATION:                
Benefit obligation at beginning of year $713  $722  $1,555  $1,539 
Service cost  0   0   36   37 
Interest cost  24   26   57   62 
Plan participants’ contributions  0   0   211   215 
Actuarial loss (gain)  127   3   (103)  (30)
Benefits paid  (14)  (38)  (259)  (268)
Benefit obligation at end of year $850  $713  $1,497  $1,555 
                 
CHANGE IN PLAN ASSETS:                
Fair value of plan assets at beginning of year $846  $839  $0  $0 
Actual return on plan assets  91   45   0   0 
Employer contribution  0   0   48   53 
Plan participants’ contributions  0   0   211   215 
Benefits paid  (14)  (38)  (259)  (268)
Fair value of plan assets at end of year $923  $846  $0  $0 
                 
Funded status at end of year $73  $133  $(1,497) $(1,555)

 

 Pension: Postretirement:
 2014201320142013
CHANGE IN BENEFIT OBLIGATION:    
Benefit obligation at beginning of year$1,733$1,783$1,391$2,081
Service cost003441
Interest cost73715755
Plan participants' contributions00198208
Actuarial loss (gain)76(104)(48)(171)
Plan amendments000(557)
Benefits paid(16)(17)(254)(266)
Settlement of plan obligation(781)000
Benefit obligation at end of year$1,085$1,733$1,378$1,391
     
CHANGE IN PLAN ASSETS:    
Fair value of plan assets at    
   beginning of year$1,968$1,842$0$0
Actual return on plan assets3714300
Employer contribution005658
Plan participants' contributions00198208
Benefits paid(16)(17)(254)(266)
Settlement of plan obligation(781)000
Fair value of plan assets at end of year$1,208$1,968$0$0
Funded (underfunded) status at end of year$123$235($1,378)($1,391)

In 2014, there was a distribution from the plan of $781,000, or approximately 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.

At December 31, 20142017 and 2013,2016, 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: Pension  Postretirement 
2014201320142013 2017 2016 2017 2016 
Other assets$123$235  $73  $133       
Accrued interest and other liabilities $1,378$1,391         $1,497  $1,555 

 

At December 31, 20142017 and 2013,2016, 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 
2014201320142013 2017 2016 2017 2016 
Prior service cost$0($402)($433) $0  $0  $(309) $(340)
Net actuarial loss2693571159
Net actuarial loss (gain)  221   161   (2)  101 
Total$269$357($391)($374) $221  $161  $(311) $(239)

 

For the defined benefit pension plan, amortization of the net actuarial loss is expected to be $10,000$13,000 in 2015.2018. For the postretirement plan, the estimated amount of prior service cost that will be amortized from accumulated other comprehensive incomeloss into net periodic benefit cost in 20152018 is a reduction in expense of $31,000, and no net actuarial lossgain is expected to be amortized in 2015.2018.

 

The accumulated benefit obligation for the defined benefit pension plan was $1,085,000$850,000 at December 31, 20142017 and $1,733,000$713,000 at December 31, 2013.2016.

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

 

(In Thousands)Pension: Postretirement:  Pension  Postretirement 
201420132012201420132012 2017 2016 2015 2017 2016 2015 
Service cost$0$34$41$91 $0  $0  $0  $36  $37  $38 
Interest cost737172575581  24   26   36   57   62   57 
Expected return on plan assets(88)(90)(72)0  (31)  (26)  (45)  0   0   0 
Amortization of transition (asset) obligation037
Amortization of prior service cost0(31)13  0   0   0   (31)  (31)  (31)
Recognized net actuarial loss193227010  7   9   11   0   0   0 
Loss on settlement1960  0   0   87   0   0   0 
Total net periodic benefit cost$200$13$27$60$66$222 $0  $9  $89  $62  $68  $64 

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.

 

The weighted-average assumptions used to determine net periodic benefit cost are as follows:

 

Pension: Postretirement:  Pension  Postretirement 
201420132012201420132012 2017 2016 2015 2017 2016 2015 
Citizens Trust Company Retirement Plan 
and postretirement plan: 
Discount rate4.50%4.00%4.50%4.00%4.50%  4.05%  4.30%  3.75%  3.75%  4.25%  4.00%
Expected return on plan assets5.31%7.50%N/A  6.00%  5.00%  5.31%  N/A   N/A   N/A 
Rate of compensation increaseN/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, 20142017 and 20132016 are as follows:

 

Pension: Postretirement: Pension  Postretirement 
2014201320142013 2017 2016 2017 2016 
Discount rate3.75%4.50%4.00%4.75%  3.55%  4.05%  3.75%  4.25%
Rate of compensation increaseN/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) PensionPostretirement
2015 $235$88 
2016 4187 
2017 1688 
2018 40197 
2019 3898 
2020-2024 208515 
(In Thousands) Pension  Postretirement 
2018 $312  $96 
2019  41   96 
2020  13   104 
2021  12   101 
2022  14   105 
2023-2027  226   516 

 

No estimated minimum contribution to the defined benefit pension plan is required in 2015,2018, 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.

 

The fair values of pension plan assets at December 31, 20142017 and 20132016 are as follows:

 

20142013 2017 2016 
Mutual funds invested principally in:        
Cash and cash equivalents3%36%  2%  2%
Debt securities37%24%  37%  38%
Equity securities47%30%  45%  44%
Alternative funds13%10%  16%  16%
Total100%  100%  100%

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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, 2014 and 2013,2017, the targeted asset allocation of mutual funds for the pension plan was 26%45% equity securities, 61%37% debt securities, 11%16% alternative assets, and 2% cash. At December 31, 2016, the targeted asset allocation of mutual funds for the pension plan was 44% equity securities, 38% debt securities, 16% alternative assets and 2% cash. 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 $595,000$681,000 in 2014, $557,0002017, $646,000 in 20132016 and $587,000$609,000 in 2012.2015.

 

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, 20142017 and 2013,2016, 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 409,197419,067 shares of Corporation stock at December 31, 20142017 and 362,888417,753 shares at December 31, 2013,2016, all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled $512,000$588,000 in 2014, $509,0002017, $549,000 in 20132016 and $507,000$522,000 in 2012.2015.

 

The Corporation also has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were $138,000$200,000 in 2014, $186,0002017, $184,000 in 20132016 and $140,000$167,000 in 2012.2015.

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, 2014,2017, 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 most of the restricted stock awards issued under this Plan in 2014, 2013 and 2012 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 2014, 2013 and 2012 plan years. For 2014 restricted stock awards to individuals who are substantially involved in mortgage lending, vesting is not dependent on the Corporation’s ROAE. There are 286,386270,179 shares available for issuance under the Stock Incentive Plan as of December 31, 2014.2017.

 

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 granted through the end of 2014 vest ratably over 3 years. There are 30,77517,396 shares available for issuance under the Independent Directors Stock Incentive Plan as of December 31, 2014.

The Corporation records stock option expense based on estimated fair value calculated using the Black-Scholes-Merton option-pricing model with the following assumptions:

 201420132012
Volatility39%41%41%
Expected option lives        8 Years        8 Years        7 Years
Risk-free interest rate2.85%1.60%1.53%
Dividend yield4.33%3.69%3.97%

Management estimated the lives for options based on the Corporation’s average historical experience with both plans. The Corporation utilized its historical volatility and dividend yield over the immediately prior 8-year period to estimate future levels of volatility and dividend yield for the 2014 and 2013 awards, and utilized its historical volatility and dividend yield over the immediately prior 7-year period in estimating the value of the 2012 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.2017.

 

Total stock-based compensation expense is as follows:

 

(In Thousands)201420132012
 Stock options$153$242$247
 Restricted stock412454320
 Total$565$696$567

A summary of stock option activity is presented below:

(In Thousands) 2017  2016  2015 
 Restricted stock $627  $578  $606 
 Stock options  0   0   0 
 Total $627  $578  $606 

 

 2014 2013 2012 
  Weighted Weighted Weighted
  Average Average Average
  Exercise Exercise Exercise
 SharesPriceSharesPriceSharesPrice
Outstanding, beginning of year358,176$19.03337,670$19.08301,797$19.05
Granted39,027$20.4564,050$19.2164,757$18.54
Exercised(50,415)$17.57(10,656)$17.22(17,284)$16.20
Forfeited(16,424)$20.03(14,135)$20.13(6,830)$21.51
Expired(14,207)$26.59(18,753)$20.73(4,770)$17.00
Outstanding, end of year316,157$19.05358,176$19.03337,670$19.08
Options exercisable at year-end316,157$19.05358,176$19.03337,670$19.08
Weighted-average fair value of options granted $5.50 $5.56 $5.15
Weighted-average fair value of options forfeited $4.89 $3.77 $4.03
77

 

The weighted-average remaining contractual term of outstanding stock options at December 31, 2014 was 5.4 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 2014) was $668,000 at December 31, 2014. The total intrinsic value of options exercised was $90,000 in 2014, $29,000 in 2013 and $72,000 in 2012.

 

The following summarizes non-vested stock options and restricted stock activity as of and for the year ended December 31, 2014:2017:

 

Stock Options Restricted Stock    Weighted 
 Weighted Weighted    Average 
 Average Average Number Grant
Date
 
NumberGrant Date NumberGrant Date of
Shares
 Fair
Value
 
of SharesFair Value of SharesFair Value
Outstanding, December 31, 20130 67,878$18.67
Outstanding, December 31, 2016  63,362  $20.35 
Granted39,027$5.50 16,711$20.40  30,782  $25.97 
Vested(39,027)$5.50 (24,695)$18.18  (28,981) $20.21 
Forfeited0 (7,458)$19.47  (4,406) $21.74 
Outstanding, December 31, 20140 52,436$19.34
Outstanding, December 31, 2017  60,757  $23.17 

 

Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.period, adjusted for estimated and actual forfeitures. As of December 31, 2014,2017, there was $604,000$671,000 total unrecognized compensation costscost related to restricted stock, which is expected to be recognized over a weighted average period of 1.51.3 years.

 

In 2017 and 2016, the first two monthsCorporation awarded shares of restricted stock under the Stock Incentive Plan, as follows:

  2017  2016 
Executive Officers  14,897   17,289 
Other employees    7,415   10,304 
Total      22,312   27,593 

Restricted stock awards in 2017 and 2016 to employees other than executive officers vest over a three-year term, subject to continued employment and satisfactory job performance, with no additional performance conditions (time vesting). Restricted stock awards in 2017 and 2016 to Executive Officers vest over a three-year term, with vesting for half of the shares based on 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. The minimum level for satisfying the performance condition defined in the 2017 and 2016 awards was an ROAE at the 50th percentile of the defined Peer Group’s results. The Corporation did not meet the performance condition defined in the 2017 and 2016 awards, as the Corporation’s return on average equity ROAE was in the 37th percentile of the Peer Group’s results for the 12-month period ended September 30, 2017 and in the 47th percentile of the Peer Group’s results for the 12-month period ended September 30, 2016. For purposes of the 2017 and 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.

Most of the restricted stock awards issued under this Plan prior to 2016, for which a portion of the awards vested in 2017 and 2016, include a condition that the Corporation must meet an annual targeted ROAE performance ratio, as defined, in order for participants to vest. In 2017, 2016 and 2015, the Corporation met the ROAE target applicable to these awards, 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.

In 2017, a total of 8,470 restricted shares were granted under the Independent Directors Stock Incentive Plan, subject to time vesting over a term of one year. In 2016, a total of 7,834 restricted shares were granted under the Independent Directors Stock Incentive Plan, also with time vesting over a term of one year.

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There were no stock options granted in 2017, 2016 or 2015. A summary of stock option activity is presented below:

  2017  2016  2015 
     Weighted     Weighted     Weighted 
     Average     Average     Average 
     Exercise     Exercise     Exercise 
  Shares  Price  Shares  Price  Shares  Price 
Outstanding, beginning of year  202,037  $18.58   248,486  $18.59   316,157  $19.05 
Granted  0       0       0     
Exercised  (24,976) $17.50   (35,880) $18.86   (29,557) $17.56 
Forfeited  (635) $19.88   (10,569) $18.03   (20,211) $19.76 
Expired  (10,766) $22.33   0       (17,903) $27.00 
Outstanding, end of year  165,660  $18.49   202,037  $18.58   248,486  $18.59 
Options exercisable at year-end  165,660  $18.49   202,037  $18.58   248,486  $18.59 
Weighted-average fair value of options forfeited     $4.21      $4.04      $4.86 

The weighted-average remaining contractual term of outstanding stock options at December 31, 2017 was 3.5 years. The aggregate intrinsic value of stock options outstanding was $913,000 at December 31, 2017. The total intrinsic value of options exercised was $164,000 in 2017, $183,000 in 2016 and $77,000 in 2015.

The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2017. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2018.

In January 2018, the Corporation awarded 22,49625,416 shares of restricted stock under the Stock Incentive Plan and 7,1309,086 shares of restricted stock under the Independent Directors Stock Incentive Plans. The 20152018 restricted stock awards under the Stock Incentive Plan vest ratably over fourthree years, and vesting for 20,298one-half of the 16,578 restricted shares awarded to Executive Officers depends on the Corporation meeting a ROAE target each year. The 20152018 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Total estimated stock-based compensation for 20152018 is $628,000.$716,000. The restricted stock awards made in the first two months of 2015January 2018 are not included in the tables above.

The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2014. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2015.

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14. INCOME TAXES

 

The net deferred tax asset at December 31, 20142017 and 20132016 represents the following temporary difference components:

 

December 31, December 31, December 31, 
(In Thousands)20142013 2017 2016 
Deferred tax assets:         
Unrealized holding losses on securities$0$541
Net realized losses on securities14491
Unrealized holding losses on securities:        
Included in accumulated other comprehensive loss $843  $512 
Included in retained earnings  (337)  0 
Allowance for loan losses2,5683,032  1,894   2,998 
Credit for alternative minimum tax paid5371,905
Other deferred tax assets2,5952,332  1,726   2,658 
Total deferred tax assets5,8447,901  4,126   6,168 
         
Deferred tax liabilities:         
Unrealized holding gains on securities2,8440
Defined benefit plans - ASC 835436
Defined benefit plans - ASC 835:        
Included in accumulated other comprehensive loss  31   27 
Included in retained earnings  (12)  0 
Bank premises and equipment1,1341,314  751   913 
Core deposit intangibles1830  3   6 
Other deferred tax liabilities137207  64   105 
Total deferred tax liabilities4,1761,557  837   1,051 
Deferred tax asset, net$1,668$6,344 $3,289  $5,117 

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The provision for income taxes includes the following:

 

(In thousands)201420132012 2017 2016 2015 
Currently payable$4,280$4,125$4,545 $4,938  $5,328  $5,097 
Tax expense resulting from allocations 
of certain tax benefits to equity or as a 
reduction in other assets158219121
Tax expense resulting from allocations of certain tax benefits to equity or as a reduction in other assets  63   175   161 
Deferred1,2541,8393,760  2,155   (156)  79 
Total provision$5,692$6,183$8,426 $7,156  $5,347  $5,337 

 

A reconciliation of income tax at the statutory rate to the Corporation’s effective rate is as follows (amounts in thousands):

 

(Amounts in thousands)2014 2013 2012  2017     2016     2015    
 Amount% Amount% Amount% Amount % Amount % Amount % 
Expected provision$7,97335.00$8,67235.00$10,89635.00 $7,207   35.00  $7,388   35.00  $7,633   35.00 
Tax-exempt interest income(1,982)(8.70)(2,137)(8.62)(2,287)(7.35)  (1,817)  (8.82)  (1,801)  (8.53)  (1,914)  (8.78)
Nondeductible interest expense560.25600.24920.30  42   0.20   40   0.19   51   0.23 
Dividends received deduction(79)(0.35)(76)(0.31)(78)(0.25)  (7)  (0.03)  (22)  (0.10)  (75)  (0.34)
Increase in cash surrender value of life insurance(132)(0.58)(140)(0.57)(159)(0.51)  (133)  (0.65)  (134)  (0.63)  (135)  (0.62)
Employee stock option compensation410.18670.27620.20  8   0.04   0   0.00   0   0.00 
ESOP Dividends  (154)  (0.75)  0   0.00   0   0.00 
Tax benefit from limited partnership investment(83)(0.36)(85)(0.34)00.00  (73)  (0.35)  (76)  (0.36)  (80)  (0.37)
Effect of tax rate change  2,159   10.49   0   0.00   0   0.00 
Other, net(101)(0.45)(178)(0.72)(100)(0.32)  (76)  (0.37)  (48)  (0.23)  (143)  (0.66)
Effective income tax provision$5,69224.99$6,18324.95$8,42627.07 $7,156   34.75  $5,347   25.33  $5,337   24.47 

In 2017, the Corporation recognized a reduction in the carrying value of the net deferred tax asset of $2,159,000 as a result of the December 2017 enactment of a reduction in the federal corporate income tax rate to 21% effective January 1, 2018, from the 35% marginal tax rate in effect throughout 2017, 2016 and 2015. Included in the total related provision was $325,000 associated with items included in Accumulated Other Comprehensive Loss in the consolidated balance sheets. Management believes the Corporation’s accounting for the effects of the reduction in the federal income tax rate is materially complete at December 31, 2017.

 

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 2017 and expects to continue to receive tax credits over a 10-year period beginning in 2013. At December 31, 2014, theannually through 2022. The carrying amount of the Corporation’s investment is $906,000$608,000 at December 31, 2017 and $713,000 at December 31, 2016 (included in Other Assets in the consolidated balance sheets). For 2017, the estimated amount of tax credits and other tax benefits to be received is $157,000 and the amount recognized as a reduction of the provision for income taxes is $73,000. In 2013,2016, the Corporation received tax credits and other tax benefits totaling $158,000, and recognized a reduction of the provision for income tax of $76,000. In 2015, the Corporation received tax credits and other tax benefits totaling $160,000, and recognized a reduction of the provision for income tax of $85,000. The estimated amount of tax credits and other tax benefits to be received for 2014 is $159,000, and the amount recognized as a reduction of the provision for income taxes for 2014 is $83,000.$80,000.

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 2011.2014.

 

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)BeginningNew OtherEnding
 BalanceLoansRepaymentsChangesBalance
12 directors, 8 executive officers 2014$12,547$188($1,358)$646$12,023
11 directors, 8 executive officers 201314,1251,110(2,723)3512,547
11 directors, 7 executive officers 201212,9972,517(1,424)3514,125
(In Thousands) Beginning  New     Other  Ending 
  Balance  Loans  Repayments  Changes  Balance 
12 directors, 7 executive officers 2017 $11,414  $2,128  $(2,061) $2,931  $14,412 
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 

80

 

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 $3,203,000$7,171,000 at December 31, 20142017 and $3,897,000$6,261,000 at December 31, 2013.2016.

 

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, 20142017 and 20132016 are as follows:

 

(In Thousands)20142013 2017 2016 
Commitments to extend credit$143,863$139,866 $187,919  $180,768 
Standby letters of credit13,41521,590  7,445   9,025 

 

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, 20142017 and 2013.2016.

Standby letters of credit as of December 31, 20142017 expire as follows:

 

 Amount
Year of Expiration(In Thousands)
2015$8,932
20162,183
201760
201930
2020 and Thereafter2,210
Total$13,415
Year of Expiration (In Thousands) 
2018 $7,042 
2019  355 
2020  48 
Total $7,445 

 

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, 20142017 and 2013,2016, 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) MinimumCapitalized Under              Minimum To Be Well      
 CapitalPrompt Corrective Actual   Minimum To Maintain Capitalized Under Minimum To Meet 
ActualRequirementAction Provisions      Minimum Capital Conservation Prompt Corrective the Corporation’s 
AmountRatioAmountRatioAmountRatio Actual     Capital
Requirement
 Buffer at
Reporting Date
 Action
Provisions
 Policy
Thresholds
 
December 31, 2014: 
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
December 31, 2017:                     
Total capital to risk-weighted assets:                                         
Consolidated$179,58827.60%$52,051³8%     n/a n/a $187,097   23.07% $64,872   ³8%  $75,008   ³9.25%  $81,090   ³10%  $85,144   ³10.5% 
C&N Bank156,42024.33%51,442³8%$64,303³10%  165,142   20.47%  64,528   ³8%   74,611   ³9.25%   80,661   ³10%   84,694   ³10.5% 
Tier 1 capital to risk-weighted assets:                                          
Consolidated170,88026.26%26,026³4% n/a  177,981   21.95%  48,654   ³6%   58,790   ³7.25%   64,872   ³8%   68,926   ³8.5% 
C&N Bank149,05523.18%25,721³4%         38,582³6%  156,026   19.34%  48,396   ³6%   58,479   ³7.25%   64,528   ³8%   68,561   ³8.5% 
Common equity tier 1 capital to risk-weighted assets:                                        
Consolidated  177,981   21.95%  36,490   ³4.5%   46,626   ³5.75%   52,708   ³6.5%   56,763   ³7% 
C&N Bank  156,026   19.34%  36,297   ³4.5%   46,380   ³5.75%   52,429   ³6.5%   56,462   ³7% 
Tier 1 capital to average assets:                                          
Consolidated170,88013.89%49,224³4% n/a  177,981   14.23%  50,023   ³4%   N/A   N/A   62,529   ³5%   62,529   ³5% 
C&N Bank149,05512.22%48,798³4%         60,998³5%  156,026   12.63%  49,418   ³4%   N/A   N/A   61,772   ³5%   61,772   ³5% 
                                         
December 31, 2013: 
December 31, 2016:                                        
Total capital to risk-weighted assets:                                         
Consolidated$177,69326.60%$53,449³8%     n/a n/a $183,597   23.60% $62,245   ³8%  $67,108   ³8.625%  $77,806   ³10%  $81,697   ³10.5% 
C&N Bank162,61024.65%52,783³8%$65,979³10%  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:                                         
Consolidated168,03925.15%26,724³4% n/a  174,928   22.48%  46,684   ³6%   51,547   ³6.625%   62,245   ³8%   66,135   ³8.5% 
C&N Bank154,32323.39%26,392³4%         39,588³6%  154,036   19.91%  46,421   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%  35,013   ³4.5%   39,876   ³5.125%   50,574   ³6.5%   54,464   ³7% 
C&N Bank  154,036   19.91%  34,815   ³4.5%   39,651   ³5.125%   50,289   ³6.5%   54,157   ³7% 
Tier 1 capital to average assets:                                         
Consolidated168,03913.78%48,783³4% n/a  174,928   14.27%  49,026   ³4%   N/A   N/A   61,282   ³5%   61,282   ³5% 
C&N Bank154,32312.77%48,348³4%         60,435³5%  154,036   12.73%  48,404   ³4%   N/A   N/A   60,506   ³5%   60,506   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 implemented higher minimum capital requirements, revised the definition of regulatory capital components and related calculations, added a new common equity tier 1 capital ratio, implemented a new capital conservation buffer, increased the risk weighting for past due loans and provided a transition period for several aspects of the new rule.

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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. The 2017 minimum required capital ratios and capital conservation buffer needed in order to fully avoid limitations on capital distributions, along with the remaining transition schedule for new ratios and the capital conservation buffer, is as follows:

  As of January 1: 
  2017  2018  2019 
Minimum common equity tier 1 capital ratio  4.5%  4.5%  4.5%
Common equity tier 1 capital conservation buffer  1.25%  1.875%  2.5%
Minimum common equity tier 1 capital ratio plus capital conservation buffer  5.75%  6.375%  7.0%
Phase-in of most deductions from common equity tier 1 capital  80%  100%  100%
Minimum tier 1 capital ratio  6.0%  6.0%  6.0%
Minimum tier 1 capital ratio plus capital conservation buffer  7.25%  7.875%  8.5%
Minimum total capital ratio  8.0%  8.0%  8.0%
Minimum total capital ratio plus capital            
conservation buffer  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 BufferMaximum 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, 2017, the Corporation’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 15.07%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 12.47%.

 

Banking regulators limit the amount of dividends that may be paid by C&N Bank to the Corporation. Retained earnings against which dividends may be paid without prior approval of the banking regulators amounted to approximately $84,022,000$88,980,000 at December 31, 2014,2017, 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)loss) or $15,580,000$15,604,000 at December 31, 2014.2017.

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19. PARENT COMPANY ONLY

 

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

 

CONDENSED BALANCE SHEETDecember 31,
(In Thousands)20142013
ASSETS  
Cash$9,624$2,297
Investment in subsidiaries:  
     Citizens & Northern Bank164,551163,711
     Citizens & Northern Investment Corporation10,82210,216
     Bucktail Life Insurance Company3,3363,254
Other assets360
TOTAL ASSETS$188,369$179,478
   
LIABILITIES AND STOCKHOLDERS' EQUITY  
Other liabilities$7$6
Stockholders' equity188,362179,472
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$188,369$179,478
CONDENSED INCOME STATEMENT   
(In Thousands)201420132012
Dividends from Citizens & Northern Bank$22,608$11,108$9,245
Expenses(112)(108)(105)
Income before equity in undistributed income   
  of subsidiaries22,49611,0009,140
Equity in undistributed (loss) income of subsidiaries(5,410)7,59413,565
NET INCOME$17,086$18,594$22,705
    
CONDENSED STATEMENT OF CASH FLOWS   
(In Thousands)   
 201420132012
CASH FLOWS FROM OPERATING ACTIVITIES:   
  Net income$17,086$18,594$22,705
  Adjustments to reconcile net income to net   
    cash provided by operating activities:   
     Equity in undistributed net loss (income) of   
       Subsidiaries5,410(7,594)(13,565)
     (Increase) decrease in other assets(36)7116
     Increase in other liabilities106
     Net Cash Provided by Operating Activities22,46111,0079,262
    
CASH FLOWS FROM FINANCING ACTIVITIES:   
  Proceeds from sale of treasury stock123184229
  Tax benefit from compensation plans, net137127104
  Purchase of treasury stock(4,002)00
  Dividends paid(11,392)(10,916)(9,061)
     Net Cash Used in Financing Activities(15,134)(10,605)(8,728)
    
INCREASE IN CASH AND CASH EQUIVALENTS7,327402534
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR2,2971,8951,361
CASH AND CASH EQUIVALENTS, END OF YEAR$9,624$2,297$1,895
CONDENSED BALANCE SHEET December 31, 
(In Thousands) 2017  2016 
ASSETS        
Cash $6,790  $6,033 
Investment in subsidiaries:        
Citizens & Northern Bank  166,576   165,397 
Citizens & Northern Investment Corporation  11,588   11,168 
Bucktail Life Insurance Company  3,488   3,419 
Other assets  15   4 
TOTAL ASSETS $188,457  $186,021 
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Other liabilities $14  $13 
Stockholders’ equity  188,443   186,008 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $188,457  $186,021 

CONDENSED INCOME STATEMENT         
(In Thousands) 2017  2016  2015 
Dividends from Citizens & Northern Bank $12,022  $14,960  $11,569 
Expenses  (233)  (367)  (234)
Income before equity in undistributed income of subsidiaries  11,789   14,593   11,335 
Equity in undistributed income of subsidiaries  1,645   1,169   5,136 
NET INCOME $13,434  $15,762  $16,471 

CONDENSED STATEMENT OF CASH FLOWS         
(In Thousands)         
  2017  2016  2015 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income $13,434  $15,762  $16,471 
Adjustments to reconcile net income to net            
cash provided by operating activities:            
Equity in undistributed net income of subsidiaries  (1,645)  (1,169)  (5,136)
(Increase) decrease in other assets  (11)  20   12 
Increase (decrease) in other liabilities  1   (6)  12 
Net Cash Provided by Operating Activities  11,779   14,607   11,359 
CASH FLOWS FROM FINANCING ACTIVITIES:            
Proceeds from sale of treasury stock  128   263   381 
Tax (cost) benefit from compensation plans, net  (5)  151   143 
Purchase of treasury stock  0   (3,723)  (4,415)
Dividends paid  (11,145)  (11,112)  (11,245)
Net Cash Used in Financing Activities  (11,022)  (14,421)  (15,136)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  757   186   (3,777)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR  6,033   5,847   9,624 
CASH AND CASH EQUIVALENTS, END OF YEAR $6,790  $6,033  $5,847 

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20. SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)

 

The following table presents summarized quarterly financial data for 20142017 and 2013:2016:

 

 2014 Quarter Ended
 Mar. 31,June 30,Sept. 30,Dec. 31,
Interest income$11,406$11,563$11,572$11,468
Interest expense1,2881,2901,2871,257
Net interest income10,11810,27310,28510,211
(Credit) provision for loan losses(311)446218123
Net interest income after (credit) provision for loan losses10,4299,82710,06710,088
Other income3,7513,9803,8873,802
Net gains on available-for-sale securities31103760210
Other expenses8,5248,3479,0368,250
Income before income tax provision5,6875,5635,6785,850
Income tax provision1,3991,4001,4111,482
Net income available to common shareholders$4,288$4,163$4,267$4,368
Net income per share – basic$0.35$0.33$0.34$0.36
Net income per share – diluted$0.34$0.33$0.34$0.35
 2013 Quarter Ended
 Mar. 31,June 30,Sept. 30,Dec. 31,
Interest income$12,647$12,355$12,027$11,885
Interest expense1,6001,4151,3961,354
Net interest income11,04710,94010,63110,531
Provision for loan losses183662391,559
Net interest income after provision for loan losses10,86410,87410,3928,972
Other income3,8434,1914,2934,124
Net gains on available-for-sale securities1,159100193266
Loss on prepayment of debt1,023000
Other expenses8,5538,5208,6107,788
Income before income tax provision6,2906,6456,2685,574
Income tax provision1,5841,6711,5791,349
Net income available to common shareholders$4,706$4,974$4,689$4,225
Net income per share – basic$0.38$0.40$0.38$0.34
Net income per share – diluted$0.38$0.40$0.38$0.34
SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA      
(In Thousands Except Per Share Data) (Unaudited)         
  2017 Quarter Ended 
  Mar. 31,  June 30,  Sept. 30,  Dec. 31, 
  2017  2017  2017  2017 
Interest income $11,112  $11,340  $11,626  $11,785 
Interest expense  953   978   985   999 
Net interest income  10,159   10,362   10,641   10,786 
Provision for loan losses  452   4   322   23 
Net interest income after provision for loan losses  9,707   10,358   10,319   10,763 
Other income  3,864   4,106   4,066   4,117 
Net gains on available-for-sale securities  145   107   5   0 
Other expenses  9,298   9,076   9,192   9,401 
Income before income tax provision  4,418   5,495   5,198   5,479 
Income tax provision  984   1,374   1,262   3,536 
Net income $3,434  $4,121  $3,936  $1,943 
Net income attributable to common shares $3,416  $4,100  $3,916  $1,933 
Net income per share – basic $0.28  $0.34  $0.32  $0.16 
Net income per share – diluted $0.28  $0.34  $0.32  $0.16 

  2016 Quarter Ended 
  Mar. 31,  June 30,  Sept. 30,  Dec. 31, 
  2016  2016  2016  2016 
Interest income $10,937  $10,924  $11,131  $11,106 
Interest expense  904   925   944   920 
Net interest income  10,033   9,999   10,187   10,186 
Provision (credit) for loan losses  368   318   538   (3)
Net interest income after provision (credit) for loan losses  9,665   9,681   9,649   10,189 
Other income  3,690   3,906   3,884   4,031 
Net gains on available-for-sale securities  383   122   584   69 
Other expenses  9,072   8,535   8,579   8,558 
Income before income tax provision  4,666   5,174   5,538   5,731 
Income tax provision  1,093   1,303   1,451   1,500 
Net income $3,573  $3,871  $4,087  $4,231 
Net income attributable to common shares $3,553  $3,850  $4,065  $4,209 
Net income per share – basic $0.29  $0.32  $0.34  $0.35 
Net income per share – diluted $0.29  $0.32  $0.34  $0.35 

 

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85 

  

Report of Independent Registered Public Accounting Firm

 

Stockholders and Board of Directors of

Citizens & Northern Corporation:Corporation

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries (collectively, the “Corporation”) as of December 31, 20142017 and 20132016 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the three-year period ended December 31, 2014. Citizens & Northern2017, and the related notes (collectively referred to as the “consolidated financial statements”). We have also audited the Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control-Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2017 and subsidiaries’2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control-Integrated Framework (2013)issued by COSO.

Basis for Opinion

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

 

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

86

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. 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, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2014 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’A company’s internal control over financial reporting asis a process designed to provide reasonable assurance regarding the reliability of December 31, 2014, based on criteria establishedfinancial reporting and the preparation of financial statements for external purposes inInternal Control-Integrated Framework (2013) issued by accordance with generally accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the Committeemaintenance of Sponsoring Organizationsrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Treadway Commission (COSO),assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and our report dated February 26, 2015 expressed an unqualified opinion.that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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.

/s/  Baker Tilly Virchow Krause, LLP 
  
Williamsport, Pennsylvania 
We have served as the Corporation’s auditor since 1979.
February 26, 201515, 2018 

 

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87 

 

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

 

None

 

ITEM 9A. CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

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

 

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

 

The Corporation’s management has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014. To make this assessment, we used2017, based on the criteria for effective internal control over financial reporting described inInternal Control – Integrated Framework(2013), 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, 2014,2017, the Corporation’s internal control over financial reporting was effective.is effective based on the criteria established inInternal Control – Integrated Framework(2013).

 

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, 2014.2017. That report appears below.immediately prior to this report.

 

February 26, 201515, 2018By:  /s/ Mark A. Hughes/s/ J. Bradley Scovill
Date Interim President and Chief Executive Officer
   
February 26, 201515, 2018By:  /s/ Anthony Peluso/s/ Mark A. Hughes
Date Interim Treasurer and Chief Financial Officer

 

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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, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Citizens & Northern Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting based on our audit.

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

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. 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.

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, 2014, 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 26, 2015 expressed an unqualified opinion.

/s/  Baker Tilly Virchow Krause, LL
Williamsport, Pennsylvania
February 26, 2015

ITEM 9B. OTHER INFORMATION

 

There was no information the Corporation was required to disclose in a report on Form 8-K during the fourth quarter 20142017 that was not disclosed.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information concerning Directors and Executive Officers is incorporated herein by reference to disclosure under the captions “Proposal 1 - Election of Directors,” “Executive Officers,” “Information Concerning Security Ownership” and “Meetings and Committees of the Board of Directors” of the Corporation’s proxy statement dated March 13, 20159, 2018 for the annual meeting of stockholders to be held on April 23, 2015.19, 2018.

 

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 13, 20159, 2018 for the annual meeting of stockholders to be held on April 23, 2015.19, 2018.

 

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 13, 20159, 2018 for the annual meeting of stockholders to be held on April 23, 2015.19, 2018.

 

“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“Related Person Transaction and Policies"Policies” of the Corporation'sCorporation’s proxy statement dated March 13, 20159, 2018 for the annual meeting of stockholders to be held on April 23, 2015.19, 2018.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Information concerning services provided by the Corporation’s independent auditor Baker Tilly Virchow Krause, LLP, , the audit committee’s pre-approval policies and procedures for such services, and fees paid by the Corporation to that firm, is incorporated herein by reference to disclosure under the caption “Fees of Independent Public Accountants” of the Corporation’s proxy statement dated March 13, 20159, 2018 for the annual meeting of stockholders to be held on April 23, 2015.19, 2018.

 

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89 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

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

 

 Page
Report of Independent Registered Public Accounting Firm8386-87
  
Financial Statements: 
Consolidated Balance Sheets - December 31, 20142017 and 201320163841
Consolidated Statements of Income - Years Ended December 31, 2017, 2016 and 201542
      December 31, 2014, 2013 and 201239
Consolidated Statements of Comprehensive Income - Years
Ended December 31, 2014, 20132017, 2016 and 201220154043
Consolidated Statements of Changes in Stockholders'Stockholders’ Equity -
Years Ended December 31, 2014, 20132017, 2016 and 20122015 4144
Consolidated Statements of Cash Flows - Years Ended December 31, 2017, 2016 and 201545
      December 31, 2014, 2013 and 201242
Notes to Consolidated Financial Statements43-8246-85

 

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

 

2. Plan of acquisition, reorganization, arrangement,Not applicable
liquidation or succession Not applicable
   
3. (i) Articles of Incorporation Incorporated by reference to Exhibit 3.1 of
the Corporation'sCorporation’s Form 8-K filed
September 21, 2009
   
3. (ii) By-laws Incorporated by reference to Exhibit 3.23.1 of the
Corporation's Corporation’s Form 8-K filed September 21, 2009April 19, 2013
   
4. Instruments defining the rights of Security holders, including
    indentures Indentures Not applicable
   
9. Voting trust agreement Not applicable
   
10. Material contracts:  
10.1 Form of Restricted Stock agreement dated January 5, 2015Filed herewith
3, 2018 between the Corporation and certain officersExecutive Officers pursuant to
the Citizens & Northern Corporation Stock Incentive Plan Filed herewith
   
10.2 Form of Restricted Stock agreement dated January 5, 2015Filed herewith
3, 2018 between the Corporation and certain mortgage lendingnon-executive officers
pursuant to the Citizens & Northern Corporation Stock Incentive Plan 
             Incentive PlanFiled herewith
   
10.3 Form of Restricted Stock agreement dated January 5, 2015Filed herewith
3, 2018 between the Corporation and its independent directors
pursuant to the Citizens & Northern Corporation
Independent Directors Stock Incentive Plan Filed herewith
   
10.4 Form of Restricted Stock agreement dated February 5, 20152018 Annual Performance Incentive Award Plan Filed herewith
             between the Corporation and Mark A. Hughes pursuant to
             the Citizens & Northern Corporation Stock Incentive Plan
   
10.5 2018 Annual Performance Incentive Award Plan - Mortgage LendersFiled herewith

90

10.6 Form of Indemnification Agreement dated January 9, 2018 between the Corporation and Tracy E. WatkinsFiled herewith
10.7 Change in Control Agreement dated January 9, 2018 between the Corporation and Tracy E. WatkinsFiled herewith
10.8 Deferred Compensation Agreement dated December 17, 2015Filed herewith
10.9 Employment agreement dated September 19, 2013March 2, 2015 between the Corporation and J. Bradley Scovill Incorporated by reference to Exhibit 10.1 filed with
              the Corporation and Charles H. Updegraff, Jr.Corporation’s Form 8-K on September 19, 2013February 9, 2015
 10.6
10.10 Employment agreement dated September 19, 2013 between the Corporation and Mark A. Hughes Incorporated by reference to Exhibit 10.2 filed with
              the Corporation and Mark A. HughesCorporation’s Form 8-K on September 19, 2013
   
       10.710.11 Employment agreement dated September 19, 2013 between the Corporation and Harold F. Hoose, III Incorporated by reference to Exhibit 10.3 filed with
              the Corporation and Harold F. Hoose, IIICorporation’s Form 8-K on September 19, 2013
   
       10.810.12 Employment agreement dated September 19, 2013 between the Corporation and Deborah E. Scott Incorporated by reference to Exhibit 10.4 filed with
              the Corporation and Deborah E. ScottCorporation’s Form 8-K on September 19, 2013
   
       10.910.13 Form of Indemnification Agreement dated February 9,Filed herewith
11, 2015 between the Corporation and Stan R. Dunsmore Incorporated by reference to Exhibit 10.9 filed with Corporation’s Form 10-K on February 26, 2015
   
       10.1010.14 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
                between the Corporation and Shelley L. D'HaeneCorporation’s Form 10-K on February 21, 2013
   
       10.1110.15 Form of Indemnification Agreement dated January 19,Incorporated by reference to Exhibit 10.6 filed
2011 between the Corporation and John M. Reber Incorporated by reference to Exhibit 10.6 filed  with Corporation'sCorporation’s Form 10-K on Feb. 28, 2011
   
       10.12 Change in Control Agreement dated January 2, 2013Incorporated by reference to Exhibit 10.7 filed with
                between the Corporation and Shelley L. D'HaeneCorporation’s Form 10-K on February 21, 2013
       10.13 Change in Control Agreement dated April 15, 2008Incorporated by reference to Exhibit 10.9
               between the Corporation and George M. Raupfiled with the Corporation's Form 10-K
on March 6, 2009
       10.1410.16 Form of Indemnification Agreements dated May 2004Incorporated by reference to Exhibit 10.1
between the Corporation and the Directors and certain officersfiled with the Corporation's Form 10-K
 Incorporated by reference to Exhibit 10.1 filed with Corporation’s 10-K on March 11,14, 2005
   
       10.1510.17 Change in Control Agreement dated March 17, 2015 between the Corporation and Stan R. DunsmoreIncorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on May 8, 2015
10.18 Change in Control Agreement dated January 2, 2013 between the Corporation and Shelley L. D’HaeneIncorporated by reference to Exhibit 10.7 filed with Corporation’s Form 10-K on February 21, 2013
10.19  Change in Control Agreement dated January 20, 2005 between the Corporation and John M. ReberIncorporated by reference to Exhibit 10.18 filed with Corporation’s Form 10-K on February 18, 2016
10.20 Change in Control Agreement dated December 31, 2003Incorporated by reference to Exhibit 10.2
between the Corporation and Thomas L. Rudy, Jr. filed with the Corporation's Form 10-K

          10.16 Employment Agreement to be effective as of March 2, 2015

between the Corporation, Citizens & Northern Bank and

J. Bradley Scovill

on March 11, 2005

Incorporated by reference to Exhibit 10.1

10.2 filed with the Corporation’s Form 8-K10-K on

February 9, 2015

March 14, 2005
   
       10.1710.21 Executive Compensation Recoupment Policy dated September 19, 2013Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 8-K on September 19, 2013
10.22 Fourth Amendment to Citizens & Northern Corporation Stock Incentive Plan and Annual Incentive PlanIncorporated by reference to Exhibit 10.6 filed with Corporation’s Form 8-K on September 19, 2013
10.23 Third Amendment to Citizens & Northern Corporation Stock Incentive Plan Incorporated by reference to Exhibit A to
                Stock Incentive Planthe Corporation'sCorporation’s proxy statement
dated March 18, 2008 for the annual meeting
of stockholders held on April 15, 2008
   
       10.1810.24 Second Amendment to Citizens & Northern Corporation Stock Incentive Plan Incorporated by reference to Exhibit 10.5
                Stock Incentive Planfiled with the Corporation'sCorporation’s Form 10-K
on March 10, 2004

91

10.25 First Amendment to Citizens & Northern Corporation Stock Incentive PlanIncorporated by reference to Exhibit 10.6 filed with the Corporation’s Form 10-K on March 10, 2004
   
       10.19 First Amendment to10.26 Citizens & Northern Corporation Stock Incentive Plan Incorporated by reference to Exhibit 10.6
               Stock Incentive Plan10.7 filed with the Corporation'sCorporation’s Form 10-K
on March 10, 2004
   
       10.2010.27 First Amendment to Citizens & Northern Corporation Independent Directors Stock Incentive Plan Incorporated by reference to Exhibit 10.7
filed withB to the Corporation's Form 10-K
Corporation’s proxy statement dated March 18, 2008 for the annual meeting of stockholders held on March 10, 2004April 15, 2008
   
       10.21 First Amendment to Citizens & Northern CorporationIncorporated by reference to Exhibit B to
               Independent Directors Stock Incentive Planthe Corporation's proxy statement
dated March 18, 2008 for the annual
meeting of stockholders held on April 15, 2008
       10.2210.28 Citizens & Northern Corporation Independent Directors Stock Incentive Plan Incorporated by reference to Exhibit A to
                Stock Incentive Planthe Corporation'sCorporation’s proxy statement
dated March 19, 2001 for the annual
meeting of stockholders held on
April 17, 2001.
   
       10.2310.29 Citizens & Northern Corporation Supplemental Executive Retirement Plan (as amended and restated) Incorporated by reference to Exhibit 10.21
                Retirement Plan (as amended and restated)filed with the Corporation'sCorporation’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 orNot applicable
quarterly report to security holders Not applicable
   
14. Code of ethics The Code of Ethics is available through the
Corporation's Corporation’s website at www.cnbankpa.com.
To access the Code of Ethics, click on
"Investor “Investor Relations," followed by "Corporate
Governance"“Pages within Investor Relations,” “Corporate Governance Policies,” and "Code“Code of Ethics."
   
16. Letter re: change in certifying accountant Incorporated by reference to Exhibit

16 filed with the Corporation’s Form 8-K on October 2, 2014.

18. Letter re: change in accounting principles

Not applicable
   
18. Letter re: change in accounting principlesNot applicable
21. Subsidiaries of the registrant Filed herewith
   
22. Published report regarding matters submitted toNot applicable    
vote of security holders Not applicable
   
23. ConsentsConsent of experts and counselIndependent Registered Public Accounting Firm 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

 92 

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 toFiled herewith
shareholders with proxy statement and Form 10-K on March 9, 2018 
              March 13, 2015Filed herewith
   
100. XBRL-related documents Not applicable
   
101. Interactive data file Filed herewith

 

90
93 

 

SIGNATURES

 

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/ Mark A. HughesJ. Bradley Scovill 
Interim President and Chief Executive Officer 
  
Date: February 26, 201515, 2018 
  
By: /s/ Anthony PelusoMark A. Hughes 
Interim Treasurer and Principal Accounting Officer 
Date: February 26, 2015

Date: February 15, 2018

 

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 26, 201515, 2018  Date: February 26, 201515, 2018
     
/s/Jan E. Fisher /s/ Leonard SimpsonJ. Bradley Scovill
 Jan E. Fisher       Leonard SimpsonJ. Bradley Scovill
 Date: February 26, 201515, 2018  Date: February 26, 201515, 2018
     
/s/R. Bruce Haner /s/James E. TownerLeonard Simpson
 R. Bruce Haner       James E. TownerLeonard Simpson
 Date: February 26, 201515, 2018  Date: February 26, 201515, 2018
     
/s/Susan E. Hartley /s/ Ann M. TylerJames E. Towner
 Susan E. Hartley       Ann M. TylerJames E. Towner
 Date: February 26, 201515, 2018  Date: February 26, 201515, 2018
     
/s/Leo F. Lambert /s/Mark A. HughesAaron K. Singer
 Leo F. Lambert       Mark A. HughesAaron K. Singer
 Date: February 26, 201515, 2018  Date:  February 26, 201515, 2018
 
/s/Terry L. Lehman/s/Frank G. Pellegrino
Terry L. LehmanFrank G. Pellegrino
Date: February 15, 2018Date: February 15, 2018

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