Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
■ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
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December 31, 2017
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or
□ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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to
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Commission file number
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000-13222
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CITIZENS FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
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Pennsylvania
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23-2265045
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State or other jurisdiction of
incorporation or organization
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(I.R.S. Employer
Identification No.)
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15 South Main Street, Mansfield, Pennsylvania
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16933
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area code
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(570) 662-2121
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Securities registered pursuant to Section 12(b) of the Act:
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None
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Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $1.00 per share
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(Title of class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
□ Yes ■ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
□ Yes ■ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
■ Yes □ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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).
■ Yes □ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐ Accelerated filer ■
Non-accelerated filer ☐ Smaller reporting company ☐
(Do not check if a 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 reporting transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) if the exchange act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
□ Yes ■ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $166,105,387 as of June 30, 2017.
As of February 26, 2018, there were 3,484,305 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III is incorporated by reference to the Registrant's Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders.
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Citizens Financial Services, Inc.
Form 10-K
INDEX
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Page
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PART I
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ITEM 1 – BUSINESS
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1 – 9
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ITEM 1A – RISK FACTORS
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9 – 16
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ITEM 1B – UNRESOLVED STAFF COMMENTS
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17
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ITEM 2 – PROPERTIES
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17
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ITEM 3 – LEGAL PROCEEDINGS
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17
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ITEM 4 – MINE SAFETY DISCLOSURES
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17
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PART II
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ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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18 – 19
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ITEM 6 – SELECTED FINANCIAL DATA
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20
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ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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21 – 51
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ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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51
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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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52 – 113
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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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114
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ITEM 9A – CONTROLS AND PROCEDURES
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114
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ITEM 9B– OTHER INFORMATION
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114
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PART III
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ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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115
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ITEM 11 – EXECUTIVE COMPENSATION
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115
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ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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115 – 116
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ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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116
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ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
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116
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PART IV
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ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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117 – 119
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ITEM 16 – FORM 10-K SUMMARY
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119
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SIGNATURES
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120
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PART I
ITEM 1 – BUSINESS.
CITIZENS FINANCIAL SERVICES, INC.
Citizens Financial Services, Inc. (the "Company"), a Pennsylvania corporation, was incorporated on April 30, 1984 to be the holding company for First Citizens Community Bank (the "Bank"), a Pennsylvania-chartered bank and trust company. The Company is primarily engaged in the ownership and management of the Bank and the Bank's wholly-owned insurance agency subsidiary, First Citizens Insurance Agency, Inc. We completed the acquisition of a branch in Centre County, Pennsylvania on December 8, 2017. On December 11, 2015, the Company completed the acquisition of The First National Bank of Fredericksburg ("FNB") by merging FNB into the Bank, with the Bank as the resulting institution.
AVAILABLE INFORMATION
A copy of the Company'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, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge through the Company's web site at www.firstcitizensbank.com as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission. Information on our website shall not be considered as incorporated by reference into this Form 10-K.
FIRST CITIZENS COMMUNITY BANK
The Bank is a full-service bank engaged in a broad range of banking activities and services for individual, business, governmental and institutional customers. These activities and services principally include checking, savings, and time deposit accounts; residential, commercial and agricultural real estate, commercial and industrial, state and political subdivision and consumer loans; and a variety of other specialized financial services. The Trust and Investment division of the Bank offers a full range of client investment, estate, mineral management and retirement services.
The Bank's main office is located at 15 South Main Street, Mansfield (Tioga County), Pennsylvania. The Bank's primary market area consists of the Pennsylvania Counties of Bradford, Clinton, Potter and Tioga in north central Pennsylvania. It also includes Allegany, Steuben, Chemung and Tioga Counties in Southern New York. With the completion of the FNB acquisition, the Bank added seven additional banking offices in south central Pennsylvania; four offices in Lebanon County, two offices in Schuylkill County, and one office in Berks County. During 2016, the Bank opened a full service branch in Lancaster County, Pennsylvania and a limited branch office in Union County, Pennsylvania. In 2017, the Bank opened a limited branch office in Lancaster County. We also purchased a full service branch in State College, Pennsylvania in 2017, which is located in Centre County, Pennsylvania. The economy of the Bank's market areas are diversified and include manufacturing industries, wholesale and retail trade, service industries, agricultural and the production of natural resources of gas and timber. We are dependent geographically upon the economic conditions in north central, central and south central Pennsylvania, as well as the southern tier of New York. In addition to the main office in Mansfield, the Bank operates 25 full service offices and two limited branch office in its market areas.
As of December 31, 2017, the Bank had 233 full time employees and 40 part-time employees, resulting in 253 full time equivalent employees at our corporate offices and other banking locations.
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COMPETITION
The banking industry in the Bank's service area is intensely competitive, both among commercial banks and with financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions, mortgage banking firms, financial companies, financial affiliates of industrial companies, internet entities, and government sponsored agencies, such as Freddie Mac and Fannie Mae. There has been an increase in competitive pressures as entities continue to seek loan growth and expand into new markets. In north central Pennsylvania there has been additional competition from brokerage firms and retirement fund management firms due to the wealth generated from the exploration for natural gas in the market area. The Bank is generally competitive with all competing financial institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.
Additional information related to our business and competition is included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
SUPERVISION AND REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by the Pennsylvania Department of Banking ("PDB") and, as a member of the Federal Reserve System, by the Board of Governors of the Federal Reserve System (the "FRB"). Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, terms of deposit accounts, loans a bank makes, the interest rates a bank charges and collateral a bank takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches. The Company is registered as a bank holding company and is subject to supervision and regulation by the FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA").
PENNSYLVANIA BANKING LAWS
The Pennsylvania Banking Code ("Banking Code") contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the PDB so that the supervision and regulation of state chartered banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.
Pennsylvania law also provides Pennsylvania state chartered institutions elective parity with the power of national banks, federal thrifts, and state-chartered institutions in other states as authorized by the FDIC, subject to a required notice to the PDB. The Federal Deposit Insurance Corporation Act ("FDIA"), however, prohibits state chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund and (2) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Banking Code is restricted by the FDIA.
In April 2008, banking regulators in the States of New Jersey, New York, and Pennsylvania entered into a Memorandum of Understanding (the "Interstate MOU") to clarify their respective roles, as home and host state regulators, regarding interstate branching activity on a regional basis pursuant to the Riegle-Neal Amendments Act of 1997. The Interstate MOU establishes the regulatory responsibilities of the respective state banking regulators regarding bank regulatory examinations and is intended to reduce the regulatory burden on state chartered banks branching within the region by eliminating duplicative host state compliance exams. Under the Interstate MOU, the activities of branches we established in New York would be governed by Pennsylvania state law to the same extent that federal law governs the activities of the branch of an out-of-state national bank in such host states. Issues regarding whether a particular host state law is preempted are to be determined in the first instance by the PDB. In the event that the PDB and the applicable host state regulator disagree regarding whether a particular host state law is pre-empted, the PDB and the applicable host state regulator would use their reasonable best efforts to consider all points of view and to resolve the disagreement.
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COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act, ("CRA"), as implemented by FRB regulations, provides that the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FRB, in connection with its examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain corporate applications by such institution, such as mergers and branching. The Bank's most recent rating was "Satisfactory." Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the FRB as it attempts to control the money supply and credit availability in order to influence the economy.
THE DODD-FRANK ACT
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") has significantly changed the current bank regulatory structure and will affect it into the immediate future the lending and investment activities and general operations of depository institutions and their holding companies.
The Dodd-Frank Act requires the FRB to establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depository institutions; the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of trust preferred securities are excluded from Tier 1 capital unless (i) such securities are issued by bank holding companies with assets of less than $500 million or (ii) such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The exclusion of such proceeds were phased in over a three year period beginning in 2013.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to implement and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks, among other things, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators.
The Dodd-Frank Act created a new supervisory structure for oversight of the U.S. financial system, including the establishment of a new council of regulators, the Financial Stability Oversight Council, to monitor and address systemic risks to the financial system. Non-bank financial companies that are deemed to be significant to the stability of the U.S. financial system and all bank holding companies with $50 billion or more in total consolidated assets will be subject to heightened supervision and regulation. The FRB will implement prudential requirements and prompt corrective action procedures for such companies.
The Dodd-Frank Act made many other changes in banking regulation. Those include allowing depository institutions, for the first time, to pay interest on business checking accounts, requiring originators of securitized loans to retain a percentage of the risk for transferred loans, establishing regulatory rate-setting for certain debit card interchange fees and establishing a number of reforms for mortgage originations. Effective October 1, 2011, the debit-card interchange fee, for banks with assets about $10.0 billion, was capped at $0.21 per transaction, plus an additional 5 basis point charge to cover fraud losses.
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The Dodd-Frank Act also broadened the base for FDIC insurance assessments. The FDIC was required to promulgate rules revising its assessment system so that it is based on the average consolidated total assets less tangible equity capital of an insured institution instead of deposits. That rule took effect April 1, 2011. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.
Under provisions of the Dodd-Frank Act referred to as the "Volcker Rule" certain limitations are placed on the ability of bank holding companies and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, including hedge funds and private equity funds (collectively "covered funds"). The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities. The Volcker Rule became fully effective in July 2015.
CURRENT CAPITAL REQUIREMENTS
Federal regulations require FDIC-insured depository institutions, including state-chartered, FRB-member banks, to meet several minimum capital standards. These capital standards were effective January 1, 2015, and result from a final rule implementing regulator amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6.0% and 8.0%, respectively, and a leverage ratio of at least 4% of Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income ("AOCI"), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The Company has exercised the AOCI opt-out option and therefore AOCI is not incorporated into common equity Tier 1 capital. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.
The FRB has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution's capital level is or may become inadequate in light of the particular risks or circumstances.
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As of December 31, 2017, we met all applicable capital adequacy requirements.
PROMPT CORRECTIVE ACTION RULES
Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. The law requires that certain supervisory actions be taken against undercapitalized institutions, the severity of which depends on the degree of undercapitalization. The FRB has adopted regulations to implement the prompt corrective action legislation as to state member banks. The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is "undercapitalized" if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
Subject to a narrow exception, a receiver or conservator must be appointed for an institution that is "critically undercapitalized" within specified time frames. The regulations also provide that a capital restoration plan must be filed with the FRB within 45 days of the date an institution is deemed to have received notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the capital restoration plan must be guaranteed by any parent holding company up to the lesser of 5% of the depository institution's total assets when it was deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital requirements. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The FRB could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.
STANDARDS FOR SAFETY AND SOUNDNESS
The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness in various areas such as internal controls and information systems, internal audit, loan documentation and credit underwriting, interest rate exposure, asset growth and quality, earnings and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the FRB determines that a state member bank fails to meet any standard prescribed by the guidelines, the FRB may require the institution to submit an acceptable plan to achieve compliance with the standard.
ENFORCEMENT
The PDB maintains enforcement authority over the Bank, including the power to issue cease and desist orders and civil money penalties and remove directors, officers or employees. The PDB also has the power to appoint a conservator or receiver for a bank upon insolvency, imminent insolvency, unsafe or unsound condition or certain other situations. The FRB has primary federal enforcement responsibility over FRB-member state banks and has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on the bank. Formal enforcement action may range from the issuance of a capital directive or a cease and desist order, to removal of officers and/or directors. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC, as deposit insurer, has the authority to recommend to the FRB that enforcement action be taken with respect to a member bank. If the FRB does not take action, the FDIC has authority to take such action under certain circumstances. In general, regulatory enforcement actions occur with respect to situations involving unsafe or unsound practices or conditions, violations of law or regulation or breaches of fiduciary duty. Federal and Pennsylvania law also establish criminal penalties for certain violations.
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REGULATORY RESTRICTIONS ON BANK DIVIDENDS
The Bank may not declare a dividend without approval of the FRB, unless the dividend to be declared by the Bank's Board of Directors does not exceed the total of: (i) the Bank's net profits for the current year to date, plus (ii) its retained net profits for the preceding two years, less any required transfers to surplus.
Under Pennsylvania law, the Bank may only declare and pay dividends from its accumulated net earnings. In addition, the Bank may not declare and pay dividends from the surplus funds that Pennsylvania law requires that it maintain. Under these policies and subject to the restrictions applicable to the Bank, the Bank could have declared, during 2017, without prior regulatory approval, aggregate dividends of approximately $13.9 million, plus net profits earned to the date of such dividend declaration.
BANK SECRECY ACT
Under the Bank Secrecy Act (BSA), banks and other financial institutions are required to retain records to assure that the details of financial transactions can be traced if investigators need to do so. Banks are also required to report most cash transactions in amounts exceeding $10,000 made by or on behalf of their customers. Failure to meet BSA requirements may expose the Bank to statutory penalties, and a negative compliance record may affect the willingness of regulating authorities to approve certain actions by the Bank requiring regulatory approval, including acquisition and opening new branches.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund (DIF) of the FDIC. Under the FDIC's risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution's assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations.
As required by the Dodd-Frank Act, the FDIC has issued final rules implementing changes to the assessment rules. The rules change the assessment base used for calculating deposit insurance assessments from deposits to total assets less tangible (Tier 1) capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base. The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for funding, and shift more of the burden for supporting the insurance fund to larger institutions, which are thought to have greater access to nondeposit funding. No institution may pay a dividend if it is in default of its assessments. As a result of the Dodd-Frank Act, deposit insurance per account owner is $250,000 for all types of accounts.
The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The FDIC has recently exercised that discretion by establishing a long range fund ratio of 2%.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
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Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
Under FRB regulations, the Bank is required to maintain reserves against its transaction accounts (primarily NOW and regular checking accounts). For 2018, the Bank is required to maintain average daily reserves equal to 3% on aggregate transaction accounts of up to and including $122.3 million, plus 10% on the remainder, and the first $16.0 million of otherwise reservable balances will be exempt. These reserve requirements are subject to annual adjustment by the FRB. The Bank is in compliance with the foregoing requirements.
PROHIBITIONS AGAINST TYING ARRANGEMENTS
State-chartered banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
OTHER REGULATIONS
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank's operations are also subject to federal and state laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Truth in Savings Act; and
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Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such laws.
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The Bank's operations also are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services;
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Check Clearing for the 21st Century Act (also known as "Check 21"), which gives "substitute checks," such as digital check images and copies made from that image, the same legal standing as the original paper check;
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The USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution's privacy policy and provide such customers the opportunity to "opt out" of the sharing of certain personal financial information with unaffiliated third parties.
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HOLDING COMPANY REGULATION
The Company, as a bank holding company, is subject to examination, supervision, regulation, and periodic reporting under the BHCA, as administered by the FRB. The Company is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval is also required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.
A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in nonbanking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association.
A bank holding company that meets specified conditions, including that its depository institutions subsidiaries are "well capitalized" and "well managed," can opt to become a "financial holding company." A "financial holding company" may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. The Company does not anticipate opting for "financial holding company" status at this time.
The Company is subject to the FRB's consolidated capital adequacy guidelines for bank holding companies. Traditionally, those guidelines have been structured similarly to the regulatory capital requirements for the subsidiary depository institutions, but were somewhat more lenient. For example, the holding company capital requirements allowed inclusion of certain instruments in Tier 1 capital that are not includable at the institution level. As previously noted, the Dodd-Frank Act requires that the guidelines be amended so that they are at least as stringent as those required for the subsidiary depository institutions. See "—The Dodd-Frank Act."
A bank holding company is generally required to give the FRB prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company's consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. The FRB has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions.
The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB's policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization's capital needs, asset quality and overall financial condition. The FRB's policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
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The Federal Deposit Insurance Act makes depository institutions liable to the Federal Deposit Insurance Corporation for losses suffered or anticipated by the insurance fund in connection with the default of a commonly controlled depository institution or any assistance provided by the Federal Deposit Insurance Corporation to such an institution in danger of default. That law would have potential applicability if the Company ever held as a separate subsidiary a depository institution in addition to the Bank.
The status of the Company as a registered bank holding company under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
ACQUISITION OF THE HOLDING COMPANY
Under the Change in Bank Control Act (the "CIBCA"), a federal statute, a notice must be submitted to the FRB if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company's shares of outstanding common stock, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the CIBCA, the FRB generally has 60 days within which to act on such notices, taking into consideration certain factors, including the financial and managerial resources of the acquirer, the convenience and needs of the communities served by the Company and the Bank, and the anti-trust effects of the acquisition. Under the BHCA, any company would be required to obtain prior approval from the FRB before it may obtain "control" of the Company within the meaning of the BHCA. Control generally is defined to mean the ownership or power to vote 25% or more of any class of voting securities of the Company or the ability to control in any manner the election of a majority of the Company's directors. An existing bank holding company would be required to obtain the FRB's prior approval under the BHCA before acquiring more than 5% of the Company's voting stock.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings and growth of the banking industry are affected by the credit policies of monetary authorities, including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market activities in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These operations are used in varying combinations to influence overall economic growth and indirectly, bank loans, securities, and deposits. These variables may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.
In view of the changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities including the Federal Reserve System, no prediction can be made as to possible changes in interest rates, deposit levels, loan demand or their effect on the business and earnings of the Company and the Bank. Additional information is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in this Annual Report on Form 10-K.
ITEM 1A – RISK FACTORS.
Changing interest rates may decrease our earnings and asset values.
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Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the asset yields catch up. Changes in the slope of the "yield curve"—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.
Changes in interest rates also affect the value of the Bank's interest-earning assets, and in particular the Bank's securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of shareholder equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders' equity.
Activities related to the drilling for natural gas in the in the Marcellus and Utica Shale formations impacts certain customers of the Bank.
Our north central Pennsylvania market area is predominately centered in the Marcellus and Utica Shale natural gas exploration and drilling area, and as a result, the economy in north central Pennsylvania is influenced by the natural gas industry. Loan demand, deposit levels and the market value of local real estate are impacted by this activity. While the Company does not lend to the various entities directly engaged in exploration, drilling or production activities, many of our customers provide transportation and other services and products that support natural gas exploration and production activities. Therefore, our customers are impacted by changes in the market price for natural gas, as a significant downturn in this industry could impact the ability of our borrowers to repay their loans in accordance with their terms. Additionally, exploration and drilling activities may be affected by federal, state and local laws and regulations such as restrictions on production, permitting, changes in taxes and environmental protection. Regulatory and market pricing of natural gas could also impact and/or reduce demand for loans and deposit levels or loan collateral values. These factors could have a material adverse effect on our business, prospects, financial condition and results of operations.
Higher loan losses could require us to increase our allowance for loan losses through a charge to earnings.
When we loan money we incur the risk that our borrowers do not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. A decline in the national economy and the local economies of the areas in which the loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. In addition, bank regulators may require us to make a provision for loan losses or otherwise recognize further loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures, and our loan loss allowance. Any increase in our allowance for loan losses or loan charge-offs as required by such regulatory authorities could have a material adverse effect on our financial condition and results of operations.
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Our allowance for loan losses amounted to $11.2 million, or 1.12% of total loans outstanding and 104.3% of nonperforming loans, at December 31, 2017. Our allowance for loan losses at December 31, 2017 may not be sufficient to cover future loan losses. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would decrease our earnings. In addition, at December 31, 2017 we had a total of 39 loan relationships with outstanding balances that exceeded $3.0 million, 38 of which were performing according to their original terms. However, the deterioration of one or more of these loans could result in a significant increase in our nonperforming loans and our provision for loan losses, which would negatively impact our results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management's current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The implementation of this standard may result in significant changes to the balance in the allowance for loan losses and may results in significant costs being expended to implement.
Our emphasis on commercial real estate, agricultural real estate, construction and municipal lending may expose us to increased lending risks.
At December 31, 2017, we had $308.1 million in loans secured by commercial real estate, $240.0 million in agricultural real estate loans, $13.5 million in construction loans and $104.7 million in municipal loans. Commercial real estate loans, agricultural real estate, construction and municipal loans represented 30.8%, 24.0%, 1.3% and 10.5%, respectively, of our loan portfolio. At December 31, 2017, we had $7.8 million of reserves specifically allocated to these loan types. While commercial real estate, agricultural real estate, construction and municipal loans are generally more interest rate sensitive and carry higher yields than do residential mortgage loans, these types of loans generally expose a lender to greater risk of non-payment and loss than single-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers and, for construction loans, the accuracy of the estimate of the property's value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to single-family residential mortgage loans. We monitor loan concentrations on an individual relationship and industry wide basis to monitor the amount of risk we have in our loan portfolio.
Agricultural loans are dependent for repayment on the successful operation and management of the farm property, the health of the agricultural industry broadly, and on the location of the borrower in particular, and other factors outside of the borrower's control.
At December 31, 2017, our agricultural loans, consisting primarily of agricultural real estate loans and other agricultural loans were $277.8 million representing 27.8% of our total loan portfolio. The primary activities of our agricultural customers include dairy and beef farms, poultry and swine operations, crops and support businesses. Agricultural markets are highly sensitive to real and perceived changes in the supply and demand of agricultural products. Weaker prices, could reduce the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land, animals and equipment that serves as collateral for certain of our loans. At December 31, 2017, the Company had a loan concentration to the dairy industry as loans to this industry totaled $137,502,000, or 13.7% of total loans.
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Our agricultural loans are dependent on the profitable operation and management of the farm property securing the loan and its cash flows. The success of a farm property may be affected by many factors outside the control of the borrower, including:
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adverse weather conditions (such as hail, drought and floods), restrictions on water supply or other conditions that prevent the planting of a crop or limit crop yields;
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loss of crops or livestock due to disease or other factors;
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declines in the market prices or demand for agricultural products (both domestically and internationally), for any reason;
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increases in production costs (such as the costs of labor, rent, feed, fuel and fertilizer);
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the impact of government policies and regulations (including changes in price supports, subsidies, government-sponsored crop insurance, minimum ethanol content requirements for gasoline, tariffs, trade barriers and health and environmental regulations);
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access to technology and the successful implementation of production technologies; and
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changes in the general economy that could affect the availability of off-farm sources of income and prices of real estate for borrowers.
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Lower prices for agricultural products may cause farm revenues to decline and farm operators may be unable to reduce expenses as quickly as their revenues decline. In addition, many farms are dependent on a limited number of key individuals whose injury or death could significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower's ability to repay the loan may be impaired. Consequently, agricultural loans may involve a greater degree of risk than residential mortgage lending, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment (some of which is highly specialized with a limited or no market for resale) or perishable assets such as livestock or crops. In such cases, any repossessed collateral for a defaulted agricultural operating loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the collateral exceeds the eventual realization value.
Loan participations comprise a significant portion of our loan portfolio and a decline in loan participation volume could hurt profits and slow loan growth.
We have actively engaged in loan participations whereby we are invited to participate in loans, primarily commercial real estate and municipal loans, originated by another financial institution known as the lead lender. We have participated with other financial institutions in both our primary markets and out of market areas. Loan participations totaled $84.7 million, $86.7 million and $86.3 million at December 31, 2017, 2016 and 2015, respectively. As a percent of total loans, participation purchased loans were 8.5%, 10.8% and 12.4% as of December 31, 2017, 2016 and 2015. Our profits and loan growth could be significantly and adversely affected if the volume of loan participations would materially decrease, whether because loan demand declines, loan payoffs, lead lenders may come to perceive us as a potential competitor in their respective market areas, or otherwise.
If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.
We review our investment securities portfolio monthly and at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings. As of December 31, 2017, our investment portfolio included available for sale investment securities with an amortized cost of $255.1 million and a fair value of $254.9 million, which included unrealized losses on 122 securities totaling $1,288,000. Changes in the expected cash flows of these securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down these securities to their fair value. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.
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Our profits, asset values and liquidity could be hurt if the Pennsylvania state legislature and governor fail to pass a state budget.
The Company makes loans to, invests in securities issued by, and maintains deposit accounts of Pennsylvania municipalities, primarily school districts. If a budget impasse occurs, we may incur losses on loans granted to municipalities as well as incur losses, including impairment losses as a result of credit rating downgrades or otherwise, on municipal securities in which we invest. A budget impasse may also reduce municipal funds on deposit with the Company, which could hurt our liquidity and our earnings if we would have to resort to higher cost funding sources to meet our liquidity needs.
Income from secondary mortgage market operations is volatile, and we may incur losses or charges with respect to our secondary mortgage market operations which would negatively affect our earnings.
We generally sell in the secondary market the longer term fixed-rate residential mortgage loans that we originate, earning non-interest income in the form of gains on sale. When interest rates rise, the demand for mortgage loans tends to fall and may reduce the number of loans available for sale. In addition to interest rate levels, weak or deteriorating economic conditions also tend to reduce loan demand. Although we sell loans in the secondary market without recourse, we are required to give customary representations and warranties to the buyers. If we breach those representations and warranties, the buyers can require us to repurchase the loans and we may incur a loss on the repurchase. Because we generally retain the servicing rights on the loans we sell in the secondary market, we are required to record a mortgage servicing right asset, which we test annually for impairment. The value of mortgage servicing rights tends to increase with rising interest rates and to decrease with falling interest rates. If we are required to take an impairment charge on our mortgage servicing rights our earnings would be adversely affected.
As a result of the acquisition of FNB, the Bank acquired a portfolio of loans sold to the FHLB, which were sold under the Mortgage Partnership Finance Program ("MPF"). The Bank is no longer an active participant in the MPF program. The MPF portfolio balance was $28,329,000 at December 31, 2017. The FHLB maintains a first-loss position for the MPF portfolio that totals $123,000. Should the FHLB exhaust its first-loss position, recourse to the Bank's credit enhancement would be up to the next $980,000 of losses. The Bank has not experienced any losses for the MPF portfolio.
The Company's financial condition and results of operations are dependent on the economy in the Bank's market area.
The Bank's primary market area consists of the Pennsylvania Counties of Bradford, Clinton, Potter, and Tioga in north central Pennsylvania, Lebanon, Schuylkill, Berks and Lancaster in south central, Pennsylvania and Allegany, Steuben, Chemung and Tioga Counties in southern New York. With the acquisition of the State College branch in December 2017, we consider Centre County to be a primary market going forward. As of December 31, 2017, management estimates that approximately 90.1% of deposits and 64.5% of loans came from households whose primary address is located in the Bank's primary market areas. Because of the Bank's concentration of business activities in its market area, the Company's financial condition and results of operations depend upon economic conditions in its market areas. Adverse economic conditions in our market areas could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates and short money supply and other factors beyond our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the States of Pennsylvania and New York could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.
A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.
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Although the U.S. economy is not currently in a recession, economic growth has been uneven, and while the unemployment rate has decreased, the percentage of people out of the workforce remains elevated. A return to prolonged deteriorating economic conditions and/or negative developments in the domestic and international credit markets could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.
We may fail to realize all of the anticipated benefits of entering new markets.
With the FNB acquisition in 2015, the hiring of additional agricultural lending teams in 2016 and the State College branch acquisition in 2017, the Company entered into new banking market areas. The success of entering these new markets will depend upon, in part, the Company's ability to realize the anticipated benefits and cost savings from combining the businesses of the Company and the acquisition, as well as organically growing loans and deposits. To realize these anticipated benefits and cost savings, the businesses and individuals must be successfully combined and operated. If the Company is not able to achieve these objectives, the anticipated benefits, including growth and cost savings related to the combined businesses, may not be realized at all or may take longer to realize than expected. If the Company fails to realize the anticipated benefits of the acquisition and the new employee hiring's, the Company's results of operations could be adversely affected.
Regulation of the financial services industry is undergoing major changes, and future legislation could increase our cost of doing business or harm our competitive position.
We are subject to extensive regulation, supervision and examination by the FRB and the PDB, our primary regulators, and by the FDIC, as insurer of our deposits. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our profitability and operations. Future legislative changes could require changes to business practices or force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a banking agency was to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin "unsafe or unsound" practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the composition of our assets or liabilities, to assess civil monetary penalties against us and/or our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.
Strong competition within the Bank's market areas could hurt profits and slow growth.
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The Bank faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for the Bank to make new loans and at times has forced the Bank to offer higher deposit rates. Price competition for loans and deposits might result in the Bank earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to increase the volume of our loan and deposit portfolios. As of June 30, 2017, which is the most recent date for which information is available, we held 35.7% of the FDIC insured deposits in Bradford, Potter and Tioga Counties, Pennsylvania, which was the largest share of deposits out of eight financial institutions with offices in the area, and 6.2% of the FDIC insured deposits in Allegany County, New York, which was the fourth largest share of deposits out of five financial institutions with offices in this area. As of June 30, 2017, we held 7.1% of the deposits in Lebanon County, Pennsylvania, which was the fifth largest share out of the 12 financial institutions with offices in the County. This data does not include deposits held by credit unions. Competition also makes it more difficult to hire and retain experienced employees. Some of the institutions with which the Bank competes have substantially greater resources and lending limits than the Bank has and may offer services that the Bank does not provide. Management expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Bank's profitability depends upon its continued ability to compete successfully in its market area.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial and agricultural loan officers. The unexpected loss of services of any key management personnel or commercial and agricultural loan officers could have an adverse effect on our business and financial condition because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.
Our ability to pay dividends is limited by law.
Our ability to pay dividends to our shareholders largely depends on our receipt of dividends from the Bank. The amount of dividends that the Bank may pay to us is limited by federal and state laws and regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business.
Federal and state banking laws, our articles of incorporation and our by-laws may have an anti-takeover effect.
Federal law imposes restrictions, including regulatory approval requirements, on persons seeking to acquire control over us. Pennsylvania law also has provisions that may have an anti-takeover effect. These provisions may serve to entrench management or discourage a takeover attempt that shareholders consider to be in their best interest or in which they would receive a substantial premium over the current market price.
We are subject to certain risks in connection with our use of technology.
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Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits, our loans, and to deliver on-line and electronic banking services. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber attacks that could have a security impact.
In addition, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our confidential or other information or the confidential or other information of our customers, clients, or counterparties. If one or more of such events were to occur, the confidential and other information processed and stored in, and transmitted through, our computer systems and networks could potentially be jeopardized, or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers, clients, or counterparties. This could cause us significant reputational damage or result in our experiencing significant losses from fraud or otherwise.
Furthermore, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. Also, we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance we maintain.
We routinely transmit and receive personal, confidential, and proprietary information by e-mail and other electronic means. We have discussed and worked with our customers, clients, and counterparties to develop secure transmission capabilities, but we do not have, and may be unable to put in place, secure capabilities with all of these constituents, and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of such information. Any interception, misuse, or mishandling of personal, confidential, or proprietary information being sent to or received from a customer, client, or counterparty could result in legal liability, regulatory action, and reputational harm, and could have a significant adverse effect on our competitive position, financial condition, and results of operations.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
We have implemented a risk management framework to manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies which involve management assumptions and judgment. There is no assurance that our risk management framework will be effective under all circumstances or that it will adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of operations or prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
Impairment of goodwill could require charges to earnings, which could result in a negative impact on our results of operations.
Our goodwill could become impaired in the future. If goodwill were to become impaired, it could limit the ability of the Bank to pay dividends to the Company, adversely impacting the Company's liquidity and ability to pay dividends. The most significant assumptions affecting our goodwill impairment evaluation are variables including the market price of our Common Stock, projections of earnings, and the control premium above our current stock price that an acquirer would pay to obtain control of us. We are required to test goodwill for impairment at least annually or when impairment indicators are present. If an impairment determination is made in a future reporting period, our earnings and book value of goodwill will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our Common Stock, or our regulatory capital levels, but such an impairment loss could significantly reduce the Bank's earnings and thereby restrict the Bank's ability to make dividend payments to us without prior regulatory approval, because Federal Reserve policy states the bank holding company dividends should be paid from current earnings. At December 31, 2017, the book value of our goodwill was $23.3 million, all of which was recorded at the Bank.
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ITEM 1B – UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2 – PROPERTIES.
The headquarters of the Company and Bank are located at 15 South Main Street, Mansfield, Pennsylvania. The building contains the central offices of the Company and Bank. Our bank owns twenty two banking facilities and leases seven other facilities. All buildings owned by the Bank are free of any liens or encumbrances.
The net book value of owned banking facilities and leasehold improvements totaled $15,603,000 as of December 31, 2017. The properties are adequate to meet the needs of the employees and customers. We have equipped all of our facilities with current technological improvements for data processing.
ITEM 3 - LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company's financial condition or results of operations.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
17
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's stock is not listed on any stock exchange, but it is quoted on the OTC Pink Market under the trading symbol CZFS. Prices presented in the table below are bid prices between broker-dealers published by the OTC Pink Market and the Pink Sheets Electronic Quotation Service. The prices do not include retail markups or markdowns or any commission to the broker-dealer. The bid prices do not necessarily reflect prices in actual transactions. For 2017 and 2016, cash dividends were declared on a quarterly basis and are summarized in the table below:
|
Dividends
|
Dividends
|
|||||||||||||||||||||||
|
|
2017
|
declared
|
2016
|
declared
|
||||||||||||||||||||
|
High
|
Low
|
per share
|
High
|
Low
|
per share
|
|||||||||||||||||||
|
First quarter
|
$
|
50.29
|
$
|
48.29
|
$
|
0.425
|
$
|
48.51
|
$
|
46.78
|
$
|
0.415
|
||||||||||||
|
Second quarter
|
53.50
|
50.10
|
0.425
|
48.50
|
46.53
|
0.415
|
||||||||||||||||||
|
Third quarter
|
57.00
|
52.65
|
0.430
|
52.00
|
47.25
|
0.420
|
||||||||||||||||||
|
Fourth quarter
|
62.51
|
57.05
|
0.430
|
51.75
|
49.50
|
0.420
|
||||||||||||||||||
The Company has paid dividends since April 30, 1984, the effective date of our formation as a bank holding company. The Company's Board of Directors expects that comparable cash dividends will continue to be paid by the Company in the future; however, future dividends necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors in existence at the time the Board of Directors considers a dividend distribution. Cash available for dividend distributions to stockholders of the Company comes primarily from dividends paid to the Company by the Bank. Therefore, restrictions on the ability of the Bank to make dividend payments are directly applicable to the Company. Under the Pennsylvania Business Corporation Law of 1988, the Company may pay dividends only if, after payment, the Company would be able to pay debts as they become due in the usual course of our business and total assets will be greater than the sum of total liabilities. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions. Also see "Supervision and Regulation – Regulatory Restrictions on Bank Dividends," "Supervision and Regulation – Holding Company Regulation," and "Note 14 – Regulatory Matters" to the consolidated financial statements.
As of February 26, 2018, the Company had approximately 1,766 stockholders of record. The computation of stockholders of record excludes investors whose shares were held for them by a bank or broker at that date. The following table presents information regarding the Company's stock repurchases during the three months ended December 31, 2017:
|
Period
|
Total Number of
Shares (or units
Purchased)
|
Average Price
Paid per Share
(or Unit)
|
Total Number of Shares (or
Units) Purchased as Part of
Publicly Announced Plans of Programs
|
Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
|
||||||||||||
|
10/1/17 to 10/31/17
|
-
|
$
|
0.00
|
-
|
94,976
|
|||||||||||
|
11/1/17 to 11/30/17
|
451
|
$
|
59.37
|
451
|
94,525
|
|||||||||||
|
12/1/17 to 12/31/17
|
5,086
|
$
|
60.27
|
5,086
|
89,439
|
|||||||||||
|
Total
|
5,537
|
$
|
60.20
|
5,537
|
89,439
|
|||||||||||
|
(1)
|
On October 20, 2015, the Company announced that the Board of Directors authorized the Company to repurchase up to an additional 150,000 shares. The repurchases will be conducted through open-market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors. No time limit was placed on the duration of the share repurchase program. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.
|
18
Set forth below is a line graph comparing the yearly dollar changes in the cumulative shareholder return on the Company's common stock against the cumulative total return of the S&P 500 Stock index, SNL Mid-Atlantic Bank Index, SNL Bank $1 Billion to $5 Billion index and SNL Bank $500 Million to $1 Billion index for the period of seven fiscal years assuming the investment of $100.00 on December 31, 2010 and assuming the reinvestment of dividends. The $1 Billion to $5 Billion index was added to the chart in 2015 due to the Company exceeding $1.0 billion in assets in December of 2015 as a result of the FNB acquisition. The shareholder return shown on the graph below is not necessarily indicative of future performance and was obtained from SNL Financial LC, Charlottesville, VA.
|
|
Period Ended
|
|||||||
|
Index
|
12/31/10
|
12/31/11
|
12/31/12
|
12/31/13
|
12/31/14
|
12/31/15
|
12/31/16
|
12/31/17
|
|
Citizens Financial Services, Inc.
|
100
|
97.16
|
127.15
|
171.89
|
179.56
|
169.90
|
191.94
|
245.23
|
|
S&P 500
|
100
|
102.11
|
118.45
|
156.82
|
178.28
|
180.75
|
202.37
|
246.55
|
|
SNL Mid-Atlantic Bank
|
100
|
75.13
|
100.64
|
135.65
|
147.79
|
153.33
|
194.89
|
238.86
|
|
SNL Bank $1B-$5B
|
100
|
91.2
|
112.45
|
163.52
|
170.98
|
191.39
|
275.35
|
293.55
|
|
SNL Bank $500M-$1B
|
100
|
87.98
|
112.79
|
146.26
|
160.46
|
181.11
|
244.54
|
298.34
|
19
ITEM 6 - SELECTED FINANCIAL DATA.
The following table sets forth certain financial data as of and for each of the years in the five year period ended December 31, 2017:
|
(in thousands, except per share data)
|
2017
|
2016
|
2015
|
2014
|
2013
|
|||||||||||||||
|
Interest and dividend income
|
$
|
48,093
|
$
|
43,005
|
$
|
35,653
|
$
|
35,291
|
$
|
36,234
|
||||||||||
|
Interest expense
|
5,839
|
5,041
|
4,820
|
4,953
|
6,315
|
|||||||||||||||
|
Net interest income
|
42,254
|
37,964
|
30,833
|
30,338
|
29,919
|
|||||||||||||||
|
Provision for loan losses
|
2,540
|
1,520
|
480
|
585
|
405
|
|||||||||||||||
|
Net interest income after provision
|
||||||||||||||||||||
|
for loan losses
|
39,714
|
36,444
|
30,353
|
29,753
|
29,514
|
|||||||||||||||
|
Non-interest income
|
7,621
|
7,644
|
6,994
|
6,740
|
6,982
|
|||||||||||||||
|
Investment securities gains (losses), net
|
1,035
|
255
|
429
|
616
|
441
|
|||||||||||||||
|
Non-interest expenses
|
29,314
|
28,671
|
23,429
|
20,165
|
19,810
|
|||||||||||||||
|
Income before provision for income taxes
|
19,056
|
15,672
|
14,347
|
16,944
|
17,127
|
|||||||||||||||
|
Provision for income taxes
|
6,031
|
3,034
|
2,721
|
3,559
|
3,752
|
|||||||||||||||
|
Net income
|
$
|
13,025
|
$
|
12,638
|
$
|
11,626
|
$
|
13,385
|
$
|
13,375
|
||||||||||
|
|
||||||||||||||||||||
|
Per share data:
|
||||||||||||||||||||
|
Net income - Basic (1)
|
$
|
3.74
|
$
|
3.60
|
$
|
3.60
|
$
|
4.14
|
$
|
4.11
|
||||||||||
|
Net income - Diluted (1)
|
3.74
|
3.60
|
3.60
|
4.13
|
4.11
|
|||||||||||||||
|
Cash dividends declared (1)
|
1.67
|
1.58
|
1.63
|
2.04
|
1.14
|
|||||||||||||||
|
Stock dividend
|
5
|
%
|
1
|
%
|
0
|
%
|
1
|
%
|
5
|
%
|
||||||||||
|
Book value (1) (2)
|
37.81
|
35.77
|
33.95
|
30.82
|
28.76
|
|||||||||||||||
|
|
||||||||||||||||||||
|
End of Period Balances:
|
||||||||||||||||||||
|
Total assets
|
$
|
1,361,886
|
$
|
1,223,018
|
$
|
1,162,984
|
$
|
925,048
|
$
|
914,934
|
||||||||||
|
Total investments
|
254,782
|
314,017
|
359,737
|
306,146
|
317,301
|
|||||||||||||||
|
Loans
|
1,000,525
|
799,611
|
695,031
|
554,105
|
540,612
|
|||||||||||||||
|
Allowance for loan losses
|
11,190
|
8,886
|
7,106
|
6,815
|
7,098
|
|||||||||||||||
|
Total deposits
|
1,104,943
|
1,005,503
|
988,031
|
773,933
|
748,316
|
|||||||||||||||
|
Total borrowed funds
|
114,664
|
79,662
|
41,631
|
41,799
|
66,932
|
|||||||||||||||
|
Stockholders' equity
|
129,011
|
123,268
|
119,760
|
100,528
|
92,056
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Key Ratios:
|
||||||||||||||||||||
|
Return on assets (net income to average total assets)
|
1.03
|
%
|
1.06
|
%
|
1.22
|
%
|
1.48
|
%
|
1.51
|
%
|
||||||||||
|
Return on equity (net income to average total equity)
|
10.04
|
%
|
10.24
|
%
|
11.20
|
%
|
13.73
|
%
|
14.89
|
%
|
||||||||||
|
Equity to asset ratio (average equity to average total assets,
|
||||||||||||||||||||
|
excluding other comprehensive income)
|
10.31
|
%
|
10.35
|
%
|
10.91
|
%
|
10.74
|
%
|
10.13
|
%
|
||||||||||
|
Net interest margin
|
3.80
|
%
|
3.68
|
%
|
3.76
|
%
|
3.84
|
%
|
3.87
|
%
|
||||||||||
|
Efficiency (3)
|
54.82
|
%
|
57.97
|
%
|
54.50
|
%
|
48.61
|
%
|
48.12
|
%
|
||||||||||
|
Dividend payout ratio (dividends declared divided by net income)
|
44.97
|
%
|
44.12
|
%
|
46.00
|
%
|
49.32
|
%
|
27.63
|
%
|
||||||||||
|
Tier 1 leverage
|
9.18
|
%
|
9.46
|
%
|
11.01
|
%
|
10.99
|
%
|
10.42
|
%
|
||||||||||
|
Common equity risk based capital
|
11.27
|
%
|
12.89
|
%
|
14.14
|
%
|
N/A
|
N/A
|
||||||||||||
|
Tier 1 risk-based capital
|
12.04
|
%
|
13.81
|
%
|
15.20
|
%
|
17.30
|
%
|
16.44
|
%
|
||||||||||
|
Total risk-based capital
|
13.21
|
%
|
14.93
|
%
|
16.23
|
%
|
18.55
|
%
|
17.75
|
%
|
||||||||||
|
Nonperforming assets/total loans
|
1.18
|
%
|
1.61
|
%
|
1.22
|
%
|
1.67
|
%
|
1.88
|
%
|
||||||||||
|
Nonperforming loans/total loans
|
1.07
|
%
|
1.48
|
%
|
1.03
|
%
|
1.34
|
%
|
1.63
|
%
|
||||||||||
|
Allowance for loan losses/total loans
|
1.12
|
%
|
1.11
|
%
|
1.02
|
%
|
1.23
|
%
|
1.31
|
%
|
||||||||||
|
Net charge-offs (recoveries)/average loans
|
0.03
|
%
|
(0.04
|
%)
|
0.03
|
%
|
0.16
|
%
|
0.02
|
%
|
||||||||||
|
|
||||||||||||||||||||
|
(1) Amounts were adjusted to reflect stock dividends.
|
||||||||||||||||||||
|
(2) Calculation excludes accumulated other comprehensive income.
|
||||||||||||||||||||
|
(3) Bank expenses to tax adjusted net interest income and non-interest income excluding security gains
|
||||||||||||||||||||
20
ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT
We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of the Company, the Bank, First Citizens Insurance Agency, Inc. or the Company on a consolidated basis. When we use words such as "believes," "expects," "anticipates," or similar expressions, we are making forward-looking statements. Forward-looking statements may prove inaccurate. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements:
| · |
Interest rates could change more rapidly or more significantly than we expect.
|
| · |
The economy could change significantly in an unexpected way, which would cause the demand for new loans and the ability of borrowers to repay outstanding loans to change in ways that our models do not anticipate.
|
| · |
The financial markets could suffer a significant disruption, which may have a negative effect on our financial condition and that of our borrowers, and on our ability to raise money by issuing new securities.
|
| · |
It could take us longer than we anticipate implementing strategic initiatives, including expansions, designed to increase revenues or manage expenses, or we may be unable to implement those initiatives at all.
|
| · |
Acquisitions and dispositions of assets could affect us in ways that management has not anticipated.
|
| · |
We may become subject to new legal obligations or the resolution of litigation may have a negative effect on our financial condition or operating results.
|
| · |
We may become subject to new and unanticipated accounting, tax, regulatory or compliance practices or requirements. Failure to comply with any one or more of these requirements could have an adverse effect on our operations.
|
| · |
We could experience greater loan delinquencies than anticipated, adversely affecting our earnings and financial condition.
|
· We could experience greater losses than expected due to the ever increasing volume of information theft and fraudulent scams impacting our customers and the banking industry.
| · |
We could lose the services of some or all of our key personnel, which would negatively impact our business because of their business development skills, financial expertise, lending experience, technical expertise and market area knowledge.
|
| · |
The agricultural economy is subject to extreme swings in both the costs of resources and the prices received from the sale of products, which could negatively impact our customers.
|
| · |
Loan concentrations in certain industries could negatively impact our results, if financial results or economic conditions deteriorate.
|
| · |
A budget impasse in the Commonwealth of Pennsylvania could impact our asset values, liquidity and profitability as a result of either delayed or reduced funding to school districts and municipalities who are customers of the bank.
|
| · |
Companies providing support services related to the exploration and drilling of the natural gas reserves in our market area may be affected by federal, state and local laws and regulations such as restrictions on production, permitting, changes in taxes and environmental protection, which could negatively impact our customers and, as a result, negatively impact our loan and deposit volume and loan quality. Additionally, the activities the companies providing support services related to the exploration and drilling of the natural gas reserves may be dependent on the market price of natural gas. As a result, decreases in the market price of natural gas could also negatively impact these companies, our customers.
|
Additional factors are discussed in this Annual Report on Form 10-K under "Item 1A. Risk Factors." These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.
21
INTRODUCTION
The following is management's discussion and analysis of the significant changes in financial condition, the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for the Company. The Company's consolidated financial condition and results of operations consist almost entirely of the Bank's financial condition and results of operations. Management's discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes. Except as noted, tabular information is presented in thousands of dollars.
The Company currently engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Potter and Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill and Lancaster counties in south central Pennsylvania and Allegany county in southern New York. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural customers in the central Pennsylvania market. We maintain our main office in Mansfield, Pennsylvania. Presently we operate 29 banking facilities, 28 of which operate as bank branches. In Pennsylvania, the Company has full service offices located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy, State College and three branches near the city of Lebanon, Pennsylvania. We also have limited branch offices in Winfield and Narvon, Pennsylvania. In New York, our office is in Wellsville.
Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, liquidity, reputational and regulatory risk.
Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk results from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company. The Company uses its asset/liability and funds management policies to control and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from loans with customers and the purchasing of securities. The Company's primary credit risk is in the loan portfolio. The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for loan losses. Also, the investment policy limits the amount of credit risk that may be taken in the investment portfolio.
Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Company has established guidelines within its asset/liability and funds management policy to manage liquidity risk. These guidelines include, among other things, contingent funding alternatives.
Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion, could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information, which could include identify theft, or theft of customer information through third parties. We expend significant resources to comply with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers, and adversely impact our earnings and liquidity.
Regulatory risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company and its subsidiary. We cannot predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.
22
Readers should carefully review the risk factors described in other documents our Company files with the SEC, including the annual reports on Form 10-K, the quarterly reports on Form 10-Q and any current reports on Form 8-K filed by us.
TRUST AND INVESTMENT SERVICES; OIL AND GAS SERVICES
Our Investment and Trust Division is committed to helping our customers meet their financial goals. The Trust Division offers professional trust administration, investment management services, estate planning and administration, custody of securities and individual retirement accounts. Assets held by the Bank in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Bank. As of December 31, 2017 and 2016, assets owned and invested by customers of the Bank through the Bank's investment representatives totaled $156.0 million and $137.4 million, respectively. Additionally, as summarized in the table below, the Trust Department had assets under management as of December 31, 2017 and 2016 of $122.7 million and $110.6 million, respectively. The increase in assets under management is due to due to new accounts and contributions of $7.5 million, accounts closings and distributions of $7.2 million and changes in market value and income of $11.8 million.
|
(market values - in thousands)
|
2017
|
2016
|
||||||
|
INVESTMENTS:
|
||||||||
|
Bonds
|
$
|
18,672
|
$
|
17,871
|
||||
|
Stock
|
18,957
|
18,860
|
||||||
|
Savings and Money Market Funds
|
13,076
|
10,697
|
||||||
|
Mutual Funds
|
67,027
|
59,306
|
||||||
|
Mineral interests
|
3,885
|
2,598
|
||||||
|
Mortgages
|
343
|
456
|
||||||
|
Real Estate
|
513
|
613
|
||||||
|
Miscellaneous
|
238
|
170
|
||||||
|
Cash
|
9
|
-
|
||||||
|
TOTAL
|
$
|
122,720
|
$
|
110,571
|
||||
|
ACCOUNTS:
|
||||||||
|
Trusts
|
28,714
|
26,597
|
||||||
|
Guardianships
|
748
|
1,846
|
||||||
|
Employee Benefits
|
57,035
|
48,692
|
||||||
|
Investment Management
|
36,221
|
33,434
|
||||||
|
Custodial
|
2
|
2
|
||||||
|
TOTAL
|
$
|
122,720
|
$
|
110,571
|
||||
Our financial consultants offer full service brokerage and financial planning services throughout the Bank's market areas. Appointments can be made at any Bank branch. Products such as mutual funds, annuities, health and life insurance are made through our insurance subsidiary, First Citizens Insurance Agency, Inc.
In addition to traditional trust and investment services offered, we assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. As of December 31, 2017, customers owning 7,012 acres have signed agreements with the Bank that provide for the Bank to manage oil and gas matters related to the customers land, which may include negotiating lease payments and royalty percentages, resolving leasing issues, accounting for and ensuring the accuracy of royalty checks, distributing revenue to satisfy investment objectives and providing customized reports outlining payment and distribution information.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 2017 was $13,025,000, which represents an increase of $387,000, or 3.1%, when compared to the 2016 related period. Net income for the year ended December 31, 2016 was $12,638,000, which represents an increase of $1,012,000, or 8.7%, when compared to the 2015 related period. Basic and diluted earnings per share were $3.74, $3.60, and $3.60 for the years ended 2017, 2016 and 2015, respectively.
23
Net income is influenced by five key components: net interest income, provision for loan losses, non-interest income, non-interest expenses, and the provision for income taxes.
Net Interest Income
The most significant source of revenue is net interest income; the amount of interest earned on interest-earning assets exceeding interest paid on interest-bearing liabilities. Factors that influence net interest income are changes in volume of interest-earning assets and interest-bearing liabilities as well as changes in the associated interest rates.
The following table sets forth our Company's average balances of, and the interest earned or incurred on, each principal category of assets, liabilities and stockholders' equity, the related rates, net interest income and rate "spread" created. It should be noted that average balances and rates for 2017 were slightly impacted by the acquisition of the State College branch, which closed on December 8, 2017. The average balances and rates for 2016 were impacted by the acquisition of FNB, which closed on December 11, 2015. The FNB acquisition had a small impact on average balances for 2015:
24
|
Analysis of Average Balances and Interest Rates
|
||||||||||||||||||||||||||||||||||||
|
|
2017
|
2016
|
2015
|
|||||||||||||||||||||||||||||||||
|
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||||||||
|
|
Balance (1)
|
Interest
|
Rate
|
Balance (1)
|
Interest
|
Rate
|
Balance (1)
|
Interest
|
Rate
|
|||||||||||||||||||||||||||
|
(dollars in thousands)
|
|
$
|
$
|
|
%
|
|
$
|
$
|
|
%
|
|
$
|
$ |
|
%
|
|||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
Short-term investments:
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing deposits at banks
|
8,790
|
15
|
0.17
|
22,726
|
82
|
0.36
|
12,218
|
20
|
0.16
|
|||||||||||||||||||||||||||
|
Total short-term investments
|
8,790
|
15
|
0.17
|
22,726
|
82
|
0.36
|
12,218
|
20
|
0.16
|
|||||||||||||||||||||||||||
|
Interest bearing time deposits at banks
|
8,346
|
171
|
2.05
|
7,232
|
139
|
1.92
|
6,215
|
122
|
1.97
|
|||||||||||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
194,716
|
3,366
|
1.73
|
254,673
|
3,971
|
1.56
|
202,991
|
3,320
|
1.64
|
|||||||||||||||||||||||||||
|
Tax-exempt (3)
|
84,235
|
3,657
|
4.34
|
99,689
|
4,499
|
4.51
|
97,852
|
4,776
|
4.88
|
|||||||||||||||||||||||||||
|
Total investment securities
|
278,951
|
7,023
|
2.52
|
354,362
|
8,470
|
2.39
|
300,843
|
8,096
|
2.69
|
|||||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||||||
|
Residential mortgage loans
|
206,321
|
10,660
|
5.17
|
204,278
|
10,749
|
5.26
|
182,877
|
10,059
|
5.50
|
|||||||||||||||||||||||||||
|
Construction loans
|
24,299
|
1,040
|
4.28
|
15,242
|
752
|
4.93
|
8,518
|
438
|
5.14
|
|||||||||||||||||||||||||||
|
Commercial Loans
|
329,767
|
17,525
|
5.31
|
302,717
|
16,163
|
5.34
|
248,754
|
12,969
|
5.21
|
|||||||||||||||||||||||||||
|
Agricultural Loans
|
214,200
|
9,251
|
4.32
|
91,279
|
4,374
|
4.79
|
43,764
|
2,325
|
5.31
|
|||||||||||||||||||||||||||
|
Loans to state & political subdivisions
|
98,427
|
4,146
|
4.21
|
101,329
|
4,278
|
4.22
|
85,631
|
3,815
|
4.45
|
|||||||||||||||||||||||||||
|
Other loans
|
10,341
|
823
|
7.96
|
11,036
|
916
|
8.30
|
8,448
|
676
|
8.00
|
|||||||||||||||||||||||||||
|
Loans, net of discount (2)(3)(4)
|
883,355
|
43,445
|
4.92
|
725,881
|
37,232
|
5.13
|
577,992
|
30,282
|
5.24
|
|||||||||||||||||||||||||||
|
Total interest-earning assets
|
1,179,442
|
50,654
|
4.29
|
1,110,201
|
45,923
|
4.14
|
897,268
|
38,520
|
4.29
|
|||||||||||||||||||||||||||
|
Cash and due from banks
|
6,774
|
7,357
|
4,197
|
|||||||||||||||||||||||||||||||||
|
Bank premises and equipment
|
16,799
|
17,218
|
12,837
|
|||||||||||||||||||||||||||||||||
|
Other assets
|
55,910
|
57,604
|
36,781
|
|||||||||||||||||||||||||||||||||
|
Total non-interest earning assets
|
79,483
|
82,179
|
53,815
|
|||||||||||||||||||||||||||||||||
|
Total assets
|
1,258,925
|
1,192,380
|
951,083
|
|||||||||||||||||||||||||||||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
NOW accounts
|
323,105
|
1,139
|
0.35
|
301,681
|
917
|
0.30
|
230,675
|
801
|
0.35
|
|||||||||||||||||||||||||||
|
Savings accounts
|
179,557
|
191
|
0.11
|
172,182
|
184
|
0.11
|
119,021
|
144
|
0.12
|
|||||||||||||||||||||||||||
|
Money market accounts
|
127,888
|
650
|
0.51
|
118,486
|
523
|
0.44
|
98,452
|
481
|
0.49
|
|||||||||||||||||||||||||||
|
Certificates of deposit
|
261,758
|
2,645
|
1.01
|
271,117
|
2,623
|
0.97
|
250,952
|
2,687
|
1.07
|
|||||||||||||||||||||||||||
|
Total interest-bearing deposits
|
892,308
|
4,625
|
0.52
|
863,466
|
4,247
|
0.49
|
699,100
|
4,113
|
0.59
|
|||||||||||||||||||||||||||
|
Other borrowed funds
|
68,536
|
1,214
|
1.77
|
47,004
|
794
|
1.69
|
36,700
|
707
|
1.93
|
|||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
960,844
|
5,839
|
0.61
|
910,470
|
5,041
|
0.55
|
735,800
|
4,820
|
0.66
|
|||||||||||||||||||||||||||
|
Demand deposits
|
153,523
|
145,968
|
102,977
|
|||||||||||||||||||||||||||||||||
|
Other liabilities
|
14,802
|
12,524
|
8,510
|
|||||||||||||||||||||||||||||||||
|
Total non-interest-bearing liabilities
|
168,325
|
158,492
|
111,487
|
|||||||||||||||||||||||||||||||||
|
Stockholders' equity
|
129,756
|
123,418
|
103,796
|
|||||||||||||||||||||||||||||||||
|
Total liabilities & stockholders' equity
|
1,258,925
|
1,192,380
|
951,083
|
|||||||||||||||||||||||||||||||||
|
Net interest income
|
44,815
|
40,882
|
33,700
|
|||||||||||||||||||||||||||||||||
|
Net interest spread (5)
|
3.68
|
%
|
3.59
|
%
|
3.63
|
%
|
||||||||||||||||||||||||||||||
|
Net interest income as a percentage
|
||||||||||||||||||||||||||||||||||||
|
of average interest-earning assets
|
3.80
|
%
|
3.68
|
%
|
3.76
|
%
|
||||||||||||||||||||||||||||||
|
Ratio of interest-earning assets
|
||||||||||||||||||||||||||||||||||||
|
to interest-bearing liabilities
|
1.23
|
1.22
|
1.22
|
|||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
(1) Averages are based on daily averages.
|
||||||||||||||||||||||||||||||||||||
|
(2) Includes loan origination and commitment fees.
|
||||||||||||||||||||||||||||||||||||
|
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
|
||||||||||||||||||||||||||||||||||||
|
a statutory federal income tax rate of 34%.
|
||||||||||||||||||||||||||||||||||||
|
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
|
||||||||||||||||||||||||||||||||||||
|
(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets
|
||||||||||||||||||||||||||||||||||||
|
and the average rate paid on interest-bearing liabilities.
|
||||||||||||||||||||||||||||||||||||
Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison using a statutory, federal income tax rate of 34%, which is the Bank's federal income tax rate for 2017, 2016 and 2015.
For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the 34% Federal statutory rate. Accordingly, tax equivalent adjustments for investments and loans have been made accordingly to the previous table for the years ended December 31, 2017, 2016 and 2015, respectively (in thousands):
25
|
|
2017
|
2016
|
2015
|
|||||||||
|
Interest and dividend income from investment securities,
|
||||||||||||
|
interest bearing time deposits and short-term investments (non-tax adjusted)
|
$
|
5,966
|
$
|
7,161
|
$
|
6,614
|
||||||
|
Tax equivalent adjustment
|
1,243
|
1,530
|
1,624
|
|||||||||
|
Interest and dividend income from investment securities,
|
||||||||||||
|
interest bearing time deposits and short-term investments (tax equivalent basis)
|
$
|
7,209
|
$
|
8,691
|
$
|
8,238
|
||||||
|
|
||||||||||||
|
|
2017
|
2016
|
2015
|
|||||||||
|
Interest and fees on loans (non-tax adjusted)
|
$
|
42,127
|
$
|
35,844
|
$
|
29,039
|
||||||
|
Tax equivalent adjustment
|
1,318
|
1,388
|
1,243
|
|||||||||
|
Interest and fees on loans (tax equivalent basis)
|
$
|
43,445
|
$
|
37,232
|
$
|
30,282
|
||||||
|
|
||||||||||||
|
|
2017
|
2016
|
2015
|
|||||||||
|
Total interest income
|
$
|
48,093
|
$
|
43,005
|
$
|
35,653
|
||||||
|
Total interest expense
|
5,839
|
5,041
|
4,820
|
|||||||||
|
Net interest income
|
42,254
|
37,964
|
30,833
|
|||||||||
|
Total tax equivalent adjustment
|
2,561
|
2,918
|
2,867
|
|||||||||
|
Net interest income (tax equivalent basis)
|
$
|
44,815
|
$
|
40,882
|
$
|
33,700
|
||||||
The following table shows the tax-equivalent effect of changes in volume and rates on interest income and expense (in thousands):
|
Analysis of Changes in Net Interest Income on a Tax-Equivalent Basis
|
||||||||||||||||||||||||
|
|
2017 vs. 2016 (1)
|
2016 vs. 2015 (1)
|
||||||||||||||||||||||
|
|
Change in
|
Change
|
Total
|
Change in
|
Change
|
Total
|
||||||||||||||||||
|
|
Volume
|
in Rate
|
Change
|
Volume
|
in Rate
|
Change
|
||||||||||||||||||
|
Interest Income:
|
||||||||||||||||||||||||
|
Interest-bearing deposits at banks
|
$
|
(36
|
)
|
$
|
(31
|
)
|
$
|
(67
|
)
|
$
|
26
|
$
|
36
|
$
|
62
|
|||||||||
|
Interest bearing time deposits at banks
|
23
|
9
|
32
|
20
|
(3
|
)
|
17
|
|||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
Taxable
|
(1,121
|
)
|
516
|
(605
|
)
|
797
|
(146
|
)
|
651
|
|||||||||||||||
|
Tax-exempt
|
(677
|
)
|
(165
|
)
|
(842
|
)
|
92
|
(369
|
)
|
(277
|
)
|
|||||||||||||
|
Total investment securities
|
(1,798
|
)
|
351
|
(1,447
|
)
|
889
|
(515
|
)
|
374
|
|||||||||||||||
|
Total investment income
|
(1,811
|
)
|
329
|
(1,482
|
)
|
935
|
(482
|
)
|
453
|
|||||||||||||||
|
Loans:
|
||||||||||||||||||||||||
|
Residential mortgage loans
|
110
|
(199
|
)
|
(89
|
)
|
1,096
|
(406
|
)
|
690
|
|||||||||||||||
|
Construction loans
|
371
|
(83
|
)
|
288
|
331
|
(17
|
)
|
314
|
||||||||||||||||
|
Commercial Loans
|
1,437
|
(75
|
)
|
1,362
|
2,875
|
319
|
3,194
|
|||||||||||||||||
|
Agricultural Loans
|
5,263
|
(386
|
)
|
4,877
|
2,252
|
(203
|
)
|
2,049
|
||||||||||||||||
|
Loans to state & political subdivisions
|
(122
|
)
|
(10
|
)
|
(132
|
)
|
648
|
(185
|
)
|
463
|
||||||||||||||
|
Other loans
|
(56
|
)
|
(37
|
)
|
(93
|
)
|
214
|
26
|
240
|
|||||||||||||||
|
Total loans, net of discount
|
7,003
|
(790
|
)
|
6,213
|
7,416
|
(466
|
)
|
6,950
|
||||||||||||||||
|
Total Interest Income
|
5,192
|
(461
|
)
|
4,731
|
8,351
|
(948
|
)
|
7,403
|
||||||||||||||||
|
Interest Expense:
|
||||||||||||||||||||||||
|
Interest-bearing deposits:
|
||||||||||||||||||||||||
|
NOW accounts
|
69
|
153
|
222
|
195
|
(79
|
)
|
116
|
|||||||||||||||||
|
Savings accounts
|
8
|
(1
|
)
|
7
|
54
|
(14
|
)
|
40
|
||||||||||||||||
|
Money Market accounts
|
44
|
83
|
127
|
79
|
(37
|
)
|
42
|
|||||||||||||||||
|
Certificates of deposit
|
(78
|
)
|
100
|
22
|
321
|
(385
|
)
|
(64
|
)
|
|||||||||||||||
|
Total interest-bearing deposits
|
43
|
335
|
378
|
649
|
(515
|
)
|
134
|
|||||||||||||||||
|
Other borrowed funds
|
379
|
41
|
420
|
156
|
(69
|
)
|
87
|
|||||||||||||||||
|
Total interest expense
|
422
|
376
|
798
|
805
|
(584
|
)
|
221
|
|||||||||||||||||
|
Change in net interest income
|
$
|
4,770
|
$
|
(837
|
)
|
$
|
3,933
|
$
|
7,546
|
$
|
(364
|
)
|
$
|
7,182
|
||||||||||
|
|
||||||||||||||||||||||||
|
(1) The portion of the total change attributable to both volume and rate changes during the year has been allocated
|
||||||||||||||||||||||||
|
to volume and rate components based upon the absolute dollar amount of the change in each component prior to allocation.
|
||||||||||||||||||||||||
26
2017 vs. 2016
Tax equivalent net interest income for 2017 was $44,815,000 compared to $40,882,000 for 2016, an increase of $3,933,000 or 9.6%. Total interest income increased $4,731,000, as loan interest income increased $6,213,000, while total investment income decreased $1,482,000. Interest expense increased $798,000 from 2016.
Total tax equivalent interest income from investment securities decreased $1,447,000 in 2017 from 2016. The average balance of investment securities decreased $75.4 million, which had an effect of decreasing interest income by $1,798,000 due to volume. The majority of the decrease in volume was in taxable securities, which experienced a decrease in the average balance of $60.0 million. The average tax-effected yield on our investment portfolio increased from 2.39% in 2016 to 2.52% in 2017. This had the effect of increasing interest income by $351,000 due to rate, which was related to taxable securities whose yield increased from 1.56% in 2016 to 1.73% in 2017. The primary driver of the decrease in the average balance of investments securities is attributable to the decision to fund a portion of our strong loan growth through the cashflows of the investment portfolio. The increase in yield is attributable to the Federal Reserve raising interest rates during 2017. Investment purchases in 2017 focused on securities with short fixed maturities for agency securities and short repricing windows for asset backed securities. We also focused our purchases on securities with lower risk weightings due to the loan growth experienced that carries a higher risk weight for capital adequacy purposes. We continually monitor interest rate trading ranges and try to focus purchases to times when rates are in the top third of the trading range. The Bank believes its investment strategy has appropriately mitigated its interest rate risk exposure if rates continue to rise, while providing sufficient cashflows.
In total, loan interest income increased $6,213,000 in 2017 from 2016. The average balance of our loan portfolio increased by $157.5 million in 2017 compared to 2016, which resulted in an increase in interest income of $7,003,000 due to volume. Offsetting this was a decrease in average yield on total loans from 5.13% in 2016 to 4.92% in 2017 resulting in a decrease in interest income of $790,000 due to rate. The increase in the average balance of loans was driven by the loan growth in our central and south central Pennsylvania markets as a result of lending teams hired in 2016.
|
·
|
Interest income on residential mortgage loans decreased $89,000. The average balance of residential mortgage loans increased $2.0 million, resulting in an increase of $110,000 due to volume. The change due to rate was a decrease of $199,000 as the average yield on residential mortgages decreased from 5.26% in 2016 to 5.17% in 2017.
|
|
·
|
The average balance of construction loans increased $9.1 million from 2016 to 2017, due to several large projects in progress during 2017 which resulted in an increase of $371,000 in interest income. Additionally, the average yield on construction loans decreased from 4.93% to 4.28%, which correlated to a $83,000 decrease in interest income.
|
|
·
|
Interest income on commercial loans increased $1,362,000 from 2016 to 2017. The increase in the average balance of commercial loans of $27.1 million is primarily attributable to the additional lenders hired in 2016 to serve the central and south central markets. The ability of these lenders to attract and retain previous loan relationships, and the market upheaval created by several bank mergers in the Lebanon and Lancaster markets, resulted in commercial loan growth. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $1,437,000. We believe our lenders are adept at customizing and structuring loans to customers that meet their needs and satisfy our commitment to credit quality. In many cases, the Bank works with the Small Business Administration (SBA) guaranteed loan programs to offset risk and to further promote economic growth in our market area.
|
27
|
·
|
Interest income on agricultural loans increased $4,877,000 from 2016 to 2017. The increase in the average balance of agricultural loans of $122.9 million is primarily attributable to the additional lenders hired in 2016 to serve the central and south central markets. The market disruption discussed above resulted in agricultural loan growth in the Lancaster and Lebanon markets. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $5,263,000. The average yield on agricultural loans decreased from 4.79% in 2016 to 4.32% in 2017 resulting in a decrease in interest income due to rate of $386,000. We believe our lenders are adept at customizing and structuring loans to customers that meet their needs and satisfy our commitment to credit quality. In many cases, the Bank works with the United States Department of Agriculture's (USDA) guaranteed loan programs to offset risk and to further promote economic growth in our market area.
|
|
·
|
The average balance of loans to state and political subdivisions decreased $2.9 million from 2016 to 2017 which had a negative impact of $122,000 on total interest income due to volume. The average tax equivalent yield on loans to state and political subdivisions decreased from 4.22% in 2016 to 4.21% in 2017, decreasing interest income by $10,000.
|
Total interest expense increased $798,000 in 2017 compared to 2016. A portion of the increase is attributable to a change in volume as the average balance of interest bearing liabilities increased $50.4 million in 2017, which had the effect of increasing interest expense by $422,000. This increase was attributable to growth necessary to fund the loan growth experienced by the Bank. Increases in average deposits included NOW accounts of $21.4 million, savings accounts of $7.4 million and money markets accounts of $9.4. The combined impact to interest expense of these increases was an increase $121,000. The average balance of other borrowed funds increased $21.5 million as a result of funding loan growth, which corresponds to an increase in interest expense of $3789,000. The average balance of certificates of deposits decreased $9.4 million, which corresponds to a decrease in interest expense of $78,000.
The average interest rate paid on interest bearing liabilities increased from 0.55% in 2016 to 0.61% in 2017, which resulted in an increase in interest expense of $376,000. The Federal Reserve raised short term rates during 2017, but long term rates experienced little change. The average rate on certificates of deposit increased from 0.97% to 1.01% resulting in an increase in interest expense of $100,000. The average rate paid on other borrowed funds increased from 1.69% to 1.77% resulting in an increase in interest expense of $41,000. Increases in rates paid on NOW accounts, savings accounts and money market accounts were less than 7 basis points, and resulted in a cumulative increase in interest expense of $235,000.
Our net interest margin for 2017 was 3.80% compared to 3.68% for 2016. The interest rate environment for the majority of 2017 was a flat yield curve with short term rates rising, while longer term rates remained steady. Should short or long-term interest rates move in such a way that results in a further flattening or inverted yield curve, we would anticipate additional pressure on our margin.
2016 vs. 2015
Tax equivalent net interest income for 2016 was $40,882,000 compared to $33,700,000 for 2015, an increase of $7,182,000 or 21.3%. Total interest income increased $7,403,000, as loan interest income increased $6,950,000, while total investment income increased $453,000. Interest expense increased $221,000 from 2015.
Total tax equivalent interest income from investment securities increased $374,000 in 2016 from 2015. The average balance of investment securities increased $53.5 million, which had an effect of increasing interest income by $889,000 due to volume. The majority of the increase in volume was in taxable securities, which experienced an increase in the average balance of $51.7 million. The average tax-effected yield on our investment portfolio decreased from 2.69% in 2015 to 2.39% in 2016. This had the effect of decreasing interest income by $515,000 due to rate, the majority of which was related to non-taxable securities whose yield decreased from 4.88% in 2015 to 4.51% in 2016. The primary driver of the increase in the average balance of investments securities was attributable to the FNB acquisition. The decrease in yield was also attributable to the acquisition of FNB, as the securities acquired had a lower yield than our existing portfolio. Due to the amount of liquidity obtained as part of the FNB acquisition, during the first part of 2016 purchases made included US agency securities, mortgage backed securities, and high coupon municipal bonds. During the second half of 2016, we chose to fund a portion of our loan growth from the cash flows from the investment portfolio, which were not reinvested in the bond market.
28
In total, loan interest income increased $6,950,000 in 2016 from 2015. The average balance of the loan portfolio increased by $147.9 million in 2016 compared to 2015, which resulted in an increase in interest income of $7,416,000 due to volume. Offsetting this was a decrease in average yield on total loans from 5.24% in 2015 to 5.13% in 2016 resulting in a decrease in interest income of $466,000 due to rate. The increase in the average balance of loans was driven by the FNB acquisition as well as loan growth in our central and south central Pennsylvania markets as a result of lending teams hired in 2016.
|
·
|
Interest income on residential mortgage loans increased $690,000. The average balance of residential mortgage loans increased $21.4 million, resulting in an increase of $1,096,000 due to volume. The increase in volume was a result of the FNB acquisition. The change due to rate was a decrease of $406,000 as the average yield on residential mortgages decreased from 5.50% in 2015 to 5.26% in 2016. The Bank originated loans to be sold of $22.2 million during 2016, which compares to $18.9 million originated in 2015.
|
|
·
|
The average balance of construction loans increased $6.7 million from 2015 to 2016, due to several large projects in progress during 2016 which resulted in an increase of $331,000 in interest income. Additionally, the average yield on construction loans decreased from 5.14% to 4.93%, which correlated to a $17,000 decrease in interest income.
|
|
·
|
Interest income on commercial loans increased $3,194,000 from 2015 to 2016. The increase in the average balance of commercial loans of $54.0 million is primarily attributable to the acquisition of FNB. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $2,875,000. The average rate on commercial loans increased 13 basis points to 5.34% in 2016, resulting in an increase in income of $319,000.
|
|
·
|
Interest income on agricultural loans increased $2,049,000 from 2015 to 2016. The increase in the average balance of agricultural loans of $47.5 million is primarily attributable to the additional lenders hired in 2016 to serve the central and south central markets. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $2,252,000. The average yield on agricultural loans decreased from 5.31% in 2015 to 4.79% in 2016 resulting in a decrease in interest income due to rate of $203,000.
|
|
·
|
The average balance of loans to state and political subdivisions increased $15.7 million from 2015 to 2016 which had a positive impact of $648,000 on total interest income due to volume. The average tax equivalent yield on loans to state and political subdivisions decreased from 4.45% in 2015 to 4.22% in 2016, decreasing interest income by $185,000.
|
Total interest expense increased $221,000 in 2016 compared to 2015. The increase is attributable to a change in volume as the average balance of interest bearing liabilities increased $174.7 million in 2016, which had the effect of increasing interest expense by $805,000. This increase was attributable to the FNB acquisition, which increased our deposit levels and the increase in borrowings to fund our loan portfolio growth. Increases in average deposits included NOW accounts of $71.0 million, savings accounts of $53.2 million, money markets accounts of $20.0 and certificates of deposit of $20.2 million. The combined impact to interest expense of these increases was an increase $649,000. The average balance of other borrowed funds increased $10.3 million as a result of funding loan growth in the second half of 2016, which corresponds to an increase in interest expense of $156,000.
The average interest rate paid on interest bearing liabilities decreased from 0.66% in 2015 to 0.55% in 2016, which resulted in a decrease in interest expense of $584,000 during 2016. The low interest rate environment had the effect of decreasing our rates on certificate of deposit products. The average rate on certificates of deposit decreased from 1.07% to 0.97% resulting in a decrease in interest expense of $385,000. The average rate paid on other borrowed funds decreased from 1.93% to 1.69% resulting in a decrease in interest expense of $69,000. Decreases in rates paid on NOW accounts, savings accounts and money market accounts were less than 5 basis points, and resulted in a cumulative decrease in interest expense of $130,000.
29
Our net interest margin for 2016 was 3.68% compared to 3.76% for 2015.
PROVISION FOR LOAN LOSSES
For the year ended December 31, 2017, we recorded a provision for loan losses of $2,540,000. The provision for 2017 was $1,020,000, or 67.1%, higher than the provision in 2016. The increase in the provision for loan losses was primarily the result of the organic loan growth experienced in 2017. (see also "Financial Condition – Allowance for Loan Losses and Credit Quality Risk").
For the year ended December 31, 2016, we recorded a provision for loan losses of $1,520,000. The provision for 2016 was $1,040,000, or 216.7%, higher than the provision in 2015. The increase in the provision for loan losses was primarily the result of the organic loan growth experienced in 2016 and the increase in classified loans from December 31, 2015 to December 31, 2016. (see also "Financial Condition – Allowance for Loan Losses and Credit Quality Risk").
NON-INTEREST INCOME
The following table reflects non-interest income by major category for the periods ended December 31 (dollars in thousands):
|
NON-INTEREST INCOME
|
||||||||||||||||
|
|
||||||||||||||||
|
|
2017
|
2016
|
2015
|
|||||||||||||
|
Service charges
|
$
|
4,456
|
$
|
4,461
|
$
|
4,126
|
||||||||||
|
Trust
|
755
|
693
|
673
|
|||||||||||||
|
Brokerage and insurance
|
635
|
766
|
720
|
|||||||||||||
|
Investment securities gains, net
|
1,035
|
255
|
429
|
|||||||||||||
|
Gains on loans sold
|
578
|
449
|
404
|
|||||||||||||
|
Earnings on bank owned life insurance
|
660
|
688
|
628
|
|||||||||||||
|
Other
|
537
|
587
|
443
|
|||||||||||||
|
Total
|
$
|
8,656
|
$
|
7,899
|
$
|
7,423
|
||||||||||
|
|
|
|
||||||||||||||
|
2017/2016
|
2016/2015
|
|||||||||||||||
|
|
Change
|
Change
|
||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Service charges
|
$
|
(5
|
)
|
(0.1
|
)
|
$
|
335
|
8.1
|
||||||||
|
Trust
|
62
|
8.9
|
20
|
3.0
|
||||||||||||
|
Brokerage and insurance
|
(131
|
)
|
(17.1
|
)
|
46
|
6.4
|
||||||||||
|
Investment securities gains, net
|
780
|
305.9
|
(174
|
)
|
(40.6
|
)
|
||||||||||
|
Gains on loans sold
|
129
|
28.7
|
45
|
11.1
|
||||||||||||
|
Earnings on bank owned life insurance
|
(28
|
)
|
(4.1
|
)
|
60
|
9.6
|
||||||||||
|
Other
|
(50
|
)
|
(8.5
|
)
|
144
|
32.5
|
||||||||||
|
Total
|
$
|
757
|
9.6
|
$
|
476
|
6.4
|
||||||||||
2017 vs. 2016
Non-interest income increased $757,000 in 2017 from 2016, or 9.6%. We recorded investment securities gains totaling $1,035,000 compared with net gains of $255,000 in 2016. During 2017, we sold 24 agency securities for a net loss of $147,183 to fund loan growth and to restructure the investment portfolio for future rate increases. We also sold one Agency MBS security for a gain of $20,000. Finally, in anticipation of the adoption of accounting standard ASU 2016-01, the Company chose to sell a significant portion of its equity securities portfolio that resulted in a gain of $1,149,000. We also sold several interest bearing time deposits during 2017 for a gain of $13,000. During 2016, we sold two US treasury securities and one agency security for gains totaling $27,000 and $48,000, respectively, as a result of interest rates at the time of the sale. We sold four municipal securities for gains totaling $80,000. We also sold 7 agency securities for a gain of $2,000 and 6 corporate securities for a loss of $35,000 to fund loan growth that occurred in the fourth quarter. Finally, we sold portions of three of the equity security positions as a result of their rise in price subsequent to the presidential election for a total gain of $133,000.
30
Gains on loans sold increased $129,000 compared to last year. During 2017, the Bank generated $25.1 million of residential mortgage loan sale proceeds, which was $3.6 million, or 16.8% more than the proceeds received in 2016. We also sold the credit card portfolio for $1.0 million in 2017 generating a gain on the sale of approximately $39,000.
The decrease in brokerage revenues is due to the loss of service of two employees early in 2017, whose positions remained unfilled for a portion of the year. The increase in trust revenues was due to settling several estates in 2017.
2016 vs. 2015
Non-interest income increased $476,000 in 2016 from 2015, or 6.4%. We recorded investment securities gains totaling $255,000 compared with net gains of $429,000 in 2015. During 2016, we sold two US treasury securities and one agency security for gains totaling $27,000 and $48,000, respectively, as a result of interest rates at the time of the sale. We sold four municipal securities for gains totaling $80,000. We also sold 7 agency securities for a gain of $2,000 and 6 corporate securities for a loss of $35,000 to fund loan growth that occurred in the fourth quarter. Finally, we sold portions of three of the equity security positions as a result of their rise in price subsequent to the presidential election for a total gain of $133,000. During 2015, we sold five agency securities for gains totaling $196,000, five mortgage backed securities in government sponsored entities for gains totaling $69,000, seven municipal bonds for gains totaling $99,000, a financial institution equity holding for a gain of $76,000 and a US Treasury note for a loss of $11,000. Subsequent to the acquisition in 2015, we sold seven agency securities and three mortgage backed securities, as a result of their risk profile in a rising interest rate environment. These securities were sold upon the acquisition close and as a result no gains or losses were recorded on the sale.
Gains on loans sold increased $45,000 in 2016 compared to 2015, which is the result of the additional market areas obtained as part of the FNB acquisition. During 2016, the Bank generated $21.5 million of loan sale proceeds, which was $2.2 million, or 11.5% more than the proceeds received in 2015.
Service charge income increased by $335,000 in 2016 compared to 2015. The Company experienced a $33,000 increase in fees charged to customers for insufficient funds. ATM income increased $32,000 in 2016 compared to 2015 and interchange revenue increased $272,000. The increases were the result of the additional customers obtained as part of the FNB acquisition.
The increase in earnings on bank owned life insurance of $60,000 is primarily due to the additional insurance obtained as part of the FNB acquisition. The increase in other income is attributable to the FNB acquisition and includes increases in safe deposit rents and loan servicing fees.
Non-interest Expenses
The following tables reflect the breakdown of non-interest expense by major category for the periods ended December 31 (dollars in thousands):
31
|
|
2017
|
2016
|
2015
|
|||||||||||||
|
Salaries and employee benefits
|
$
|
17,456
|
$
|
16,410
|
$
|
12,504
|
||||||||||
|
Occupancy
|
1,988
|
1,900
|
1,424
|
|||||||||||||
|
Furniture and equipment
|
603
|
644
|
506
|
|||||||||||||
|
Professional fees
|
1,039
|
1,094
|
846
|
|||||||||||||
|
FDIC insurance
|
385
|
572
|
464
|
|||||||||||||
|
Pennsylvania shares tax
|
705
|
690
|
713
|
|||||||||||||
|
Amortization of intangibles
|
297
|
327
|
-
|
|||||||||||||
|
Merger and acquisition
|
165
|
-
|
1,103
|
|||||||||||||
|
ORE expenses
|
655
|
389
|
969
|
|||||||||||||
|
Other
|
6,021
|
6,645
|
4,900
|
|||||||||||||
|
Total
|
$
|
29,314
|
$
|
28,671
|
$
|
23,429
|
||||||||||
|
|
||||||||||||||||
|
|
2017/2016 Change
|
2016/2015 Change
|
||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Salaries and employee benefits
|
$
|
1,046
|
6.4
|
$
|
3,906
|
31.2
|
||||||||||
|
Occupancy
|
88
|
4.6
|
476
|
33.4
|
||||||||||||
|
Furniture and equipment
|
(41
|
)
|
(6.4
|
)
|
138
|
27.3
|
||||||||||
|
Professional fees
|
(55
|
) |
5.7
|
248
|
29.3
|
|||||||||||
|
FDIC insurance
|
(187
|
)
|
(32.7
|
)
|
108
|
23.3
|
||||||||||
|
Pennsylvania shares tax
|
15
|
2.2
|
(23
|
)
|
(3.2
|
)
|
||||||||||
|
Amortization of intangibles
|
(30
|
)
|
(9.2
|
)
|
327
|
-
|
||||||||||
|
Merger and acquisition
|
165
|
N/A
|
(1,103
|
)
|
(100.0
|
)
|
||||||||||
|
ORE expenses
|
266
|
68.4
|
(580
|
)
|
(59.9
|
)
|
||||||||||
|
Other
|
(624
|
)
|
(9.4
|
)
|
1,745
|
35.6
|
||||||||||
|
Total
|
$
|
643
|
2.2
|
$
|
5,242
|
22.4
|
||||||||||
2017 vs. 2016
Non-interest expenses for 2017 totaled $29,314,000, which represents an increase of $643,000, compared to 2016 expenses of $28,671,000. The primary cause of the total increase was salaries and benefits. Salary and benefit costs increased $1,046,000. Base salaries and related payroll taxes increased $902,000 as a result of 2017 merit increases and staffing mix changes. Full time equivalent staffing was 253 and 252 employees for 2017 and 2016, respectively. Retirement and profit sharing expenses increased $235,000 compared to 2016, also as a result of a change in the employee mix and increased profitability.
The increase in ORE expenses is the result of a non-accrual loan paying off in the third quarter of 2016, which resulted in the reimbursement of $240,000 in 2016 of previously paid real estate taxes and legal fees. The decrease in FDIC insurances expense is due to a lower assessment charged by the FDIC. The increase in merger and acquisition expenses is due to the acquisition of the State College branch in 2017. The largest driver of the decrease in other expenses is a decrease of $377,000 in charge-offs related to fraudulent charges on our customers debit cards.
2016 vs. 2015
Non-interest expenses for 2016 totaled $28,671,000, which represents an increase of $5,242,000, compared to 2015 expenses of $23,429,000. The primary cause of the total increase was the acquisition of FNB and the retained employees and branches and the hiring of the lending teams in 2016. Salary and benefit costs increased $3,906,000. Base salaries and related payroll taxes increased $2,848,000. Full time equivalent staffing was 252 and 195 employees for 2016 and 2015, respectively. Health insurance related expenses increased $615,000 from 2015 due to increased claims experience in 2016 from the additional headcount due to the acquisition and hiring of lending teams. Retirement and profit sharing expenses increased $286,000 compared to 2015, also as a result of the increased headcount.
The increases in occupancy and furniture and equipment in 2016 was primarily related to the acquisition and the acquired branches as well as the opening of the office in Mount Joy, Pennsylvania and the limited branch office in Winfield, Pennsylvania. The increase in professional fees was associated with legal fees, as the Company look exited certain contracts and closed a branch in 2016, and consulting fees associated with system upgrades, including the issuance of new debit cards in the third quarter of 2016.
32
The decrease in merger and acquisition expense is due to the acquisition that occurred in 2015 with no corresponding activity in 2016. The decrease in ORE expenses is the result of a non-accrual loan paying off in the third quarter of 2016, which resulted in the reimbursement of $240,000 of previously paid real estate taxes and legal fees. Additionally, in 2015, there were two OREO write-downs that totaled $262,000 compared to write-downs in 2016 that totaled $60,000.
The largest driver of the increase in other expenses for 2016 was a general expense increase as part of the FNB acquisition. These included additional advertising, phone and data communication, supplies and printing expenses. A second factor was an increase of $200,000 in contributions associated with the Pennsylvania educational improvement tax credit program. Also, we experienced an increase of $240,000 in charge-offs related to fraudulent charges on our customers debit cards.
Provision for Income Taxes
The provision for income taxes was $6,031,000, $3,034,000 and $2,721,000 for 2017, 2016 and 2015, respectively. The effective tax rates for 2017, 2016 and 2015 were 31.7%, 19.4% and 19.0%, respectively.
The increase in income tax expense of $2,997,000 in 2017 has two primary drivers. The first was the increase of $3,384,000 in income before the provision for income taxes, which accounts for an increase in tax expense of $1,151,000 at a 34% tax rate. The second driver was a $1,531,000 increase in tax expense due to the Tax Cuts and Jobs Act, enacted on December 22, 2017, which lowered the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the lowered tax rate, the carrying value of the Company's net deferred tax asset was reduced by $1,531,000, which was charged to income tax expense. The remaining increase was due to a lower amount of tax exempt income in 2017 and a reduction in tax credits due to one expiring in December of 2016.
Income before the provision for income taxes increased by $1,325,000 in 2016 compared to 2015. As the result of this increase, the provision for income taxes increased by $313,000 when compared to 2015.
We are involved in four limited partnership agreements that established low-income housing projects in our market area. During 2017, we recognized tax credits related to one of the four partnerships and in 2016 and 2015, we recognized tax credits related to two of the four partnerships. Tax credits associated with one project became fully utilized in December 2016. The tax credits for the other two projects were fully utilized by December 31, 2012. We anticipate recognizing an aggregate of $705,000 of tax credits over the next five years.
FINANCIAL CONDITION
The following table presents ending balances (dollars in millions), the dollar amount of change and the percentage change during the past two years:
|
|
2017
|
%
|
2016
|
%
|
2015
|
|||||||||||||||||||||||
|
|
Balance
|
Increase
|
Change
|
Balance
|
Increase
|
Change
|
Balance
|
|||||||||||||||||||||
|
Total assets
|
$
|
1,361.9
|
$
|
138.9
|
11.4
|
$
|
1,223.0
|
$
|
60.0
|
5.2
|
$
|
1,163.0
|
||||||||||||||||
|
Total investments
|
254.8
|
(59.2
|
)
|
(18.9
|
)
|
314.0
|
(45.7
|
)
|
(12.7
|
)
|
359.7
|
|||||||||||||||||
|
Total loans, net
|
989.3
|
198.6
|
25.1
|
790.7
|
102.8
|
14.9
|
687.9
|
|||||||||||||||||||||
|
Total deposits
|
1,104.9
|
99.4
|
9.9
|
1,005.5
|
17.5
|
1.8
|
988.0
|
|||||||||||||||||||||
|
Total borrowings
|
114.7
|
35.0
|
43.9
|
79.7
|
38.1
|
91.6
|
41.6
|
|||||||||||||||||||||
|
Total stockholders' equity
|
129.0
|
5.7
|
4.6
|
123.3
|
3.5
|
2.9
|
119.8
|
|||||||||||||||||||||
33
Cash and Cash Equivalents
Cash and cash equivalents totaled $18.5 million at December 31, 2017 compared to $17.8 million at December 31, 2016. Management actively measures and evaluates its liquidity through our Asset – Liability committee and believes its liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.
Investments
The following table shows the year-end composition of the investment portfolio for the five years ended December 31 (dollars in thousands):
|
|
2017
|
% of
|
2016
|
% of
|
2015
|
% of
|
2014
|
% of
|
2013
|
% of
|
||||||||||||||||||||||||||||||
|
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
Amount
|
Total
|
||||||||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||||||||||||||||||
|
U. S. agency securities
|
$
|
98,887
|
38.8
|
$
|
170,414
|
54.3
|
$
|
199,591
|
55.5
|
$
|
150,885
|
49.3
|
$
|
152,189
|
48.0
|
|||||||||||||||||||||||||
|
U.S. treasuries
|
28,604
|
11.2
|
3,000
|
0.9
|
10,082
|
2.8
|
4,849
|
1.6
|
11,309
|
3.6
|
||||||||||||||||||||||||||||||
|
Obligations of state & political
|
||||||||||||||||||||||||||||||||||||||||
|
subdivisions
|
79,090
|
31.0
|
96,926
|
30.9
|
102,863
|
28.6
|
105,036
|
34.3
|
95,005
|
29.9
|
||||||||||||||||||||||||||||||
|
Corporate obligations
|
3,083
|
1.2
|
3,050
|
1.0
|
14,565
|
4.0
|
13,958
|
4.6
|
16,802
|
5.3
|
||||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
45,027
|
17.7
|
37,728
|
12.0
|
30,204
|
8.4
|
29,728
|
9.6
|
40,671
|
12.8
|
||||||||||||||||||||||||||||||
|
Equity securities
|
91
|
0.1
|
2,899
|
0.9
|
2,432
|
0.7
|
1,690
|
0.6
|
1,325
|
0.4
|
||||||||||||||||||||||||||||||
|
Total
|
$
|
254,782
|
100.0
|
$
|
314,017
|
100.0
|
$
|
359,737
|
100.0
|
$
|
306,146
|
100.0
|
$
|
317,301
|
100.0
|
|||||||||||||||||||||||||
2017
The Company's investment portfolio decreased by $59.2 million, or 18.9%, during the past year primarily due to investment cash flows being utilized to fund loan growth in 2017. During 2017, we purchased $28.8 million of U.S. Treasury securities, $6.1 million of U.S. agencies, $15.7 million of mortgage backed securities, $3.4 million of state and local obligations and $100,000 of equity securities in financial corporations, which helped to offset the $7.5 million of principal repayments and $52.6 million of calls and maturities that occurred during the year. We also sold $50.4 million of bonds and equities at a net gain of $1,022,000. The market value of our investment portfolio decreased approximately $2.3 million in 2017 due to interest rate fluctuations and sales of securities during 2017. Excluding our short term investments consisting of monies held primarily at the Federal Reserve, the effective yield on our investment portfolio for 2017 was 2.52% compared to 2.39% for 2016 on a tax equivalent basis.
During 2017, rates on the short end of the Treasury yield curve increased as a result of the increase in the federal funds rate and the potential for additional future increases in the federal funds rate. This resulted in a flattening of the yield curve. The investment strategy in 2017 was to utilize cashflows from the investment portfolio to fund the strong loan growth the Company has experienced, while maintaining a portfolio sufficient to support our various pledging requirements for deposits, borrowings and liquidity. Investment purchases have been focused on securities with short fixed maturities for treasury and agency securities and short repricing windows for asset backed securities. We have also focused our purchases on securities with lower risk weightings due to the loan growth experienced that carries a higher risk weight for capital adequacy purposes. We continually monitor interest rate trading ranges and try to focus purchases to times when rates are in the top third of the trading range. The Bank believes its investment strategy has appropriately mitigated its interest rate risk exposure if rates continue to rise while providing sufficient cashflows to fund loan growth expected as a result of the loan growth initiatives.
At December 31, 2017, the Company did not own any securities, other than government-sponsored and government-guaranteed mortgage-backed securities, that had an aggregate book value in excess of 10% of its stockholders' equity at that date.
34
The expected principal repayments at amortized cost and average weighted yields for the investment portfolio (excluding equity securities) as of December 31, 2017, are shown below (dollars in thousands). Expected principal repayments, which include prepayment speed assumptions for mortgage-backed securities, are significantly different than the contractual maturities detailed in Note 3 of the consolidated financial statements. Yields on tax-exempt securities are presented on a fully taxable equivalent basis, assuming a 34% tax rate, which was the rate in effect at December 31, 2017.
|
After One Year
|
After Five Years
|
|||||||||||||||||||||||||||||||||||||||
|
One Year or Less
|
to Five years
|
to Ten Years
|
After Ten Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Amortized
|
Yield
|
Amortized
|
Yield
|
Amortized
|
Yield
|
Amortized
|
Yield
|
Amortized
|
Yield
|
|||||||||||||||||||||||||||||||
|
Cost
|
%
|
Cost
|
%
|
Cost
|
%
|
Cost
|
%
|
Cost
|
%
|
|||||||||||||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. agency securities
|
$
|
33,502
|
1.2
|
$
|
65,952
|
1.7
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
99,454
|
1.5
|
|||||||||||||||||||||||||
|
U.S. treasuries
|
-
|
-
|
28,782
|
2.0
|
-
|
-
|
-
|
-
|
28,782
|
2.0
|
||||||||||||||||||||||||||||||
|
Obligations of state & political
|
||||||||||||||||||||||||||||||||||||||||
|
subdivisions
|
16,194
|
3.2
|
50,126
|
2.6
|
9,167
|
3.0
|
2,922
|
4.2
|
78,409
|
2.8
|
||||||||||||||||||||||||||||||
|
Corporate obligations
|
-
|
-
|
-
|
-
|
3,000
|
5.8
|
-
|
-
|
3,000
|
5.8
|
||||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
16,643
|
1.7
|
18,289
|
1.9
|
10,089
|
2.2
|
364
|
2.7
|
45,385
|
1.9
|
||||||||||||||||||||||||||||||
|
Total available-for-sale
|
$
|
66,339
|
1.8
|
$
|
163,149
|
1.7
|
$
|
22,256
|
3.0
|
$
|
3,286
|
4.0
|
$
|
255,030
|
2.1
|
|||||||||||||||||||||||||
At December 31, 2017, approximately 90.0% of the amortized cost of debt securities is expected to mature, call or pre-pay within five years or less. The Company expects that earnings from operations, the levels of cash held at the Federal Reserve and other correspondent banks, the high liquidity level of the available-for-sale securities, growth of deposits and the availability of borrowings from the Federal Home Loan Bank and other third party banks will be sufficient to meet future liquidity needs.
2016
The Company's investment portfolio decreased by $45.7 million, or 12.7%, during 2016 primarily due to investment cash flows being utilized to fund loan growth in 2016. During 2016, we purchased $28.6 million of U.S. agencies, $14.2 million of mortgage backed securities, $9.8 million of state and local obligations and $3.0 million of corporate obligations, which helped to offset the $6.1 million of principal repayments and $61.7 million of calls and maturities that occurred during the year. We also sold $30.1 million of bonds and equities at a net gain of $255,000. The market value of our investment portfolio decreased approximately $1.3 million in 2016 due to interest rate fluctuations. Excluding our short term investments consisting of monies held primarily at the Federal Reserve, the effective yield on our investment portfolio for 2016 was 2.39% compared to 2.69% for 2015 on a tax equivalent basis.
During 2016, rates on the short and long end of the Treasury yield curve increased, as the result of the increase in the federal funds rate and the potential for additional future increases in the federal funds rate, as well as the uncertainty surrounding the economic environment as a result of the 2016 presidential election. The investment strategy in 2016 was to purchase agency securities with maturities of less than five years, mortgage backed securities with predictable cash flows and high quality municipal bonds with high coupons.
At December 31, 2016, the Company did not own any securities, other than government-sponsored and government-guaranteed mortgage-backed securities, that had an aggregate book value in excess of 10% of its stockholders' equity at that date.
Loans
The Bank's lending efforts have historically focused on north central Pennsylvania and southern New York. With the acquisition of FNB and the opening of offices in Lancaster County, this focus has grown to include Lebanon, Schuylkill, Berks and Lancaster County markets of south central, Pennsylvania. In 2016, we opened a limited branch office in Union County that is staffed by a lending team to primarily support agricultural opportunities in central Pennsylvania. We also opened a full service branch in Mount Joy, Pennsylvania in 2016. In December 2017, we completed a branch acquisition in State College, which provides us with opportunities in Centre County, Pennsylvania. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships that our lending teams have with their customers, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank's website. The Bank offers a variety of loans, although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans. As of December 31, 2017, approximately 77.5% of our loan portfolio consisted of real estate loans. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors.
35
The Bank primarily offers fixed rate residential mortgage loans with terms of up to 25 years and adjustable rate mortgage loans (with amortization schedules up to 30 years) with interest rates and payments that adjust based on one, three, and five year fixed periods. Loan to value ratios are usually 80% or less with exceptions for individuals with excellent credit and low debt to income and/or high net worth. Adjustable rate mortgages are tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate. Home equity loans are written with terms of up to 15 years at fixed rates. Home equity lines of credit are variable rate loans tied to the Prime Rate generally with a ten year draw period followed by a ten year repayment period. Home equity loans are typically written with a maximum 80% loan to value.
Commercial real estate loan terms are generally 20 years or less, with one to five year adjustable interest rates. The adjustable rates are typically tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate with a maximum loan to value ratio of 80%. Where feasible, the Bank participates in the United States Department of Agriculture's (USDA) and Small Business Administration (SBA) guaranteed loan programs to offset risk and to further promote economic growth in our market area. During 2017, we originated $7.5 million in USDA and SBA guaranteed commercial real estate loans.
Agriculture is an important industry throughout our market areas. Therefore, the Bank has not only developed an agriculture lending team with significant experience that has a thorough understanding of this industry, but also hired two additional agricultural lending teams in 2016. We've also developed an agricultural policy to assist in underwriting agricultural loans. Agricultural loans are made to a diversified customer base that include dairy, swine and poultry farmers and their support businesses. Agricultural loans focus on character, cash flow and collateral, while also taking into account the particular risks of the industry. Loan terms are generally 20 years or less, with one to five year adjustable interest rates. The adjustable rates are typically tied to a margin above the comparable Federal Home Loan Bank of Pittsburgh borrowing rate with a maximum loan to value of 80%. The Bank is a preferred lender under the USDA's Farm Service Agency (FSA) and participates in the FSA guaranteed loan program.
The Bank, as part of its commitment to the communities it serves, is an active lender for projects by our local municipalities and school districts. These loans range from short term bridge financing to 20 year term loans for specific projects. These loans are typically written at rates that adjust at least every five years. Due to the size of certain municipal loans, we have developed participation lending relationships with other community banks that allow us to meet regulatory compliance issues, while meeting the needs of the customer. At December 31, 2017, the aggregate balance of our participation loans, in which a portion was sold to other lender's totaled $50.4 million.
Activity associated with exploration for natural gas remained limited in 2017 due to the low price of natural gas produced in our area. There was an increase in pipeline installations in 2017, which may lead to increased exploration in the future. While the Bank has loaned to companies that service the exploration activities, the Bank did not originate any loans to companies performing the actual drilling and exploration activities. Loans made by the Company were to service industry customers which included trucking companies, stone quarries and other support businesses. We also originated loans to businesses and individuals for restaurants, hotels and apartment rentals that were developed and expanded to meet the housing and living needs of the gas workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities were originated in a prudent and cautious manner and were subject to specific policies and procedures for lending to these entities, which included lower loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.
36
The following table shows the year-end composition of the loan portfolio for the five years ended December 31 (dollars in thousands):
|
|
2017
|
2016
|
2015
|
2014
|
2013
|
|||||||||||||||||||||||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
|
$
|
214,479
|
21.4
|
$
|
207,423
|
25.9
|
$
|
203,407
|
29.3
|
$
|
185,438
|
33.5
|
$
|
187,101
|
34.6
|
|||||||||||||||||||||||||
|
Commercial
|
308,084
|
30.8
|
252,577
|
31.6
|
237,542
|
34.2
|
190,945
|
34.5
|
193,087
|
35.7
|
||||||||||||||||||||||||||||||
|
Agricultural
|
239,957
|
24.0
|
123,624
|
15.5
|
57,822
|
8.3
|
24,639
|
4.4
|
22,001
|
4.1
|
||||||||||||||||||||||||||||||
|
Construction
|
13,502
|
1.3
|
25,441
|
3.2
|
15,011
|
2.2
|
6,353
|
1.1
|
8,937
|
1.7
|
||||||||||||||||||||||||||||||
|
Consumer
|
9,944
|
1.0
|
11,005
|
1.4
|
11,543
|
1.7
|
8,497
|
1.5
|
9,563
|
1.7
|
||||||||||||||||||||||||||||||
|
Other commercial loans
|
72,013
|
7.2
|
58,639
|
7.3
|
57,549
|
8.2
|
47,451
|
8.6
|
44,488
|
8.2
|
||||||||||||||||||||||||||||||
|
Other agricultural loans
|
37,809
|
3.8
|
23,388
|
2.9
|
13,657
|
2.0
|
11,065
|
2.0
|
9,541
|
1.8
|
||||||||||||||||||||||||||||||
|
State & political subdivision loans
|
104,737
|
10.5
|
97,514
|
12.2
|
98,500
|
14.1
|
79,717
|
14.4
|
65,894
|
12.2
|
||||||||||||||||||||||||||||||
|
Total loans
|
1,000,525
|
100.0
|
799,611
|
100.0
|
695,031
|
100.0
|
554,105
|
100.0
|
540,612
|
100.0
|
||||||||||||||||||||||||||||||
|
Less allowance for loan losses
|
11,190
|
8,886
|
7,106
|
6,815
|
7,098
|
|||||||||||||||||||||||||||||||||||
|
Net loans
|
$
|
989,335
|
$
|
790,725
|
$
|
687,925
|
$
|
547,290
|
$
|
533,514
|
||||||||||||||||||||||||||||||
|
|
2017/2016
|
2016/2015
|
||||||||||||||
|
|
Change
|
Change
|
||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Real estate:
|
||||||||||||||||
|
Residential
|
$
|
7,056
|
3.4
|
$
|
4,016
|
2.0
|
||||||||||
|
Commercial
|
55,507
|
22.0
|
15,035
|
6.3
|
||||||||||||
|
Agricultural
|
116,333
|
94.1
|
65,802
|
113.8
|
||||||||||||
|
Construction
|
(11,939
|
)
|
(46.9
|
)
|
10,430
|
69.5
|
||||||||||
|
Consumer
|
(1,061
|
)
|
(9.6
|
)
|
(538
|
)
|
(4.7
|
)
|
||||||||
|
Other commercial loans
|
13,374
|
22.8
|
1,090
|
1.9
|
||||||||||||
|
Other agricultural loans
|
14,421
|
61.7
|
9,731
|
71.3
|
||||||||||||
|
State & political subdivision loans
|
7,223
|
7.4
|
(986
|
)
|
(1.0
|
)
|
||||||||||
|
Total loans
|
$
|
200,914
|
25.1
|
$
|
104,580
|
15.0
|
||||||||||
2017
Total loans grew $200.9 million in 2017 from $799.6 million at the end of 2016 to $1.0 billion at the end of 2017. In December 2017, the Company completed the acquisition of a branch in State College, Pennsylvania, which included loans totaling $39.8 million. During 2017, excluding the branch acquisition, the Company experienced growth in agricultural real estate loans of $116.3 million, commercial real estate loans of $35.7 million, other agricultural loans of $14.4 million, other commercial loans of $7.5 million and state and political subdivision loans of $4.5 million. A portion of the increases in agricultural real estate and commercial real estate was due to transfers from construction, which decreased $12.3 million, excluding the impact of the State College branch acquisition. The growth in agricultural and commercial loan categories was primarily in our southcentral and central Pennsylvania markets and is a result of entering the south central and central Pennsylvania markets as a result of the FNB acquisition and the hiring of additional agricultural and commercial lenders.
Excluding the State College branch acquisition, residential real estate loans decreased $3.7 million. Demand for non-conforming loans remains limited and was highly competitive, especially in the north central Pennsylvania market. During 2017, $24.3 million of residential real estate loans were originated for sale on the secondary market, which compares to $22.2 million for 2016. For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income.
37
2016
Total loans grew $104.6 million in 2016 from $695.0 million at the end of 2015 to $799.6 million at the end of 2016. During 2016, the Company experienced growth in agricultural real estate loans of $65.8 million, commercial real estate loans of $15.0 million, construction loans of $10.4 million, other agricultural loans of $9.7 million and other commercial loans of $1.1 million The increases in these areas is the result of entering into the south central Pennsylvania market via the FNB acquisition, the hiring of additional agricultural and commercial lenders in the south central market and the hiring of an agricultural lending team to enter the central Pennsylvania market.
The increase of $4.0 million in residential loans was due us entering the south central Pennsylvania market and making additional residential loans in this market. During 2016, $22.2 million of loans were originated for sale on the secondary market, which compares to $18.9 million for 2015.
The following table shows the maturity of commercial business and agricultural, state and political subdivision loans, commercial real estate loans, and construction loans as of December 31, 2017, classified according to the sensitivity to changes in interest rates within various time intervals (in thousands). The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.
|
|
Commercial,
|
|||||||||||
|
|
municipal,
|
Real estate
|
||||||||||
|
|
agricultural
|
construction
|
Total
|
|||||||||
|
Maturity of loans:
|
||||||||||||
|
One year or less
|
$
|
23,115
|
$
|
1,062
|
$
|
24,177
|
||||||
|
Over one year through five years
|
79,769
|
124
|
79,893
|
|||||||||
|
Over five years
|
659,716
|
12,316
|
672,032
|
|||||||||
|
Total
|
$
|
762,600
|
$
|
13,502
|
$
|
776,102
|
||||||
|
Sensitivity of loans to changes in interest
|
||||||||||||
|
rates - loans due after December 31, 2018:
|
||||||||||||
|
Predetermined interest rate
|
$
|
107,942
|
$
|
861
|
$
|
108,803
|
||||||
|
Floating or adjustable interest rate
|
631,543
|
11,579
|
643,122
|
|||||||||
|
Total
|
$
|
739,485
|
$
|
12,440
|
$
|
751,925
|
||||||
Allowance for Loan Losses and Credit Quality Risk
The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb probable future loan losses inherent in the loan portfolio. The provision for loan losses is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The following table presents an analysis of the change in the allowance for loan losses and a summary of our non-performing assets for the years ended December 31, 2017, 2016, 2015, 2014 and 2013. All non-accruing troubled debt restructurings (TDRs) are also included the non-accruing loans totals.
38
|
|
December 31,
|
|||||||||||||||||||
|
|
2017
|
2016
|
2015
|
2014
|
2013
|
|||||||||||||||
|
Balance
|
||||||||||||||||||||
|
at beginning of period
|
$
|
8,886
|
$
|
7,106
|
$
|
6,815
|
$
|
7,098
|
$
|
6,784
|
||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Residential
|
107
|
85
|
66
|
97
|
17
|
|||||||||||||||
|
Commercial
|
41
|
100
|
84
|
516
|
62
|
|||||||||||||||
|
Agricultural
|
30
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Consumer
|
130
|
100
|
47
|
47
|
54
|
|||||||||||||||
|
Other commercial loans
|
-
|
55
|
41
|
250
|
1
|
|||||||||||||||
|
Other agricultural loans
|
5
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total loans charged-off
|
313
|
340
|
238
|
910
|
134
|
|||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Residential
|
-
|
-
|
-
|
-
|
5
|
|||||||||||||||
|
Commercial
|
11
|
479
|
14
|
15
|
5
|
|||||||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Consumer
|
49
|
88
|
33
|
27
|
33
|
|||||||||||||||
|
Other commercial loans
|
16
|
33
|
2
|
-
|
-
|
|||||||||||||||
|
Other agricultural loans
|
1
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total loans recovered
|
77
|
600
|
49
|
42
|
43
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Net loans charged-off (recovered)
|
236
|
(260
|
)
|
189
|
868
|
91
|
||||||||||||||
|
Provision charged to expense
|
2,540
|
1,520
|
480
|
585
|
405
|
|||||||||||||||
|
Balance at end of year
|
$
|
11,190
|
$
|
8,886
|
$
|
7,106
|
$
|
6,815
|
$
|
7,098
|
||||||||||
|
|
||||||||||||||||||||
|
Loans outstanding at end of period
|
$
|
1,000,525
|
$
|
799,611
|
$
|
695,031
|
$
|
554,105
|
$
|
540,612
|
||||||||||
|
Average loans outstanding, net
|
$
|
883,355
|
$
|
725,881
|
$
|
577,992
|
$
|
540,541
|
$
|
516,748
|
||||||||||
|
Non-performing assets:
|
||||||||||||||||||||
|
Non-accruing loans
|
$
|
10,171
|
$
|
11,454
|
$
|
6,531
|
$
|
6,599
|
$
|
8,097
|
||||||||||
|
Accrual loans - 90 days or more past due
|
555
|
405
|
623
|
836
|
697
|
|||||||||||||||
|
Total non-performing loans
|
$
|
10,726
|
$
|
11,859
|
$
|
7,154
|
$
|
7,435
|
$
|
8,794
|
||||||||||
|
Foreclosed assets held for sale
|
1,119
|
1,036
|
1,354
|
1,792
|
1,360
|
|||||||||||||||
|
Total non-performing assets
|
$
|
11,845
|
$
|
12,895
|
$
|
8,508
|
$
|
9,227
|
$
|
10,154
|
||||||||||
|
|
||||||||||||||||||||
|
Troubled debt restructurings (TDR)
|
||||||||||||||||||||
|
Non-accruing TDRs
|
$
|
6,798
|
$
|
6,758
|
$
|
3,397
|
$
|
3,654
|
$
|
4,701
|
||||||||||
|
Accrual TDRs
|
13,056
|
6,095
|
2,243
|
2,502
|
2,510
|
|||||||||||||||
|
Total troubled debt restructurings
|
$
|
19,854
|
$
|
12,853
|
$
|
5,640
|
$
|
6,156
|
$
|
7,211
|
||||||||||
|
Net charge-offs (recoveries) to average loans
|
0.03
|
%
|
(0.04
|
%)
|
0.03
|
%
|
0.16
|
%
|
0.02
|
%
|
||||||||||
|
Allowance to total loans
|
1.12
|
%
|
1.11
|
%
|
1.02
|
%
|
1.23
|
%
|
1.31
|
%
|
||||||||||
|
Allowance to total non-performing loans
|
104.33
|
%
|
74.93
|
%
|
99.33
|
%
|
91.66
|
%
|
80.71
|
%
|
||||||||||
|
Non-performing loans as a percent of loans
|
||||||||||||||||||||
|
net of unearned income
|
1.07
|
%
|
1.48
|
%
|
1.03
|
%
|
1.34
|
%
|
1.63
|
%
|
||||||||||
|
Non-performing assets as a percent of loans
|
||||||||||||||||||||
|
net of unearned income
|
1.18
|
%
|
1.61
|
%
|
1.22
|
%
|
1.67
|
%
|
1.88
|
%
|
||||||||||
39
The Company believes it utilizes a disciplined and thorough loan review process based upon its internal loan policy approved by the Company's Board of Directors. The purpose of the review is to assess loan quality, analyze delinquencies, identify problem loans, evaluate potential charge-offs and recoveries, and assess general overall economic conditions in the markets served. An external independent loan review is performed on our commercial portfolio semi-annually for the Company. The external consultant is engaged to 1) review a minimum of 50% (55% for loans between 2016 and 2013 and 60% of loans prior to 2013) of the dollar volume of the commercial loan portfolio on an annual basis, 2) new loans originated for over $1.0 million in the last year, 3) a majority of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate. As part of this review, our underwriting process and loan grading system is evaluated.
Management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate as of December 31, 2017. However, future adjustments could be required if circumstances differ substantially from assumptions and estimates used in making the initial determination. A prolonged downturn in the economy, high unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, loan loss provisions and reduction in income. Additionally, bank regulatory agencies periodically examine the Bank's allowance for loan losses. The banking agencies could require the recognition of additions to the allowance for loan losses based upon their judgment of information available to them at the time of their examination.
On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports. Based on data surrounding the collection process of each identified loan, the loan may be added or deleted from the monthly watch list. The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may choose to include. Watch list loans are continually monitored going forward until satisfactory conditions exist that allow management to upgrade and remove the loan from the watchlist. In certain cases, loans may be placed on non-accrual status or charged-off based upon management's evaluation of the borrower's ability to pay. All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans, other commercial loans and other agricultural loans, on non-accrual are evaluated quarterly for impairment.
The adequacy of the allowance for loan losses is subject to a formal, quarterly analysis by management of the Company. In order to better analyze the risks associated with the loan portfolio, the entire portfolio is divided into several categories. As stated above, loans on non-accrual status are specifically reviewed for impairment and given a specific reserve, if appropriate. Loans evaluated and not found to be impaired are included with other performing loans, by category, by their respective homogenous pools. Three year average historical loss factors were calculated for each pool and applied to the performing portion of the loan category for each year presented. The historical loss factors for both reviewed and homogeneous pools are adjusted based upon the following qualitative factors:
|
·
|
Level of and trends in delinquencies, impaired/classified loans
|
|
§
|
Change in volume and severity of past due loans
|
|
§
|
Volume of non-accrual loans
|
|
§
|
Volume and severity of classified, adversely or graded loans
|
|
·
|
Level of and trends in charge-offs and recoveries
|
|
·
|
Trends in volume, terms and nature of the loan portfolio
|
|
·
|
Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices
|
|
·
|
Changes in the quality of the Bank's loan review system
|
|
·
|
Experience, ability and depth of lending management and other relevant staff
|
|
·
|
National, state, regional and local economic trends and business conditions
|
|
§
|
General economic conditions
|
|
§
|
Unemployment rates
|
|
§
|
Inflation / CPI
|
|
§
|
Changes in values of underlying collateral for collateral-dependent loans
|
40
|
·
|
Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses.
|
|
·
|
Existence and effect of any credit concentrations, and changes in the level of such concentrations
|
|
·
|
Any change in the level of board oversight
|
See also "Note 4 – Loans and Related Allowance for Loan Losses" to the consolidated financial statements.
The allowance for loan losses was $11,190,000 or 1.12% of total loans as of December 31, 2017 as compared to $8,886,000 or 1.11% of loans as of December 31, 2016. The $2,304,000 increase is a result of a $2,540,000 provision for loan losses less net charge-offs of $236,000. The decrease as a percent of loans for 2017, 2016 and 2015 when compared to 2014 and 2013 is attributable to the increase in loans as part of the acquisition of FNB and the State College branch acquisition and the associated purchase accounting adjustments that were applied to the acquired loan portfolios. The following table shows the distribution of the allowance for loan losses and the percentage of loans compared to total loans by loan category (dollars in thousands) as of December 31:
|
|
2017
|
2016
|
2015
|
2014
|
2013
|
|||||||||||||||||||||||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
|
$
|
1,049
|
21.4
|
$
|
1,064
|
25.9
|
$
|
905
|
29.3
|
$
|
878
|
33.5
|
$
|
946
|
34.6
|
|||||||||||||||||||||||||
|
Commercial
|
3,867
|
30.8
|
3,589
|
31.6
|
3,376
|
34.2
|
3,419
|
34.5
|
3,983
|
35.7
|
||||||||||||||||||||||||||||||
|
Agricultural
|
3,143
|
24.0
|
1,494
|
15.5
|
409
|
8.3
|
451
|
4.4
|
575
|
4.1
|
||||||||||||||||||||||||||||||
|
Construction
|
23
|
1.3
|
47
|
3.2
|
24
|
2.2
|
26
|
1.1
|
50
|
1.7
|
||||||||||||||||||||||||||||||
|
Consumer
|
124
|
1.0
|
122
|
1.4
|
102
|
1.7
|
84
|
1.5
|
105
|
1.7
|
||||||||||||||||||||||||||||||
|
Other commercial loans
|
1,272
|
7.2
|
1,327
|
7.3
|
1,183
|
8.2
|
1,007
|
8.6
|
686
|
8.2
|
||||||||||||||||||||||||||||||
|
Other agricultural loans
|
492
|
3.8
|
312
|
2.9
|
122
|
2.0
|
217
|
2.0
|
256
|
1.8
|
||||||||||||||||||||||||||||||
|
State & political subdivision loans
|
816
|
10.5
|
833
|
12.2
|
593
|
14.1
|
545
|
14.4
|
330
|
12.2
|
||||||||||||||||||||||||||||||
|
Unallocated
|
404
|
N/A
|
98
|
N/A
|
392
|
N/A
|
188
|
N/A
|
167
|
N/A
|
||||||||||||||||||||||||||||||
|
Total allowance for loan losses
|
$
|
11,190
|
100.0
|
$
|
8,886
|
100.0
|
$
|
7,106
|
100.0
|
$
|
6,815
|
100.0
|
$
|
7,098
|
100.0
|
|||||||||||||||||||||||||
As a result of previous loss experiences and other risk factors utilized in determining the allowance, the Bank's allocation of the allowance does not directly correspond to the actual balances of the loan portfolio. While commercial and agricultural real estate loans total 54.8% of the loan portfolio, 62.7% of the allowance is assigned to these portions of the loan portfolio as these loans have more inherent risks than residential real estate or loans to state and political subdivisions. Residential real estate loans comprise 21.4% of the loan portfolio as of December 31, 2017 and 9.37% of the allowance is assigned to this segment as generally there are less inherent risks then commercial and agricultural loans.
The following table identifies amounts of loans contractually past due 30 to 90 days and non-performing loans by loan category, as well as the change from December 31, 2016 to December 31, 2017 in non-performing loans (dollars in thousands). Non-performing loans include those loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.
|
|
December 31, 2017
|
December 31, 2016
|
||||||||||||||||||||||||||||||
|
|
30 - 89 Days
|
Non-Performing Loans
|
30 - 89 Days
|
Non-Performing Loans
|
||||||||||||||||||||||||||||
|
|
Past Due
|
90 Days Past
|
Non-
|
Total Non-
|
Past Due
|
90 Days Past
|
Non-
|
Total Non-
|
||||||||||||||||||||||||
|
|
Accruing
|
Due Accruing
|
accrual
|
Performing
|
Accruing
|
Due Accruing
|
accrual
|
Performing
|
||||||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||||||||||
|
Residential
|
$
|
1,550
|
$
|
218
|
$
|
1,386
|
$
|
1,604
|
$
|
1,010
|
$
|
333
|
$
|
1,570
|
$
|
1,903
|
||||||||||||||||
|
Commercial
|
1,519
|
162
|
5,192
|
5,354
|
1,703
|
-
|
4,445
|
4,445
|
||||||||||||||||||||||||
|
Agricultural
|
242
|
30
|
175
|
205
|
-
|
-
|
1,340
|
1,340
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
133
|
133
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
|
Consumer
|
86
|
7
|
42
|
49
|
131
|
67
|
42
|
109
|
||||||||||||||||||||||||
|
Other commercial loans
|
50
|
32
|
2,637
|
2,669
|
78
|
-
|
4,057
|
4,057
|
||||||||||||||||||||||||
|
Other agricultural loans
|
42
|
106
|
606
|
712
|
77
|
5
|
-
|
5
|
||||||||||||||||||||||||
|
Total nonperforming loans
|
$
|
3,489
|
$
|
555
|
$
|
10,171
|
$
|
10,726
|
$
|
2,999
|
$
|
405
|
$
|
11,454
|
$
|
11,859
|
||||||||||||||||
41
|
|
||||||||
|
|
Change in Non-Performing Loans
|
|||||||
|
2017 / 2016
|
||||||||
|
|
Amount
|
%
|
||||||
|
Real estate:
|
||||||||
|
Residential
|
$
|
(299
|
)
|
(15.7
|
)
|
|||
|
Commercial
|
909
|
20.4
|
||||||
|
Agricultural
|
(1,135
|
)
|
(84.7
|
)
|
||||
|
Construction
|
133
|
-
|
||||||
|
Consumer
|
(60
|
)
|
(55.0
|
)
|
||||
|
Other commercial loans
|
(1,388
|
)
|
(34.2
|
)
|
||||
|
Other agricultural loans
|
707
|
14,140.0
|
||||||
|
Total nonperforming loans
|
$
|
(1,133
|
)
|
(9.6
|
)
|
|||
The following table shows the distribution of non-performing loans by loan category (dollars in thousands) for the past five years as of December 31:
|
|
Non-Performing Loans
|
|||||||||||||||||||
|
|
2017
|
2016
|
2015
|
2014
|
2013
|
|||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Residential
|
$
|
1,604
|
$
|
1,903
|
$
|
1,402
|
$
|
1,174
|
$
|
1,037
|
||||||||||
|
Commercial
|
5,354
|
4,445
|
4,482
|
5,320
|
7,591
|
|||||||||||||||
|
Agricultural
|
205
|
1,340
|
34
|
-
|
-
|
|||||||||||||||
|
Construction
|
133
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Consumer
|
49
|
109
|
64
|
53
|
16
|
|||||||||||||||
|
Other commercial loans
|
2,669
|
4,057
|
1,172
|
888
|
150
|
|||||||||||||||
|
Other agricultural loans
|
712
|
5
|
-
|
-
|
-
|
|||||||||||||||
|
State & political subdivision loans
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total nonperforming loans
|
10,726
|
11,859
|
7,154
|
7,435
|
8,794
|
|||||||||||||||
For the year ended December 31, 2017, we recorded a provision for loan losses of $2,540,000 which compares to $1,520,000 for the same period in 2016, an increase of $1,020,000. The increase is primarily attributable to the organic loan growth for 2017. Non-performing loans decreased $1,133,000 from December 31, 2016 to December 31, 2017 with the decrease being primarily related to one agricultural relationship that paid off in 2017. At December 31, 2017, approximately 63.3% of the Bank's non-performing loans are associated with the following three customer relationships:
|
·
|
A commercial loan relationship of $3.2 million, secured by undeveloped land, stone quarries and equipment, was on non-accrual status as of December 31, 2017. The slowdown in the exploration for natural gas has significantly impacted the cash flows of the customer, who provides excavation services and stone for pad construction related to these activities. During 2017, the Company had the underlying collateral appraised. The appraisals indicated a decrease in collateral values compared to the appraisals ordered for the loan origination, however, the loan is still considered well secured on a loan to value basis. Management determined that no specific reserve was required as of December 31, 2017.
|
|
·
|
A commercial loan relationship of $2.7 million, secured by residential rental properties, was on non-accrual status as of December 31, 2017. In the first quarter of 2011, the Company and borrower entered into a forbearance agreement to restructure the debt. In July of 2013, the customer filed for bankruptcy under Chapter 11 and a Trustee was appointed in January of 2014. In 2015, the Trustee decreased the loan payments below what was agreed to in the forbearance agreement. This decrease is currently being litigated in bankruptcy court. As a result of the decrease, the relationship has become more than 90 days past due. During 2016, the Company appraised the underlying collateral. The appraisals indicated a slight decrease in collateral values compared to the appraisals ordered for the loan origination, however, the loan is still considered well secured on a loan to value basis. We continue to monitor the bankruptcy proceedings to identify potential changes in the customer's operations and the impact these would have on the loan payments for our loans to the customer and the underlying collateral that supports these loans. As of December 31, 2017, there was no specific reserve for this relationship.
|
42
|
·
|
A commercial loan relationship of $902,000, secured by residential rental properties, was on non-accrual status as of December 31, 2017. The slowdown in the exploration for natural gas has significantly impacted the cash flows of the customer, as he rented his properties to individuals working on the exploration activities. During 2017, the Company had the underlying collateral appraised. The appraisals indicated a decrease in collateral values compared to the appraisals ordered for the loan origination, however, the loan is still considered well secured on a loan to value basis. Management determined that no specific reserve was required as of December 31, 2017.
|
Management believes that the allowance for loan losses at December 31, 2017 was adequate at that date, which was based on the following factors:
|
·
|
Three loan relationships comprise 63.3% of the non-performing loan balance, whose debt is considered well collateralized as of December 31, 2017.
|
|
·
|
As seen on page 39, the Company has a history of low charge-offs, which continued in 2017 as the net charge-offs were .03% of average loans and only $236,000. In 2016, a net recovery was experienced as the result of recovering a loan that was partially charged off in 2014.
|
Bank Owned Life Insurance
The Company holds bank owned life insurance policies to offset future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits. As of December 31, 2017 and 2016, the cash surrender value of the life insurance was $26.9 million and $26.2 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled $660,000, $688,000 and $628,000 in 2017, 2016 and 2015, respectively. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers' credit ratings.
Effective January 1, 2015, the Company restructured its agreements so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under the restructured agreements, the employee's beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The net amount at risk is the total death benefit payable less the cash surrender value of the policy as of the date of death. The policies acquired as part of the acquisition of FNB, provide a fixed dollar benefit for the beneficiaries estate, which is dependent on several factors including whether the covered individual was a Director of FNB or an employee of FNB and their salary level. As of December 31, 2017 and 2016, included in other liabilities on the Consolidated Balance sheet is a liability of $578,000 and $569,000, respectively, for the obligation under the split-dollar benefit agreements.
Other Assets
2017
Other assets increased $1.2 million in 2017 to $14.7 million from $13.5 million in 2016. As a result of an increase in FHLB borrowings regulatory stock increased $1.5 million. The deferred tax asset decreased $1.3 million, primarily due to a change in the federal income tax rate to 21%. As a result of funding the pension plans, pension plan assets increased from $0 to $717,000.
2016
Other assets increased $1.4 million in 2016 to $13.5 million from $12.1 million in 2015. Due to the increase in FHLB borrowings, regulatory stock increased $1.8 million.
43
Deposits
The following table shows the breakdown of deposits by deposit type (dollars in thousands) at December 31:
|
|
2017
|
2016
|
2015
|
|||||||||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||
|
Non-interest-bearing deposits
|
$
|
171,840
|
15.6
|
$
|
147,425
|
14.7
|
$
|
150,960
|
15.3
|
|||||||||||||||
|
NOW accounts
|
337,307
|
30.5
|
305,862
|
30.4
|
279,655
|
28.3
|
||||||||||||||||||
|
Savings deposits
|
184,057
|
16.7
|
170,722
|
17.0
|
170,277
|
17.2
|
||||||||||||||||||
|
Money market deposit accounts
|
145,287
|
13.1
|
116,880
|
11.6
|
105,229
|
10.7
|
||||||||||||||||||
|
Certificates of deposit
|
266,452
|
24.1
|
264,614
|
26.3
|
281,910
|
28.5
|
||||||||||||||||||
|
Total
|
$
|
1,104,943
|
100.0
|
$
|
1,005,503
|
100.0
|
$
|
988,031
|
100.0
|
|||||||||||||||
|
|
||||||||||||||||||||||||
|
|
2017/2016
|
2016/2015
|
||||||||||||||||||||||
|
|
Change
|
Change
|
||||||||||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||||
|
Non-interest-bearing deposits
|
$
|
24,415
|
16.6
|
$
|
(3,535
|
)
|
(2.3
|
)
|
||||||||||||||||
|
NOW accounts
|
31,445
|
10.3
|
26,207
|
9.4
|
||||||||||||||||||||
|
Savings deposits
|
13,335
|
7.8
|
445
|
0.3
|
||||||||||||||||||||
|
Money market deposit accounts
|
28,407
|
24.3
|
11,651
|
11.1
|
||||||||||||||||||||
|
Certificates of deposit
|
1,838
|
0.7
|
(17,296
|
)
|
(6.1
|
)
|
||||||||||||||||||
|
Total
|
$
|
99,440
|
9.9
|
$
|
17,472
|
1.8
|
||||||||||||||||||
2017
Total deposits increased $99.4 million in 2017, or 9.9%. The State College branch acquisition accounted for $37.9 million of this growth, with the remaining $61.5 million being organic growth. Excluding the acquisition, growth was experienced across all product lines and customer types, with the exception of certificates of deposit (CD). Excluding the acquisition, non-interest bearing accounts increased $18.9 million in 2017. As a percentage of total deposits, non-interest bearing deposits totaled 15.6% as of the end of 2017, which compares to 14.7% at the end of 2016. In order to manage our overall cost of funds, the Company continues to focus on adding low cost deposits by having several checking products available for retail customers as well as being the primary checking account for commercial customers who also have loans with the Company.
NOW accounts increased by $31.4 million and money market deposit accounts increased by $10.1 million, exclusive of the acquisition, since the end of 2016. The primary causes of the increase in NOW accounts and money market accounts was in state political organizations as we continue to gather deposits from our local municipalities and school districts. Due to the low interest rate environment, individuals moved money from certificates of deposit to savings accounts. Excluding the acquisition, savings accounts increased $12.6 million, CDs decreased $11.4 million. During 2017, the Company continued to pay historically low rates on certificates of deposits due to the interest rate environment. Certain customers who typically utilize certificate of deposits as a means of generating income or as a longer term investment option, were continuing to move funds into money market and savings accounts that still paid interest in order to maintain flexibility for potentially rising interest rates. The rates paid on certificates of deposit by the Company remain competitive with rates paid by our competition. With the increase in the fed funds rate during 2017, the Bank increased interest rates on both certificates of deposits and certain transactional deposit accounts.
2016
Total deposits increased $17.5 million in 2016, or 1.8%. The primary driver of the increase was an increase in public deposits. This was due to the fact that at December 31, 2015, the Commonwealth of Pennsylvania had not passed a budget for the 2015-2016 fiscal year and as a result was not passing funds through to local public governments who maintain their deposit accounts with the Company. As a result, to fund operations, these entities were experiencing significant decreases in their deposit balances. Once a budget was passed in 2016, funding was restored to the local public governments.
44
Non-interest bearing deposits decreased $3.5 million in 2016. As a percentage of total deposits, non-interest bearing deposits totaled 14.7% as of the end of 2016, which compares to 15.3% at the end of 2015.
NOW accounts increased by $26.2 million and money market deposit accounts increased by $11.7 million since the end of 2015. The primary causes of the increase in NOW accounts and money market accounts was the resolution of the Pennsylvania budget stalemate described previously and transfers from certificates of deposit. Certificates of deposits decreased in 2016 by $17.3 million. During 2016 the Company continued to pay historically low rates on CDs, which resulted in the Company's customers looking for other investment alternatives and liquidity.
Remaining maturities of certificates of deposit of $100,000 or more are as follows (dollars in thousands) at December 31:
|
|
2017
|
2016
|
2015
|
|||||||||
|
3 months or less
|
$
|
15,118
|
$
|
13,402
|
$
|
17,475
|
||||||
|
Over 3 months through 6 months
|
12,461
|
10,299
|
11,804
|
|||||||||
|
Over 6 months through 12 months
|
23,775
|
41,481
|
27,226
|
|||||||||
|
Over 12 months
|
82,572
|
59,324
|
69,875
|
|||||||||
|
Total
|
$
|
133,926
|
$
|
124,506
|
$
|
126,380
|
||||||
|
As a percent of total
|
||||||||||||
|
certificates of deposit
|
50.26
|
%
|
47.05
|
%
|
44.83
|
%
|
||||||
Interest expense on certificates of deposit of $100,000 or more amounted to $1,504,000, $1,415,000 and $1,406,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
Deposits by type of depositor are as follows (dollars in thousands) at December 31:
|
|
2017
|
2016
|
2015
|
|||||||||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||
|
Individuals
|
$
|
651,845
|
59.0
|
$
|
624,030
|
62.0
|
$
|
634,109
|
64.2
|
|||||||||||||||
|
Businesses and other organizations
|
229,425
|
20.8
|
200,718
|
20.0
|
193,527
|
19.6
|
||||||||||||||||||
|
State & political subdivisions
|
223,673
|
20.2
|
180,755
|
18.0
|
160,395
|
16.2
|
||||||||||||||||||
|
Total
|
$
|
1,104,943
|
100.0
|
$
|
1,005,503
|
100.0
|
$
|
988,031
|
100.0
|
|||||||||||||||
Borrowed Funds
2017
Borrowed funds increased $35.0 million during 2017. The increase was associated with an increase of $36.3 million of short term borrowings from the FHLB, which was used to fund the organic loan growth experienced by the Bank in 2017. In addition, we experienced a $682,000 increase in repurchase agreements. Term loans totaled $14.5 million and $16.5 million as of December 31, 2017 and 2016, respectively. The change in term loans was due to a $2.0 million maturity in 2017 (see Note 9 of the consolidated financial statements for additional information). Management continually monitors interest rates in order to minimize interest rate risk in future years and as part of this may extend some of the short term borrowings via term notes. Short term borrowings from the FHLB were $77.7 million as of December 21, 2017 compared to $41.3 million as of December 31, 2016.
2016
Borrowed funds increased $38.0 million during 2016. The increase was associated with an increase of $39.7 million of short term borrowings from the FHLB, which was used to fund the organic loan growth experienced by the Bank in 2016. The increase was offset by a decrease of $1.7 in repurchase agreements. Term loans totaled $16.5 million as of December 31, 2016 and 2015 (see Note 9 of the consolidated financial statements for additional information). Short term borrowings from the FHLB were $41.3 million as of December 21, 2016 compared to $1.6 million as of December 31, 2015.
45
Other Liabilities
2017
Other liabilities decreased $1.5 million during 2017, or 10.8%. The primary driver of the decrease was a decrease in pension liabilities due to contributions made to the plan in 2017.
2016
Other liabilities increased $1.0 million during 2016, or 8.08%. The primary driver of this increase was a contract enhancement payment, which will be recognized over the life of the contract of five years, which had a balance at December 31, 2016 of $1.3 million.
Stockholders' Equity
We evaluate stockholders' equity in relation to total assets and the risk associated with those assets. The greater our capital resources, the greater the likelihood of meeting our cash obligations and absorbing unforeseen losses. For these reasons, capital adequacy has been, and will continue to be, of paramount importance. Due to its importance, we develop a capital plan and stress test capital levels using various techniques and assumptions annually to ensure that in the event of unforeseen circumstances, we would remain in compliance with our capital plan approved by the Board of Directors and regulatory requirement levels.
Our Board of Directors determines our cash dividend rate after considering our capital requirements, current and projected net income, and other factors. In 2017 and 2016, the Company paid out 44.97% and 44.12% of net income in cash dividends, respectively.
As of December 31, 2017, the total number of common shares outstanding was 3,486,874. For comparative purposes, outstanding shares for prior periods were adjusted for the June 2017 stock dividend in computing earnings and cash dividends per share as detailed in Note 1 of the consolidated financial statements. During 2017, we purchased 17,990 shares of treasury stock at a weighted average cost of $54.40 per share. The Company awarded 4,482 shares of restricted stock to employees at a weighted average cost per share of $53.84 under an equity incentive plan. The Board of Directors was awarded 1,350 shares at a cost of $53.47 per share under equity incentive program.
There are currently four federal regulatory measures of capital adequacy. The Company's ratios meet the regulatory standards for well capitalized for 2017 and 2016, as detailed in Note 14 of the consolidated financial statements.
2017
Stockholders' equity increased 4.7% in 2017 to $129.0 million. Excluding accumulated other comprehensive income, which is the after-tax effect of unrealized holding gains and losses on available-for-sale securities and additional pension obligation, stockholders' equity increased $7.7 million, or 6.2%. This increase is due to net income of $13,025,000, offset by net cash dividends of $5,177,000 and net treasury stock activity of $21,000. All of the Company's debt investment securities are classified as available-for-sale, making this portion of the Company's balance sheet more sensitive to the changing market value of investments. Accumulated other comprehensive income decreased $2,006,000 from December 31, 2016 as result of the decrease in the fair market value of the investment portfolio and the cumulative effect adjustment for the adoption of ASU 2018-02 - Income Statement-Reporting Comprehensive Income (Topic 220). Total stockholders' equity was approximately 9.47% of total assets as of December 31, 2017, compared to 10.08% of total assets as of December 31, 2016.
2016
Stockholders' equity increased 2.9% in 2016 to $123.3 million. Excluding accumulated other comprehensive income, stockholders' equity increased $4.7 million, or 3.9%. This increase is due to net income of $12,638,000, offset by net cash dividends of $5,081,000 and net treasury stock activity of $2,391,000. Accumulated other comprehensive income decreased $1,156,000 from December 31, 2015 primarily as result of the decrease in the fair market value of the investment portfolio. Total stockholders' equity was approximately 10.08% of total assets as of December 31, 2016, compared to 10.30% of total assets as of December 31, 2015.
46
LIQUIDITY
Liquidity is a measure of the Company's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. Liquidity is needed to meet depositors' withdrawal demands, extend credit to meet borrowers' needs, provide funds for normal operating expenses and cash dividends, and fund future capital expenditures.
To maintain proper liquidity, we use funds management policies along with our investment and asset liability policies to assure we can meet our financial obligations to depositors, credit customers and stockholders. Management monitors liquidity by reviewing loan demand, investment opportunities, deposit pricing and the cost and availability of borrowing funds. Additionally, the bank has established various limits and ratios to monitor liquidity. On a quarterly basis, we stress test our liquidity position to ensure that the Bank has the capability of meeting its cash flow requirements in the event of unforeseen circumstances. The Company's historical activity in this area can be seen in the Consolidated Statement of Cash Flows from investing and financing activities.
Cash generated by operating activities, investing activities and financing activities influences liquidity management. The most important source of funds is the deposits that are primarily core deposits (deposits from customers with other relationships). Short-term debt from the Federal Home Loan Bank supplements the Company's availability of funds as well as a line of credit arrangement with a corresponding bank. Other sources of short-term funds include brokered CDs and the sale of loans, if needed.
The Company's use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is detailed. Other significant uses of funds are capital expenditures, purchase of loans and acquisition premiums. Surplus funds are then invested in investment securities.
Capital expenditures in 2017 totaled $208,000, which included:
|
§
|
Mail equipment totaling $73,000
|
|
§
|
Compliance and other software totaling $25,000
|
|
§
|
Computer and copier upgrades totaling $49,000
|
Capital expenditures in 2016 totaled $587,000, which included:
|
§
|
ATM upgrades totaling $329,000
|
|
§
|
Leasehold improvements to open the Mount Joy branch and the Winfield limited branch office totaling $137,000
|
|
§
|
Computer and copier upgrades totaling $98,000
|
|
§
|
Bank vehicle replacement of $17,000
|
These expenditures will support our initiatives and will create operating efficiencies, while providing quality customer service.
In addition to the Bank's cash balances, the Bank achieves additional liquidity primarily from its investment in the FHLB of Pittsburgh and the resulting borrowing capacity obtained through this investment, investments that mature in less than one year and expected principal repayments from mortgage backed securities. The Bank has a maximum borrowing capacity at the Federal Home Loan Bank of approximately $453.4 million, inclusive of any outstanding amounts, as a source of liquidity. The Bank also has a federal funds line with a third party provider in the amount of $10.0 million as of December 31, 2017, which is unsecured and a borrower in custody agreement was established with the FRB in the amount of $4.4 million, which is collateralized by $14.6 million of municipal loans.
47
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company also has repurchased shares of its common stock. The Company's primary source of income is dividends received from the Bank. The Bank may not declare a dividend without approval of the FRB, unless the dividend to be declared by the Bank's Board of Directors does not exceed the total of: (i) the Bank's net profits for the current year to date, plus (ii) its retained net profits for the preceding two current years, less any required transfers to surplus. In addition, the Bank can only pay dividends to the extent that its retained net profits (including the portion transferred to surplus) exceed its bad debts. The FRB, the OCC, the PDB and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends, because banks which are not classified as well capitalized or adequately capitalized may not pay dividends and no dividend may be paid which would make the Bank undercapitalized after the dividend. At December 31, 2017, the Company (unconsolidated basis) had liquid assets of $6.2 million.
CONTRACTUAL OBLIGATIONS
The Company has various financial obligations, including contractual obligations which may require cash payments. The following table presents as of December 31, 2017, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the obligations can be found in Notes 8, 9 and 16 to the Consolidated Financial Statements.
|
|
One year
|
One to
|
Three to
|
Over Five
|
||||||||||||||||
|
Contractual Obligations
|
or Less
|
Three Years
|
Five Years
|
Years
|
Total
|
|||||||||||||||
|
Deposits without a stated maturity
|
$
|
838,491
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
838,491
|
||||||||||
|
Time deposits
|
107,591
|
107,586
|
45,260
|
6,015
|
266,452
|
|||||||||||||||
|
FHLB Advances
|
77,650
|
-
|
-
|
-
|
77,650
|
|||||||||||||||
|
Long-term borrowings - FHLB
|
1,000
|
2,000
|
11,525
|
-
|
14,525
|
|||||||||||||||
|
Note Payable
|
7,500
|
-
|
-
|
-
|
7,500
|
|||||||||||||||
|
Repurchase agreements
|
13,875
|
580
|
534
|
-
|
14,989
|
|||||||||||||||
|
Operating leases
|
324
|
546
|
329
|
141
|
1,340
|
|||||||||||||||
|
Total
|
$
|
1,046,431
|
$
|
110,712
|
$
|
57,648
|
$
|
6,156
|
$
|
1,220,947
|
||||||||||
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, unused lines of credit and letters of credit. For information about our loan commitments, unused lines of credit and letters of credit, see Note 15 of the notes to consolidated financial statements.
For the year ended December 31, 2017, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
INTEREST RATE AND MARKET RISK MANAGEMENT
The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities.
48
Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, since the Company has no trading portfolio, it is not subject to trading risk.
At December 31, 2017, the Company had equity securities that represent only 0.1% of our investment portfolio, and therefore equity risk is not significant.
The primary factors that make assets interest-sensitive include adjustable-rate features on loans and investments, loan repayments, investment maturities and money market investments. The primary components of interest-sensitive liabilities include maturing certificates of deposit, IRA certificates of deposit, repurchase agreements and short-term borrowings. Savings deposits, NOW accounts and money market investor accounts, with the exception of top interest tier money market and NOW accounts, are considered core deposits and are not short-term interest sensitive and therefore are included in the table below in the over five year column. Top interest tier money market and NOW accounts are included in the table below in the within three month column.
The following table shows the cumulative static gap (at amortized cost) for various time intervals (dollars in thousands):
|
Maturity or Re-pricing of Company Assets and Liabilities as of December 31, 2017
|
||||||||||||||||||||||||||||
|
|
Within
|
Four to
|
One to
|
Two to
|
Three to
|
Over
|
||||||||||||||||||||||
|
|
Three
|
Twelve
|
Two
|
Three
|
Five
|
Five
|
||||||||||||||||||||||
|
Months
|
Months
|
Years
|
Years
|
Years
|
Years
|
Total
|
||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||||||
|
Interest-bearing deposits at banks
|
$
|
2,170
|
$
|
744
|
$
|
1,988
|
$
|
350
|
$
|
7,201
|
$
|
-
|
$
|
12,453
|
||||||||||||||
|
Investment securities
|
34,977
|
39,379
|
62,257
|
51,405
|
56,343
|
10,669
|
255,030
|
|||||||||||||||||||||
|
Residential mortgage loans
|
36,385
|
46,936
|
44,899
|
33,784
|
37,535
|
14,940
|
214,479
|
|||||||||||||||||||||
|
Construction loans
|
5,333
|
3,943
|
4,102
|
-
|
-
|
124
|
13,502
|
|||||||||||||||||||||
|
Commercial and farm loans
|
160,760
|
97,452
|
93,433
|
96,420
|
187,599
|
22,199
|
657,863
|
|||||||||||||||||||||
|
Loans to state & political subdivisions
|
11,311
|
34,050
|
5,885
|
8,596
|
6,856
|
38,039
|
104,737
|
|||||||||||||||||||||
|
Other loans
|
2,737
|
2,279
|
1,953
|
1,172
|
1,078
|
725
|
9,944
|
|||||||||||||||||||||
|
Total interest-earning assets
|
$
|
253,673
|
$
|
224,783
|
$
|
214,517
|
$
|
191,727
|
$
|
296,612
|
$
|
86,696
|
$
|
1,268,008
|
||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||
|
NOW accounts
|
$
|
205,543
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
131,764
|
$
|
337,307
|
||||||||||||||
|
Savings accounts
|
-
|
-
|
-
|
-
|
-
|
184,057
|
184,057
|
|||||||||||||||||||||
|
Money Market accounts
|
128,863
|
-
|
-
|
-
|
-
|
16,424
|
145,287
|
|||||||||||||||||||||
|
Certificates of deposit
|
32,015
|
75,576
|
51,071
|
56,515
|
45,260
|
6,015
|
266,452
|
|||||||||||||||||||||
|
Short-term borrowing
|
91,525
|
-
|
-
|
-
|
-
|
-
|
91,525
|
|||||||||||||||||||||
|
Long-term borrowing
|
7,500
|
1,000
|
2,000
|
580
|
12,059
|
-
|
23,139
|
|||||||||||||||||||||
|
Total interest-bearing liabilities
|
$
|
465,446
|
$
|
76,576
|
$
|
53,071
|
$
|
57,095
|
$
|
57,319
|
$
|
338,260
|
$
|
1,047,767
|
||||||||||||||
|
Excess interest-earning
|
||||||||||||||||||||||||||||
|
assets (liabilities)
|
$
|
(211,773
|
)
|
$
|
148,207
|
$
|
161,446
|
$
|
134,632
|
$
|
239,293
|
$
|
(251,564
|
)
|
||||||||||||||
|
Cumulative interest-earning assets
|
$
|
253,673
|
$
|
478,456
|
$
|
692,973
|
$
|
884,700
|
$
|
1,181,312
|
$
|
1,268,008
|
||||||||||||||||
|
Cumulative interest-bearing liabilities
|
$
|
465,446
|
$
|
542,022
|
$
|
595,093
|
$
|
652,188
|
$
|
709,507
|
$
|
1,047,767
|
||||||||||||||||
|
Cumulative gap
|
$
|
(211,773
|
)
|
$
|
(63,566
|
)
|
$
|
97,880
|
$
|
232,512
|
$
|
471,805
|
$
|
220,241
|
||||||||||||||
|
Cumulative interest rate
|
||||||||||||||||||||||||||||
|
sensitivity ratio (1)
|
0.55
|
0.88
|
1.16
|
1.36
|
1.66
|
1.21
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
(1) Cumulative interest-earning assets divided by interest-bearing liabilities.
|
||||||||||||||||||||||||||||
The previous table and the simulation models discussed below are presented assuming money market investment accounts and NOW accounts in the top interest rate tier are re-priced within the first three months. The loan amounts reflect the principal balances expected to be re-priced as a result of contractual amortization and anticipated early payoffs.
Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on the Bank's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competition and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis.
49
The Bank currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management and asset liability management processes that we believe will effectively identify, measure, and monitor the Bank's risk exposure. In this analysis, the Bank examines the results of movements in interest rates with additional assumptions made concerning the timing of interest rate changes, prepayment speeds on mortgage loans and mortgage securities and deposit pricing movements. Shock scenarios, which assume a parallel shift in interest rates and is instantaneous, typically have the greatest impact on net interest income. The following is a rate shock analysis and the impact on net interest income as of December 31, 2017 (dollars in thousands):
|
|
Change In
|
% Change In
|
||||||||||
|
|
Prospective One-Year
|
Prospective
|
Prospective
|
|||||||||
|
Changes in Rates
|
Net Interest Income
|
Net Interest Income
|
Net Interest Income
|
|||||||||
|
-100 Shock
|
$
|
44,485
|
$
|
(966
|
)
|
(2.13
|
)
|
|||||
|
Base
|
45,451
|
|||||||||||
|
+100 Shock
|
44,231
|
(1,220
|
)
|
(2.68
|
)
|
|||||||
|
+200 Shock
|
42,872
|
(2,579
|
)
|
(5.67
|
)
|
|||||||
|
+300 Shock
|
41,446
|
(4,005
|
)
|
(8.81
|
)
|
|||||||
|
+400 Shock
|
39,969
|
(5,482
|
)
|
(12.06
|
)
|
|||||||
The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage backed securities, call activity of other investment securities, and deposit selection, re-pricing and maturity structure. Because of these assumptions, actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change on net interest income. Additionally, the changes above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. The projections above utilize a static balance sheet and do not include any changes that may result from the growth of the Bank. Management has developed policy limits for acceptable changes in net interest income for multiple scenarios, including shock scenarios. As of December 31, 2017, changes in net interest income projected for all scenarios, including the shock scenarios noted above are in line with Bank policy limits for interest rate risk.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the consolidated financial statements. Our most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.
Other than Temporary Impairment
All securities are evaluated periodically to determine whether a decline in their value is other than temporary and is a matter of judgment. For debt securities, management considers whether the present value of cash flows expected to be collected are less than the security's amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company's intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security's amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for one year, the Company's policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted.
50
Allowance for Loan Losses
Arriving at an adequate level of allowance for loan losses involves a high degree of judgment. The Company's allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. This evaluation is inherently subjective as it requires significant estimates that may be susceptible to significant change, subjecting the Bank to volatility of earnings. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company's methodology of assessing the adequacy of the allowance for loan losses, refer to Note 1 of the consolidated financial statements.
Goodwill and Other Intangible Assets
As discussed in Note 1 of the consolidated financial statements, the Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Management performed an evaluation of the Company's goodwill during the fourth quarter of 2017. In performing its evaluation, management obtained several commonly used financial ratios from pending and completed purchase transactions for banks based in the Mid-Atlantic. Management used these ratios to determine an implied fair value for the Company. The implied fair value exceeded the carrying value including goodwill. Therefore management concluded that goodwill was not impaired and made no adjustment in 2017.
Pension Benefits
Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company's pension obligations and future expense. Our pension benefits are described further in Note 10 of the "Notes to Consolidated Financial Statements."
Deferred Tax Assets
We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. Management also evaluates deferred tax assets to determine if it is more likely than not that the deferred tax benefit will be utilized in future periods. If not, a valuation allowance is recorded. Our deferred tax assets are described further in Note 11 of the consolidated financial statements.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This information is included under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate and Market Risk Management", appearing in this Annual Report on Form 10-K.
51
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
Citizens Financial Services, Inc.
|
|||||||||||
|
Consolidated Balance Sheet
|
|||||||||||
|
December 31,
|
|||||||||||
|
(in thousands, except share data)
|
2017
|
2016
|
|||||||||
|
ASSETS:
|
|||||||||||
|
Cash and cash equivalents:
|
|||||||||||
|
Noninterest-bearing
|
$
|
16,347
|
$
|
16,854
|
|||||||
|
Interest-bearing
|
2,170
|
900
|
|||||||||
|
Total cash and cash equivalents
|
18,517
|
17,754
|
|||||||||
|
Interest bearing time deposits with other banks
|
10,283
|
6,955
|
|||||||||
|
Available-for-sale securities
|
254,782
|
314,017
|
|||||||||
|
Loans held for sale
|
1,439
|
1,827
|
|||||||||
|
Loans (net of allowance for loan losses:
|
|||||||||||
|
$
|
2017, 11,190; 2016, $8,886
|
)
|
989,335
|
790,725
|
|||||||
|
Premises and equipment
|
16,523
|
17,030
|
|||||||||
|
Accrued interest receivable
|
4,196
|
4,089
|
|||||||||
|
Goodwill
|
23,296
|
21,089
|
|||||||||
|
Bank owned life insurance
|
26,883
|
26,223
|
|||||||||
|
Other intangibles
|
1,953
|
2,096
|
|||||||||
|
Investment sale receivable
|
-
|
7,759
|
|||||||||
|
Other assets
|
14,679
|
13,454
|
|||||||||
|
TOTAL ASSETS
|
$
|
1,361,886
|
$
|
1,223,018
|
|||||||
|
LIABILITIES:
|
|||||||||||
|
Deposits:
|
|||||||||||
|
Noninterest-bearing
|
$
|
171,840
|
$
|
147,425
|
|||||||
|
Interest-bearing
|
933,103
|
858,078
|
|||||||||
|
Total deposits
|
1,104,943
|
1,005,503
|
|||||||||
|
Borrowed funds
|
114,664
|
79,662
|
|||||||||
|
Accrued interest payable
|
897
|
720
|
|||||||||
|
Other liabilities
|
12,371
|
13,865
|
|||||||||
|
TOTAL LIABILITIES
|
1,232,875
|
1,099,750
|
|||||||||
|
STOCKHOLDERS' EQUITY:
|
|||||||||||
|
Preferred Stock $1.00 par value; authorized 3,000,000 shares
|
|||||||||||
|
2017 and 2016; none issued in 2017 or 2016
|
-
|
-
|
|||||||||
|
Common Stock
|
|||||||||||
|
$1.00 par value; authorized 15,000,000 shares 2017 and 2016;
|
|||||||||||
|
issued 3,869,939 and 3,704,375 shares in 2017 and 2016,
|
|||||||||||
|
respectively
|
3,870
|
3,704
|
|||||||||
|
Additional paid-in capital
|
51,108
|
42,250
|
|||||||||
|
Retained earnings
|
89,982
|
91,278
|
|||||||||
|
Accumulated other comprehensive loss
|
(3,398
|
)
|
(1,392
|
)
|
|||||||
|
Treasury stock, at cost:
|
|||||||||||
|
383,065 and 384,671 shares for 2017 and 2016, respectively
|
(12,551
|
)
|
(12,572
|
)
|
|||||||
|
TOTAL STOCKHOLDERS' EQUITY
|
129,011
|
123,268
|
|||||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
1,361,886
|
$
|
1,223,018
|
|||||||
|
See accompanying notes to consolidated financial statements.
|
|||||||||||
52
|
Citizens Financial Services, Inc.
|
||||||||||||
|
Consolidated Statement of Income
|
||||||||||||
|
Year Ended December 31,
|
||||||||||||
|
(in thousands, except per share data)
|
2017
|
2016
|
2015
|
|||||||||
|
INTEREST AND DIVIDEND INCOME:
|
||||||||||||
|
Interest and fees on loans
|
$
|
42,127
|
$
|
35,844
|
$
|
29,039
|
||||||
|
Interest-bearing deposits with banks
|
186
|
221
|
142
|
|||||||||
|
Investment securities:
|
||||||||||||
|
Taxable
|
3,095
|
3,687
|
3,102
|
|||||||||
|
Nontaxable
|
2,414
|
2,970
|
3,152
|
|||||||||
|
Dividends
|
271
|
283
|
218
|
|||||||||
|
TOTAL INTEREST AND DIVIDEND INCOME
|
48,093
|
43,005
|
35,653
|
|||||||||
|
INTEREST EXPENSE:
|
||||||||||||
|
Deposits
|
4,625
|
4,247
|
4,113
|
|||||||||
|
Borrowed funds
|
1,214
|
794
|
707
|
|||||||||
|
TOTAL INTEREST EXPENSE
|
5,839
|
5,041
|
4,820
|
|||||||||
|
NET INTEREST INCOME
|
42,254
|
37,964
|
30,833
|
|||||||||
|
Provision for loan losses
|
2,540
|
1,520
|
480
|
|||||||||
|
NET INTEREST INCOME AFTER PROVISION FOR
|
||||||||||||
|
LOAN LOSSES
|
39,714
|
36,444
|
30,353
|
|||||||||
|
NON-INTEREST INCOME:
|
||||||||||||
|
Service charges
|
4,456
|
4,461
|
4,126
|
|||||||||
|
Trust
|
755
|
693
|
673
|
|||||||||
|
Brokerage and insurance
|
635
|
766
|
720
|
|||||||||
|
Investment securities gains, net
|
1,035
|
255
|
429
|
|||||||||
|
Gains on loans sold
|
578
|
449
|
404
|
|||||||||
|
Earnings on bank owned life insurance
|
660
|
688
|
628
|
|||||||||
|
Other
|
537
|
587
|
443
|
|||||||||
|
TOTAL NON-INTEREST INCOME
|
8,656
|
7,899
|
7,423
|
|||||||||
|
NON-INTEREST EXPENSES:
|
||||||||||||
|
Salaries and employee benefits
|
17,456
|
16,410
|
12,504
|
|||||||||
|
Occupancy
|
1,988
|
1,900
|
1,424
|
|||||||||
|
Furniture and equipment
|
603
|
644
|
506
|
|||||||||
|
Professional fees
|
1,039
|
1,094
|
846
|
|||||||||
|
Federal depository insurance
|
385
|
572
|
464
|
|||||||||
|
Pennsylvania shares tax
|
705
|
690
|
713
|
|||||||||
|
Amortization of intangibles
|
297
|
327
|
-
|
|||||||||
|
Merger and acquisition
|
165
|
-
|
1,103
|
|||||||||
|
ORE expenses
|
655
|
389
|
969
|
|||||||||
|
Other
|
6,021
|
6,645
|
4,900
|
|||||||||
|
TOTAL NON-INTEREST EXPENSES
|
29,314
|
28,671
|
23,429
|
|||||||||
|
Income before provision for income taxes
|
19,056
|
15,672
|
14,347
|
|||||||||
|
Provision for income taxes
|
6,031
|
3,034
|
2,721
|
|||||||||
|
NET INCOME
|
$
|
13,025
|
$
|
12,638
|
$
|
11,626
|
||||||
|
PER COMMON SHARE DATA:
|
||||||||||||
|
NET INCOME - BASIC
|
$
|
3.74
|
$
|
3.60
|
$
|
3.60
|
||||||
|
NET INCOME - DILUTED
|
$
|
3.74
|
$
|
3.60
|
$
|
3.60
|
||||||
|
CASH DIVIDENDS PER SHARE
|
$
|
1.67
|
$
|
1.58
|
$
|
1.63
|
||||||
|
|
||||||||||||
|
Number of shares used in computation - basic
|
3,481,366
|
3,507,497
|
3,229,470
|
|||||||||
|
Number of shares used in computation - diluted
|
3,483,090
|
3,509,053
|
3,230,830
|
|||||||||
|
|
||||||||||||
|
See accompanying notes to consolidated financial statements.
|
||||||||||||
53
|
Citizens Financial Services, Inc.
|
||||||||||||
|
Consolidated Statement of Changes in Comprehensive Income
|
||||||||||||
|
Year Ended December 31,
|
||||||||||||
|
|
||||||||||||
|
(in thousands)
|
2017
|
2016
|
2015
|
|||||||||
|
Net Income
|
$
|
13,025
|
$
|
12,638
|
$
|
11,626
|
||||||
|
|
||||||||||||
|
Other Comprehensive income
|
||||||||||||
|
Securities available for sale
|
||||||||||||
|
Unrealized holding loss during the period
|
(1,283
|
)
|
(1,105
|
)
|
(920
|
)
|
||||||
|
Income tax benefit
|
436
|
375
|
314
|
|||||||||
|
(847
|
)
|
(730
|
)
|
(606
|
)
|
|||||||
|
Reclassification adjustment for (gains) losses
|
||||||||||||
|
included in income
|
(1,035
|
)
|
(255
|
)
|
(429
|
)
|
||||||
|
Income tax benefit
|
352
|
87
|
146
|
|||||||||
|
(683
|
)
|
(168
|
)
|
(283
|
)
|
|||||||
|
|
||||||||||||
|
Change in unrecognized pension costs
|
127
|
(391
|
)
|
(172
|
)
|
|||||||
|
Income tax benefit
|
(44
|
)
|
133
|
58
|
||||||||
|
83
|
(258
|
)
|
(114
|
)
|
||||||||
|
|
||||||||||||
|
Net other comprehensive income
|
(1,447
|
)
|
(1,156
|
)
|
(1,003
|
)
|
||||||
|
Comprehensive income
|
$
|
11,578
|
$
|
11,482
|
$
|
10,623
|
||||||
|
|
||||||||||||
|
See accompanying notes to consolidated financial statements.
|
||||||||||||
54
|
Citizens Financial Services, Inc.
|
||||||||||||||||||||||||||||
|
Consolidated Statement of Changes in Stockholders' Equity
|
||||||||||||||||||||||||||||
|
|
Accumulated
|
|||||||||||||||||||||||||||
|
|
Additional
|
Other
|
||||||||||||||||||||||||||
|
|
Common Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
|||||||||||||||||||||||
|
(in thousands, except share data)
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income (Loss)
|
Stock
|
Total
|
|||||||||||||||||||||
|
Balance, December 31, 2014
|
3,335,236
|
$
|
3,335
|
$
|
25,150
|
$
|
79,512
|
$
|
767
|
$
|
(8,236
|
)
|
$
|
100,528
|
||||||||||||||
|
Net income
|
11,626
|
11,626
|
||||||||||||||||||||||||||
|
Net other comprehensive income
|
(1,003
|
)
|
(1,003
|
)
|
||||||||||||||||||||||||
|
Stock issued for acquisition
|
336,515
|
337
|
15,647
|
-
|
15,984
|
|||||||||||||||||||||||
|
Purchase of treasury stock (49,465 shares)
|
(2,455
|
)
|
(2,455
|
)
|
||||||||||||||||||||||||
|
Restricted stock and Board of Director awards
|
(256
|
)
|
308
|
52
|
||||||||||||||||||||||||
|
Restricted stock vesting
|
179
|
179
|
||||||||||||||||||||||||||
|
Forfeited restricted stock
|
7
|
(7
|
)
|
-
|
||||||||||||||||||||||||
|
Cash dividend reinvestment paid from treasury stock
|
(12
|
)
|
(197
|
)
|
209
|
-
|
||||||||||||||||||||||
|
Cash dividends, $1.63 per share
|
(5,151
|
)
|
(5,151
|
)
|
||||||||||||||||||||||||
|
Balance, December 31, 2015
|
3,671,751
|
3,672
|
40,715
|
85,790
|
(236
|
)
|
(10,181
|
)
|
119,760
|
|||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net income
|
12,638
|
12,638
|
||||||||||||||||||||||||||
|
Net other comprehensive income
|
(1,156
|
)
|
(1,156
|
)
|
||||||||||||||||||||||||
|
Stock dividend
|
32,624
|
32
|
1,542
|
(1,574
|
)
|
-
|
||||||||||||||||||||||
|
Purchase of treasury stock (66,110 shares)
|
(3,227
|
)
|
(3,227
|
)
|
||||||||||||||||||||||||
|
Restricted stock, executive and Board of Director awards
|
(197
|
)
|
288
|
91
|
||||||||||||||||||||||||
|
Restricted stock vesting
|
184
|
184
|
||||||||||||||||||||||||||
|
Sale of treasury stock
|
(1
|
)
|
60
|
59
|
||||||||||||||||||||||||
|
Forfeited restricted stock
|
4
|
(4
|
)
|
-
|
||||||||||||||||||||||||
|
Cash dividend reinvestment paid from treasury stock
|
3
|
(495
|
)
|
492
|
-
|
|||||||||||||||||||||||
|
Cash dividends, $1.58 per share
|
(5,081
|
)
|
(5,081
|
)
|
||||||||||||||||||||||||
|
Balance, December 31, 2016
|
3,704,375
|
$
|
3,704
|
$
|
42,250
|
$
|
91,278
|
$
|
(1,392
|
)
|
$
|
(12,572
|
)
|
$
|
123,268
|
|||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net income
|
13,025
|
13,025
|
||||||||||||||||||||||||||
|
Net other comprehensive income
|
(1,447
|
)
|
(1,447
|
)
|
||||||||||||||||||||||||
|
Stock dividend
|
165,564
|
166
|
8,857
|
(9,023
|
)
|
-
|
||||||||||||||||||||||
|
Purchase of treasury stock (17,990 shares)
|
(979
|
)
|
(979
|
)
|
||||||||||||||||||||||||
|
Restricted stock, executive and Board of Director awards
|
(224
|
)
|
296
|
72
|
||||||||||||||||||||||||
|
Restricted stock vesting
|
206
|
206
|
||||||||||||||||||||||||||
|
Sale of treasury stock
|
-
|
43
|
43
|
|||||||||||||||||||||||||
|
Forfeited restricted stock
|
2
|
(2
|
)
|
-
|
||||||||||||||||||||||||
|
Reclassification of certain income tax effects from
|
||||||||||||||||||||||||||||
|
accumulated other comprehensive income
|
559
|
(559
|
)
|
-
|
||||||||||||||||||||||||
|
Cash dividend reinvestment paid from treasury stock
|
17
|
(680
|
)
|
663
|
-
|
|||||||||||||||||||||||
|
Cash dividends, $1.67 per share
|
(5,177
|
)
|
(5,177
|
)
|
||||||||||||||||||||||||
|
Balance, December 31, 2017
|
3,869,939
|
$
|
3,870
|
$
|
51,108
|
$
|
89,982
|
$
|
(3,398
|
)
|
$
|
(12,551
|
)
|
$
|
129,011
|
|||||||||||||
|
Per share data has been restated to reflect a 5% stock dividend paid on June 30, 2017
|
||||||||||||||||||||||||||||
|
See accompanying notes to consolidated financial statements.
|
||||||||||||||||||||||||||||
55
|
Citizens Financial Services, Inc.
|
||||||||||||
|
Consolidated Statement of Cash Flows
|
||||||||||||
|
|
Year Ended December 31,
|
|||||||||||
|
(in thousands)
|
2017
|
2016
|
2015
|
|||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income
|
$
|
13,025
|
$
|
12,638
|
$
|
11,626
|
||||||
|
Adjustments to reconcile net income to net
|
||||||||||||
|
cash provided by operating activities:
|
||||||||||||
|
Provision for loan losses
|
2,540
|
1,520
|
480
|
|||||||||
|
Depreciation and amortization
|
200
|
320
|
464
|
|||||||||
|
Amortization and accretion on investment securities, net
|
1,441
|
2,302
|
2,057
|
|||||||||
|
Deferred income taxes
|
1,448
|
362
|
(192
|
)
|
||||||||
|
Investment securities gains, net
|
(1,035
|
)
|
(255
|
)
|
(429
|
)
|
||||||
|
Earnings on bank owned life insurance
|
(660
|
)
|
(688
|
)
|
(628
|
)
|
||||||
|
Stock awards
|
278
|
284
|
179
|
|||||||||
|
Originations of loans held for sale
|
(25,305
|
)
|
(22,237
|
)
|
(18,945
|
)
|
||||||
|
Proceeds from sales of loans held for sale
|
26,086
|
21,462
|
19,243
|
|||||||||
|
Realized gains on loans sold
|
(578
|
)
|
(449
|
)
|
(404
|
)
|
||||||
|
(Increase) decrease in accrued interest receivable
|
(34
|
)
|
122
|
(285
|
)
|
|||||||
|
Increase (decrease) in accrued interest payable
|
147
|
(14
|
)
|
(36
|
)
|
|||||||
|
Other, net
|
(1,814
|
)
|
827
|
(319
|
)
|
|||||||
|
Net cash provided by operating activities
|
15,739
|
16,194
|
12,811
|
|||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Available-for-sale securities:
|
||||||||||||
|
Proceeds from sales of available-for-sale securities
|
58,177
|
22,372
|
30,464
|
|||||||||
|
Proceeds from maturity and principal repayments of securities
|
60,081
|
67,782
|
48,103
|
|||||||||
|
Purchase of securities
|
(54,003
|
)
|
(55,600
|
)
|
(111,304
|
)
|
||||||
|
Proceeds from redemption of Regulatory Stock
|
7,425
|
1,556
|
4,476
|
|||||||||
|
Purchase of Regulatory Stock
|
(8,903
|
)
|
(3,403
|
)
|
(3,879
|
)
|
||||||
|
Net increase in loans
|
(161,127
|
)
|
(103,915
|
)
|
(25,981
|
)
|
||||||
|
Purchase of interest bearing time deposits
|
(7,301
|
)
|
-
|
(500
|
)
|
|||||||
|
Proceeds from matured interest bearing time deposits with other banks
|
744
|
744
|
-
|
|||||||||
|
Proceeds from sale of interest bearing time deposits with other banks
|
3,243
|
-
|
-
|
|||||||||
|
Purchase of premises, equipment and software
|
(208
|
)
|
(587
|
)
|
(776
|
)
|
||||||
|
Proceeds from sale of premises and equipment
|
-
|
-
|
-
|
|||||||||
|
Proceeds from sale of foreclosed assets held for sale
|
846
|
973
|
565
|
|||||||||
|
Acquisition, net of cash paid
|
(4,399
|
)
|
-
|
77,895
|
||||||||
|
Net cash used in investing activities
|
(105,425
|
)
|
(70,078
|
)
|
19,063
|
|||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Net (decrease) increase in deposits
|
61,560
|
17,472
|
(11,132
|
)
|
||||||||
|
Proceeds from long-term borrowings
|
9
|
543
|
5,291
|
|||||||||
|
Repayments of long-term borrowings
|
(2,000
|
)
|
(534
|
)
|
(700
|
)
|
||||||
|
Net increase (decrease) in short-term borrowed funds
|
36,993
|
38,022
|
(4,759
|
)
|
||||||||
|
Purchase of treasury stock
|
(979
|
)
|
(3,227
|
)
|
(2,455
|
)
|
||||||
|
Purchase of restricted stock
|
-
|
-
|
(7
|
)
|
||||||||
|
Reissuance of treasury stock to employee stock purchase plan
|
43
|
59
|
-
|
|||||||||
|
Dividends paid
|
(5,177
|
)
|
(5,081
|
)
|
(5,151
|
)
|
||||||
|
Net cash provided by (used in) financing activities
|
90,449
|
47,254
|
(18,913
|
)
|
||||||||
|
Net increase (decrease) in cash and cash equivalents
|
763
|
(6,630
|
)
|
12,961
|
||||||||
|
Cash and Cash Equivalents at Beginning of Year
|
17,754
|
24,384
|
11,423
|
|||||||||
|
Cash and Cash Equivalents at End of Year
|
$
|
18,517
|
$
|
17,754
|
$
|
24,384
|
||||||
|
|
||||||||||||
|
Supplemental Disclosures of Cash Flow Information:
|
||||||||||||
|
Interest paid
|
$
|
5,662
|
$
|
5,055
|
$
|
4,841
|
||||||
|
Income taxes paid
|
$
|
4,550
|
$
|
2,475
|
$
|
3,375
|
||||||
|
Non-cash activities:
|
||||||||||||
|
Stock dividend
|
$
|
9,023
|
$
|
1,574
|
$
|
-
|
||||||
|
Real estate acquired in settlement of loans
|
$
|
911
|
$
|
599
|
$
|
323
|
||||||
|
Investments sold and not settled included in other assets
|
$
|
-
|
$
|
7,759
|
$
|
-
|
||||||
56
|
|
||||||||||||
|
Acquisition of
|
||||||||||||
|
State College S&T Branch
|
The First National Bank of Fredericksburg
|
|||||||||||
|
Non-cash assets acquired
|
||||||||||||
|
Available-for-sale securities
|
$
|
-
|
$
|
-
|
$
|
23,831
|
||||||
|
Interest bearing time deposits with other banks
|
-
|
-
|
1,236
|
|||||||||
|
Loans
|
39,847
|
-
|
115,211
|
|||||||||
|
Premises and equipment
|
86
|
-
|
4,743
|
|||||||||
|
Accrued interest receivable
|
74
|
-
|
282
|
|||||||||
|
Bank owned life insurance
|
-
|
-
|
4,598
|
|||||||||
|
Intangibles
|
145
|
-
|
1,981
|
|||||||||
|
Deferred tas asset
|
-
|
-
|
2,979
|
|||||||||
|
Other assets
|
-
|
-
|
2,332
|
|||||||||
|
Goodwill
|
2,207
|
-
|
10,833
|
|||||||||
|
|
42,359
|
-
|
168,026
|
|||||||||
|
|
||||||||||||
|
Liabilities assumed
|
||||||||||||
|
Noninterest-bearing deposits
|
37,880
|
-
|
71,971
|
|||||||||
|
Interest-bearing deposits
|
-
|
-
|
153,259
|
|||||||||
|
Accrued interest payable
|
29
|
-
|
14
|
|||||||||
|
Other liabilities
|
51
|
-
|
4,693
|
|||||||||
|
|
37,960
|
-
|
229,937
|
|||||||||
|
Net non-cash assets (liabilities) acquired
|
4,399
|
-
|
(61,911
|
)
|
||||||||
|
Cash and cash equivalents acquired
|
$
|
154
|
$
|
-
|
$
|
83,514
|
||||||
|
|
||||||||||||
|
See accompanying notes to consolidated financial statements.
|
||||||||||||
57
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
Citizens Financial Services, Inc. (individually and collectively, the "Company") is headquartered in Mansfield, Pennsylvania, and provides a full range of banking and related services through its wholly owned subsidiary, First Citizens Community Bank (the "Bank"), and its wholly owned subsidiary, First Citizens Insurance Agency, Inc. On December 11, 2015, the Company completed its acquisition of The First National Bank of Fredericksburg (FNB). On December 8, 2017, the Bank completed its acquisition of the S&T branch in State College (State College). As of December 31, 2017, the Bank operates twenty six full-service banking branches in Potter, Tioga, Bradford, Clinton, Lebanon, Lancaster, Berks, Schuylkill and Centre counties, Pennsylvania and Allegany County, New York, and a limited branch office in both Union and Lancaster counties, Pennsylvania. The Bank also provides trust services, including the administration of trusts and estates, retirement plans, and other employee benefit plans, along with a brokerage division that provides a comprehensive menu of investment services. The Bank serves individual and corporate customers and is subject to competition from other financial institutions and intermediaries with respect to these services. The Company and Bank are supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to additional regulation and supervision by the Pennsylvania Department of Banking.
A summary of significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:
Basis of Presentation
The financial statements are consolidated to include the accounts of the Company and its subsidiary, First Citizens Community Bank, and its subsidiary, First Citizens Insurance Agency, Inc. These statements have been prepared in accordance with U.S. generally accepted accounting principles. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.
Use of Estimates
In preparing the financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, pension plans and deferred tax assets and liabilities.
Operating Segments
An operating segment is defined as a component of an enterprise that engages in business activities that generates revenue and incurs expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of resource allocation and performance. While the Company's chief decision makers monitor the revenue streams of the various Company's products, services and regions, operations are managed and financial performance is evaluated on a Company-wide basis. Consistent with our internal reporting, the Company's business activities are reported as one segment, which is community banking.
58
Cash and Cash Equivalents
Cash equivalents include cash on hand, deposits in banks and interest-earning deposits. Interest-earning deposits with original maturities of 90 days or less are considered cash equivalents. Net cash flows are reported for loans, deposits and short term borrowing transactions.
Interest bearing time deposits with other banks are not included with cash and cash equivalents as the original maturities were greater than 90 days.
Investment Securities
Investment securities at the time of purchase are classified as one of the three following types:
Held-to-Maturity Securities - Includes securities that the Company has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. The Company had no held-to-maturity securities as of December 31, 2017 and 2016.
Trading Securities - Includes debt and equity securities bought and held principally for the purpose of selling them in the near term. Such securities are reported at fair value with unrealized holding gains and losses included in earnings. The Company had no trading securities as of December 31, 2017 and 2016.
Available-for-Sale Securities - Includes debt and equity securities not classified as held-to-maturity or trading securities that will be held for indefinite periods of time. These securities may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of estimated income tax effect.
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security.
Securities are periodically reviewed for other-than-temporary impairment. For debt securities, management considers whether the present value of future cash flows expected to be collected are less than the security's amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company's intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security's amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for one year, the Company's policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statement of Income.
Common stock of the Federal Reserve Bank, Federal Home Loan Bank of Pittsburgh (FHLB) and correspondent banks represent ownership in institutions which are wholly owned by other financial institutions. These equity securities are accounted for at cost and are classified as other assets.
59
The fair value of investments, except certain state and municipal securities, is based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value is based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.
Loans Held for Sale
Certain newly originated fixed-rate residential mortgage loans are classified as held for sale, because it is management's intent to sell these residential mortgage loans. The residential mortgage loans held for sale are carried at the lower of aggregate cost or market value.
Loans
Interest on all loans is recognized on the accrual basis based upon the principal amount outstanding. The accrual of interest income on loans is discontinued when, in the opinion of management, doubt exists as to the ability to collect such interest. Payments received on non-accrual loans are applied to the outstanding principal balance or recorded as interest income, depending upon our assessment of our ultimate ability to collect principal and interest. Loans are returned to the accrual status when factors indicating doubtful collectability cease to exist.
The Company recognizes nonrefundable loan origination fees and certain direct loan origination costs over the life of the related loan as an adjustment of loan yield using the interest method.
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based upon management's periodic evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses are particularly susceptible to significant change in the near term.
Impaired loans are other commercial, other agricultural, municipal, agricultural real estate, commercial real estate loans and certain residential mortgages cross collateralized with commercial relationships for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of "impaired loans" is not the same as the definition of "non-accrual loans," although the two categories overlap. The Company may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial, agricultural, municipal or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value; or, as a practical expedient in the case of a collateral dependent loan, the difference between the fair value of the collateral and the recorded amount of the loans.
Mortgage loans on one to four family properties and all consumer loans are large groups of smaller balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which is defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the borrower's prior payment record, and the amount of shortfall in relation to the principal and interest owed.
60
The Company allocates the allowance based on the factors described below, which conform to the Company's loan classification policy. In reviewing risk within the Bank's loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) residential real estate loans; (ii) commercial real estate (iii) agricultural real estate loans; (iv) construction; (v) consumer loans; (vi) other commercial loans (vii) other agricultural loans and (viii) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non classified loans. The following qualitative factors are analyzed:
|
·
|
Level of and trends in delinquencies, impaired/classified loans
|
|
§
|
Change in volume and severity of past due loans
|
|
§
|
Volume of non-accrual loans
|
|
§
|
Volume and severity of classified, adversely or graded loans
|
|
·
|
Level of and trends in charge-offs and recoveries
|
|
·
|
Trends in volume, terms and nature of the loan portfolio
|
|
·
|
Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices
|
|
·
|
Changes in the quality of the Bank's loan review system
|
|
·
|
Experience, ability and depth of lending management and other relevant staff
|
|
·
|
National, state, regional and local economic trends and business conditions
|
|
§
|
General economic conditions
|
|
§
|
Unemployment rates
|
|
§
|
Inflation / CPI
|
|
§
|
Changes in values of underlying collateral for collateral-dependent loans
|
|
·
|
Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses.
|
|
·
|
Existence and effect of any credit concentrations, and changes in the level of such concentrations
|
|
·
|
Any change in the level of board oversight
|
The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.
Loan Charge-off Policies
Consumer loans are generally fully or partially charged down to the fair value of collateral securing the asset when the loan is 180 days past due for open-end loans or 120 days past due for closed-end loans unless the loan is well secured and in the process of collection. All other loans are generally charged down to the net realizable value when the loan is 90 days past due.
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. In addition to the allowance for the pooled portfolios, management has developed a separate allowance for loans that are identified as impaired through a TDR. TDRs are excluded from pooled loss forecasts and a separate reserve is provided under the accounting guidance for loan impairment.
61
Purchased Credit Impaired Loans
The Company purchased loans in connection with its acquisition of FNB in 2015 and its acquisition of the State College branch in 2017, some of which showed evidence of credit deterioration as of the acquisition since origination. These purchased credit impaired (PCI) loans were recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Over the life of the loan, expected cash flows continue to be estimated. If this subsequent estimated indicated that the present value of expected cash flows is less than the carrying amount, a charge to the allowance for loan loss is made through a provision. If the estimate indicates that the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Such purchased credit impaired loans are accounted for individually, and the Company estimates the amount and timing of expected cash flows for each loan. The expected cash flows in excess of the amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan's contractual principal and interest over expected cash flows is not amortized over the remaining life of the loan (nonaccretable difference).
For loans purchased that did not show evidence of credit deterioration, the difference between the fair value of the loan at the acquisition date and the loan's face value is being amortized as a yield adjustment over the estimated remaining life of the loan using the effective interest method.
Foreclosed Assets Held For Sale
Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell. Prior to foreclosure, as the value of the underlying loan is written down to fair market value of the real estate or other assets to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on disposition, are included in other expenses and gains and losses are included in other non-interest income or other non-interest expense.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed on straight line and accelerated methods over the estimated useful lives of the assets, which range from 3 to 15 years for furniture, fixtures and equipment and 5 to 40 years for building premises. Repair and maintenance expenditures which extend the useful life of an asset are capitalized and other repair expenditures are expensed as incurred.
When premises or equipment are retired or sold, the remaining cost and accumulated depreciation are removed from the accounts and any gain or loss is credited to income or charged to expense, respectively.
Intangible Assets
Intangible assets, other than goodwill, include core deposit intangibles, covenants not to compete and mortgage servicing rights (MSRs). Core deposit intangibles are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. Covenants not to compete are payments made to former employees as compensation for agreeing not to work for competitors. The core deposit intangibles are being amortized over 10 years using the sum-of-the-years digits method of amortization, while the covenant not to compete is being amortized over four years on a straight line basis.
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MSR's arose from the Company originating certain loans for the express purpose of selling such loans in the secondary market. The Company maintains all servicing rights for these loans. The loans held for sale are carried at lower of cost or market. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio and measured annually for impairment.
The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.
Goodwill
The Company utilizes a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company's reported net income because impairment losses, if any, could occur irregularly and in varying amounts. The Company may also perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Based on the fair value of the reporting unit, no impairment of goodwill was recognized in 2017, 2016 or 2015.
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain employees. Prior to January 1, 2015, the Company was the owner and sole beneficiary of the policies. Effective January 1, 2015, the insurance policies were restructured so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these restructured agreements, the Bank receives the cash surrender value of the policy plus 50% of the benefit in excess of the cash surrender value and the remaining amount of the payout will be given to the beneficiary of the policy. Additionally, as a result of the acquisition of FNB, the Company acquired life insurance policies on former FNB employees and directors. The policies obtained as part of the acquisition provide a fixed dollar benefit to the former employee or director beneficiaries, whether or not the insured person is affiliated with the Company at the time of his or her death. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as other non-interest income. The obligation of $578,000 and $569,000 under split-dollar benefit agreements to former employees and directors or their beneficiaries have been recognized as liabilities on the consolidated balance sheet.at December 31, 2017 and 2016.
Income Taxes
The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period. The Tax Cuts and Jobs Act, enacted on December 22, 2017, lowered the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the carrying value of net deferred tax assets was reduced which increased income tax expense by $1,531,000.
Employee Benefit Plans
The Company has noncontributory defined benefit pension plans covering employees hired before January 1, 2007 and employees acquired as part of the FNB acquisition. It is the Company's policy to fund pension costs on a current basis to the extent deductible under existing tax regulations. Such contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.
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The Company has a defined contribution, 401(k) plan covering eligible employees. The employee may also contribute to the plan on a voluntary basis, up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k). Under the plan, the Company also makes contributions on behalf of eligible employees, which vest immediately. For employees hired after January 1, 2007, in lieu of the pension plan, an additional annual discretionary 401(k) plan contribution is made and is equal to a percentage of an employee's base compensation.
The Company also has a profit-sharing plan for employees which provide tax-deferred salary savings to plan participants. The Company has a deferred compensation plan for directors who have elected to defer all or portions of their fees until their retirement or termination from service.
The Company has a restricted stock plan which covers eligible employees and non-employee corporate directors. Under the plan, awards are granted based upon performance related requirements and are subject to certain vesting criteria. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.
The Company has an employee stock purchase plan that allows employees to withhold money from their paychecks, which is then utilized to purchase shares of the Company's stock on either the open market or through treasury stock, if shares are unavailable on the open market.
The Company maintains a non-qualified supplemental executive retirement plan ("SERP") for certain executives to compensate those executive participants in the Company's noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. The SERP is considered an unfunded plan for tax and ERISA purposes and all obligations arising under the SERP are payable from the general assets of the Company. Expenses under the SERP are recognized as earned over the expected years of service.
Advertising Costs
Advertising costs are generally expensed as incurred and amounted to $343,000, $356,000 and $243,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Comprehensive Loss
The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other comprehensive loss is comprised of unrealized holding gains (losses) on the available-for-sale securities portfolio and unrecognized pension costs.
Change in Accounting Principal
On February 14, 2018, the Financial Accounting Standards Board finalized ASU 2018-02 - Income Statement-Reporting Comprehensive Income (Topic 220). This accounting standard allows Companies to reclassify the "stranded" tax effect in accumulated other comprehensive income that resulted from the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act), which requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws.
The Company has elected to early-adopt this accounting standard, which provides a benefit to the financial statements by more accurately aligning the impacts of the items carried in accumulated other comprehensive income with the associate tax effect. The adoption was applied on a modified retrospective and resulted in a one-time cumulative effect adjustment of $559,000 between Retained Earnings and Accumulated Other Comprehensive Income on the Consolidated Balance Sheet as of the beginning of the current period. The adjustment had no impact on Net Income or any prior periods presented.
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Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update's core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Since the guidance scopes out revenue associated with financial instruments, including loan receivables and investment securities, we do not expect the adoption of the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's revenue is not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates 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; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies 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. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption on January 1, 2018, the Company made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $1,000. The net effect was a decrease to retained earnings.
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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position 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. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact to the financial statements. Based on the Company's preliminary analysis of its current portfolio, the impact to the Company's balance sheet is estimated to result in less than a 1% increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity's ordinary activities) in exchange for consideration. The amendments in this Update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company's consolidated financial position or results of operations.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company's consolidated financial position or results of operations.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company's consolidated financial statements
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management's current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company's statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), which requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact the adoption of the standard will have on the Company's consolidated financial position or results of operations.
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In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) ("ASU 2016-18"), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company's statement of cash flows.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers "ASU 2016-20". This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020. The Company is currently evaluating the impact the adoption of the standard will have on the Company's consolidated financial position or results of operations.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business "ASU 2017-01", which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a "set") is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. This Update is not expected to have a significant impact on the Company's financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company's financial statements.
I
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n March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this Update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. This Update is not expected to have a significant impact on the Company's financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a significant impact on the Company's financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity's own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. This Update is not expected to have a significant impact on the Company's financial statements.
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In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively. The Company is currently evaluating the impact the adoption of the standard will have on the Company's financial position or results of operations.
In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Company's financial statements.
Treasury Stock
The purchase of the Company's common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a last-in-first-out basis.
Cash Flows
The Company utilizes the net reporting of cash receipts and cash payments for deposit, short-term borrowing and lending activities. The Company considers amounts due from banks and interest-bearing deposits in banks as cash equivalents.
Trust Assets and Income
Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Company. In accordance with industry practice, fees are recorded on the cash basis and approximate the fees which would have been recognized on the accrual basis.
Earnings Per Share
The following table sets forth the computation of earnings per share. Earnings per share calculations give retroactive effect to stock dividends declared by the Company.
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|
2017
|
2016
|
2015
|
||||||||||
|
Basic earnings per share computation:
|
||||||||||||
|
Net income applicable to common stock
|
$
|
13,025,000
|
$
|
12,638,000
|
$
|
11,626,000
|
||||||
|
Weighted average common shares outstanding
|
3,481,366
|
3,507,497
|
3,229,470
|
|||||||||
|
Earnings per share - basic
|
$
|
3.74
|
$
|
3.60
|
$
|
3.60
|
||||||
|
|
||||||||||||
|
Diluted earnings per share computation:
|
||||||||||||
|
Net income applicable to common stock
|
$
|
13,025,000
|
$
|
12,638,000
|
$
|
11,626,000
|
||||||
|
|
||||||||||||
|
Weighted average common shares outstanding for basic earnings per share
|
3,481,366
|
3,507,497
|
3,229,470
|
|||||||||
|
Add: Dilutive effects of restricted stock
|
1,724
|
1,556
|
1,360
|
|||||||||
|
Weighted average common shares outstanding for dilutive earnings per share
|
3,483,090
|
3,509,053
|
3,230,830
|
|||||||||
|
Earnings per share - dilutive
|
$
|
3.74
|
$
|
3.60
|
$
|
3.60
|
||||||
Nonvested shares of restricted stock totaling 3,403, 3,087 and 2,105 were outstanding during 2017, 2016 and 2015, respectively, but were not included in the computation of diluted earnings per common share because to do so would be anti-dilutive. These anti-dilutive shares had per share prices ranging from $46.69-$53.15, $46.69-$53.15 and $50.15-$53.15 for 2017, 2016 and 2015, respectively.
Reclassification
Certain of the prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income or stockholders' equity.
2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserves, in the form of cash balances with the Federal Reserve Bank, against its deposit liabilities. The amount of such reserves was $2,645,000 and $2,297,000 at December 31, 2017 and 2016, respectively.
Non-retirement account deposits with one financial institution are insured up to $250,000. At times, the Company maintains cash and cash equivalents with other financial institutions in excess of the insured amount.
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of investment securities at December 31, 2017 and 2016 were as follows (in thousands):
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
2017
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
U.S. Agency securities
|
$
|
99,454
|
$
|
26
|
$
|
(593
|
)
|
$
|
98,887
|
|||||||
|
U.S. Treasuries
|
28,782
|
-
|
(178
|
)
|
28,604
|
|||||||||||
|
Obligations of state and
|
||||||||||||||||
|
political subdivisions
|
78,409
|
820
|
(139
|
)
|
79,090
|
|||||||||||
|
Corporate obligations
|
3,000
|
83
|
-
|
3,083
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
45,385
|
19
|
(377
|
)
|
45,027
|
|||||||||||
|
Equity securities in financial institutions
|
92
|
-
|
(1
|
)
|
91
|
|||||||||||
|
Total available-for-sale securities
|
$
|
255,122
|
$
|
948
|
$
|
(1,288
|
)
|
$
|
254,782
|
|||||||
71
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
2016
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
U.S. Agency securities
|
$
|
170,276
|
$
|
407
|
$
|
(269
|
)
|
$
|
170,414
|
|||||||
|
U.S. Treasuries
|
2,999
|
1
|
-
|
3,000
|
||||||||||||
|
Obligations of state and
|
||||||||||||||||
|
political subdivisions
|
95,956
|
1,463
|
(493
|
)
|
96,926
|
|||||||||||
|
Corporate obligations
|
3,000
|
50
|
-
|
3,050
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
37,987
|
88
|
(347
|
)
|
37,728
|
|||||||||||
|
Equity securities in financial institutions
|
1,821
|
1,078
|
-
|
2,899
|
||||||||||||
|
Total available-for-sale securities
|
$
|
312,039
|
$
|
3,087
|
$
|
(1,109
|
)
|
$
|
314,017
|
|||||||
The following table shows the Company's gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at December 31, 2017 and 2016 (in thousands). As of December 31, 2017, the Company owned 122 securities whose fair value was less than their cost basis.
|
|
Less than Twelve Months
|
Twelve Months or Greater
|
Total
|
|||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
|
2017
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
|
U.S. Agency securities
|
$
|
74,952
|
$
|
(421
|
)
|
$
|
16,928
|
$
|
(172
|
)
|
$
|
91,880
|
$
|
(593
|
)
|
|||||||||
|
U.S. Treasuries
|
28,604
|
(178
|
)
|
-
|
-
|
28,604
|
(178
|
)
|
||||||||||||||||
|
Obligations of states and
|
||||||||||||||||||||||||
|
political subdivisions
|
14,885
|
(85
|
)
|
5,958
|
(54
|
)
|
20,843
|
(139
|
)
|
|||||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||||||||||
|
government sponsored entities
|
27,154
|
(190
|
)
|
13,822
|
(187
|
)
|
40,976
|
(377
|
)
|
|||||||||||||||
|
Equity securities in financial institutions
|
91
|
(1
|
)
|
-
|
-
|
91
|
(1
|
)
|
||||||||||||||||
|
Total securities
|
$
|
145,686
|
$
|
(875
|
)
|
$
|
36,708
|
$
|
(413
|
)
|
$
|
182,394
|
$
|
(1,288
|
)
|
|||||||||
|
2016
|
||||||||||||||||||||||||
|
U.S. Agency securities
|
$
|
50,947
|
$
|
(269
|
)
|
$
|
-
|
$
|
-
|
$
|
50,947
|
$
|
(269
|
)
|
||||||||||
|
Obligations of states and
|
||||||||||||||||||||||||
|
political subdivisions
|
28,398
|
(472
|
)
|
767
|
(21
|
)
|
29,165
|
(493
|
)
|
|||||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||||||||||
|
government sponsored entities
|
26,717
|
(330
|
)
|
753
|
(17
|
)
|
27,470
|
(347
|
)
|
|||||||||||||||
|
Total securities
|
$
|
106,062
|
$
|
(1,071
|
)
|
$
|
1,520
|
$
|
(38
|
)
|
$
|
107,582
|
$
|
(1,109
|
)
|
|||||||||
As of December 31, 2017, the Company's investment securities portfolio contained unrealized losses on agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, U.S Treasury securities, obligations of states and political subdivisions, mortgage backed securities in government sponsored entities and equity securities in financial institutions. For fixed maturity investments management considers whether the present value of cash flows expected to be collected are less than the security's amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company's intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security's amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for one year, the Company's policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted. As of December 31, 2017 and 2016, the Company had concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.
72
Proceeds from sales of securities available-for-sale during 2017, 2016 and, 2015 were $58,177,000, $22,372,000 and $30,464,000, respectively. The gross gains realized during 2017 consisted of $23,000, $20,000, $13,000 and $1,149,000 from the sales of ten agency securities, one mortgage backed security, thirteen interest bearing time deposits with other banks and five equity security positions, respectively. The gross losses realized during 2017 consisted of $170,000 from the sale of fourteen agency securities. The gross gains realized during 2016 consisted of $72,000, $27,000, $80,000 and $133,000 from the sales of four agency securities, two US treasury notes, four municipal securities and portions of three equity security positions, respectively. The gross losses realized during 2016 consisted of $22,000 and $35,000 from the sales of four agency securities and six corporate securities. The gross gains realized during 2015 consisted of $196,000, $69,000, $99,000 and $76,000 from the sales of five agency securities, five mortgage backed securities, seven municipal securities and an entire equity security position, respectively. The gross loss of $11,000 was realized from the sale of one US treasury security. Gross gains and gross losses were realized as follows (in thousands):
|
|
2017
|
2016
|
2015
|
|||||||||
|
Gross gains
|
$
|
1,205
|
$
|
312
|
$
|
440
|
||||||
|
Gross losses
|
(170
|
)
|
(57
|
)
|
(11
|
)
|
||||||
|
Net (losses) gains
|
$
|
1,035
|
$
|
255
|
$
|
429
|
||||||
Investment securities with an approximate carrying value of $243,382,000 and $206,322,000 at December 31, 2017 and 2016, respectively, were pledged to secure public funds and certain other deposits as provided by law and certain borrowing arrangements of the Company.
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and fair value of debt securities at December 31, 2017, by contractual maturity are shown below (in thousands). Municipal securities that have been refunded and will therefore pay-off on the call date are reflected in the table below utilizing the call date as the date of repayment as payment is guaranteed on that day:
|
Amortized
|
||||||||
|
|
Cost
|
Fair Value
|
||||||
|
Available-for-sale securities:
|
||||||||
|
Due in one year or less
|
$
|
45,328
|
$
|
45,369
|
||||
|
Due after one year through five years
|
118,597
|
118,331
|
||||||
|
Due after five years through ten years
|
31,687
|
31,676
|
||||||
|
Due after ten years
|
59,418
|
59,315
|
||||||
|
Total
|
$
|
255,030
|
$
|
254,691
|
||||
4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central and south central Pennsylvania and southern New York. Although the Company has a diversified loan portfolio at December 31, 2017 and 2016, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio, as well as how those segments are analyzed within the allowance for loan losses as of December 31, 2017 and 2016 (in thousands):
73
|
2017
|
Total Loans
|
Individually evaluated for impairment
|
Loans acquired with deteriorated credit quality
|
Collectively evaluated for impairment
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Residential
|
$
|
214,479
|
$
|
1,065
|
$
|
33
|
$
|
213,381
|
||||||||
|
Commercial
|
308,084
|
13,864
|
1,460
|
292,760
|
||||||||||||
|
Agricultural
|
239,957
|
3,901
|
702
|
235,354
|
||||||||||||
|
Construction
|
13,502
|
-
|
-
|
13,502
|
||||||||||||
|
Consumer
|
9,944
|
8
|
-
|
9,936
|
||||||||||||
|
Other commercial loans
|
72,013
|
4,197
|
443
|
67,373
|
||||||||||||
|
Other agricultural loans
|
37,809
|
1,363
|
-
|
36,446
|
||||||||||||
|
State and political subdivision loans
|
104,737
|
-
|
-
|
104,737
|
||||||||||||
|
Total
|
1,000,525
|
24,398
|
2,638
|
973,489
|
||||||||||||
|
Allowance for loan losses
|
11,190
|
410
|
-
|
10,780
|
||||||||||||
|
Net loans
|
$
|
989,335
|
$
|
23,988
|
$
|
2,638
|
$
|
962,709
|
||||||||
|
2016
|
||||||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Residential
|
$
|
207,423
|
$
|
957
|
$
|
35
|
$
|
206,431
|
||||||||
|
Commercial
|
252,577
|
5,742
|
1,969
|
244,866
|
||||||||||||
|
Agricultural
|
123,624
|
3,347
|
738
|
119,539
|
||||||||||||
|
Construction
|
25,441
|
-
|
-
|
25,441
|
||||||||||||
|
Consumer
|
11,005
|
-
|
4
|
11,001
|
||||||||||||
|
Other commercial loans
|
58,639
|
5,994
|
621
|
52,024
|
||||||||||||
|
Other agricultural loans
|
23,388
|
1,653
|
-
|
21,735
|
||||||||||||
|
State and political subdivision loans
|
97,514
|
-
|
-
|
97,514
|
||||||||||||
|
Total
|
799,611
|
17,693
|
3,367
|
778,551
|
||||||||||||
|
Allowance for loan losses
|
8,886
|
487
|
-
|
8,399
|
||||||||||||
|
Net loans
|
$
|
790,725
|
$
|
17,206
|
$
|
3,367
|
$
|
770,152
|
||||||||
As of December 31, 2017 and 2016, net unamortized loan fees and costs of $794,000 and $732,000, respectively, were included in the carrying value of loans. Purchased loans acquired in connection with the FNB acquisition and the State College branch acquisition were recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.
Upon acquisition, the Company evaluated whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired ("PCI") loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans' collateral. The carrying value of PCI loans was $2,638,000 and $3,367,000 at December 31, 2017 and December 31, 2016, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows.
On the acquisition date, the unpaid principal balance for all PCI loans was $6,969,000 and the estimated fair value of the loans was $3,809,000. Total contractually required payments on these loans, including interest, at the acquisition date was $9,913,000. However, the Company's preliminary estimate of expected cash flows was $4,474,000. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $5,439,000 relating to these PCI loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows and established an accretable discount of $665,000 on the acquisition date relating to these PCI loans.
74
Changes in the amortizable yield for PCI loans were as follows for the years ended December 31, 2017 and 2016 (in thousands):
|
|
December 31, 2017
|
December 31, 2016
|
||||||
|
Balance at beginning of period
|
$
|
389
|
$
|
637
|
||||
|
Accretion
|
(632
|
)
|
(349
|
)
|
||||
|
Reclassification of non-accretable discount
|
349
|
101
|
||||||
|
Balance at end of period
|
$
|
106
|
$
|
389
|
||||
The following table presents additional information regarding PCI loans (in thousands):
|
December 31, 2017
|
December 31, 2016
|
|||||||
|
Outstanding balance
|
$
|
5,295
|
$
|
6,487
|
||||
|
Carrying amount
|
2,638
|
3,367
|
||||||
Real estate loans serviced for Freddie Mac, Fannie Mae and the FHLB, which are not included in the Consolidated Balance Sheet, totaled $142,972,000 and $135,404,000 at December 31, 2017 and 2016, respectively. Loans sold to Freddie Mac and Fannie Mae were sold without recourse and total $114,643,000 and $102,444,000 at December 31, 2017 and 2016, respectively. Additionally, the Bank acquired a portfolio of loans sold to the FHLB during the acquisition of FNB, which were sold under the Mortgage Partnership Finance Program ("MPF"). The Bank is no longer an active participant in the MPF program. The MPF portfolio balance was $28,329,000 and $32,960,000 at December 31, 2017 and 2016, respectively. The FHLB maintains a first-loss position for the MPF portfolio that totals $123,000. Should the FHLB exhaust its first-loss position, recourse to the Bank's credit enhancement would be up to the next $980,000 of losses. The Bank has not experienced any losses for the MPF portfolio.
The segments of the Bank's loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consists of 15 to 30 year first mortgages on residential real estate, while residential real estate home equities are consumer purpose installment loans or lines of credit secured by a mortgage which is often a second lien on residential real estate with terms of 15 years or less. Commercial real estate are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate are loans secured by a mortgage on real estate used in agriculture production. Construction real estate are loans secured by residential or commercial real estate used during the construction phase of residential and commercial projects. Consumer loans are typically unsecured or primarily secured by collateral other than real estate and overdraft lines of credit connected with customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non real estate collateral. State and political subdivisions are loans for state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.
Management considers other commercial loans, other agricultural loans, commercial and agricultural real estate loans and state and political subdivision loans which are 90 days or more past due to be impaired. Certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships determined to be impaired may be classified as impaired as well. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance allocation or a charge-off to the allowance.
The following table includes the recorded investment and unpaid principal balances for impaired loans by class, with the associated allowance amount as of December 31, 2017 and 2016, if applicable (in thousands):
75
|
|
Recorded
|
Recorded
|
||||||||||||||||||
|
|
Unpaid
|
Investment
|
Investment
|
Total
|
||||||||||||||||
|
|
Principal
|
With No
|
With
|
Recorded
|
Related
|
|||||||||||||||
|
2017
|
Balance
|
Allowance
|
Allowance
|
Investment
|
Allowance
|
|||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||
|
Mortgages
|
$
|
1,055
|
$
|
273
|
$
|
700
|
$
|
973
|
$
|
47
|
||||||||||
|
Home Equity
|
92
|
40
|
52
|
92
|
9
|
|||||||||||||||
|
Commercial
|
16,363
|
13,154
|
710
|
13,864
|
94
|
|||||||||||||||
|
Agricultural
|
5,231
|
3,283
|
618
|
3,901
|
3
|
|||||||||||||||
|
Consumer
|
10
|
2
|
6
|
8
|
-
|
|||||||||||||||
|
Other commercial loans
|
4,739
|
3,766
|
431
|
4,197
|
231
|
|||||||||||||||
|
Other agricultural loans
|
1,397
|
1,238
|
125
|
1,363
|
26
|
|||||||||||||||
|
Total
|
$
|
28,887
|
$
|
21,756
|
$
|
2,642
|
$
|
24,398
|
$
|
410
|
||||||||||
|
|
||||||||||||||||||||
|
2016
|
||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||
|
Mortgages
|
$
|
953
|
$
|
570
|
$
|
330
|
$
|
900
|
$
|
22
|
||||||||||
|
Home Equity
|
57
|
-
|
57
|
57
|
10
|
|||||||||||||||
|
Commercial
|
7,958
|
5,697
|
45
|
5,742
|
45
|
|||||||||||||||
|
Agricultural
|
3,347
|
2,000
|
1,347
|
3,347
|
54
|
|||||||||||||||
|
Other commercial loans
|
6,159
|
5,135
|
859
|
5,994
|
326
|
|||||||||||||||
|
Other agricultural loans
|
1,653
|
1,629
|
24
|
1,653
|
30
|
|||||||||||||||
|
Total
|
$
|
20,127
|
$
|
15,031
|
$
|
2,662
|
$
|
17,693
|
$
|
487
|
||||||||||
The following table includes the average investment in impaired loans and the income recognized on impaired loans for 2017, 2016 and 2015 (in thousands):
|
|
Interest
|
|||||||||||
|
|
Average
|
Interest
|
Income
|
|||||||||
|
|
Recorded
|
Income
|
Recognized
|
|||||||||
|
2017
|
Investment
|
Recognized
|
Cash Basis
|
|||||||||
|
Real estate loans:
|
||||||||||||
|
Mortgages
|
$
|
900
|
$
|
13
|
$
|
-
|
||||||
|
Home Equity
|
67
|
4
|
-
|
|||||||||
|
Commercial
|
11,567
|
385
|
7
|
|||||||||
|
Agricultural
|
3,574
|
131
|
-
|
|||||||||
|
Consumer
|
3
|
-
|
-
|
|||||||||
|
Other commercial loans
|
4,790
|
152
|
52
|
|||||||||
|
Other agricultural loans
|
1,491
|
65
|
-
|
|||||||||
|
Total
|
$
|
22,392
|
$
|
750
|
$
|
59
|
||||||
|
|
||||||||||||
|
2016
|
||||||||||||
|
Real estate loans:
|
||||||||||||
|
Mortgages
|
$
|
590
|
$
|
13
|
$
|
-
|
||||||
|
Home Equity
|
59
|
4
|
-
|
|||||||||
|
Commercial
|
5,959
|
69
|
1
|
|||||||||
|
Agricultural
|
361
|
17
|
-
|
|||||||||
|
Consumer
|
-
|
-
|
-
|
|||||||||
|
Other commercial loans
|
5,715
|
87
|
6
|
|||||||||
|
Other agricultural loans
|
190
|
11
|
-
|
|||||||||
|
Total
|
$
|
12,874
|
$
|
201
|
$
|
7
|
||||||
76
|
Interest
|
||||||||||||
|
Average
|
Interest
|
Income
|
||||||||||
|
|
Recorded
|
Income
|
Recognized
|
|||||||||
|
2015
|
Investment
|
Recognized
|
Cash Basis
|
|||||||||
|
Real estate loans:
|
||||||||||||
|
Mortgages
|
$
|
240
|
$
|
12
|
$
|
-
|
||||||
|
Home Equity
|
88
|
4
|
-
|
|||||||||
|
Commercial
|
5,683
|
63
|
5
|
|||||||||
|
Agricultural
|
56
|
2
|
-
|
|||||||||
|
Consumer
|
-
|
-
|
-
|
|||||||||
|
Other commercial loans
|
2,700
|
98
|
6
|
|||||||||
|
Other agricultural loans
|
37
|
1
|
-
|
|||||||||
|
Total
|
$
|
8,804
|
$
|
180
|
$
|
11
|
||||||
Credit Quality Information
For commercial real estate, agricultural real estate, construction, other commercial, other agricultural loans and state and political subdivision loans, management uses a nine point internal risk rating system to monitor the credit quality. The first five categories are considered not criticized and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:
|
·
|
Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.
|
|
·
|
Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.
|
|
·
|
Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
|
|
·
|
Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.
|
|
·
|
Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.
|
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Bank's loan rating process includes several layers of internal and external oversight. The Company's loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial and agricultural loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Bank engages an external consultant on at least an annual basis. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated over $1.0 million in the last years, 3) review a majority of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.
The following tables represent credit exposures by internally assigned grades as of December 31, 2017 and 2016 (in thousands):
77
|
2017
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
Ending Balance
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
$
|
281,742
|
$
|
15,029
|
$
|
11,271
|
$
|
42
|
$
|
-
|
$
|
308,084
|
||||||||||||
|
Agricultural
|
222,198
|
11,538
|
6,221
|
-
|
-
|
239,957
|
||||||||||||||||||
|
Construction
|
13,364
|
-
|
138
|
-
|
-
|
13,502
|
||||||||||||||||||
|
Other commercial loans
|
67,706
|
615
|
3,567
|
125
|
-
|
72,013
|
||||||||||||||||||
|
Other agricultural loans
|
34,914
|
1,325
|
1,570
|
-
|
-
|
37,809
|
||||||||||||||||||
|
State and political subdivision loans
|
94,125
|
-
|
10,612
|
-
|
-
|
104,737
|
||||||||||||||||||
|
Total
|
$
|
714,049
|
$
|
28,507
|
$
|
33,379
|
$
|
167
|
$
|
-
|
$
|
776,102
|
||||||||||||
|
2016
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
Ending Balance
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
$
|
225,185
|
$
|
14,045
|
$
|
13,347
|
$
|
-
|
$
|
-
|
$
|
252,577
|
||||||||||||
|
Agricultural
|
110,785
|
8,231
|
4,608
|
-
|
-
|
123,624
|
||||||||||||||||||
|
Construction
|
25,441
|
-
|
-
|
-
|
-
|
25,441
|
||||||||||||||||||
|
Other commercial loans
|
51,396
|
2,049
|
5,105
|
89
|
-
|
58,639
|
||||||||||||||||||
|
Other agricultural loans
|
20,178
|
1,733
|
1,477
|
-
|
-
|
23,388
|
||||||||||||||||||
|
State and political subdivision loans
|
83,620
|
13,066
|
828
|
-
|
-
|
97,514
|
||||||||||||||||||
|
Total
|
$
|
516,605
|
$
|
39,124
|
$
|
25,365
|
$
|
89
|
$
|
-
|
$
|
581,183
|
||||||||||||
For residential real estate mortgages, home equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2017 and 2016 (in thousands):
|
2017
|
Performing
|
Non-performing
|
PCI
|
Total
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Mortgages
|
$
|
152,820
|
$
|
1,492
|
$
|
33
|
$
|
154,345
|
||||||||
|
Home Equity
|
60,022
|
112
|
-
|
60,134
|
||||||||||||
|
Consumer
|
9,895
|
49
|
-
|
9,944
|
||||||||||||
|
Total
|
$
|
222,737
|
$
|
1,653
|
$
|
33
|
$
|
224,423
|
||||||||
|
|
||||||||||||||||
|
2016
|
Performing
|
Non-performing
|
PCI
|
Total
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Mortgages
|
$
|
147,047
|
$
|
1,648
|
$
|
35
|
$
|
148,730
|
||||||||
|
Home Equity
|
58,438
|
255
|
-
|
58,693
|
||||||||||||
|
Consumer
|
10,892
|
109
|
4
|
11,005
|
||||||||||||
|
Total
|
$
|
216,377
|
$
|
2,012
|
$
|
39
|
$
|
218,428
|
||||||||
Aging Analysis of Past Due Loans by Class
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loans as of December 31, 2017 and 2016 (in thousands):
78
|
|
30-59 Days
|
60-89 Days
|
90 Days
|
Total Past
|
Total Financing
|
90 Days and
|
||||||||||||||||||||||||||
|
2017
|
Past Due
|
Past Due
|
Or Greater
|
Due
|
Current
|
PCI
|
Receivables |
Accruing
|
||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||||||
|
Mortgages
|
$
|
996
|
$
|
362
|
$
|
810
|
$
|
2,168
|
$
|
152,144
|
$
|
33
|
$
|
154,345
|
$
|
218
|
||||||||||||||||
|
Home Equity
|
277
|
86
|
78
|
441
|
59,693
|
-
|
60,134
|
-
|
||||||||||||||||||||||||
|
Commercial
|
1,353
|
1,010
|
3,865
|
6,228
|
300,396
|
1,460
|
308,084
|
162
|
||||||||||||||||||||||||
|
Agricultural
|
242
|
-
|
205
|
447
|
238,808
|
702
|
239,957
|
30
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
133
|
133
|
13,369
|
-
|
13,502
|
-
|
||||||||||||||||||||||||
|
Consumer
|
53
|
33
|
49
|
135
|
9,809
|
-
|
9,944
|
7
|
||||||||||||||||||||||||
|
Other commercial loans
|
132
|
-
|
2,372
|
2,504
|
69,066
|
443
|
72,013
|
32
|
||||||||||||||||||||||||
|
Other agricultural loans
|
-
|
42
|
106
|
148
|
37,661
|
-
|
37,809
|
106
|
||||||||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||||||||||
|
subdivision loans
|
-
|
-
|
-
|
-
|
104,737
|
-
|
104,737
|
-
|
||||||||||||||||||||||||
|
Total
|
$
|
3,053
|
$
|
1,533
|
$
|
7,618
|
$
|
12,204
|
$
|
985,683
|
$
|
2,638
|
$
|
1,000,525
|
$
|
555
|
||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans considered non-accrual
|
$
|
816
|
$
|
281
|
$
|
7,063
|
$
|
8,160
|
$
|
2,011
|
$
|
-
|
$
|
10,171
|
||||||||||||||||||
|
Loans still accruing
|
2,237
|
1,252
|
555
|
4,044
|
983,672
|
2,638
|
990,354
|
|||||||||||||||||||||||||
|
Total
|
$
|
3,053
|
$
|
1,533
|
$
|
7,618
|
$
|
12,204
|
$
|
985,683
|
$
|
2,638
|
$
|
1,000,525
|
||||||||||||||||||
|
2016
|
||||||||||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||||||
|
Mortgages
|
$
|
630
|
$
|
36
|
$
|
1,109
|
$
|
1,775
|
$
|
146,920
|
$
|
35
|
$
|
148,730
|
$
|
173
|
||||||||||||||||
|
Home Equity
|
384
|
49
|
209
|
642
|
58,051
|
-
|
58,693
|
160
|
||||||||||||||||||||||||
|
Commercial
|
1,757
|
58
|
4,302
|
6,117
|
244,491
|
1,969
|
252,577
|
-
|
||||||||||||||||||||||||
|
Agricultural
|
-
|
-
|
1,145
|
1,145
|
121,741
|
738
|
123,624
|
-
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
25,441
|
-
|
25,441
|
-
|
||||||||||||||||||||||||
|
Consumer
|
115
|
40
|
83
|
238
|
10,763
|
4
|
11,005
|
67
|
||||||||||||||||||||||||
|
Other commercial loans
|
95
|
35
|
4,004
|
4,134
|
53,884
|
621
|
58,639
|
-
|
||||||||||||||||||||||||
|
Other agricultural loans
|
43
|
34
|
5
|
82
|
23,306
|
-
|
23,388
|
5
|
||||||||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||||||||||
|
subdivision loans
|
-
|
-
|
-
|
-
|
97,514
|
-
|
97,514
|
-
|
||||||||||||||||||||||||
|
Total
|
$
|
3,024
|
$
|
252
|
$
|
10,857
|
$
|
14,133
|
$
|
782,111
|
$
|
3,367
|
$
|
799,611
|
$
|
405
|
||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans considered non-accrual
|
$
|
172
|
$
|
105
|
$
|
10,452
|
$
|
10,729
|
$
|
725
|
$
|
-
|
$
|
11,454
|
||||||||||||||||||
|
Loans still accruing
|
2,852
|
147
|
405
|
3,404
|
781,386
|
3,367
|
788,157
|
|||||||||||||||||||||||||
|
Total
|
$
|
3,024
|
$
|
252
|
$
|
10,857
|
$
|
14,133
|
$
|
782,111
|
$
|
3,367
|
$
|
799,611
|
||||||||||||||||||
Nonaccrual Loans
Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected.
The following table reflects the loans on nonaccrual status as of December 31, 2017 and 2016, respectively. The balances are presented by class of loan (in thousands):
79
|
|
2017
|
2016
|
||||||
|
Real estate loans:
|
||||||||
|
Mortgages
|
$
|
1,274
|
$
|
1,475
|
||||
|
Home Equity
|
112
|
95
|
||||||
|
Commercial
|
5,192
|
4,445
|
||||||
|
Agricultural
|
175
|
1,340
|
||||||
|
Construction
|
133
|
-
|
||||||
|
Consumer
|
42
|
42
|
||||||
|
Other commercial loans
|
2,637
|
4,057
|
||||||
|
Other agricultural loans
|
606
|
-
|
||||||
|
|
$
|
10,171
|
$
|
11,454
|
||||
Interest income on loans would have increased by approximately $709,000, $603,000 and $463,000 during 2017, 2016 and 2015, respectively, if these loans had performed in accordance with their terms.
Troubled Debt Restructurings (TDR)
In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company's investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower's ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of December 31, 2017, 2016 and 2015, included within the allowance for loan losses are reserves of $41,000, $29,000 and $37,000, respectively, that are associated with loans modified as TDRs.
Loan modifications that are considered TDRs completed during the years ended December 31, 2017, 2016 and 2015 were as follows (dollars in thousands):
80
|
Number of contracts
|
Pre-modification Outstanding Recorded Investment
|
Post-Modification Outstanding Recorded Investment
|
||||||||||||||||||||||
|
2017
|
Interest Modification
|
Term Modification
|
Interest Modification
|
Term Modification
|
Interest Modification
|
Term Modification
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Home Equity
|
-
|
1
|
$
|
-
|
$
|
25
|
$
|
-
|
$
|
25
|
||||||||||||||
|
Commercial
|
-
|
5
|
-
|
7,021
|
-
|
7,021
|
||||||||||||||||||
|
Agricultural
|
-
|
4
|
-
|
1,475
|
-
|
1,475
|
||||||||||||||||||
|
Other commercial loans
|
-
|
1
|
-
|
9
|
-
|
9
|
||||||||||||||||||
|
Other agricultural loans
|
-
|
1
|
-
|
161
|
-
|
161
|
||||||||||||||||||
|
Total
|
-
|
12
|
$
|
-
|
$
|
8,691
|
$
|
-
|
$
|
8,691
|
||||||||||||||
|
2016
|
||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
-
|
4
|
$
|
-
|
$
|
1,188
|
$
|
-
|
$
|
1,188
|
||||||||||||||
|
Agricultural
|
-
|
5
|
-
|
1,956
|
-
|
1,956
|
||||||||||||||||||
|
Other commercial loans
|
-
|
3
|
-
|
3,076
|
-
|
3,076
|
||||||||||||||||||
|
Other agricultural loans
|
-
|
7
|
-
|
1,558
|
-
|
1,558
|
||||||||||||||||||
|
Total
|
-
|
19
|
$
|
-
|
$
|
7,778
|
$
|
-
|
$
|
7,778
|
||||||||||||||
|
2015
|
||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Mortgages
|
1
|
1
|
$
|
71
|
$
|
19
|
$
|
71
|
$
|
19
|
||||||||||||||
|
Total
|
1
|
1
|
$
|
71
|
$
|
19
|
$
|
71
|
$
|
19
|
||||||||||||||
Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which begin January 1, 2017, 2016 and 2015, respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):
|
|
December 31, 2017
|
December 31, 2016
|
December 31, 2015
|
|||||||||||||||||||||
|
|
Number of
contracts
|
Recorded
investment
|
Number of
contracts
|
Recorded
investment
|
Number of
contracts
|
Recorded
investment
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Other agricultural loans
|
2
|
$
|
632
|
-
|
$
|
-
|
-
|
$
|
-
|
|||||||||||||||
|
Total recidivism
|
2
|
$
|
632
|
-
|
$
|
-
|
-
|
$
|
-
|
|||||||||||||||
Foreclosed Assets Held For Sale
Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of December 31, 2017 and 2016 included with other assets are $1,119,000, and $1,036,000, respectively, of foreclosed assets. As of December 31, 2017, included within the foreclosed assets is $254,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2017, the Company has initiated formal foreclosure proceedings on $1,600,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.
Allowance for Loan Losses
The following tables roll forward the balance of the allowance for loan and lease losses for the years ended December 31, 2017, 2016 and 2015 and is segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2017, 2016 and 2015 (in thousands):
81
|
|
Balance at
December 31, 2016
|
Charge-offs
|
Recoveries
|
Provision
(Benefit)
|
Balance at
December 31, 2017
|
Individually
evaluated for impairment
|
Collectively
evaluated for impairment
|
|||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
1,064
|
$
|
(107
|
)
|
$
|
-
|
$
|
92
|
$
|
1,049
|
$
|
56
|
$
|
993
|
|||||||||||||
|
Commercial
|
3,589
|
(41
|
)
|
11
|
308
|
3,867
|
94
|
3,773
|
||||||||||||||||||||
|
Agricultural
|
1,494
|
(30
|
)
|
-
|
1,679
|
3,143
|
3
|
3,140
|
||||||||||||||||||||
|
Construction
|
47
|
-
|
-
|
(24
|
)
|
23
|
-
|
23
|
||||||||||||||||||||
|
Consumer
|
122
|
(130
|
)
|
49
|
83
|
124
|
-
|
124
|
||||||||||||||||||||
|
Other commercial loans
|
1,327
|
-
|
16
|
(71
|
)
|
1,272
|
231
|
1,041
|
||||||||||||||||||||
|
Other agricultural loans
|
312
|
(5
|
)
|
1
|
184
|
492
|
26
|
466
|
||||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||||||
|
subdivision loans
|
833
|
-
|
-
|
(17
|
)
|
816
|
-
|
816
|
||||||||||||||||||||
|
Unallocated
|
98
|
-
|
-
|
306
|
404
|
-
|
404
|
|||||||||||||||||||||
|
Total
|
$
|
8,886
|
$
|
(313
|
)
|
$
|
77
|
$
|
2,540
|
$
|
11,190
|
$
|
410
|
$
|
10,780
|
|||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
Balance at
December 31, 2015
|
Charge-offs
|
Recoveries
|
Provision
(Benefit)
|
Balance at
December 31, 2016
|
Individually
evaluated for
impairment
|
Collectively
evaluated for
impairment
|
|||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
905
|
$
|
(85
|
)
|
$
|
-
|
$
|
244
|
$
|
1,064
|
$
|
32
|
$
|
1,032
|
|||||||||||||
|
Commercial
|
3,376
|
(100
|
)
|
479
|
(166
|
)
|
3,589
|
45
|
3,544
|
|||||||||||||||||||
|
Agricultural
|
409
|
-
|
-
|
1,085
|
1,494
|
54
|
1,440
|
|||||||||||||||||||||
|
Construction
|
24
|
-
|
-
|
23
|
47
|
-
|
47
|
|||||||||||||||||||||
|
Consumer
|
102
|
(100
|
)
|
88
|
32
|
122
|
-
|
122
|
||||||||||||||||||||
|
Other commercial loans
|
1,183
|
(55
|
)
|
33
|
166
|
1,327
|
326
|
1,001
|
||||||||||||||||||||
|
Other agricultural loans
|
122
|
-
|
-
|
190
|
312
|
30
|
282
|
|||||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||||||
|
subdivision loans
|
593
|
-
|
-
|
240
|
833
|
-
|
833
|
|||||||||||||||||||||
|
Unallocated
|
392
|
-
|
-
|
(294
|
)
|
98
|
-
|
98
|
||||||||||||||||||||
|
Total
|
$
|
7,106
|
$
|
(340
|
)
|
$
|
600
|
$
|
1,520
|
$
|
8,886
|
$
|
487
|
$
|
8,399
|
|||||||||||||
|
|
Balance at
December 31, 2014
|
Charge-offs
|
Recoveries
|
Provision
(Benefit)
|
Balance at
December 31, 2015
|
Individually
evaluated for
impairment
|
Collectively
evaluated for
impairment
|
|||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||
|
Residential
|
$
|
878
|
$
|
(66
|
)
|
$
|
-
|
$
|
93
|
$
|
905
|
$
|
37
|
$
|
868
|
|||||||||||||
|
Commercial
|
3,419
|
(84
|
)
|
14
|
27
|
3,376
|
62
|
3,314
|
||||||||||||||||||||
|
Agricultural
|
451
|
-
|
-
|
(42
|
)
|
409
|
409
|
|||||||||||||||||||||
|
Construction
|
26
|
-
|
-
|
(2
|
)
|
24
|
-
|
24
|
||||||||||||||||||||
|
Consumer
|
84
|
(47
|
)
|
33
|
32
|
102
|
-
|
102
|
||||||||||||||||||||
|
Other commercial loans
|
1,007
|
(41
|
)
|
2
|
215
|
1,183
|
256
|
927
|
||||||||||||||||||||
|
Other agricultural loans
|
217
|
-
|
-
|
(95
|
)
|
122
|
122
|
|||||||||||||||||||||
|
State and political
|
-
|
|||||||||||||||||||||||||||
|
subdivision loans
|
545
|
-
|
-
|
48
|
593
|
-
|
593
|
|||||||||||||||||||||
|
Unallocated
|
188
|
-
|
-
|
204
|
392
|
-
|
392
|
|||||||||||||||||||||
|
Total
|
$
|
6,815
|
$
|
(238
|
)
|
$
|
49
|
$
|
480
|
$
|
7,106
|
$
|
355
|
$
|
6,751
|
|||||||||||||
As discussed in Footnote 1, management evaluates various qualitative factors on a quarterly basis. The following are explanations for the changes in the allowance by portfolio segments:
2017
Residential - There was an increase in the historical loss factor for residential loans when comparing 2016 and 2017. The specific reserve for residential loans increased slightly between 2016 and 2017. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for residential loans due to an increase in past due. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for residential loan categories due to an decrease in the unemployment rates in the local economy during 2017.
82
Commercial real estate– There was a decrease in the historical loss factor for commercial real estate loans when comparing 2016 and 2017. The specific reserve for commercial real estate loans increased slightly between 2016 and 2017. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for all commercial real estate loans due to an decrease in the unemployment rates in the local economy during 2017. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of substandard loans.
Agricultural real estate – There was an increase in the historical loss factor for agricultural real estate loans from 2016 to 2017. The specific reserve for agricultural real estate loans decreased from 2016 to 2017. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was increased for agricultural real estate due to an increase in classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for agricultural real estate loans due to a decrease in the unemployment rates in the local economy during 2017. The qualitative factors for existence of credit concentrations and changes in the level of concentrations were increased for agricultural real estate loans due to growth in these loan categories.
Other commercial - There was a decrease in the historical loss factor for other commercial loans when comparing 2016 and 2017. The specific reserve for other commercial loans decreased from 2016 to 2017. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was decreased due to the decrease in non-accrual loans and past due loans. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for other commercial loans due to an decrease in the unemployment rates in the local economy during 2017. The qualitative factors for existence of credit concentrations and changes in the level of concentrations were decreased for other commercial loans due to limited organic growth in these loan categories.
Other agricultural - There was an increase in the historical loss factor for other agricultural loans from 2016 to 2017. The specific reserve for other agricultural loans decreased slightly from 2016 to 2017. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other agricultural loans due to an increase in past due, non-accrual and substandard loans. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for other agricultural loan categories due to a decrease in the unemployment rates in the local economy during 2017. The qualitative factors for existence of credit concentrations and changes in the level of concentrations were increased for other agricultural loans due to growth in these loan categories.
Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2016 to 2017. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for municipal loans due to a decrease in the unemployment rates in the local economy during 2017.
2016
Residential - There was an increase in the historical loss factor for residential loans when comparing 2015 and 2016. The specific reserve for residential loans decreased slightly between 2015 and 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for residential loans due to an increase in past due, non-accrual and classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to an increase in the unemployment rates in the local economy during 2016.
Commercial real estate– There was a decrease in the historical loss factor for commercial real estate loans when comparing 2015 and 2016. The specific reserve for commercial real estate loans decreased slightly between 2015 and 2016. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all commercial real estate loans due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for changes in quality of the institutions loan review system were increased for commercial real estate loans due to the addition of new staff and processes.
83
Agricultural real estate – There was no change in the historical loss factor for agricultural real estate loans from 2015 to 2016. The specific reserve for agricultural real estate loans increased from 2015 to 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was increased for agricultural real estate due to an increase in past due, non-accrual and classified loans. The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for agricultural real estate due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2016, which negatively affected customer earnings. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for changes in quality of the institutions loan review system were increased for agricultural real estate due to the addition of new staff and processes. The qualitative factors for trends in volume, terms and nature of the loan portfolio were increased for agricultural real estate loans due to growth in these loan categories.
Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2015 and 2016. The specific reserve for other commercial loans increased from 2015 to 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was not increased due to the increase being caused by one relationship instead of a larger trend. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for changes in quality of the institutions loan review system were increased for other commercial due to the addition of new staff and processes.
Other agricultural - There was no change in the historical loss factor for other agricultural loans from 2015 to 2016. The specific reserve for other agricultural loans increased from 2015 to 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other agricultural loans due to an increase in past due, non-accrual and classified loans The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for other agricultural loans due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2016, which negatively affected customer earnings. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural loan categories due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for changes in quality of the institutions loan review system were increased for other agricultural loans due to the addition of new staff and processes. The qualitative factors for trends in volume, terms and nature of the loan portfolio were increased for other agricultural loans due to growth in these loan categories.
Municipal loans - There was no change in the historical loss factor or the specific reserve for municipal loans from 2015 to 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for municipal loans due to an increase in classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for trends in volume, terms and nature of the loan portfolio were decreased for municipal loans due to this loan segment making up a smaller portion of the Bank's overall loan portfolio as we continue to grow commercial and agricultural loans. The qualitative factors for experience, ability, and depth of lending management was decreased for municipal loans due to employees gaining additional experience and the use of a third party in reviewing loan information.
84
2015
Residential - There was a decrease in the historical loss factor for residential loans when comparing 2014 and 2015. The specific reserve for residential loans increased slightly between 2014 and 2015. The qualitative factor for levels of and trends in charge-offs and recoveries was increased for residential real estate loans due to the increase in charge-offs compared to historical norms for the Company. The qualitative factors for changes in levels of and trends in delinquencies and impaired/classified loans was increased for residential mortgages due to increases in the amount of non-performing loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity.
Commercial real estate– There was an increase in the historical loss factor for commercial real estate loans when comparing 2014 and 2015. The specific reserve for commercial real estate loans decreased slightly between 2014 and 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all commercial real estate loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for commercial real estate loans due to an increase in the amount of loans classified as substandard. The qualitative factor for levels of and trends in charge-offs and recoveries was decreased for commercial real estate due to the decrease in charge-offs compared to the prior year as charge-offs returned to historical norms for the Bank. The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for commercial real estate, due to the length of time employees involved throughout the loan process have been in their positions.
Agricultural real estate – There were no changes in the historical loss factor and specifc reserve for agricultural real estate loans from 2014 to 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for agricultural real estate to the decrease in the amount of loans classified as substandard, excluding loans acquired as part of the FNB acquisition. The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for agricultural real estate, due to the length of time employees involved throughout the loan process have been in their positions. The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for agricultural real estate due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2015, which negatively affected customer earnings.
Other commercial - There was a decrease in the historical loss factor for other commercial loans when comparing 2014 and 2015. The specific reserve for other commercial loans increased from 2014 to 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other commercial loans due to an increase in the amount of loans classified as substandard. The qualitative factor for levels of and trends in charge-offs and recoveries was decreased for other commercial loans due to the decrease in charge-offs compared to the prior year as charge-offs returned to historical norms for the Bank. The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for other commercial loans real estate, due to the length of time employees involved throughout the loan process have been in their positions.
Other agricultural - There were no changes in the historical loss factor or specific reserve for other agricultural loans from 2014 to 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for other agricultural loans to the decrease in the amount of loans classified as substandard, excluding loans acquired as part of the FNB acquisition. The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for other agricultural loans, due to the length of time employees involved throughout the loan process have been in their positions. The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for other agricultural loans due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2015, which negatively affected customer earnings.
85
Municipal loans - There were no changes in the historical loss factor or specific reserve for municipal loans from 2014 to 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity.
5. PREMISES & EQUIPMENT
Premises and equipment at December 31, 2017 and 2016 are summarized as follows (in thousands):
|
|
December 31,
|
|||||||
|
|
2017
|
2016
|
||||||
|
Land
|
$
|
5,110
|
$
|
5,110
|
||||
|
Buildings
|
17,402
|
17,315
|
||||||
|
Furniture, fixtures and equipment
|
6,698
|
6,678
|
||||||
|
Construction in process
|
16
|
5
|
||||||
|
|
29,226
|
29,108
|
||||||
|
Less: accumulated depreciation
|
12,703
|
12,078
|
||||||
|
Premises and equipment, net
|
$
|
16,523
|
$
|
17,030
|
||||
Depreciation expense amounted to $776,000, $763,000 and $608,000 for 2017, 2016 and 2015, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table provides the gross carrying value and accumulated amortization of intangible assets as of December 31, 2017 and 2016 (in thousands):
|
|
December 31, 2017
|
December 31, 2016
|
||||||||||||||||||||||
|
|
Gross carrying value
|
Accumulated amortization
|
Net carrying value
|
Gross carrying value
|
Accumulated amortization
|
Net carrying value
|
||||||||||||||||||
|
Amortized intangible assets (1):
|
||||||||||||||||||||||||
|
MSRs
|
$
|
1,605
|
$
|
(912
|
)
|
$
|
693
|
$
|
1,471
|
$
|
(787
|
)
|
$
|
684
|
||||||||||
|
Core deposit intangibles
|
1,786
|
(586
|
)
|
1,200
|
1,641
|
(320
|
)
|
1,321
|
||||||||||||||||
|
Covenant not to compete
|
125
|
(65
|
)
|
60
|
125
|
(34
|
)
|
91
|
||||||||||||||||
|
Total amortized intangible assets
|
$
|
3,516
|
$
|
(1,563
|
)
|
$
|
1,953
|
$
|
3,237
|
$
|
(1,141
|
)
|
$
|
2,096
|
||||||||||
|
Unamortized intangible assets:
|
||||||||||||||||||||||||
|
Goodwill
|
$
|
23,296
|
$
|
21,089
|
||||||||||||||||||||
|
(1) Excludes fully amortized intangible assets
|
||||||||||||||||||||||||
The following table provides the current year and estimated future amortization expense for the next five years of amortized intangible assets (in thousands). We based our projections of amortization expense shown below on existing asset balances at December 31, 2017. Future amortization expense may vary from these projections:
86
|
|
MSRs
|
Core deposit intangibles
|
Covenant not to compete
|
Total
|
||||||||||||
|
Year ended December 31, 2017 (actual)
|
$
|
177
|
$
|
266
|
$
|
31
|
$
|
474
|
||||||||
|
Estimate for year ended December 31,
|
||||||||||||||||
|
2018
|
184
|
265
|
31
|
480
|
||||||||||||
|
2019
|
148
|
230
|
29
|
407
|
||||||||||||
|
2020
|
115
|
197
|
-
|
312
|
||||||||||||
|
2021
|
88
|
165
|
-
|
253
|
||||||||||||
|
2022
|
64
|
133
|
-
|
197
|
||||||||||||
7. FEDERAL HOME LOAN BANK (FHLB) STOCK
As a member of the FHLB of Pittsburgh, the Bank is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. As of December 31, 2017 and 2016, the Bank held $6,021,000 and $4,542,000, respectively, of FHLB stock. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated by management. The stock's value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) A significant decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management considered that the FHLB's regulatory capital ratios have improved, liquidity appears adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of excess capital stock from its members and has paid a quarterly cash dividend.
8. DEPOSITS
The following table shows the breakdown of deposits as of December 31, 2017 and 2016, by deposit type (in thousands):
|
|
2017
|
2016
|
||||||
|
Non-interest-bearing deposits
|
$
|
171,840
|
$
|
147,425
|
||||
|
NOW accounts
|
337,307
|
305,862
|
||||||
|
Savings deposits
|
184,057
|
170,722
|
||||||
|
Money market deposit accounts
|
145,287
|
116,880
|
||||||
|
Certificates of deposit
|
266,452
|
264,614
|
||||||
|
Total
|
$
|
1,104,943
|
$
|
1,005,503
|
||||
Certificates of deposit of $250,000 or more amounted to $62,561,000 and $56,743,000 at December 31, 2017 and 2016, respectively.
Following are maturities of certificates of deposit as of December 31, 2017 (in thousands):
|
2018
|
$
|
107,591
|
||
|
2019
|
51,071
|
|||
|
2020
|
56,515
|
|||
|
2021
|
24,390
|
|||
|
2022
|
20,870
|
|||
|
Thereafter
|
6,015
|
|||
|
Total certificates of deposit
|
$
|
266,452
|
9. BORROWED FUNDS AND REPURCHASE AGREEMENTS
The following table shows the breakdown of borrowed funds as of December 31, 2017 and 2016, (dollars in thousands):
87
|
|
Securities
|
|||||||||||||||||||||||||||
|
|
Sold Under
|
Total
|
||||||||||||||||||||||||||
|
|
Agreements to
|
FHLB
|
Federal Funds
|
FRB
|
Notes
|
Term
|
Borrowed
|
|||||||||||||||||||||
|
|
Repurchase(a)
|
Advances(b)
|
Line (c)
|
BIC Line (d)
|
Payable(e)
|
Loans(f)
|
Funds
|
|||||||||||||||||||||
|
2017
|
||||||||||||||||||||||||||||
|
Balance at December 31
|
$
|
14,989
|
$
|
77,650
|
$
|
-
|
$
|
-
|
$
|
7,500
|
$
|
14,525
|
$
|
114,664
|
||||||||||||||
|
Highest balance at any month-end
|
16,643
|
78,858
|
-
|
-
|
7,500
|
16,525
|
119,526
|
|||||||||||||||||||||
|
Average balance
|
15,598
|
29,409
|
1
|
2
|
7,500
|
16,026
|
68,536
|
|||||||||||||||||||||
|
Weighted average interest rate:
|
||||||||||||||||||||||||||||
|
Paid during the year
|
0.97
|
%
|
1.25
|
%
|
1.52
|
%
|
1.75
|
%
|
4.06
|
%
|
2.44
|
%
|
1.77
|
%
|
||||||||||||||
|
As of year-end
|
1.37
|
%
|
1.54
|
%
|
0.00
|
%
|
0.00
|
%
|
4.40
|
%
|
2.42
|
%
|
1.82
|
%
|
||||||||||||||
|
2016
|
||||||||||||||||||||||||||||
|
Balance at December 31
|
$
|
14,307
|
$
|
41,330
|
$
|
-
|
$
|
-
|
$
|
7,500
|
$
|
16,525
|
$
|
79,662
|
||||||||||||||
|
Highest balance at any month-end
|
16,132
|
45,125
|
-
|
-
|
7,500
|
16,525
|
85,282
|
|||||||||||||||||||||
|
Average balance
|
15,057
|
7,917
|
2
|
3
|
7,500
|
16,525
|
47,004
|
|||||||||||||||||||||
|
Weighted average interest rate:
|
||||||||||||||||||||||||||||
|
Paid during the year
|
0.49
|
%
|
0.63
|
%
|
0.76
|
%
|
1.00
|
%
|
3.55
|
%
|
2.44
|
%
|
1.69
|
%
|
||||||||||||||
|
As of year-end
|
0.67
|
%
|
0.74
|
%
|
0.00
|
%
|
0.00
|
%
|
3.79
|
%
|
2.44
|
%
|
1.36
|
%
|
||||||||||||||
The collateral pledged on the repurchase agreements by the remaining contractual maturity of the repurchase agreements in the Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016 is presented in the following tables.
|
|
Remaining Contractual Maturity of the Agreements
|
|||||||||||||||||||
|
|
Overnight and
|
Up to
|
Greater than
|
|||||||||||||||||
|
2017
|
Continuous
|
30 Days
|
30 - 90 Days
|
90 days
|
Total
|
|||||||||||||||
|
Repurchase Agreements:
|
||||||||||||||||||||
|
U.S. agency securities
|
$
|
16,027
|
$
|
-
|
$
|
-
|
$
|
2,035
|
||||||||||||
|
Total carrying value of collateral pledged
|
$
|
16,027
|
$
|
-
|
$
|
-
|
$
|
2,035
|
$
|
18,062
|
||||||||||
|
Total liability recognized for repurchase agreements
|
$
|
14,989
|
||||||||||||||||||
|
Remaining Contractual Maturity of the Agreements
|
||||||||||||||||||||
|
Overnight and
|
Up to
|
Greater than
|
||||||||||||||||||
|
2016
|
Continuous
|
30 Days
|
30 - 90 Days
|
90 days
|
Total
|
|||||||||||||||
|
Repurchase Agreements:
|
||||||||||||||||||||
|
U.S. agency securities
|
$
|
16,118
|
$
|
-
|
$
|
-
|
$
|
2,059
|
||||||||||||
|
Total carrying value of collateral pledged
|
$
|
16,118
|
$
|
-
|
$
|
-
|
$
|
2,059
|
$
|
18,177
|
||||||||||
|
Total liability recognized for repurchase agreements
|
$
|
14,307
|
||||||||||||||||||
(a) We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.
(b) FHLB Advances consist of an "Open RepoPlus" agreement with the FHLB of Pittsburgh. FHLB "Open RepoPlus" advances are short-term borrowings that bear interest based on the FHLB discount rate or Federal Funds rate, whichever is higher. The Company has a borrowing limit of $453,407,000, inclusive of any outstanding advances. FHLB advances are secured by a blanket security agreement that includes the Company's FHLB stock, as well as certain investment and mortgage-backed securities held in safekeeping at the FHLB and certain residential and commercial mortgage loans.
(c) The federal funds line consists of an unsecured line from a third party bank at market rates. The Company has a borrowing limit of $10,000,000, inclusive of any outstanding balances. No specific collateral is required to be pledged for these borrowings.
(d) The Federal Reserve Bank Borrower in Custody (FRB BIC) Line consists of a borrower in custody in agreement open in January 2010 with the Federal Reserve Bank of Philadelphia secured by municipal loans maintained in the Company's possession. As of December 31, 2017 and 2016, the Company has a borrowing limit of $4,400,000 and $4,360,000, respectively, inclusive of any outstanding advances. The approximate carrying value of the municipal loan collateral was $14,590,000 and $15,560,000 as of December 31, 2017 and 2016, respectively.
88
(e) In December 2003, the Company formed a special purpose entity ("Entity") to issue $7,500,000 of floating rate obligated mandatory redeemable trust preferred securities as part of a pooled offering. The rate was determined quarterly and floated based on the 3 month LIBOR plus 2.80 percent. The Entity may redeem them, in whole or in part, at face value after December 17, 2008, and on a quarterly basis thereafter. The Company borrowed the proceeds of the issuance from the Entity in December 2003 in the form of a $7,500,000 note payable. Debt issue costs of $75,000 have been capitalized and fully amortized as of December 31, 2008. Under current accounting rules, the Company's minority interest in the Entity was recorded at the initial investment amount and is included in the other assets section of the balance sheet. The Entity is not consolidated as part of the Company's consolidated financial statements.
(f) Term Loans consist of separate loans with the FHLB of Pittsburgh as follows (in thousands):
|
|
December 31,
|
December 31,
|
||||||||||
|
Interest Rate
|
Maturity
|
2017
|
2016
|
|||||||||
|
Fixed:
|
|
|||||||||||
|
2.29
|
%
|
October 2, 2017
|
2,000
|
|||||||||
|
2.72
|
%
|
July 12, 2018
|
1,000
|
1,000
|
||||||||
|
1.87
|
%
|
February 4, 2019
|
2,000
|
2,000
|
||||||||
|
2.61
|
%
|
February 3, 2021
|
2,000
|
2,000
|
||||||||
|
3.52
|
%
|
July 12, 2021
|
2,000
|
2,000
|
||||||||
|
2.37
|
%
|
August 20, 2021
|
2,800
|
2,800
|
||||||||
|
2.08
|
%
|
January 6, 2022
|
4,725
|
4,725
|
||||||||
|
Total term loans
|
$
|
14,525
|
$
|
16,525
|
||||||||
Following are maturities of borrowed funds as of December 31, 2017 (in thousands):
|
2018
|
$
|
100,025
|
||
|
2019
|
2,000
|
|||
|
2020
|
580
|
|||
|
2021
|
7,334
|
|||
|
2022
|
4,725
|
|||
|
Thereafter
|
-
|
|||
|
Total borrowed funds
|
$
|
114,664
|
10. EMPLOYEE BENEFIT PLANS
Noncontributory Defined Benefit Pension Plan
The Bank sponsors a trusteed, noncontributory defined benefit pension plan covering substantially all employees and officers hired prior to January 1, 2007. Additionally, the Bank assumed the noncontributory defined benefit pension plan of FNB when it was acquired during 2015. The FNB plan was frozen prior to the acquisition and therefore, no additional benefits will accrue for employees covered under that plan. These two plans are collectively referred to herein as "the Plans". The pension plans call for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank and compensation rates during employment. Upon retirement or other termination of employment, employees can elect either an annuity benefit or a lump sum distribution of vested benefits in the pension plan. The Bank's funding policy is to make annual contributions, if needed, based upon the funding formula developed by the pension plans' actuary. For the years ended December 31, 2017, 2016 and 2015, contributions to the pension plans totaled $3,000,000, $818,000 and $400,000, respectively.
89
In lieu of the pension plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting length of service requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee's base compensation. The contribution amount is placed in a separate account within the 401(k) plan and is subject to a vesting requirement. Contributions by the Company totaled $133,000, $82,000 and $61,000 for 2017, 2016 and 2015, respectively.
The following table sets forth the obligation and funded status as of December 31 (in thousands):
|
|
2017
|
2016
|
||||||
|
|
||||||||
|
Change in benefit obligation
|
||||||||
|
Benefit obligation at beginning of year
|
$
|
18,603
|
$
|
17,809
|
||||
|
Service cost
|
349
|
345
|
||||||
|
Interest cost
|
671
|
692
|
||||||
|
Actuarial (Gain) / Loss
|
1,015
|
439
|
||||||
|
Benefits paid
|
(805
|
)
|
(682
|
)
|
||||
|
Benefit obligation at end of year
|
19,833
|
18,603
|
||||||
|
|
||||||||
|
Change in plan assets
|
||||||||
|
Fair value of plan assets at beginning of year
|
15,786
|
14,786
|
||||||
|
Actual return (loss) on plan assets
|
2,011
|
864
|
||||||
|
Employer contribution
|
3,000
|
818
|
||||||
|
Benefits paid
|
(805
|
)
|
(682
|
)
|
||||
|
Fair value of plan assets at end of year
|
19,992
|
15,786
|
||||||
|
|
||||||||
|
Funded status
|
$
|
159
|
$
|
(2,817
|
)
|
|||
Amounts not yet recognized as a component of net periodic pension cost as of December 31 (in thousands):
|
Amounts recognized in accumulated other
|
||||||||
|
comprehensive loss consists of:
|
2017
|
2016
|
||||||
|
Net loss
|
$
|
4,088
|
$
|
4,263
|
||||
|
Prior service cost
|
(127
|
)
|
(175
|
)
|
||||
|
Total
|
$
|
3,961
|
$
|
4,088
|
||||
The accumulated benefit obligation for the defined benefit pension plan was $19,833,000 and $18,603,000 at December 31, 2017 and 2016, respectively.
The components of net periodic benefit costs for the years ended December 31 are as follows (in thousands):
|
|
2017
|
2016
|
2015
|
|||||||||
|
|
||||||||||||
|
Service cost
|
$
|
349
|
$
|
345
|
$
|
352
|
||||||
|
Interest cost
|
671
|
692
|
424
|
|||||||||
|
Return on plan assets
|
(1,094
|
)
|
(1,034
|
)
|
(791
|
)
|
||||||
|
Net amortization and deferral
|
224
|
219
|
205
|
|||||||||
|
Net periodic benefit cost
|
$
|
150
|
$
|
222
|
$
|
190
|
||||||
The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive loss into the net periodic benefit cost (income) in 2018 is $233,000 and $(48,000), respectively.
The weighted-average assumptions used to determine benefit obligations at December 31, 2017 and 2016 is summarized in the following table. The change in the discount rate is the primary driver of the actuarial loss that occurred in 2017 of $1,015,000.
90
|
|
|
|
2017
|
|
2016
|
|
Discount rate
|
|
3.35%
|
|
3.78%
|
|
|
Rate of compensation increase
|
|
3.00%
|
|
3.00%
|
|
The weighted-average assumptions used to determine net periodic benefit cost (income) for the year ended December 31:
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Discount rate
|
|
3.78%
|
|
3.94%
|
|
3.61%
|
|
|
Expected long-term return on plan assets
|
|
7.00%
|
|
7.00%
|
|
7.00%
|
|
|
Rate of compensation increase
|
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
The long-term rate of return on plan assets gives consideration to returns currently being earned on plan assets as well as future rates expected to be earned. The investment objective is to maximize total return consistent with the interests of the participants and beneficiaries, and prudent investment management. The allocation of the pension plan assets is determined on the basis of sound economic principles and is continually reviewed in light of changes in market conditions. Asset allocation favors equity securities, with a target allocation of 50-70%. The target allocation for debt securities is 30-50%. At December 31, 2017, the pension plan had a sufficient cash and money market position in order to re-allocate the equity portfolio for diversification purposes and reduce risk in the total portfolio. The following table sets forth by level, within the fair value hierarchy as defined in footnote 17, the Plan's assets at fair value as of December 31, 2016 and 2017 (in thousands):
|
2017
|
Level I
|
Level II
|
Level III
|
Total
|
Allocation
|
|||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
3,827
|
$
|
-
|
$
|
-
|
$
|
3,827
|
19.1
|
%
|
||||||||||
|
Equity Securities
|
6,018
|
-
|
-
|
6,018
|
30.1
|
%
|
||||||||||||||
|
Mutual Funds and ETF's
|
6,090
|
-
|
-
|
6,090
|
30.5
|
%
|
||||||||||||||
|
Corporate Bonds
|
-
|
3,469
|
-
|
3,469
|
17.4
|
%
|
||||||||||||||
|
Municipal Bonds
|
105
|
105
|
0.5
|
%
|
||||||||||||||||
|
U.S. Agency Securities
|
-
|
483
|
-
|
483
|
2.4
|
%
|
||||||||||||||
|
Certificate of deposit
|
-
|
-
|
-
|
-
|
0.0
|
%
|
||||||||||||||
|
Total
|
$
|
15,935
|
$
|
4,057
|
$
|
-
|
$
|
19,992
|
100.0
|
%
|
||||||||||
|
2016
|
Level I
|
Level II
|
Level III
|
Total
|
Allocation
|
|||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
863
|
$
|
-
|
$
|
-
|
$
|
863
|
5.5
|
%
|
||||||||||
|
Equity securities
|
5,404
|
-
|
-
|
5,404
|
34.1
|
%
|
||||||||||||||
|
Mutual funds and ETF's
|
5,235
|
-
|
-
|
5,235
|
33.2
|
%
|
||||||||||||||
|
Corporate bonds
|
-
|
3,641
|
-
|
3,641
|
23.1
|
%
|
||||||||||||||
|
Municipal bonds
|
107
|
107
|
0.7
|
%
|
||||||||||||||||
|
U.S. Agency securities
|
-
|
536
|
-
|
536
|
3.4
|
%
|
||||||||||||||
|
Total
|
$
|
11,502
|
$
|
4,284
|
$
|
-
|
$
|
15,786
|
100.0
|
%
|
||||||||||
Equity securities include the Company's common stock in the amounts of $684,000 (3.4% of total plan assets) and $548,000 (3.5% of total plan assets) at December 31, 2017 and 2016, respectively.
Due to the contributions made in 2017, the Bank does not expect to contribute to its pension plans in 2018. Expected future benefit payments that the Bank estimates from its pension plan are as follows (in thousands):
|
2018
|
$
|
629
|
||
|
2019
|
1,896
|
|||
|
2020
|
1,599
|
|||
|
2021
|
1,421
|
|||
|
2022
|
843
|
|||
|
2023 - 2027
|
7,805
|
91
Defined Contribution Plan
The Company sponsors a voluntary 401(k) savings plan which eligible employees can elect to contribute up to the maximum amount allowable not to exceed the limits of IRS Code Sections 401(k). Under the plan, the Company also makes required contributions on behalf of the eligible employees. The Company's contributions vest immediately. Contributions by the Company totaled $388,000, $351,000 and $285,000 for 2017, 2016 and 2015, respectively.
Directors' Deferred Compensation Plan
The Company's directors may elect to defer all or portions of their fees until their retirement or termination from service. Amounts deferred under the deferred compensation plan earn interest based upon the highest current rate offered to certificate of deposit customers. Amounts deferred under the deferred compensation plan are not guaranteed and represent a general liability of the Company. As of December 31, 2017 and 2016, an obligation of $928,000 and $940,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Amounts included in interest expense on the deferred amounts totaled $19,000, $15,000 and $22,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Restricted Stock Plan
The Company maintains a Restricted Stock Plan (the Plan) whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements. Awards granted under the Plan are in the form of the Company's common stock and maybe subject to certain vesting requirements including in the case of employees, continuous employment or service with the Company. In April of 2016, the Company's shareholders authorized a total of 150,000 shares of the Company's common stock to be made available under the Plan. As of December 31, 2017, 141,408 shares remain available to be issued under the Plan. The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation.
The following table details the vesting, awarding and forfeiting of restricted shares during 2017:
|
|
2017
|
|||||||
|
|
Weighted
|
|||||||
|
|
Average
|
|||||||
|
|
Shares
|
Market Price
|
||||||
|
Outstanding, beginning of year
|
8,471
|
$
|
49.10
|
|||||
|
Granted
|
4,482
|
53.84
|
||||||
|
Forfeited
|
(43
|
)
|
48.56
|
|||||
|
Vested
|
(4,127
|
)
|
49.78
|
|||||
|
Outstanding, end of year
|
8,783
|
$
|
51.20
|
|||||
Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. Compensation expense related to restricted stock was $214,000, $193,000 and $172,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The per share weighted-average grant-date fair value of restricted shares granted during 2017, 2016 and 2015 was $53.84, $48.13 and $49.02, respectively. At December 31, 2017, the total compensation cost related to nonvested awards that has not yet been recognized was $450,000, which is expected to be recognized over the next 3 years.
Supplemental Executive Retirement Plan
The Company maintains a non-qualified supplemental executive retirement plan ("SERP") for certain executives to compensate those executive participants in the Company's noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. At December 31, 2017 and 2016, an obligation of $1,571,000 and $1,460,000, respectively, was included in other liabilities for the SERP in the Consolidated Balance Sheet. Expenses related to the SERP totaled $111,000, $121,000 and $141,000 for the years ended December 31, 2017, 2016 and 2015.
92
Salary Continuation Plan
The Company maintains a salary continuation plan for certain employees acquired through the acquisition of the FNB. At December 31, 2017 and 2016 an obligation of $716,000 and $720,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Expenses related to the salary continuation plan totaled $54,000 and $62,000 for the years ended December 31, 2017 and 2016, respectively. There were no expenses related to this plan during the year ended December 31, 2015.
Continuation of Life Insurance Plan
The Company, as part of the acquisition of FNB, has promised a continuation of life insurance coverage to certain persons post-retirement. GAAP requires the recording of post-retirement costs and a liability equal to the present value of the cost of post-retirement insurance during the person's term of service. The estimated present value of future benefits to be paid totaled $578,000 and $569,000 at December 31, 2017 and 2016, respectively, which is included in other liabilities in the Consolidated Balance Sheet. Expenses for the plan total $9,000 during 2017. There were no expenses related to this plan during the years ended December 31, 2016 and 2015.
11. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
|
|
Year Ended December 31,
|
|||||||||||
|
|
2017
|
2016
|
2015
|
|||||||||
|
Currently payable
|
$
|
4,583
|
$
|
2,672
|
$
|
2,913
|
||||||
|
Change in corporate tax rate
|
1,531
|
-
|
-
|
|||||||||
|
Deferred tax
|
(83
|
)
|
362
|
(192
|
)
|
|||||||
|
Provision for income taxes
|
$
|
6,031
|
$
|
3,034
|
$
|
2,721
|
||||||
The following temporary differences gave rise to the net deferred tax asset and liabilities at December 31, 2017 and 2016, respectively (in thousands):
93
|
|
2017
|
2016
|
||||||
|
Deferred tax assets:
|
||||||||
|
Allowance for loan losses
|
$
|
3,058
|
$
|
4,518
|
||||
|
Deferred compensation
|
464
|
757
|
||||||
|
Merger & acquisition costs
|
7
|
16
|
||||||
|
Allowance for losses on available-for-sale securities
|
6
|
250
|
||||||
|
Pension and other retirement obligation
|
297
|
1,454
|
||||||
|
Interest on non-accrual loans
|
917
|
1,259
|
||||||
|
Incentive plan accruals
|
324
|
421
|
||||||
|
Other real estate owned
|
108
|
152
|
||||||
|
Unrealized losses on available-for-sale securities
|
71
|
-
|
||||||
|
Low income housing tax credits
|
64
|
94
|
||||||
|
NOL carry forward
|
339
|
709
|
||||||
|
AMT Credit Carryforward
|
8
|
8
|
||||||
|
Other
|
117
|
156
|
||||||
|
Total
|
$
|
5,780
|
$
|
9,794
|
||||
|
|
||||||||
|
Deferred tax liabilities:
|
||||||||
|
Premises and equipment
|
$
|
(623
|
)
|
$
|
(998
|
)
|
||
|
Investment securities accretion
|
(66
|
)
|
(189
|
)
|
||||
|
Loan fees and costs
|
(257
|
)
|
(369
|
)
|
||||
|
Goodwill and core deposit intangibles
|
(2,200
|
)
|
(3,573
|
)
|
||||
|
Mortgage servicing rights
|
(146
|
)
|
(233
|
)
|
||||
|
Unrealized gains on available-for-sale securities
|
-
|
(673
|
)
|
|||||
|
Other
|
(7
|
)
|
(17
|
)
|
||||
|
Total
|
(3,299
|
)
|
(6,052
|
)
|
||||
|
Deferred tax asset, net
|
$
|
2,481
|
$
|
3,742
|
||||
No valuation allowance was established at December 31, 2017 and 2016, due to the Company's ability to carryback to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company's earnings potential.
The total provision for income taxes is different from that computed at the statutory rates due to the following items (in thousands):
|
|
Year Ended December 31,
|
|||||||||||
|
|
2017
|
2016
|
2015
|
|||||||||
|
Provision at statutory rates on
|
||||||||||||
|
pre-tax income
|
$
|
6,505
|
$
|
5,328
|
$
|
4,878
|
||||||
|
Effect of tax-exempt income
|
(1,710
|
)
|
(1,943
|
)
|
(1,915
|
)
|
||||||
|
Low income housing tax credits
|
(141
|
)
|
(198
|
)
|
(198
|
)
|
||||||
|
Bank owned life insurance
|
(225
|
)
|
(234
|
)
|
(214
|
)
|
||||||
|
Nondeductible interest
|
54
|
55
|
61
|
|||||||||
|
Nondeductible merger and acquisition expenses
|
-
|
-
|
102
|
|||||||||
|
Change in tax rate
|
1,531
|
-
|
-
|
|||||||||
|
Other items
|
17
|
26
|
7
|
|||||||||
|
Provision for income taxes
|
$
|
6,031
|
$
|
3,034
|
$
|
2,721
|
||||||
|
Statutory tax rates
|
34
|
%
|
34
|
%
|
34
|
%
|
||||||
|
Effective tax rates
|
31.6
|
%
|
19.4
|
%
|
19.0
|
%
|
||||||
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. With limited exception, the Company's federal and state income tax returns for taxable years through 2013 have been closed for purposes of examination by the federal and state taxing authorities.
94
Investments in Qualified Affordable Housing Projects
As of December 31, 2017 and 2016, the Company was invested in four partnerships that provide affordable housing. The balance of the investments, which is included within other assets in the Consolidated Balance Sheet, was $541,000 and $700,000 as of December 31, 2017 and 2016, respectively. Investments purchased prior to January 1, 2015, are accounted for utilizing the effective yield method. As of December 31, 2017, the Company has $705,000 of tax credits remaining that will be recognized over five years. Tax credits of $141,000, $198,000 and $198,000 were recognized as a reduction of tax expense during 2017, 2016 and 2015, respectively. Included within other expenses on the Consolidated Statement of Income was $159,000, $259,000 and $259,000 of amortization of the investments in qualified affordable housing projects for 2017, 2016 and 2015, respectively.
12. OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive loss, net of tax, as of December 31, were as follows (in thousands):
|
|
2017
|
2016
|
||||||
|
Net unrealized gain on securities available for sale
|
$
|
(340
|
)
|
$
|
1,979
|
|||
|
Tax effect
|
71
|
(673
|
)
|
|||||
|
Net -of-tax amount
|
(269
|
)
|
1,306
|
|||||
|
|
||||||||
|
Unrecognized pension costs
|
(3,961
|
)
|
(4,088
|
)
|
||||
|
Tax effect
|
832
|
1,390
|
||||||
|
Net -of-tax amount
|
(3,129
|
)
|
(2,698
|
)
|
||||
|
|
||||||||
|
Total accumulated other comprehensive income
|
$
|
(3,398
|
)
|
$
|
(1,392
|
)
|
||
The following tables present the changes in accumulated other comprehensive loss by component net of tax for the years ended December 31, 2017, 2016 and 2015 (in thousands):
95
|
|
Unrealized gain (loss) on available for sale securities (a)
|
Defined Benefit Pension Items (a)
|
Total
|
|||||||||
|
Balance as of December 31, 2014
|
$
|
3,093
|
$
|
(2,326
|
)
|
$
|
767
|
|||||
|
Other comprehensive income (loss) before reclassifications (net of tax)
|
(606
|
)
|
(249
|
)
|
(855
|
)
|
||||||
|
Amounts reclassified from accumulated other
|
||||||||||||
|
comprehensive income (loss) (net of tax)
|
(283
|
)
|
135
|
(148
|
)
|
|||||||
|
Net current period other comprehensive income (loss)
|
(889
|
)
|
(114
|
)
|
(1,003
|
)
|
||||||
|
Balance as of December 31, 2015
|
$
|
2,204
|
$
|
(2,440
|
)
|
$
|
(236
|
)
|
||||
|
|
||||||||||||
|
Balance as of December 31, 2015
|
$
|
2,204
|
$
|
(2,440
|
)
|
$
|
(236
|
)
|
||||
|
Other comprehensive income (loss) before reclassifications (net of tax)
|
(730
|
)
|
(403
|
)
|
(1,133
|
)
|
||||||
|
Amounts reclassified from accumulated other
|
||||||||||||
|
comprehensive income (loss) (net of tax)
|
(168
|
)
|
145
|
(23
|
)
|
|||||||
|
Net current period other comprehensive income (loss)
|
(898
|
)
|
(258
|
)
|
(1,156
|
)
|
||||||
|
Balance as of December 31, 2016
|
$
|
1,306
|
$
|
(2,698
|
)
|
$
|
(1,392
|
)
|
||||
|
|
||||||||||||
|
Balance as of December 31, 2016
|
$
|
1,306
|
$
|
(2,698
|
)
|
$
|
(1,392
|
)
|
||||
|
Other comprehensive income (loss) before reclassifications (net of tax)
|
(847
|
)
|
(65
|
)
|
(912
|
)
|
||||||
|
Amounts reclassified from accumulated other
|
||||||||||||
|
comprehensive income (loss) (net of tax)
|
(683
|
)
|
148
|
(535
|
)
|
|||||||
|
Net current period other comprehensive income (loss)
|
(1,530
|
)
|
83
|
(1,447
|
)
|
|||||||
|
Change in other comprehensive income due to change
|
||||||||||||
|
in the federal tax rate
|
(45
|
)
|
(514
|
)
|
(559
|
)
|
||||||
|
Balance as of December 31, 2017
|
$
|
(269
|
)
|
$
|
(3,129
|
)
|
$
|
(3,398
|
)
|
|||
|
|
||||||||||||
|
(a) Amounts in parentheses indicate debits on the Consolidated Balance Sheet.
|
||||||||||||
The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the years ended December 31, 2017, 2016 and 2015:
|
Details about accumulated other comprehensive income (loss)
|
Amount reclassified from accumulated comprehensive income (loss) (a)
|
Affected line item in the Consolidated Statement of Income
|
|||||||||||
|
|
December 31,
|
|
|||||||||||
|
|
2017
|
2016
|
2015
|
|
|||||||||
|
Unrealized gains and losses on available for sale securities
|
|
||||||||||||
|
|
$
|
1,035
|
$
|
255
|
$
|
429
|
Investment securities gains, net
|
||||||
|
|
(352
|
)
|
(87
|
)
|
(146
|
)
|
Provision for income taxes
|
||||||
|
|
$
|
683
|
$
|
168
|
$
|
283
|
Net of tax
|
||||||
|
|
|
||||||||||||
|
Defined benefit pension items
|
|
||||||||||||
|
|
$
|
(224
|
)
|
$
|
(219
|
)
|
$
|
(205
|
)
|
Salaries and employee benefits
|
|||
|
|
76
|
74
|
70
|
Provision for income taxes
|
|||||||||
|
|
$
|
(148
|
)
|
$
|
(145
|
)
|
$
|
(135
|
)
|
Net of tax
|
|||
|
Total reclassifications
|
$
|
535
|
$
|
23
|
$
|
148
|
|
||||||
|
|
|
||||||||||||
|
(a) Amounts in parentheses indicate debits
|
|
||||||||||||
13. RELATED PARTY TRANSACTIONS
Certain executive officers and directors of the Company, or companies in which they have 10 percent or more beneficial ownership, were indebted to the Bank. Such loans were made in the ordinary course of business at the Bank's normal credit terms and do not present more than a normal risk of collection. A summary of loan activity for the years ended December 31, 2017 and 2016 with officers, directors, stockholders and associates of such persons is listed below (in thousands):
96
|
|
Year Ended December 31,
|
|||||||
|
|
2017
|
2016
|
||||||
|
Balance, beginning of year
|
$
|
5,570
|
$
|
5,343
|
||||
|
New loans
|
4,161
|
4,512
|
||||||
|
Repayments
|
(5,146
|
)
|
(4,285
|
)
|
||||
|
Balance, end of year
|
$
|
4,585
|
$
|
5,570
|
||||
14. REGULATORY MATTERS
Dividend Restrictions:
The approval of the Federal Reserve Board (FRB) is required for the Bank to pay dividends to the Company if the total of all dividends declared in any calendar year exceeds the Bank's net income (as defined) for that year combined with its retained net income for the preceding two calendar years. Under this formula, the Bank can declare dividends in 2018 without approval of the FRB or Pennsylvania Department of Banking of approximately $12,397,000, plus the Bank's 2018 year-to-date net income at the time of the dividend declaration.
Loans:
The Bank is subject to regulatory restrictions which limit its ability to loan funds to the Company. At December 31, 2017, the Bank's regulatory lending limit amounted to approximately $19,287,000.
Regulatory Capital Requirements:
Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total, Tier I and Common Equity Tier I capital to risk-weighted assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) established five capital categories ranging from "well capitalized" to "critically under-capitalized." Should any institution fail to meet the requirements to be considered "adequately capitalized", it would become subject to a series of increasingly restrictive regulatory actions.
As of December 31, 2017 and 2016, the FRB categorized the Company and the Bank as well capitalized, under the regulatory framework for prompt corrective action. To be categorized as a well capitalized financial institution, Total risk-based, Tier I risk-based, Common Equity Tier I risk based and Tier I leverage capital ratios must be at least 10%, 8%, 6.5% and 5%, respectively.
The Company and Bank's computed risk‑based capital ratios are as follows as of December 31, 2017 and 2016 (dollars in thousands):
97
|
|
Actual
|
For Capital Adequacy Purposes
|
To Be Well Capitalized Under Prompt
Corrective Action Provisions
|
|||||||||||||||||||||
|
2017
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
Total Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
128,578
|
13.20
|
%
|
$
|
77,906
|
8.00
|
%
|
$
|
97,383
|
10.00
|
%
|
||||||||||||
|
Bank
|
$
|
122,469
|
12.58
|
%
|
$
|
77,852
|
8.00
|
%
|
$
|
97,315
|
10.00
|
%
|
||||||||||||
|
Tier 1 Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
117,224
|
12.04
|
%
|
$
|
58,430
|
6.00
|
%
|
$
|
77,906
|
8.00
|
%
|
||||||||||||
|
Bank
|
$
|
111,114
|
11.42
|
%
|
$
|
58,389
|
6.00
|
%
|
$
|
77,852
|
8.00
|
%
|
||||||||||||
|
Common Equity Tier 1 Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
109,724
|
11.27
|
%
|
$
|
43,822
|
4.50
|
%
|
$
|
63,299
|
6.50
|
%
|
||||||||||||
|
Bank
|
$
|
111,114
|
11.42
|
%
|
$
|
43,792
|
4.50
|
%
|
$
|
63,255
|
6.50
|
%
|
||||||||||||
|
Tier 1 Capital (to Average Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
117,224
|
9.18
|
%
|
$
|
51,085
|
4.00
|
%
|
$
|
63,857
|
5.00
|
%
|
||||||||||||
|
Bank
|
$
|
111,114
|
8.71
|
%
|
$
|
51,023
|
4.00
|
%
|
$
|
63,778
|
5.00
|
%
|
||||||||||||
|
|
Actual
|
For Capital Adequacy Purposes
|
To Be Well Capitalized Under Prompt
Corrective Action Provisions
|
|||||||||||||||||||||
|
2016
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
Total Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
121,717
|
14.93
|
%
|
$
|
65,217
|
8.00
|
%
|
$
|
81,522
|
10.00
|
%
|
||||||||||||
|
Bank
|
$
|
117,537
|
14.46
|
%
|
$
|
65,020
|
8.00
|
%
|
$
|
81,275
|
10.00
|
%
|
||||||||||||
|
Tier 1 Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
112,599
|
13.81
|
%
|
$
|
48,913
|
6.00
|
%
|
$
|
65,217
|
8.00
|
%
|
||||||||||||
|
Bank
|
$
|
108,419
|
13.34
|
%
|
$
|
48,765
|
6.00
|
%
|
$
|
65,020
|
8.00
|
%
|
||||||||||||
|
Common Equity Tier 1 Capital (to Risk Weighted Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
105,099
|
12.89
|
%
|
$
|
36,685
|
4.50
|
%
|
$
|
52,989
|
6.50
|
%
|
||||||||||||
|
Bank
|
$
|
108,419
|
13.34
|
%
|
$
|
36,574
|
4.50
|
%
|
$
|
52,829
|
6.50
|
%
|
||||||||||||
|
Tier 1 Capital (to Average Assets):
|
||||||||||||||||||||||||
|
Company
|
$
|
112,599
|
9.46
|
%
|
$
|
47,586
|
4.00
|
%
|
$
|
59,483
|
5.00
|
%
|
||||||||||||
|
Bank
|
$
|
108,419
|
9.13
|
%
|
$
|
39,006
|
4.00
|
%
|
$
|
48,757
|
5.00
|
%
|
||||||||||||
This annual report has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet.
Credit Extension Commitments
The Company's exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments, whose contract amounts represent credit risk at December 31, 2017 and 2016, are as follows (in thousands):
98
|
|
2017
|
2016
|
||||||
|
Commitments to extend credit
|
$
|
188,482
|
$
|
206,505
|
||||
|
Standby letters of credit
|
15,244
|
14,955
|
||||||
|
|
$
|
203,726
|
$
|
221,460
|
||||
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company on extension of credit is based on management's credit assessment of the counter party.
Standby letters of credit are conditional commitments issued by the Company to guarantee a financial agreement between a customer and a third party. Performance letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized during the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
The Company also offers limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing for business, personal or household use. The non-contractual amount of financial instruments with off-balance sheet risk at December 31, 2017 was $9,335,000. The Company reserves the right to discontinue this service without prior notice.
Litigation Matters
The Company is subject to lawsuits and claims arising out of its business. There are no legal proceedings or claims currently pending or threatened other than those encountered during the normal course of business, which include various foreclosure proceedings. As a result of these proceedings, it is not unusual for customers to countersue the Bank, which are vigorously challenged by the Bank.
16. OPERATING LEASES
The following schedule shows future minimum rental payments under operating leases with noncancellable terms in excess of one year as of December 31, 2017 (in thousands):
|
2018
|
$
|
324
|
||
|
2019
|
327
|
|||
|
2020
|
219
|
|||
|
2021
|
171
|
|||
|
2022
|
158
|
|||
|
Thereafter
|
141
|
|||
|
Total
|
$
|
1,340
|
The Company's operating lease obligations represent short and long-term lease and rental payments for facilities. Total rental expense for all operating leases for the years ended December 31, 2017, 2016 and 2015 were $351,000, $289,000 and $175,000, respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows:
99
|
Level I:
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
Level II:
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
|
|
Level III:
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's monthly and/or quarterly valuation process.
Financial Instruments Recorded at Fair Value on a Recurring Basis
The fair values of securities available for sale are determined by quoted prices in active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified as Level II. The fair values consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level III inputs.
The following tables present the assets reported on the consolidated balance sheet at their fair value on a recurring basis as of December 31, 2017 and 2016 (in thousands) by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
2017
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Fair value measurements on a recurring basis:
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. Agency securities
|
$
|
-
|
$
|
98,887
|
$
|
-
|
$
|
98,887
|
||||||||
|
U.S. Treasuries securities
|
28,604
|
-
|
-
|
28,604
|
||||||||||||
|
Obligations of state and
|
||||||||||||||||
|
political subdivisions
|
-
|
79,090
|
-
|
79,090
|
||||||||||||
|
Corporate obligations
|
-
|
3,083
|
-
|
3,083
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
-
|
45,027
|
-
|
45,027
|
||||||||||||
|
Equity securities in financial institutions
|
91
|
-
|
-
|
91
|
||||||||||||
100
|
2016
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Fair value measurements on a recurring basis:
|
||||||||||||||||
|
Securities available for sale:
|
||||||||||||||||
|
U.S. Agency securities
|
$
|
-
|
$
|
170,414
|
$
|
-
|
$
|
170,414
|
||||||||
|
U.S. Treasuries securities
|
3,000
|
-
|
-
|
3,000
|
||||||||||||
|
Obligations of state and
|
||||||||||||||||
|
political subdivisions
|
-
|
96,926
|
-
|
96,926
|
||||||||||||
|
Corporate obligations
|
-
|
3,050
|
-
|
3,050
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
-
|
37,728
|
-
|
37,728
|
||||||||||||
|
Equity securities in financial institutions
|
2,899
|
-
|
-
|
2,899
|
||||||||||||
Financial Instruments, Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during 2017 and 2016 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense.
Assets measured at fair value on a nonrecurring basis as of December 31, 2017 and 2016 (in thousands) are included in the table below:
|
2017
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Impaired Loans
|
$
|
-
|
$
|
-
|
$
|
1,569
|
$
|
1,569
|
||||||||
|
Other real estate owned
|
-
|
-
|
1,024
|
1,024
|
||||||||||||
|
|
||||||||||||||||
|
2016
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Impaired Loans
|
$
|
-
|
$
|
-
|
$
|
2,033
|
$
|
2,033
|
||||||||
|
Other real estate owned
|
-
|
-
|
839
|
839
|
||||||||||||
|
·
|
Impaired Loans - The Company has measured impairment on impaired loans generally based on the fair value of the loan's collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not current being carried at its fair value.
|
101
|
·
|
Other Real Estate Owned – OREO is carried at the lower of cost or fair value, which is measured at the date foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.
|
The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques (dollars in thousands).
|
Quantitative Information about Level 3 Fair Value Measurements
|
||||||||||||||
|
2017
|
Fair Value
|
Valuation Technique(s)
|
Unobservable input
|
Range
|
Weighted average
|
|||||||||
|
Impaired Loans
|
$
|
1,569
|
Appraised Collateral Values
|
Discount for time since appraisal
|
0-100
|
%
|
30.83
|
%
|
||||||
|
|
|
Selling costs
|
5%-9
|
%
|
8.35
|
%
|
||||||||
|
|
|
Holding period
|
6 - 12 months
|
11 months
|
||||||||||
|
|
|
|
||||||||||||
|
Other real estate owned
|
$
|
1,024
|
Appraised Collateral Values
|
Discount for time since appraisal
|
15-65
|
%
|
26.26
|
%
|
||||||
|
|
|
|
||||||||||||
|
2016
|
Fair Value
|
Valuation Technique(s)
|
Unobservable input
|
Range
|
Weighted average
|
|||||||||
|
Impaired Loans
|
$
|
2,033
|
Appraised Collateral Values
|
Discount for time since appraisal
|
0-65
|
%
|
28.98
|
%
|
||||||
|
|
|
Selling costs
|
5%-9
|
%
|
7.56
|
%
|
||||||||
|
|
|
Holding period
|
6 - 12 months
|
11 months
|
||||||||||
|
|
|
|
||||||||||||
|
Other real estate owned
|
$
|
839
|
Appraised Collateral Values
|
Discount for time since appraisal
|
10-67
|
%
|
25.45
|
%
|
||||||
The fair values of the Company's financial instruments are as follows (in thousands):
|
Carrying
|
||||||||||||||||||||
|
December 31, 2017
|
Amount
|
Fair Value
|
Level I
|
Level II
|
Level III
|
|||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Cash and due from banks
|
$
|
18,517
|
$
|
18,517
|
$
|
18,517
|
$
|
-
|
$
|
-
|
||||||||||
|
Interest bearing time deposits with other banks
|
10,283
|
10,287
|
-
|
-
|
10,287
|
|||||||||||||||
|
Available-for-sale securities
|
254,782
|
254,782
|
28,695
|
226,087
|
-
|
|||||||||||||||
|
Loans held for sale
|
1,439
|
1,439
|
1,439
|
|||||||||||||||||
|
Net loans
|
989,335
|
981,238
|
-
|
-
|
981,238
|
|||||||||||||||
|
Bank owned life insurance
|
26,883
|
26,883
|
26,883
|
-
|
-
|
|||||||||||||||
|
Regulatory stock
|
6,784
|
6,784
|
6,784
|
-
|
-
|
|||||||||||||||
|
Accrued interest receivable
|
4,196
|
4,196
|
4,196
|
-
|
-
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
$
|
1,104,943
|
$
|
1,101,583
|
$
|
838,490
|
$
|
-
|
$
|
263,093
|
||||||||||
|
Borrowed funds
|
114,664
|
113,452
|
77,650
|
-
|
35,802
|
|||||||||||||||
|
Accrued interest payable
|
897
|
897
|
897
|
-
|
-
|
|||||||||||||||
102
|
Carrying
|
||||||||||||||||||||
|
December 31, 2016
|
Amount
|
Fair Value
|
Level I
|
Level II
|
Level III
|
|||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Cash and due from banks
|
$
|
17,754
|
$
|
17,754
|
$
|
17,754
|
$
|
-
|
$
|
-
|
||||||||||
|
Interest bearing time deposits with other banks
|
6,955
|
6,960
|
-
|
-
|
6,960
|
|||||||||||||||
|
Available-for-sale securities
|
314,017
|
314,017
|
5,899
|
308,118
|
-
|
|||||||||||||||
|
Loans held for sale
|
1,827
|
1,827
|
1,827
|
|||||||||||||||||
|
Net loans
|
790,725
|
797,184
|
-
|
-
|
797,184
|
|||||||||||||||
|
Bank owned life insurance
|
26,223
|
26,223
|
26,223
|
-
|
-
|
|||||||||||||||
|
Regulatory stock
|
5,306
|
5,306
|
5,306
|
-
|
-
|
|||||||||||||||
|
Accrued interest receivable
|
4,089
|
4,089
|
4,089
|
-
|
-
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
$
|
1,005,503
|
$
|
1,004,072
|
$
|
740,889
|
$
|
-
|
$
|
263,183
|
||||||||||
|
Borrowed funds
|
79,662
|
77,425
|
41,330
|
-
|
36,095
|
|||||||||||||||
|
Accrued interest payable
|
720
|
720
|
720
|
-
|
||||||||||||||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company's regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company's fair value estimates, methods and assumptions are set forth below for the Company's other financial instruments.
Cash and Cash Equivalents:
The carrying amounts for cash and due from banks approximate fair value because they have original maturities of 90 days or less and do not present unanticipated credit concerns.
Accrued Interest Receivable and Payable:
The carrying amounts for accrued interest receivable and payable approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.
Interest bearing time deposits with other banks:
The fair value of interest bearing time deposits with other banks 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.
Available-For-Sale Securities:
The fair values of available-for-sale securities are based on quoted market prices as of the balance sheet date. For certain instruments, fair value is estimated by obtaining quotes from independent dealers.
103
Loans:
Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans has been estimated by discounting expected future cash flows. The discount rate used in these calculations is derived from the Treasury yield curve adjusted for credit quality, operating expense and prepayment option price, and is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals or estimated cash flows discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.
Bank Owned Life Insurance:
The carrying value of bank owned life insurance approximates fair value based on applicable redemption provisions.
Regulatory Stock:
The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit 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 deposits' fair value estimates 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 borrowed funds is based on the discounted value of contractual cash flows. The discount rate is the rates available to the Company for borrowed funds with similar terms and remaining maturities.
18. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The following is condensed financial information for Citizens Financial Services, Inc.:
104
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||
|
CONDENSED BALANCE SHEET
|
||||||||
|
|
December 31,
|
|||||||
|
(in thousands)
|
2017
|
2016
|
||||||
|
Assets:
|
||||||||
|
Cash
|
$
|
6,238
|
$
|
2,245
|
||||
|
Available-for-sale securities
|
91
|
2,735
|
||||||
|
Investment in subsidiary:
|
||||||||
|
First Citizens Community Bank
|
130,402
|
125,973
|
||||||
|
Other assets
|
369
|
564
|
||||||
|
Total assets
|
$
|
137,100
|
$
|
131,517
|
||||
|
|
||||||||
|
Liabilities:
|
||||||||
|
Other liabilities
|
$
|
589
|
$
|
749
|
||||
|
Borrowed funds
|
7,500
|
7,500
|
||||||
|
Total liabilities
|
8,089
|
8,249
|
||||||
|
Stockholders' equity
|
129,011
|
123,268
|
||||||
|
Total liabilities and stockholders' equity
|
$
|
137,100
|
$
|
131,517
|
||||
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||||||
|
CONDENSED STATEMENT OF INCOME
|
||||||||||||
|
|
Year Ended December 31,
|
|||||||||||
|
(in thousands)
|
2017
|
2016
|
2015
|
|||||||||
|
Dividends from:
|
||||||||||||
|
Bank subsidiary
|
$
|
7,507
|
$
|
5,842
|
$
|
5,582
|
||||||
|
Equity securities
|
60
|
92
|
71
|
|||||||||
|
Total income
|
7,567
|
5,934
|
5,653
|
|||||||||
|
Realized securities gains
|
1,021
|
31
|
76
|
|||||||||
|
Expenses
|
824
|
463
|
892
|
|||||||||
|
Income before equity
|
||||||||||||
|
in undistributed earnings
|
||||||||||||
|
of subsidiary
|
7,764
|
5,502
|
4,837
|
|||||||||
|
Equity in undistributed
|
||||||||||||
|
earnings - First Citizens Community Bank
|
5,261
|
7,136
|
6,789
|
|||||||||
|
Net income
|
$
|
13,025
|
$
|
12,638
|
$
|
11,626
|
||||||
|
Comprehensive income
|
$
|
11,578
|
$
|
11,482
|
$
|
10,623
|
||||||
105
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||||||
|
CONDENSED STATEMENT OF CASH FLOWS
|
||||||||||||
|
|
Year Ended December 31,
|
|||||||||||
|
(in thousands)
|
2017
|
2016
|
2015
|
|||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$
|
13,025
|
$
|
12,638
|
$
|
11,626
|
||||||
|
Adjustments to reconcile net income to net
|
||||||||||||
|
cash provided by operating activities:
|
||||||||||||
|
Equity in undistributed earnings of subsidiaries
|
(5,261
|
)
|
(7,136
|
)
|
(6,789
|
)
|
||||||
|
Investment securities gains, net
|
(1,021
|
)
|
(31
|
)
|
(76
|
)
|
||||||
|
Other, net
|
629
|
230
|
322
|
|||||||||
|
Net cash provided by operating activities
|
7,372
|
5,701
|
5,083
|
|||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchases of available-for-sale securities
|
(94
|
)
|
(1
|
)
|
(901
|
)
|
||||||
|
Proceeds from the sale of available-for-sale securities
|
2,828
|
201
|
113
|
|||||||||
|
Net cash provided by (used in) investing activities
|
2,734
|
200
|
(788
|
)
|
||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Cash dividends paid
|
(5,177
|
)
|
(5,081
|
)
|
(5,151
|
)
|
||||||
|
Purchase of treasury stock
|
(979
|
)
|
(3,227
|
)
|
(2,455
|
)
|
||||||
|
Reissuance of treasury stock to employee stock purchase plan
|
43
|
59
|
-
|
|||||||||
|
Purchase of restricted stock
|
-
|
-
|
(7
|
)
|
||||||||
|
Net cash used in financing activities
|
(6,113
|
)
|
(8,249
|
)
|
(7,613
|
)
|
||||||
|
Net decrease in cash
|
3,993
|
(2,348
|
)
|
(3,318
|
)
|
|||||||
|
Cash at beginning of year
|
2,245
|
4,593
|
7,911
|
|||||||||
|
Cash at end of year
|
$
|
6,238
|
$
|
2,245
|
$
|
4,593
|
||||||
19. CONSOLIDATED CONDENSED QUARTERLY DATA (UNAUDITED)
The following table presents summarized quarterly financial data for 2017 and 2016:
|
(in thousands, except per share data)
|
Three Months Ended,
|
|||||||||||||||
|
2017
|
Mar 31
|
June 30
|
Sep 30
|
Dec 31
|
||||||||||||
|
Interest income
|
$
|
11,300
|
$
|
11,778
|
$
|
12,120
|
$
|
12,895
|
||||||||
|
Interest expense
|
1,303
|
1,374
|
1,503
|
1,659
|
||||||||||||
|
Net interest income
|
9,997
|
10,404
|
10,617
|
11,236
|
||||||||||||
|
Provision for loan losses
|
615
|
625
|
500
|
800
|
||||||||||||
|
Non-interest income
|
1,863
|
1,865
|
1,912
|
1,981
|
||||||||||||
|
Investment securities gains, net
|
172
|
23
|
9
|
831
|
||||||||||||
|
Non-interest expenses
|
7,191
|
7,166
|
7,247
|
7,710
|
||||||||||||
|
Income before provision for income taxes
|
4,226
|
4,501
|
4,791
|
5,538
|
||||||||||||
|
Provision for income taxes
|
923
|
1,033
|
1,141
|
2,934
|
||||||||||||
|
Net income
|
$
|
3,303
|
$
|
3,468
|
$
|
3,650
|
$
|
2,604
|
||||||||
|
Earnings Per Share Basic
|
$
|
0.94
|
$
|
1.00
|
$
|
1.05
|
$
|
0.75
|
||||||||
|
Earnings Per Share Diluted
|
$
|
0.94
|
$
|
1.00
|
$
|
1.05
|
$
|
0.75
|
||||||||
106
|
|
Three Months Ended,
|
|||||||||||||||
|
2016
|
Mar 31
|
June 30
|
Sep 30
|
Dec 31
|
||||||||||||
|
Interest income
|
$
|
10,462
|
$
|
10,426
|
$
|
10,948
|
$
|
11,169
|
||||||||
|
Interest expense
|
1,257
|
1,255
|
1,236
|
1,293
|
||||||||||||
|
Net interest income
|
9,205
|
9,171
|
9,712
|
9,876
|
||||||||||||
|
Provision for loan losses
|
135
|
135
|
500
|
750
|
||||||||||||
|
Non-interest income
|
1,889
|
1,855
|
1,908
|
1,992
|
||||||||||||
|
Investment securities gains, net
|
27
|
128
|
-
|
100
|
||||||||||||
|
Non-interest expenses
|
6,912
|
7,301
|
7,200
|
7,258
|
||||||||||||
|
Income before provision for income taxes
|
4,074
|
3,718
|
3,920
|
3,960
|
||||||||||||
|
Provision for income taxes
|
791
|
687
|
767
|
789
|
||||||||||||
|
Net income
|
$
|
3,283
|
$
|
3,031
|
$
|
3,153
|
$
|
3,171
|
||||||||
|
Earnings Per Share Basic
|
$
|
0.93
|
$
|
0.86
|
$
|
0.90
|
$
|
0.91
|
||||||||
|
Earnings Per Share Diluted
|
$
|
0.93
|
$
|
0.86
|
$
|
0.90
|
$
|
0.91
|
||||||||
20. ACQUISITION OF FNB
In the second quarter of 2015, the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of FNB for $630 per share in cash and stock. FNB was a Pennsylvania bank that conducted its business from a main office in Lebanon County, Pennsylvania with four branches in Lebanon County, two branches in Schuylkill County, Pennsylvania, and one Branch in Berks County, Pennsylvania.
The transaction closed on December 11, 2015, with FNB having been merged into First Citizens Community Bank, with First Citizens Community Bank as the surviving entity. The acquisition established the Company's presence in the Lebanon, Berks and Schuylkill Counties, Pennsylvania markets.
Under the terms of the merger agreement, the Company acquired all of the outstanding shares of FNB for a total purchase price of approximately $21,603,000. As a result of the acquisition, the Company issued 336,515 common shares and $5.6 million in cash to the former shareholders of FNB. The shares were issued with a value of $47.50 per share, which was based on the close price of the Company's stock on December 11, 2015.
The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of FNB. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Company also recorded an identifiable intangible asset representing the core deposit base of FNB based on management's evaluation of the cost of such deposits relative to alternative funding sources. The Company also recorded an identifiable intangible asset representing a covenant not-to-compete with the former President of FNB. Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products. Management used market quotations to determine the fair value of investment securities.
The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. FNB's loans were deemed to have credit impairment at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $3,809,000 of purchased credit-impaired loans. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.
FNB's loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management's best estimates of default rates and pre-payment speeds.
107
The following table summarizes the purchase of FNB as of December 11, 2015:
|
(In Thousands, Except Per Share Data)
|
||||||||
|
Purchase Price Consideration in Common Stock
|
||||||||
|
Citizens Financial Services, Inc. shares issued
|
336,515
|
|||||||
|
Value assigned to Citizens Financial Services, Inc. common share
|
$
|
47.50
|
||||||
|
Purchase price assigned to FNB common shares exchanged for Citizens Financial Services, Inc.
|
$
|
15,984
|
||||||
|
Purchase Price Consideration - Cash for Common Stock
|
||||||||
|
Purchase price assigned to The First National Bank of Fredericksburg common shares exchanged for cash
|
5,619
|
|||||||
|
Total Purchase Price
|
21,603
|
|||||||
|
Net Assets Acquired:
|
||||||||
|
The First National Bank of Fredericksburg shareholders' equity
|
$
|
12,298
|
||||||
|
Adjustments to reflect assets acquired at fair value:
|
||||||||
|
Loans
|
||||||||
|
Interest rate
|
31
|
|||||||
|
General credit
|
(1,362
|
)
|
||||||
|
Specific credit - non-amortizing
|
(2,495
|
)
|
||||||
|
Specific credit - amortizing
|
(665
|
)
|
||||||
|
Core deposit intangible
|
1,641
|
|||||||
|
Covenant not to compete
|
125
|
|||||||
|
Premises and equipment
|
1,203
|
|||||||
|
Leased premises contracts
|
(359
|
)
|
||||||
|
Other assets
|
(358
|
)
|
||||||
|
Deferred tax assets
|
785
|
|||||||
|
Adjustments to reflect liabilities acquired at fair value:
|
||||||||
|
Time deposits
|
(74
|
)
|
||||||
|
10,770
|
||||||||
|
Goodwill resulting from merger
|
$
|
10,833
|
||||||
The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed:
|
(In Thousands)
|
||||||||
|
Total purchase price
|
$
|
21,603
|
||||||
|
Assets (liabilities) acquired:
|
||||||||
|
Cash and cash equivalents
|
$
|
83,514
|
||||||
|
Interest bearing time deposits with other banks
|
1,236
|
|||||||
|
Securities available for sale
|
23,831
|
|||||||
|
Loans
|
115,211
|
|||||||
|
Premises and equipment, net
|
4,743
|
|||||||
|
Accrued interest receivable
|
282
|
|||||||
|
Bank-owned life insurance
|
4,598
|
|||||||
|
Intangibles
|
1,981
|
|||||||
|
Deferred tax asset
|
2,979
|
|||||||
|
Other assets
|
2,332
|
|||||||
|
Time deposits
|
(42,675
|
)
|
||||||
|
Deposits other than time deposits
|
(182,555
|
)
|
||||||
|
Accrued interest payable
|
(14
|
)
|
||||||
|
Other liabilities
|
(4,693
|
)
|
||||||
|
10,770
|
||||||||
|
Goodwill resulting from the FNB merger
|
$
|
10,833
|
||||||
The Company recorded goodwill and other intangibles associated with the purchase of FNB totaling $12,814,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment from December 11, 2015 to December 31, 2017. None of the goodwill acquired is expected to be deductible for tax purposes.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. For the period from December 11, 2015 to December 31, 2017, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible, covenant not to compete intangible and MSRs which are being amortized on an accelerated basis over the useful life of such assets. See footnote 6 for additional information on the identifiable intangible assets.
108
Amounts recognized separately from the acquisition include primarily legal fees, investment banking fees, system conversion costs, severance costs and contract termination costs. These costs were included in merger and acquisition expenses within non-interest expenses on the Consolidated Statement of Income and amounted to approximately $1,103,000 for the year ended December 31, 2015.
Results of operations for FNB prior to the acquisition date are not included in the Consolidated Statement of Income for the year ended December 31, 2015. Due to the significant amount of fair value adjustments, historical results of FNB are not relevant to the Company's results of operations. Therefore, no pro forma information is presented.
21. ACQUISITION OF STATE COLLEGE BRANCH
In the second quarter of 2017, the Company announced the signing of a purchase and assumption agreement to acquire the full service branch in State College of S&T Bank. The transaction closed on December 8, 2017, and the Bank paid consideration of $1,044,000, which was based on the average deposit balances for the 30 days prior to the branch merging into First Citizens Community Bank. The acquisition established the Company's presence in the Centre County, Pennsylvania market.
The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of S&T. The Bank also recorded an identifiable intangible asset representing the core deposit base of the branch based on management's evaluation of the cost of such deposits relative to alternative funding sources.
The business combination resulted in the acquisition of loans without evidence of credit quality deterioration. Loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management's best estimates of default rates and pre-payment speeds.
The following table summarizes the purchase of the branch as of December 7, 2017:
|
(In Thousands)
|
||||||||
|
Purchase Price Consideration in cash
|
$
|
1,044
|
||||||
|
Net Assets Acquired for cash
|
||||||||
|
Loans, interest, PP&E less deposits, interest and escrow payable
|
3,509
|
|||||||
|
Total cash consideration
|
4,553
|
|||||||
|
Net Assets Acquired for cash
|
$
|
3,509
|
||||||
|
Adjustments to reflect assets acquired at fair value:
|
||||||||
|
Loans
|
||||||||
|
Interest rate
|
(522
|
)
|
||||||
|
General credit
|
(740
|
)
|
||||||
|
Core deposit intangible
|
145
|
|||||||
|
Adjustments to reflect liabilities acquired at fair value:
|
||||||||
|
Time deposits
|
(46
|
)
|
||||||
|
Acquired net assets at fair value
|
2,346
|
|||||||
|
Goodwill resulting from acquisition
|
$
|
2,207
|
||||||
109
The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed:
|
(In Thousands)
|
||||||||
|
Total purchase price
|
$
|
4,553
|
||||||
|
Net assets acquired:
|
||||||||
|
Cash and cash equivalents
|
$
|
154
|
||||||
|
Loans
|
39,847
|
|||||||
|
Premises and equipment, net
|
86
|
|||||||
|
Accrued interest receivable
|
74
|
|||||||
|
Intangibles
|
145
|
|||||||
|
Deposits
|
(37,880
|
)
|
||||||
|
Accrued interest payable
|
(29
|
)
|
||||||
|
Other liabilities
|
(51
|
)
|
||||||
|
|
2,346
|
|||||||
|
Goodwill resulting from the branch acquisition
|
$
|
2,207
|
||||||
The Company recorded goodwill and other intangibles associated with the purchase of the branch totaling $2,352,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment from December 8, 2017 to December 31, 2017.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. For the period from December 8, 2017 to December 31, 2017, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible. See footnote 6 for additional information on the identifiable intangible assets.
110
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course by management or employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. Management's assessment did not identify any material weaknesses in the Company's internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework. Because there were no material weaknesses discovered, management believes that, as of December 31, 2017, the Company's internal control over financial reporting was effective.
The Company's independent registered public accounting firm that audited the consolidated financial statements has issued an audit report on the effective operation of the Company's internal control over financial reporting as of December 31, 2017, a copy of which is included in this Annual Report on Form 10-K.
/s/ Randall E. Black
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
Date: March 8, 2018
/s/ Mickey L. Jones
By: Mickey L. Jones
By: Mickey L. Jones
Treasurer
(Principal Financial & Accounting Officer)
(Principal Financial & Accounting Officer)
Date: March 8, 2018
111
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Citizens Financial Services, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Citizens Financial Services, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016; the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017; and the related notes to the consolidated financial statements (collectively, the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 8, 2018, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 1994.
/s/S.R. Snodgrass, P.C.
Cranberry Township, Pennsylvania
March 8, 2018
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Citizens Financial Services, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Citizens Financial Services, Inc. and subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, of the Company and our report dated March 8, 2018, expressed an unqualified opinion.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 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.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes 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.
/s/S.R. Snodgrass, P.C.
Cranberry Township, Pennsylvania
March 8, 2018
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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A – CONTROLS AND PROCEDURES.
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(a)
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Disclosure Controls and Procedures
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The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
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(b)
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Internal Control Over Financial Reporting
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Management's annual report on internal control over financial reporting and the attestation report of the independent registered public accounting firm are incorporated herein by reference to Item 8 - the Company's audited Consolidated Financial Statements in this Annual Report on Form 10-K
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Changes to Internal Control Over Financial Reporting
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There were no changes in the Company's internal control over financial reporting during the three months ended December 31, 2017 that have materially affected, or are reasonable likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B – OTHER INFORMATION.
None.
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PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
For information relating to the directors of the Company, the section captioned "Proposal 1. Election of Directors" in the Company's Proxy Statement for the 2018 Annual Meeting of Stockholders (the "2018 Proxy Statement") is incorporated by reference.
Executive Officers
For information relating to officers of the Company, the section captioned "Proposal 1. Election of Directors" in the 2018 Proxy Statement is incorporated by reference.
Compliance with Section 16(a) of the Exchange Act
For information regarding compliance with Section 16(a) of the Exchange Act, the section captioned "Other Information Relating to Directors and Executive Officers - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 2018 Proxy Statement is incorporated by reference.
Disclosure of Code of Ethics
The Company has adopted a Code of Ethics that applies to directors, officers and employees of the Company and the Bank. A copy of the Code of Ethics is posted on the Company's website at www.firstcitizensbank.com. The Company intends to satisfy the disclosure requirement of Form 8-K regarding an amendment to, or a waiver from, a provision of its Code of Ethics by posting such information on its website.
Corporate Governance
For information regarding the audit committee and its composition and the audit committee financial expert, the section captioned "Corporate Governance – Committees of the Board of Directors" in the Company's 2018 Proxy Statement is incorporated by reference.
ITEM 11 – EXECUTIVE COMPENSATION
Executive Compensation
For information regarding executive and director compensation, the sections captioned "Director Compensation", "Executive Compensation", "Compensation Discussion and Analysis" and "Compensation Committee Report" in the Company's 2018 Proxy Statement are incorporated by reference.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
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(a)
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Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Stock Ownership" in the Company's 2018 Proxy Statement.
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115
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(b)
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Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "Stock Ownership" in the Company's 2018 Proxy Statement.
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(c)
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Changes in Control
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Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
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(d)
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Equity Compensation Plan Information
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The following table sets forth information as of December 31, 2017 about Company common stock that may be issued under the Company's 2017 Restricted Stock Plan. The plan was approved by the Company's stockholders.
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Plan Category
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Number of securities to be issued
upon the exercise of outstanding
options, warrants and rights
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Weighted-average exercise
price of outstanding
options, warrants and rights
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Number of securities remaining available
for future issuance under equity
compensation plans
(excluding securities reflected
in the first column)
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|||
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Equity compensation plans approved by security holders
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n/a
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n/a
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141,408
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|||
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Equity compensation plans not approved by security holders
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n/a
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n/a
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n/a
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|||
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Total
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n/a
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n/a
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141,408
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ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
For information regarding certain relationships and related transactions, the section captioned "Other Information Relating to Directors and Executive Officers - Transactions with Related Persons" in the Company's 2018 Proxy Statement is incorporated by reference.
Director Independence
For information regarding director independence, the section captioned "Corporate Governance – Director Independence" in the Company's 2018 Proxy Statement is incorporated by reference.
ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
For information regarding the principal accountant fees and expenses the section captioned "Audit – Related Matters" in the Company's 2018 Proxy Statement is incorporated by reference.
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PART IV
ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
1. The following financial statements are incorporated by reference in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2017 and 2016
Consolidated Statement of Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statement of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
2. All financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statement or in the notes thereto, which are incorporated by reference at subsection (a)(1) of this item.
3. The following Exhibits are filed herewith, or incorporated by reference as a part of this report.
117
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101
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The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) The Consolidated Balance Sheet, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders' Equity, (v) the Consolidated Statement of Cash Flows and (vi) related notes.
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*Management contract or compensatory plan, contract or arrangement
(1) Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as filed with the Commission on May 12, 2010.
(2) Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K, as filed with the Commission on December 24, 2009.
(3) Incorporated by reference to Exhibit 4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the commission on March 14, 2006.
(4) Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, as filed with the Commission on August 9, 2012.
(5) Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the Commission on March 6, 2014.
(6) Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Commission on March 15, 2005.
(7) Incorporated by reference to Exhibit 4.1 to the Company's Form S-8, as filed with the Commission on August 29, 2006.
(8) Incorporated by reference to Exhibits 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, as filed with the Commission on August 9, 2012.
(9) Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Commission on March 7, 2013.
(10) Incorporated by reference to Exhibits 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, as filed with the Commission on August 9, 2012.
(11) Incorporated by reference to Exhibits 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, as filed with the Commission on August 9, 2012.
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(12) Incorporated by reference to Exhibits 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, as filed with the Commission on August 8, 2013.
(13) Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, as filed with the Commission on January 7, 2015.
(14) Incorporated by reference to Exhibit A to the Company's definitive proxy statements for the 2016 Annual Meeting of Shareholders, as filed with the Commission on March 10, 2016.
(15) Incorporated by reference to Exhibit 99.1 to the Company's Form 8-K, as filed with the Commission on December 22, 2016.
(16) Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K, as filed with the Commission on December 21, 2017.
ITEM 16 – FORM 10-K SUMMARY
Not Applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Citizens Financial Services, Inc.
(Registrant)
/s/ Randall E. Black
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
By: Randall E. Black
Chief Executive Officer and President
(Principal Executive Officer)
Date: March 8, 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.
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Signature and Capacity
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Date
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/s/ Randall E. Black
Randall E. Black, Chief Executive Officer, President and Director
(Principal Executive Officer)
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March 8, 2018
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/s/ Mickey L. Jones
Mickey L. Jones, Treasurer and Chief Financial Officer
(Principal Financial & Accounting Officer)
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March 8, 2018
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/s/ R. Lowell Coolidge
R. Lowell Coolidge, Director
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March 8, 2018
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/s/ Rudolph J. van der Hiel
Rudolph J. van der Hiel, Director
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March 8, 2018
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/s/ Robert W. Chappell
Robert W. Chappell, Director
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March 8, 2018
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/s/ R. Joseph Landy
R. Joseph Landy, Director
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March 8, 2018
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/s/ Roger C. Graham, Jr.
Roger C. Graham, Director
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March 8, 2018 |
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/s/ E. Gene Kosa
E. Gene Kosa, Director
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March 8, 2018 |
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/s/ Rinaldo A. DePaola
Rinaldo A. DePaola, Director
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March 8, 2018
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/s/ Thomas E. Freeman
Thomas E. Freeman, Director
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March 8, 2018
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/s/ Alletta M. Schadler
Alletta M. Schadler, Director
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March 8, 2018 |
| /s/ David Z. Richards, Jr.
David Z. Richards, Jr., Director
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March 8, 2018 |
120