CITIZENS FINANCIAL SERVICES INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________ to ___________________
Commission file number 0‑13222
CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23‑2265045
(
State or
other jurisdiction of incorporation or organization
)
(I.R.S. Employer
Identification No.)
15 South Main Street
Mansfield, Pennsylvania 16933
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (570) 662‑2121
N/A
(Former Name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading Symbol(s)
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Name of Each Exchange on Which Registered
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Indicate by check mark whether the registrant (1) has filed all reports 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 __X__ No_____
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes __X__ No_____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
____
Accelerated filer
_X__
Non-accelerated filer
____
Smaller reporting company
_X__
Emerging growth company
____
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes____ No __X__
The number of outstanding shares of the Registrant’s Common Stock, as of April 30, 2020, was 3,879,378.
Citizens Financial Services, Inc.
Form 10-Q
INDEX
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PAGE
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Part I
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements (unaudited):
|
|
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Consolidated Balance Sheet as of March 31, 2020 and December 31, 2019
|
1
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|
|
Consolidated Statement of Income for the Three months Ended March 31, 2020 and 2019
|
2
|
|
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Consolidated Statement of Comprehensive Income for the Three months ended March 31, 2020 and 2019
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3
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Consolidated Statement of Changes in Stockholders’ Equity for the Three months ended March 31, 2020 and 2019
|
4
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Consolidated Statement of Cash Flows for the Three months ended March 31, 2020 and 2019
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5
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Notes to Consolidated Financial Statements
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6-28
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Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
29-48
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
|
48
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Item 4.
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Controls and Procedures
|
48
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Part II
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OTHER INFORMATION
|
|
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Item 1.
|
Legal Proceedings
|
48
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Item 1A.
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Risk Factors
|
49-50
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
|
51
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Item 3.
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Defaults Upon Senior Securities
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51
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Item 4.
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Mine Safety Disclosures
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51
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Item 5.
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Other Information
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51
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Item 6.
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Exhibits
|
51-52
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Signatures
|
53
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CITIZENS FINANCIAL SERVICES, INC.
|
||||||||
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CONSOLIDATED BALANCE SHEET
|
||||||||
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(UNAUDITED)
|
||||||||
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|
||||||||
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|
March 31,
|
December 31,
|
||||||
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(in thousands except share data)
|
2020
|
2019
|
||||||
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ASSETS:
|
||||||||
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Cash and due from banks:
|
||||||||
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Noninterest-bearing
|
$
|
20,663
|
$
|
17,727
|
||||
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Interest-bearing
|
858
|
793
|
||||||
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Total cash and cash equivalents
|
21,521
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18,520
|
||||||
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Interest bearing time deposits with other banks
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14,506
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14,256
|
||||||
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Equity securities
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649
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701
|
||||||
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Available-for-sale securities
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257,788
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240,706
|
||||||
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Loans held for sale
|
2,006
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815
|
||||||
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Loans (net of allowance for loan losses:
|
||||||||
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2020, $14,247 and 2019, $13,845)
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1,079,473
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1,101,724
|
||||||
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Premises and equipment
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16,222
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15,933
|
||||||
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Accrued interest receivable
|
4,587
|
4,555
|
||||||
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Goodwill
|
23,296
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23,296
|
||||||
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Bank owned life insurance
|
28,284
|
28,128
|
||||||
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Other intangibles
|
1,294
|
1,346
|
||||||
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Other assets
|
15,103
|
16,359
|
||||||
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||||||||
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TOTAL ASSETS
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$
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1,464,729
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$
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1,466,339
|
||||
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|
||||||||
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LIABILITIES:
|
||||||||
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Deposits:
|
||||||||
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Noninterest-bearing
|
$
|
204,489
|
$
|
203,793
|
||||
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Interest-bearing
|
1,000,661
|
1,007,325
|
||||||
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Total deposits
|
1,205,150
|
1,211,118
|
||||||
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Borrowed funds
|
83,563
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85,117
|
||||||
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Accrued interest payable
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906
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1,088
|
||||||
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Other liabilities
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15,187
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14,242
|
||||||
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TOTAL LIABILITIES
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1,304,806
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1,311,565
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||||||
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STOCKHOLDERS' EQUITY:
|
||||||||
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Preferred Stock
|
||||||||
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$1.00 par value; authorized 3,000,000 shares at March 31, 2020 and
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||||||||
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December 31, 2019; none issued in 2020 or 2019
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-
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-
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||||||
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Common stock
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||||||||
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$1.00 par value; authorized 25,000,000 shares at March 31, 2020 and December 31, 2019;
|
||||||||
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issued 3,938,668 at March 31, 2020 and December 31, 2019
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3,939
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3,939
|
||||||
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Additional paid-in capital
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55,129
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55,089
|
||||||
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Retained earnings
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113,374
|
110,800
|
||||||
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Accumulated other comprehensive income (loss)
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2,918
|
(629
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)
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|||||
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Treasury stock, at cost: 432,659 shares at March 31, 2020
|
||||||||
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and 413,607 shares at December 31, 2019
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(15,437
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)
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(14,425
|
)
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||||
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TOTAL STOCKHOLDERS' EQUITY
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159,923
|
154,774
|
||||||
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TOTAL LIABILITIES AND
|
||||||||
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STOCKHOLDERS' EQUITY
|
$
|
1,464,729
|
$
|
1,466,339
|
||||
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|
||||||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
||||||||
1
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CITIZENS FINANCIAL SERVICES, INC.
|
||||||||
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CONSOLIDATED STATEMENT OF INCOME
|
||||||||
|
(UNAUDITED)
|
||||||||
|
|
Three Months Ended
|
|||||||
|
March 31,
|
||||||||
|
(in thousands, except share and per share data)
|
2020
|
2019
|
||||||
|
INTEREST INCOME:
|
||||||||
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Interest and fees on loans
|
$
|
13,638
|
$
|
13,314
|
||||
|
Interest-bearing deposits with banks
|
95
|
104
|
||||||
|
Investment securities:
|
||||||||
|
Taxable
|
1,107
|
1,108
|
||||||
|
Nontaxable
|
389
|
357
|
||||||
|
Dividends
|
110
|
134
|
||||||
|
TOTAL INTEREST INCOME
|
15,339
|
15,017
|
||||||
|
INTEREST EXPENSE:
|
||||||||
|
Deposits
|
1,987
|
2,314
|
||||||
|
Borrowed funds
|
462
|
788
|
||||||
|
TOTAL INTEREST EXPENSE
|
2,449
|
3,102
|
||||||
|
NET INTEREST INCOME
|
12,890
|
11,915
|
||||||
|
Provision for loan losses
|
400
|
400
|
||||||
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NET INTEREST INCOME AFTER
|
||||||||
|
PROVISION FOR LOAN LOSSES
|
12,490
|
11,515
|
||||||
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NON-INTEREST INCOME:
|
||||||||
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Service charges
|
1,081
|
1,099
|
||||||
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Trust
|
198
|
232
|
||||||
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Brokerage and insurance
|
340
|
293
|
||||||
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Gains on loans sold
|
167
|
99
|
||||||
|
Equity security (losses) gains, net
|
(254
|
)
|
11
|
|||||
|
Earnings on bank owned life insurance
|
156
|
151
|
||||||
|
Other
|
163
|
148
|
||||||
|
TOTAL NON-INTEREST INCOME
|
1,851
|
2,033
|
||||||
|
NON-INTEREST EXPENSES:
|
||||||||
|
Salaries and employee benefits
|
5,414
|
5,029
|
||||||
|
Occupancy
|
526
|
592
|
||||||
|
Furniture and equipment
|
131
|
155
|
||||||
|
Professional fees
|
325
|
442
|
||||||
|
FDIC insurance
|
71
|
111
|
||||||
|
Pennsylvania shares tax
|
275
|
275
|
||||||
|
Amortization of intangibles
|
50
|
66
|
||||||
|
Merger and acquisition
|
376
|
-
|
||||||
|
Software expenses
|
247
|
227
|
||||||
|
ORE expenses
|
32
|
107
|
||||||
|
Other
|
1,474
|
1,318
|
||||||
|
TOTAL NON-INTEREST EXPENSES
|
8,921
|
8,322
|
||||||
|
Income before provision for income taxes
|
5,420
|
5,226
|
||||||
|
Provision for income taxes
|
889
|
821
|
||||||
|
NET INCOME
|
$
|
4,531
|
$
|
4,405
|
||||
|
PER COMMON SHARE DATA:
|
||||||||
|
Net Income – Basic
|
$
|
1.29
|
$
|
1.25
|
||||
|
Net Income – Diluted
|
$
|
1.29
|
$
|
1.25
|
||||
|
|
||||||||
|
Number of shares used in computation – basic
|
3,515,500
|
3,528,466
|
||||||
|
Number of shares used in computation – diluted
|
3,515,500
|
3,528,466
|
||||||
|
|
||||||||
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
||||||||
2
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||||||||||
|
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
|
||||||||||||||||
|
(UNAUDITED)
|
||||||||||||||||
|
|
Three Months Ended
|
|||||||||||||||
|
|
March 31,
|
|||||||||||||||
|
(in thousands)
|
2020
|
2019
|
||||||||||||||
|
Net income
|
$
|
4,531
|
$
|
4,405
|
||||||||||||
|
Other comprehensive income (loss):
|
||||||||||||||||
|
Change in unrealized gains (losses) on available
|
||||||||||||||||
|
for sale securities
|
4,334
|
1,328
|
||||||||||||||
|
Income tax effect
|
(910
|
)
|
(280
|
)
|
||||||||||||
|
Change in unrecognized pension cost
|
156
|
61
|
||||||||||||||
|
Income tax effect
|
(33
|
)
|
(13
|
)
|
||||||||||||
|
Other comprehensive income (loss), net of tax
|
3,547
|
1,096
|
||||||||||||||
|
Comprehensive income
|
$
|
8,078
|
$
|
5,501
|
||||||||||||
|
|
||||||||||||||||
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
||||||||||||||||
3
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||||||||||||||||||||||
|
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
|
(UNAUDITED)
|
||||||||||||||||||||||||||||
|
|
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, 2019
|
3,938,668
|
$
|
3,939
|
$
|
55,089
|
$
|
110,800
|
$
|
(629
|
)
|
$
|
(14,425
|
)
|
$
|
154,774
|
|||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
4,531
|
4,531
|
||||||||||||||||||||||||||
|
Net other comprehensive income (loss)
|
3,547
|
3,547
|
||||||||||||||||||||||||||
|
Purchase of treasury stock (23,412 shares)
|
(1,279
|
)
|
(1,279
|
)
|
||||||||||||||||||||||||
|
Restricted stock, executive and Board of Director awards (204 shares)
|
1
|
12
|
13
|
|||||||||||||||||||||||||
|
Restricted stock vesting
|
40
|
40
|
||||||||||||||||||||||||||
|
Cash dividend reinvestment paid from treasury stock (4,156 shares)
|
(1
|
)
|
-
|
255
|
254
|
|||||||||||||||||||||||
|
Cash dividends, $0.55 per share
|
(1,957
|
)
|
(1,957
|
)
|
||||||||||||||||||||||||
|
Balance, March 31, 2020
|
3,938,668
|
$
|
3,939
|
$
|
55,129
|
$
|
113,374
|
$
|
2,918
|
$
|
(15,437
|
)
|
$
|
159,923
|
||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2018
|
3,904,212
|
$
|
3,904
|
$
|
53,099
|
$
|
99,727
|
$
|
(3,921
|
)
|
$
|
(13,580
|
)
|
$
|
139,229
|
|||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
4,405
|
4,405
|
||||||||||||||||||||||||||
|
Net other comprehensive income (loss)
|
1,096
|
1,096
|
||||||||||||||||||||||||||
|
Purchase of treasury stock (5,762 shares)
|
(330
|
)
|
(330
|
)
|
||||||||||||||||||||||||
|
Restricted stock vesting
|
3
|
3
|
||||||||||||||||||||||||||
|
Cash dividends, $0.441 per share
|
(1,558
|
)
|
(1,558
|
)
|
||||||||||||||||||||||||
|
Balance, March 31, 2019
|
3,904,212
|
$
|
3,904
|
$
|
53,102
|
$
|
102,574
|
$
|
(2,825
|
)
|
$
|
(13,910
|
)
|
$
|
142,845
|
|||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
4
|
CITIZENS FINANCIAL SERVICES, INC.
|
||||||||
|
CONSOLIDATED STATEMENT OF CASH FLOWS
|
||||||||
|
(UNAUDITED)
|
Three Months Ended
|
|||||||
|
|
March 31,
|
|||||||
|
(in thousands)
|
2020
|
2019
|
||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net income
|
$
|
4,531
|
$
|
4,405
|
||||
|
Adjustments to reconcile net income to net
|
||||||||
|
cash provided by operating activities:
|
||||||||
|
Provision for loan losses
|
400
|
400
|
||||||
|
Depreciation and amortization
|
150
|
183
|
||||||
|
Amortization and accretion of investment securities
|
120
|
175
|
||||||
|
Deferred income taxes
|
(284
|
)
|
464
|
|||||
|
Equity securities losses (gains), net
|
254
|
(11
|
)
|
|||||
|
Earnings on bank owned life insurance
|
(156
|
)
|
(151
|
)
|
||||
|
Originations of loans held for sale
|
(7,043
|
)
|
(3,880
|
)
|
||||
|
Proceeds from sales of loans held for sale
|
5,973
|
4,885
|
||||||
|
Realized gains on loans sold
|
(167
|
)
|
(99
|
)
|
||||
|
Increase in accrued interest receivable
|
(32
|
)
|
(317
|
)
|
||||
|
(Decrease) increase in accrued interest payable
|
(182
|
)
|
16
|
|||||
|
Other, net
|
1,169
|
(1,313
|
)
|
|||||
|
Net cash provided by operating activities
|
4,733
|
4,757
|
||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Available-for-sale securities:
|
||||||||
|
Proceeds from maturity and principal repayments
|
29,045
|
10,581
|
||||||
|
Purchase of securities
|
(41,915
|
)
|
(12,855
|
)
|
||||
|
Purchase of equity securities
|
(202
|
)
|
-
|
|||||
|
Purchase of interest bearing time deposits with other banks
|
(250
|
)
|
-
|
|||||
|
Proceeds from redemption of regulatory stock
|
3,300
|
2,580
|
||||||
|
Purchase of regulatory stock
|
(2,798
|
)
|
(2,782
|
)
|
||||
|
Net decrease (increase) in loans
|
22,003
|
(12,908
|
)
|
|||||
|
Purchase of premises and equipment
|
(507
|
)
|
(105
|
)
|
||||
|
Proceeds from sale of premises and equipment
|
-
|
1
|
||||||
|
Proceeds from sale of foreclosed assets held for sale
|
350
|
89
|
||||||
|
Net cash provided by (used in) investing activities
|
9,026
|
(15,399
|
)
|
|||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Net increase in deposits
|
(5,968
|
)
|
(3,502
|
)
|
||||
|
Proceeds from long-term borrowings
|
5,000
|
5,000
|
||||||
|
Repayments of long-term borrowings
|
-
|
(2,589
|
)
|
|||||
|
Net (decrease) increase in short-term borrowed funds
|
(6,554
|
)
|
14,658
|
|||||
|
Purchase of treasury and restricted stock
|
(1,279
|
)
|
(330
|
)
|
||||
|
Dividends paid
|
(1,957
|
)
|
(1,558
|
)
|
||||
|
Net cash (used in) provided by financing activities
|
(10,758
|
)
|
11,679
|
|||||
|
Net increase in cash and cash equivalents
|
3,001
|
1,037
|
||||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
18,520
|
16,797
|
||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
21,521
|
$
|
17,834
|
||||
|
|
||||||||
|
Supplemental Disclosures of Cash Flow Information:
|
||||||||
|
Interest paid
|
$
|
2,631
|
$
|
3,086
|
||||
|
Income taxes paid
|
$
|
-
|
$
|
-
|
||||
|
Loans transferred to foreclosed property
|
$
|
-
|
$
|
3,805
|
||||
|
Right of use asset and liability
|
$
|
-
|
$
|
1,454
|
||||
|
|
||||||||
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
||||||||
5
CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
Citizens Financial Services, Inc. (individually and collectively with its direct and indirect subsidiaries, the “Company”) is a Pennsylvania
corporation and the holding company of its wholly owned subsidiary, First Citizens Community Bank (the “Bank”), and of the Bank’s wholly owned subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1
st
Realty of PA LLC (“Realty”). The Bank is the wholly owned subsidiary of CZFS Acquisition Company, LLC, which is a wholly owned subsidiary of the Company. Realty was
formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer.
The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange
Commission (“SEC”) and in conformity with U.S. generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles have been condensed or omitted. Certain of the prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income or
stockholders’ equity. All material inter‑company balances and transactions have been eliminated in consolidation.
In the opinion of management of the Company, the accompanying interim financial statements at March 31, 2020 and for the periods ended March
31, 2020 and 2019 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. In preparing the
consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and of revenues and expenses for the period covered by the
Consolidated Income Statement. The financial performance reported for the Company for the three month period ended March 31, 2020 is not necessarily indicative of the results to be expected for the full year. This information should be read in
conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Note 2 – Revenue Recognition
In accordance with ASC 606, Management determined that the primary sources of revenue emanating from interest and dividend income on loans and
investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold and earnings on bank owned life insurances are not within the scope of ASC 606. These sources of revenue cumulatively comprise
90.0% and 89.8% of the total revenue of the Company for the three months ended March 31, 2020 and 2019, respectively. The main types of noninterest income within the scope of the standard are as follows:
|
•
|
Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can
be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction
fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to
specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.
|
|
•
|
Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly basis. Fees
charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts,
the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company
where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction.
|
6
|
•
|
Gains and losses on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real
estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control
of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the
asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms,
the transaction price is discounted impacting the gain/loss and the carrying value of the asset.
|
|
•
|
Brokerage and insurance – Fees includes commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation
is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the
contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s
portfolio. Fees for these services are billed monthly and are recorded as revenue at the end of the month for which the wealth management service has been performed. Other performance obligations (such as the delivery of account statements
to customers) are generally considered immaterial to the overall transaction price.
|
The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and
uncertainty of revenue and cash flows for the three months ended March 31, 2020 and 2019 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.
|
|
Three Months Ended
|
|||||||
|
|
March 31,
|
|||||||
|
Revenue stream
|
2020
|
2019
|
||||||
|
Service charges on deposit accounts
|
||||||||
|
Overdraft fees
|
$
|
359
|
358
|
|||||
|
Statement fees
|
56
|
51
|
||||||
|
Interchange revenue
|
522
|
540
|
||||||
|
ATM income
|
83
|
91
|
||||||
|
Other service charges
|
61
|
59
|
||||||
|
Total Service Charges
|
1,081
|
1,099
|
||||||
|
Trust
|
198
|
232
|
||||||
|
Brokerage and insurance
|
340
|
293
|
||||||
|
Other
|
107
|
111
|
||||||
|
Total
|
$
|
1,726
|
$
|
1,735
|
||||
Note 3 - Earnings per Share
The following table sets forth the computation of earnings per share.
7
|
Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Net income applicable to common stock
|
$
|
4,531,000
|
$
|
4,405,000
|
||||
|
|
||||||||
|
Basic earnings per share computation
|
||||||||
|
Weighted average common shares outstanding
|
3,515,500
|
3,528,466
|
||||||
|
Earnings per share – basic
|
$
|
1.29
|
$
|
1.25
|
||||
|
|
||||||||
|
Diluted earnings per share computation
|
||||||||
|
Weighted average common shares outstanding for basic earnings per share
|
3,515,500
|
3,528,466
|
||||||
|
Add: Dilutive effects of restricted stock
|
-
|
-
|
||||||
|
Weighted average common shares outstanding for dilutive earnings per share
|
3,515,500
|
3,528,466
|
||||||
|
Earnings per share – diluted
|
$
|
1.29
|
$
|
1.25
|
||||
For the three months ended March 31, 2020 and 2019, there were 7,564 and 6,705 shares, respectively, related to the restricted
stock plan that were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had per share prices ranging from $52.44-$62.93 for the three month period ended March 31, 2020 and per share
prices ranging from $47.81-$62.93 for the three month period ended March 31, 2019.
Note 4 – Investments
The amortized cost, gross unrealized gains and losses, and fair value of investment securities at March 31, 2020 and December 31, 2019 were as
follows (in thousands):
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
March 31, 2020
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
U.S. agency securities
|
$
|
74,681
|
$
|
2,869
|
$
|
(40
|
)
|
$
|
77,510
|
|||||||
|
U.S. treasury securities
|
27,406
|
907
|
-
|
28,313
|
||||||||||||
|
Obligations of state and
|
||||||||||||||||
|
political subdivisions
|
73,276
|
1,650
|
(148
|
)
|
74,778
|
|||||||||||
|
Corporate obligations
|
3,250
|
97
|
-
|
3,347
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
71,942
|
1,919
|
(21
|
)
|
73,840
|
|||||||||||
|
Total available-for-sale securities
|
$
|
250,555
|
$
|
7,442
|
$
|
(209
|
)
|
$
|
257,788
|
|||||||
|
December 31, 2019
|
||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
U.S. agency securities
|
$
|
83,410
|
$
|
1,523
|
$
|
(70
|
)
|
$
|
84,863
|
|||||||
|
U.S. treasury securities
|
27,394
|
267
|
-
|
27,661
|
||||||||||||
|
Obligations of state and
|
||||||||||||||||
|
political subdivisions
|
60,667
|
865
|
(77
|
)
|
61,455
|
|||||||||||
|
Corporate obligations
|
3,250
|
78
|
-
|
3,328
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
63,086
|
468
|
(155
|
)
|
63,399
|
|||||||||||
|
Total available-for-sale securities
|
$
|
237,807
|
$
|
3,201
|
$
|
(302
|
)
|
$
|
240,706
|
|||||||
The following table shows the Company’s gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not
deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, which individual securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019 (in thousands). As of March
31, 2020, the Company owned 29 securities whose fair value was less than their cost basis.
8
|
Less than Twelve Months
|
Twelve Months or Greater
|
Total
|
||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
|
March 31, 2020
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
|
U.S. agency securities
|
$
|
3,765
|
$
|
(40
|
)
|
$
|
-
|
$
|
-
|
$
|
3,765
|
$
|
(40
|
)
|
||||||||||
|
Obligations of state and
|
||||||||||||||||||||||||
|
political subdivisions
|
13,631
|
(148
|
)
|
-
|
-
|
13,631
|
(148
|
)
|
||||||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||||||||||
|
government sponsored entities
|
3,870
|
(6
|
)
|
3,886
|
(15
|
)
|
7,756
|
(21
|
)
|
|||||||||||||||
|
Total securities
|
$
|
21,266
|
$
|
(194
|
)
|
$
|
3,886
|
$
|
(15
|
)
|
$
|
25,152
|
$
|
(209
|
)
|
|||||||||
|
December 31, 2019
|
||||||||||||||||||||||||
|
U.S. agency securities
|
$
|
14,587
|
$
|
(63
|
)
|
$
|
13,094
|
$
|
(7
|
)
|
$
|
27,681
|
$
|
(70
|
)
|
|||||||||
|
Obligations of states and
|
||||||||||||||||||||||||
|
political subdivisions
|
7,508
|
(75
|
)
|
1,507
|
(2
|
)
|
9,015
|
(77
|
)
|
|||||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||||||||||
|
government sponsored entities
|
27,737
|
(97
|
)
|
9,559
|
(58
|
)
|
37,296
|
(155
|
)
|
|||||||||||||||
|
Total securities
|
$
|
49,832
|
$
|
(235
|
)
|
$
|
24,160
|
$
|
(67
|
)
|
$
|
73,992
|
$
|
(302
|
)
|
|||||||||
As of March 31, 2020 and December 31, 2019, 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, obligations of states and political subdivisions and mortgage
backed securities issued by government sponsored entities. 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.
The Company has 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 issuer-specific
rating changes that are not expected to result in the non-collection of principal and interest during the period.
There were no sales of available for sale securities during the three months ended March 31, 2020 and 2019.
The following table presents the net gains on the Company’s equity investments recognized in earnings during the three month periods ended March
31, 2020 and 2019, and the portion of unrealized gains for the period that relates to equity investments held at March 31, 2020 and 2019 (in thousands):
|
|
Three Months Ended
|
|||||||
|
|
March 31,
|
|||||||
|
Equity Securities
|
2020
|
2019
|
||||||
|
Net (losses) gains recognized in equity securities during the period
|
$
|
(254
|
)
|
$
|
11
|
|||
|
Less: Net gains realized on the sale of equity securities during the period
|
-
|
-
|
||||||
|
Net unrealized (losses) gains
|
$
|
(254
|
)
|
$
|
11
|
|||
Investment securities with an approximate carrying value of $203.1 million and $209.1 million at March 31, 2020 and December 31, 2019,
respectively, were pledged to secure public funds, certain other deposits and borrowing lines.
9
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 (excludes equity securities) at March 31, 2020, by contractual maturity, are shown below (in thousands):
|
Amortized
|
||||||||
|
|
Cost
|
Fair Value
|
||||||
|
Available-for-sale debt securities:
|
||||||||
|
Due in one year or less
|
$
|
17,816
|
$
|
17,979
|
||||
|
Due after one year through five years
|
71,725
|
75,025
|
||||||
|
Due after five years through ten years
|
49,897
|
51,081
|
||||||
|
Due after ten years
|
111,117
|
113,703
|
||||||
|
Total
|
$
|
250,555
|
$
|
257,788
|
||||
Note 5 – Loans
The Company grants loans primarily to customers throughout north central, central and south central Pennsylvania and the
southern tier of New York. The recently completed MidCoast acquisition has expanded our lending market into Wilmington and Dover, Delaware. Although the Company had a diversified loan portfolio at March 31, 2020 and December 31, 2019, 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 and how those segments are analyzed within the allowance
for loan losses as of March 31, 2020 and December 31, 2019 (in thousands):
|
March 31, 2020
|
Total Loans
|
Individually evaluated for impairment
|
Loans acquired with deteriorated credit quality (PCI)
|
Collectively evaluated for impairment
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Residential
|
$
|
216,179
|
$
|
1,220
|
$
|
23
|
$
|
214,936
|
||||||||
|
Commercial
|
338,490
|
11,480
|
1,195
|
325,815
|
||||||||||||
|
Agricultural
|
300,606
|
3,893
|
-
|
296,713
|
||||||||||||
|
Construction
|
17,926
|
-
|
-
|
17,926
|
||||||||||||
|
Consumer
|
9,533
|
3
|
-
|
9,530
|
||||||||||||
|
Other commercial loans
|
71,038
|
1,842
|
30
|
69,166
|
||||||||||||
|
Other agricultural loans
|
46,170
|
1,293
|
-
|
44,877
|
||||||||||||
|
State and political subdivision loans
|
93,778
|
-
|
-
|
93,778
|
||||||||||||
|
Total
|
1,093,720
|
19,731
|
1,248
|
1,072,741
|
||||||||||||
|
Less: allowance for loan losses
|
14,247
|
753
|
-
|
13,494
|
||||||||||||
|
Net loans
|
$
|
1,079,473
|
$
|
18,978
|
$
|
1,248
|
$
|
1,059,247
|
||||||||
|
|
||||||||||||||||
|
December 31 , 2019
|
||||||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Residential
|
$
|
217,088
|
$
|
1,166
|
$
|
23
|
$
|
215,899
|
||||||||
|
Commercial
|
342,023
|
11,537
|
1,210
|
329,276
|
||||||||||||
|
Agricultural
|
311,464
|
3,782
|
-
|
307,682
|
||||||||||||
|
Construction
|
15,519
|
-
|
-
|
15,519
|
||||||||||||
|
Consumer
|
9,947
|
4
|
-
|
9,943
|
||||||||||||
|
Other commercial loans
|
69,970
|
1,902
|
49
|
68,019
|
||||||||||||
|
Other agricultural loans
|
55,112
|
1,281
|
-
|
53,831
|
||||||||||||
|
State and political subdivision loans
|
94,446
|
-
|
-
|
94,446
|
||||||||||||
|
Total
|
1,115,569
|
19,672
|
1,282
|
1,094,615
|
||||||||||||
|
Less: allowance for loan losses
|
13,845
|
735
|
-
|
13,110
|
||||||||||||
|
Net loans
|
$
|
1,101,724
|
$
|
18,937
|
$
|
1,282
|
$
|
1,081,505
|
||||||||
Upon acquisition, the Company evaluates whether an acquired loan is within the scope of ASC 310-30, Receivables-Loans and Debt Securities
Acquired with Deteriorated Credit Quality. PCI, defined above, 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 $1,248,000 and $1,282,000 at March 31, 2020 and
December 31, 2019, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows.
10
Changes in the accretable yield for PCI loans were as follows for the three months ended March 31, 2020 and 2019, respectively (in
thousands):
|
|
Three months ended
|
|||||||
|
|
March 31
|
|||||||
|
|
2020
|
2019
|
||||||
|
Balance at beginning of period
|
$
|
89
|
$
|
104
|
||||
|
Accretion
|
(1
|
)
|
(2
|
)
|
||||
|
Balance at end of period
|
$
|
88
|
$
|
102
|
||||
The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality
under ASC 310-30 (in thousands):
|
March 31, 2020
|
December 31, 2019
|
|||||||
|
Outstanding balance
|
$
|
4,057
|
$
|
4,072
|
||||
|
Carrying amount
|
1,248
|
1,282
|
||||||
The segments of the Company’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance.
Residential real estate mortgages consist primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equity loans are consumer purpose installment loans or lines of credit with terms of 15 years or less
secured by a mortgage which is often a second lien on residential real estate. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on
real estate used in agriculture production. Construction real estate loans are loans secured by residential, commercial or agricultural real estate used during the construction phase of residential, commercial or agricultural projects. Consumer loans
are typically unsecured or primarily secured by assets other than real estate and overdraft lines of credit are typically secured by 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 subdivision loans are loans to 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, state and political subdivision loans, commercial real estate loans and
agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer’s results of operations and cash flows or if the loan
is modified in a troubled debt restructuring. In addition, c
ertain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may
also be classified as impaired.
Impaired 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 allocation of the allowance for loan losses or a
charge-off to the allowance for loan losses.
The following table includes the recorded investment and unpaid principal balances for impaired loan receivables by class, excluding PCI
loans, with the associated allowance amount, if applicable
(in thousands)
:
11
|
|
Recorded
|
Recorded
|
||||||||||||||||||
|
|
Unpaid
|
Investment
|
Investment
|
Total
|
||||||||||||||||
|
|
Principal
|
With No
|
With
|
Recorded
|
Related
|
|||||||||||||||
|
March 31, 2020
|
Balance
|
Allowance
|
Allowance
|
Investment
|
Allowance
|
|||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||
|
Mortgages
|
$
|
1,282
|
$
|
776
|
$
|
300
|
$
|
1,076
|
$
|
20
|
||||||||||
|
Home Equity
|
166
|
80
|
64
|
144
|
11
|
|||||||||||||||
|
Commercial
|
12,000
|
10,668
|
812
|
11,480
|
335
|
|||||||||||||||
|
Agricultural
|
4,046
|
1,549
|
2,344
|
3,893
|
86
|
|||||||||||||||
|
Consumer
|
3
|
3
|
-
|
3
|
-
|
|||||||||||||||
|
Other commercial loans
|
2,459
|
1,499
|
343
|
1,842
|
148
|
|||||||||||||||
|
Other agricultural loans
|
1,381
|
129
|
1,164
|
1,293
|
153
|
|||||||||||||||
|
Total
|
$
|
21,337
|
$
|
14,704
|
$
|
5,027
|
$
|
19,731
|
$
|
753
|
||||||||||
|
|
Recorded
|
Recorded
|
||||||||||||||||||
|
|
Unpaid
|
Investment
|
Investment
|
Total
|
||||||||||||||||
|
|
Principal
|
With No
|
With
|
Recorded
|
Related
|
|||||||||||||||
|
December 31, 2019
|
Balance
|
Allowance
|
Allowance
|
Investment
|
Allowance
|
|||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||
|
Mortgages
|
$
|
1,212
|
$
|
794
|
$
|
223
|
$
|
1,017
|
$
|
20
|
||||||||||
|
Home Equity
|
170
|
83
|
66
|
149
|
12
|
|||||||||||||||
|
Commercial
|
12,070
|
10,723
|
814
|
11,537
|
251
|
|||||||||||||||
|
Agricultural
|
3,900
|
1,580
|
2,202
|
3,782
|
151
|
|||||||||||||||
|
Consumer
|
4
|
4
|
-
|
4
|
-
|
|||||||||||||||
|
Other commercial loans
|
2,517
|
1,555
|
347
|
1,902
|
147
|
|||||||||||||||
|
Other agricultural loans
|
1,347
|
126
|
1,155
|
1,281
|
154
|
|||||||||||||||
|
Total
|
$
|
21,220
|
$
|
14,865
|
$
|
4,807
|
$
|
19,672
|
$
|
735
|
||||||||||
The following tables includes the average balance of impaired loan receivables by class and the income recognized on these receivables for the
three month periods ended March 31, 2020 and 2019(in thousands):
|
|
For the Three Months Ended
|
|||||||||||||||||||||||
|
|
March 31, 2020
|
March 31, 2019
|
||||||||||||||||||||||
|
|
Interest
|
Interest
|
||||||||||||||||||||||
|
|
Average
|
Interest
|
Income
|
Average
|
Interest
|
Income
|
||||||||||||||||||
|
|
Recorded
|
Income
|
Recognized
|
Recorded
|
Income
|
Recognized
|
||||||||||||||||||
|
|
Investment
|
Recognized
|
Cash Basis
|
Investment
|
Recognized
|
Cash Basis
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Mortgages
|
$
|
1,031
|
$
|
5
|
$
|
-
|
$
|
1,103
|
$
|
4
|
$
|
-
|
||||||||||||
|
Home Equity
|
146
|
2
|
-
|
85
|
1
|
-
|
||||||||||||||||||
|
Commercial
|
11,486
|
104
|
2
|
12,548
|
119
|
6
|
||||||||||||||||||
|
Agricultural
|
3,777
|
21
|
-
|
5,575
|
32
|
-
|
||||||||||||||||||
|
Consumer
|
3
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Other commercial loans
|
1,839
|
1
|
-
|
2,137
|
1
|
-
|
||||||||||||||||||
|
Other agricultural loans
|
1,276
|
2
|
-
|
1,431
|
2
|
-
|
||||||||||||||||||
|
Total
|
$
|
19,558
|
$
|
135
|
$
|
2
|
$
|
22,879
|
$
|
159
|
$
|
6
|
||||||||||||
Credit Quality Information
For commercial real estate, agricultural real estate, construction, other commercial, other agricultural and state and political subdivision
loans, management uses a nine grade internal risk rating system to monitor and assess 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:
12
|
•
|
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 be 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
Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing
basis under the supervision of management. All commercial, agricultural and state and political relationships over $500,000 are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external
consultant on at least an annual basis to: 1) review a minimum of 50% of the dollar volume of the commercial, agricultural and municipal loan portfolios on an annual basis, 2) review a sample of new loans originated for over $1.0 million in the last
year, 3) review a sample 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 March 31, 2020 and December 31, 2019
(in thousands)
:
|
March 31, 2020
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
Ending Balance
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
$
|
326,415
|
$
|
4,256
|
$
|
7,780
|
$
|
39
|
$
|
-
|
$
|
338,490
|
||||||||||||
|
Agricultural
|
276,091
|
14,648
|
9,867
|
-
|
-
|
300,606
|
||||||||||||||||||
|
Construction
|
17,926
|
-
|
-
|
-
|
-
|
17,926
|
||||||||||||||||||
|
Other commercial loans
|
68,042
|
986
|
1,948
|
62
|
-
|
71,038
|
||||||||||||||||||
|
Other agricultural loans
|
42,917
|
1,030
|
2,223
|
-
|
-
|
46,170
|
||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||
|
subdivision loans
|
93,369
|
-
|
409
|
-
|
-
|
93,778
|
||||||||||||||||||
|
Total
|
$
|
824,760
|
$
|
20,920
|
$
|
22,227
|
$
|
101
|
$
|
-
|
$
|
868,008
|
||||||||||||
|
December 31, 2019
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
Ending Balance
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
$
|
329,831
|
$
|
4,305
|
$
|
7,848
|
$
|
39
|
$
|
-
|
$
|
342,023
|
||||||||||||
|
Agricultural
|
287,044
|
14,261
|
10,159
|
-
|
-
|
311,464
|
||||||||||||||||||
|
Construction
|
15,519
|
-
|
-
|
-
|
-
|
15,519
|
||||||||||||||||||
|
Other commercial loans
|
66,880
|
984
|
2,042
|
64
|
-
|
69,970
|
||||||||||||||||||
|
Other agricultural loans
|
51,711
|
1,077
|
2,324
|
-
|
-
|
55,112
|
||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||
|
subdivision loans
|
93,993
|
-
|
453
|
-
|
-
|
94,446
|
||||||||||||||||||
|
Total
|
$
|
844,978
|
$
|
20,627
|
$
|
22,826
|
$
|
103
|
$
|
-
|
$
|
888,534
|
||||||||||||
For residential real estate mortgages, home equity 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 and still accruing. The following table presents the recorded investment in those loan classes based on
payment activity as of March 31, 2020 and December 31, 2019 (
in thousands)
:
13
|
March 31, 2020
|
Performing
|
Non-performing
|
PCI
|
Total
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Mortgages
|
$
|
156,630
|
$
|
915
|
$
|
23
|
$
|
157,568
|
||||||||
|
Home Equity
|
58,555
|
56
|
-
|
58,611
|
||||||||||||
|
Consumer
|
9,514
|
19
|
-
|
9,533
|
||||||||||||
|
Total
|
$
|
224,699
|
$
|
990
|
$
|
23
|
$
|
225,712
|
||||||||
|
|
||||||||||||||||
|
December 31, 2019
|
Performing
|
Non-performing
|
PCI
|
Total
|
||||||||||||
|
Real estate loans:
|
||||||||||||||||
|
Mortgages
|
$
|
156,151
|
$
|
904
|
$
|
23
|
$
|
157,078
|
||||||||
|
Home Equity
|
59,950
|
60
|
-
|
60,010
|
||||||||||||
|
Consumer
|
9,939
|
8
|
-
|
9,947
|
||||||||||||
|
Total
|
$
|
226,040
|
$
|
972
|
$
|
23
|
$
|
227,035
|
||||||||
Aging Analysis of Past Due Loan Receivables
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 loan receivables as of March 31, 2020 and December 31, 2019
(in thousands):
|
|
Total
|
90 Days or
|
||||||||||||||||||||||||||||||
|
|
30-59 Days
|
60-89 Days
|
90 Days
|
Total Past
|
Loan
|
Greater and
|
||||||||||||||||||||||||||
|
March 31, 2020
|
Past Due
|
Past Due
|
Or Greater
|
Due
|
Current
|
PCI
|
Receivables
|
Accruing
|
||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||||||
|
Mortgages
|
$
|
559
|
$
|
212
|
$
|
345
|
$
|
1,116
|
$
|
156,429
|
$
|
23
|
$
|
157,568
|
$
|
-
|
||||||||||||||||
|
Home Equity
|
165
|
89
|
53
|
307
|
58,304
|
-
|
58,611
|
-
|
||||||||||||||||||||||||
|
Commercial
|
2,044
|
350
|
3,905
|
6,299
|
330,996
|
1,195
|
338,490
|
55
|
||||||||||||||||||||||||
|
Agricultural
|
201
|
-
|
413
|
614
|
299,992
|
-
|
300,606
|
98
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
17,926
|
-
|
17,926
|
-
|
||||||||||||||||||||||||
|
Consumer
|
115
|
25
|
19
|
159
|
9,374
|
-
|
9,533
|
11
|
||||||||||||||||||||||||
|
Other commercial loans
|
63
|
77
|
1,715
|
1,855
|
69,153
|
30
|
71,038
|
-
|
||||||||||||||||||||||||
|
Other agricultural loans
|
50
|
-
|
20
|
70
|
46,100
|
-
|
46,170
|
-
|
||||||||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||||||||||
|
subdivision loans
|
-
|
-
|
-
|
-
|
93,778
|
-
|
93,778
|
-
|
||||||||||||||||||||||||
|
Total
|
$
|
3,197
|
$
|
753
|
$
|
6,470
|
$
|
10,420
|
$
|
1,082,052
|
$
|
1,248
|
$
|
1,093,720
|
$
|
164
|
||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans considered non-accrual
|
$
|
786
|
$
|
5
|
$
|
6,306
|
$
|
7,097
|
$
|
4,205
|
$
|
-
|
$
|
11,302
|
||||||||||||||||||
|
Loans still accruing
|
2,411
|
748
|
164
|
3,323
|
1,077,847
|
1,248
|
1,082,418
|
|||||||||||||||||||||||||
|
Total
|
$
|
3,197
|
$
|
753
|
$
|
6,470
|
$
|
10,420
|
$
|
1,082,052
|
$
|
1,248
|
$
|
1,093,720
|
||||||||||||||||||
14
|
|
Total
|
90 Days or
|
||||||||||||||||||||||||||||||
|
|
30-59 Days
|
60-89 Days
|
90 Days
|
Total Past
|
Loan
|
Greater and
|
||||||||||||||||||||||||||
|
December 31, 2019
|
Past Due
|
Past Due
|
Or Greater
|
Due
|
Current
|
PCI
|
Receivables
|
Accruing
|
||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||||||
|
Mortgages
|
$
|
581
|
$
|
57
|
$
|
319
|
$
|
957
|
$
|
156,098
|
$
|
23
|
$
|
157,078
|
$
|
1
|
||||||||||||||||
|
Home Equity
|
334
|
11
|
56
|
401
|
59,609
|
-
|
60,010
|
1
|
||||||||||||||||||||||||
|
Commercial
|
750
|
573
|
3,720
|
5,043
|
335,770
|
1,210
|
342,023
|
-
|
||||||||||||||||||||||||
|
Agricultural
|
118
|
-
|
785
|
903
|
310,561
|
-
|
311,464
|
299
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
15,519
|
-
|
15,519
|
-
|
||||||||||||||||||||||||
|
Consumer
|
113
|
10
|
8
|
131
|
9,816
|
-
|
9,947
|
2
|
||||||||||||||||||||||||
|
Other commercial loans
|
217
|
71
|
1,946
|
2,234
|
67,687
|
49
|
69,970
|
184
|
||||||||||||||||||||||||
|
Other agricultural loans
|
29
|
32
|
-
|
61
|
55,051
|
-
|
55,112
|
-
|
||||||||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||||||||||
|
subdivision loans
|
-
|
-
|
-
|
-
|
94,446
|
-
|
94,446
|
-
|
||||||||||||||||||||||||
|
Total
|
$
|
2,142
|
$
|
754
|
$
|
6,834
|
$
|
9,730
|
$
|
1,104,557
|
$
|
1,282
|
$
|
1,115,569
|
$
|
487
|
||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans considered non-accrual
|
$
|
90
|
$
|
95
|
$
|
6,347
|
$
|
6,532
|
$
|
5,004
|
$
|
-
|
$
|
11,536
|
||||||||||||||||||
|
Loans still accruing
|
2,052
|
659
|
487
|
3,198
|
1,099,553
|
1,282
|
1,104,033
|
|||||||||||||||||||||||||
|
Total
|
$
|
2,142
|
$
|
754
|
$
|
6,834
|
$
|
9,730
|
$
|
1,104,557
|
$
|
1,282
|
$
|
1,115,569
|
||||||||||||||||||
Nonaccrual Loans
Loans are considered for non-accrual status upon reaching 90 days delinquency, 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. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings,
the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.
The following table reflects the loan receivables, excluding PCI loans, on non-accrual status as of March 31, 2020 and December 31, 2019,
respectively. The balances are presented by class of loan receivable
(in thousands):
|
March 31, 2020
|
December 31, 2019
|
|||||||
|
Real estate loans:
|
||||||||
|
Mortgages
|
$
|
915
|
$
|
903
|
||||
|
Home Equity
|
56
|
59
|
||||||
|
Commercial
|
5,038
|
5,080
|
||||||
|
Agricultural
|
2,464
|
2,578
|
||||||
|
Consumer
|
8
|
6
|
||||||
|
Other commercial loans
|
1,786
|
1,837
|
||||||
|
Other agricultural loans
|
1,035
|
1,073
|
||||||
|
|
$
|
11,302
|
$
|
11,536
|
||||
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 structure more affordable terms before their loan reaches nonaccrual status. These restructured 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 interest or principal, or both, 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. As of March 31, 2020 and December 31, 2019, included within the allowance for loan losses are reserves of $273,000 and $345,000
respectively, that are associated with loans modified as TDRs.
15
Loan modifications that are considered TDRs completed during the three months ended March 31, 2020 and 2019 were as follows (dollars in
thousands):
|
|
For the Three Months Ended March 31, 2020
|
|||||||||||||||||||||||
|
|
Number of contracts
|
Pre-modification Outstanding Recorded Investment
|
Post-Modification Outstanding Recorded Investment
|
|||||||||||||||||||||
|
|
Interest Modification
|
Term Modification
|
Interest Modification
|
Term Modification
|
Interest Modification
|
Term Modification
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Agricultural
|
-
|
1
|
$
|
-
|
$
|
150
|
$
|
-
|
$
|
150
|
||||||||||||||
|
Total
|
-
|
1
|
$
|
-
|
$
|
150
|
$
|
-
|
$
|
150
|
||||||||||||||
|
|
For the Three Months Ended March 31, 2019
|
|||||||||||||||||||||||
|
|
Number of contracts
|
Pre-modification Outstanding Recorded Investment
|
Post-Modification Outstanding Recorded Investment
|
|||||||||||||||||||||
|
|
Interest Modification
|
Term Modification
|
Interest Modification
|
Term Modification
|
Interest Modification
|
Term Modification
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Commercial
|
-
|
1
|
$
|
-
|
$
|
548
|
$
|
-
|
$
|
548
|
||||||||||||||
|
Total
|
-
|
1
|
$
|
-
|
$
|
548
|
$
|
-
|
$
|
548
|
||||||||||||||
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 on modified loans 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 began January 1, 2020 and 2019 (3 month periods), respectively, and that subsequently defaulted during these reporting
periods (dollars in thousands):
|
|
For the Three Months Ended
|
|||||||||||||||
|
|
March 31, 2020
|
March 31, 2019
|
||||||||||||||
|
|
Number of contracts
|
Recorded investment
|
Number of contracts
|
Recorded investment
|
||||||||||||
|
Other agricultural loans
|
-
|
$
|
-
|
1
|
$
|
124
|
||||||||||
|
Total recidivism
|
-
|
$
|
-
|
1
|
$
|
124
|
||||||||||
Allowance for Loan Losses
The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually
evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2020 and December 31, 2019, respectively
(in thousands):
16
|
|
March 31, 2020
|
December 31, 2019
|
||||||||||||||||||||||
|
|
Individually evaluated for impairment
|
Collectively evaluated for impairment
|
Total
|
Individually evaluated for impairment
|
Collectively evaluated for impairment
|
Total
|
||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
Residential
|
$
|
31
|
$
|
1,123
|
$
|
1,154
|
$
|
32
|
$
|
1,082
|
$
|
1,114
|
||||||||||||
|
Commercial
|
335
|
4,394
|
4,729
|
251
|
4,298
|
4,549
|
||||||||||||||||||
|
Agricultural
|
86
|
4,792
|
4,878
|
151
|
4,871
|
5,022
|
||||||||||||||||||
|
Construction
|
-
|
56
|
56
|
-
|
43
|
43
|
||||||||||||||||||
|
Consumer
|
-
|
117
|
117
|
-
|
112
|
112
|
||||||||||||||||||
|
Other commercial loans
|
148
|
1,149
|
1,297
|
147
|
1,108
|
1,255
|
||||||||||||||||||
|
Other agricultural loans
|
153
|
682
|
835
|
154
|
807
|
961
|
||||||||||||||||||
|
State and political
|
||||||||||||||||||||||||
|
subdivision loans
|
-
|
558
|
558
|
-
|
536
|
536
|
||||||||||||||||||
|
Unallocated
|
-
|
623
|
623
|
-
|
253
|
253
|
||||||||||||||||||
|
Total
|
$
|
753
|
$
|
13,494
|
$
|
14,247
|
$
|
735
|
$
|
13,110
|
$
|
13,845
|
||||||||||||
The following tables roll forward the balance of the ALLL by portfolio segment for the three months ended March 31, 2020
and 2019, respectively
(in thousands):
|
|
For the three months ended March 31, 2020
|
|||||||||||||||||||
|
|
Balance at December 31, 2019
|
Charge-offs
|
Recoveries
|
Provision
|
Balance at
March 31, 2020
|
|||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||
|
Residential
|
$
|
1,114
|
$
|
-
|
$
|
-
|
$
|
40
|
$
|
1,154
|
||||||||||
|
Commercial
|
4,549
|
(1
|
)
|
1
|
180
|
4,729
|
||||||||||||||
|
Agricultural
|
5,022
|
-
|
-
|
(144
|
)
|
4,878
|
||||||||||||||
|
Construction
|
43
|
-
|
-
|
13
|
56
|
|||||||||||||||
|
Consumer
|
112
|
(8
|
)
|
8
|
5
|
117
|
||||||||||||||
|
Other commercial loans
|
1,255
|
-
|
2
|
40
|
1,297
|
|||||||||||||||
|
Other agricultural loans
|
961
|
-
|
-
|
(126
|
)
|
835
|
||||||||||||||
|
State and political
|
||||||||||||||||||||
|
subdivision loans
|
536
|
-
|
-
|
22
|
558
|
|||||||||||||||
|
Unallocated
|
253
|
-
|
-
|
370
|
623
|
|||||||||||||||
|
Total
|
$
|
13,845
|
$
|
(9
|
)
|
$
|
11
|
$
|
400
|
$
|
14,247
|
|||||||||
|
|
For the three months ended March 31, 2019
|
|||||||||||||||||||
|
|
Balance at
December 31, 2018
|
Charge-offs
|
Recoveries
|
Provision
|
Balance at
March 31, 2019
|
|||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||
|
Residential
|
$
|
1,105
|
$
|
-
|
$
|
-
|
$
|
(16
|
)
|
$
|
1,089
|
|||||||||
|
Commercial
|
4,115
|
(200
|
)
|
-
|
215
|
4,130
|
||||||||||||||
|
Agricultural
|
4,264
|
-
|
128
|
4,392
|
||||||||||||||||
|
Construction
|
58
|
-
|
-
|
(26
|
)
|
32
|
||||||||||||||
|
Consumer
|
120
|
(14
|
)
|
11
|
7
|
124
|
||||||||||||||
|
Other commercial loans
|
1,354
|
-
|
3
|
(74
|
)
|
1,283
|
||||||||||||||
|
Other agricultural loans
|
752
|
-
|
-
|
4
|
756
|
|||||||||||||||
|
State and political
|
||||||||||||||||||||
|
subdivision loans
|
762
|
-
|
-
|
(197
|
)
|
565
|
||||||||||||||
|
Unallocated
|
354
|
-
|
-
|
359
|
713
|
|||||||||||||||
|
Total
|
$
|
12,884
|
$
|
(214
|
)
|
$
|
14
|
$
|
400
|
$
|
13,084
|
|||||||||
The Company allocates the ALLL based on the factors described below, which conform to the Company’s loan classification policy and credit
quality measurements. In reviewing risk within the Company’s loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate
loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) other commercial and agricultural loans; (vii) consumer loans; (viii) other
agricultural loans and (ix) 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 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:
17
|
•
|
Level of and trends in delinquencies and 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 Company’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 rate/ Consumer Price Index
|
|
◾
|
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; and
|
|
•
|
Any change in the level of board oversight.
|
The Company analyzes its loan portfolio at least each quarter to determine the adequacy of its ALLL.
Loans determined to be TDRs are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In
calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, impairment is recognized by a charge to the provision
for loan and lease losses and a credit to the ALLL.
For the three months ended March 31, 2020, the allowance for all categories was increased due to a general deterioration in economic
activity and unemployment as a result of the Covid-19 pandemic. In addition, commercial real estate was increased due to an increase in past due loans. The decrease in the provision for agricultural real estate loans and other agricultural loans is
due to the decrease in outstanding loans in these loan portfolios as of March 31, 2020 compared to December 31, 2019.
For the three months ended March 31, 2019, the allowance for commercial real estate was decreased in general reserves due to a decrease in
the amount of non-accrual, classified and past due loans, which was offset by an specific reserves. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result
of higher loan balances, an increase in the amount of loans classified as non-accrual and past due. The result of this was represented as an increase in the provision. The allowance for other commercial loans was decreased as a result of a decrease
in specific reserves and a decrease in the volume of classified loans. The result of these changes was represented as a decrease in the provision. The allowance for state and political subdivision was decreased as a result a decrease in the volume of
classified loans. The result of this change was represented as a decrease in the provision.
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 March 31, 2020 and December 31, 2019, included within other assets are $3,056,000 and $3,404,000, respectively, of foreclosed assets. As of March 31, 2020, included within the foreclosed assets
are $167,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31, 2020, the Company had initiated formal foreclosure proceedings on $743,000 of consumer
residential mortgages, which had not yet been transferred into foreclosed assets.
18
Note 6 – Goodwill and Other Intangible Assets
The following table provides the gross carrying value and accumulated amortization of intangible assets as of March 31,
2020 and December 31, 2019 (in thousands):
|
|
March 31, 2020
|
December 31, 2019
|
||||||||||||||||||||||
|
|
Gross carrying value
|
Accumulated amortization
|
Net carrying value
|
Gross carrying value
|
Accumulated amortization
|
Net carrying value
|
||||||||||||||||||
|
Amortized intangible assets (1):
|
||||||||||||||||||||||||
|
Mortgage servicing rights (MSRs)
|
$
|
1,764
|
$
|
(1,125
|
)
|
$
|
639
|
$
|
1,718
|
$
|
(1,077
|
)
|
$
|
641
|
||||||||||
|
Core deposit intangibles
|
1,786
|
(1,131
|
)
|
655
|
1,786
|
(1,081
|
)
|
705
|
||||||||||||||||
|
Covenant not to compete
|
125
|
(125
|
)
|
-
|
125
|
(125
|
)
|
-
|
||||||||||||||||
|
Total amortized intangible assets
|
$
|
3,675
|
$
|
(2,381
|
)
|
$
|
1,294
|
$
|
3,629
|
$
|
(2,283
|
)
|
$
|
1,346
|
||||||||||
|
Unamortized intangible assets:
|
||||||||||||||||||||||||
|
Goodwill
|
$
|
23,296
|
$
|
23,296
|
||||||||||||||||||||
The following table provides the current year and estimated future amortization expense for amortized intangible assets for the next five
years (in thousands). We based our projections of amortization expense shown below on existing asset balances at March 31, 2020. Future amortization expense may vary from these projections:
|
|
MSRs
|
Core deposit intangibles
|
Covenant not to compete
|
Total
|
||||||||||||
|
Three months ended March 31, 2020 (actual)
|
$
|
48
|
$
|
50
|
$
|
-
|
$
|
98
|
||||||||
|
Three months ended March 31, 2019 (actual)
|
48
|
58
|
8
|
114
|
||||||||||||
|
Estimate for year ending December 31,
|
||||||||||||||||
|
Remaining 2020
|
138
|
147
|
-
|
285
|
||||||||||||
|
2021
|
141
|
165
|
-
|
306
|
||||||||||||
|
2022
|
108
|
133
|
-
|
241
|
||||||||||||
|
2023
|
80
|
100
|
-
|
180
|
||||||||||||
|
2024
|
57
|
68
|
-
|
125
|
||||||||||||
|
Thereafter
|
115
|
42
|
-
|
157
|
||||||||||||
|
Total
|
$
|
639
|
$
|
655
|
$
|
-
|
$
|
1,294
|
||||||||
Note 7 - Employee Benefit Plans
For additional detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 11 of the Company's Consolidated
Financial Statements included in the 2019 Annual Report on Form 10-K.
Noncontributory Defined Benefit Pension Plan
The Bank sponsors a trusteed noncontributory defined benefit pension plan (“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 the First National Bank of
Fredericksburg (FNB) when FNB was acquired in December 2015. The FNB plan was closed and all assets were distributed in the fourth quarter of 2019.
The Bank’s funding policy is to make annual contributions, if needed, based upon the funding
formula developed by the plans’ actuary. Any employee with a hire date of January 1, 2007 or later is not eligible to participate in the Pension Plan.
In lieu of the Pension Plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting certain 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, if any, is placed in a separate account within the 401(k) plan and is subject
to a vesting requirement.
19
For employees who are eligible to participate in the Pension Plan, the Pension Plan requires benefits to be paid to eligible employees based
primarily upon age 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 following sets forth the components of net periodic benefit costs of the Pension Plan and the line item on the Consolidated Statement of
Income where such amounts are included, for the three months ended March 31, 2020 and 2019, respectively (in thousands):
|
|
Three Months Ended
|
|||||||
|
|
March 31,
|
|||||||
|
|
2020
|
2019
|
||||||
|
Service cost
|
$
|
83
|
$
|
89
|
||||
|
Interest cost
|
87
|
139
|
||||||
|
Expected return on plan assets
|
(225
|
)
|
(205
|
)
|
||||
|
Net amortization and deferral
|
62
|
61
|
||||||
|
Net periodic benefit cost
|
$
|
7
|
$
|
84
|
||||
The Bank does not expect to contribute to the Pension Plan during 2020.
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 are subject to certain vesting requirements including 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 March 31, 2020, 129,211 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 the three months ended March 31,
2020:
|
|
Three months
|
|||||||
|
|
Weighted
|
|||||||
|
|
Unvested
|
Average
|
||||||
|
|
Shares
|
Market Price
|
||||||
|
Outstanding, beginning of period
|
10,877
|
$
|
60.11
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Forfeited
|
-
|
-
|
||||||
|
Vested
|
(680
|
)
|
(59.85
|
)
|
||||
|
Outstanding, end of period
|
10,197
|
$
|
60.12
|
|||||
Compensation expense 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 $82,000 and $67,000 for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, the total compensation cost related to nonvested awards that had not yet been
recognized was $613,000, which is expected to be recognized over the next three years.
Note 8 – Accumulated Comprehensive Income Loss
The following tables present the changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March
31, 2020 and 2019 (in thousands):
20
|
|
Three months ended March 31, 2020
|
|||||||||||
|
|
Unrealized gain (loss) on available for sale securities (a)
|
Defined Benefit Pension Items (a)
|
Total
|
|||||||||
|
Balance as of December 31, 2019
|
$
|
2,290
|
$
|
(2,919
|
)
|
$
|
(629
|
)
|
||||
|
Other comprehensive income (loss) before reclassifications (net of tax)
|
3,424
|
-
|
3,424
|
|||||||||
|
Amounts reclassified from accumulated other
|
||||||||||||
|
comprehensive income (loss) (net of tax)
|
-
|
123
|
123
|
|||||||||
|
Net current period other comprehensive income (loss)
|
3,424
|
123
|
3,547
|
|||||||||
|
Balance as of March 31, 2020
|
$
|
5,714
|
$
|
(2,796
|
)
|
$
|
2,918
|
|||||
|
|
Three months ended March 31, 2019
|
|||||||||||
|
|
Unrealized gain (loss) on available for sale securities (a)
|
Defined Benefit Pension Items (a)
|
Total
|
|||||||||
|
Balance as of December 31, 2018
|
$
|
(973
|
)
|
$
|
(2,948
|
)
|
$
|
(3,921
|
)
|
|||
|
Other comprehensive income (loss) before reclassifications (net of tax)
|
1,048
|
-
|
1,048
|
|||||||||
|
Amounts reclassified from accumulated other
|
||||||||||||
|
comprehensive income (loss) (net of tax)
|
-
|
48
|
48
|
|||||||||
|
Net current period other comprehensive income (loss)
|
1,048
|
48
|
1,096
|
|||||||||
|
Balance as of March 31, 2019
|
$
|
75
|
$
|
(2,900
|
)
|
$
|
(2,825
|
)
|
||||
(a) Amounts in parentheses indicate debits
The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive income for the
three months ended March 31, 2020 and 2019 (in thousands):
|
Details about accumulated other comprehensive income (loss)
|
Amount reclassified from accumulated comprehensive income (loss) (a)
|
Affected line item in the Consolidated Statement of Income
|
|||||||
|
|
Three Months Ended March 31, 2020
|
|
|||||||
|
|
2020
|
2019
|
|
||||||
|
Defined benefit pension items
|
|
||||||||
|
|
$
|
(156
|
)
|
$
|
(61
|
)
|
Other expenses
|
||
|
|
33
|
13
|
Provision for income taxes
|
||||||
|
|
$
|
(123
|
)
|
$
|
(48
|
)
|
Net of tax
|
||
|
Total reclassifications
|
$
|
(123
|
)
|
$
|
(48
|
)
|
|
||
(a) Amounts in parentheses indicate debits
Note 9 – Fair Value Measurements
The Company has established a hierarchal disclosure framework associated with the level of pricing observability
utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows
:
|
Level I:
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
Level II:
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and
liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
|
|
|
|
|
Level III:
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s
best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy, is set forth below.
21
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is
based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to
reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value
calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date
of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.
Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The fair values of equity securities and securities available for sale are determined by quoted prices in
active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without
relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities and classified as Level II. The fair values consider observable data that may include dealer
quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
The following tables present the assets and liabilities reported on the Consolidated Balance Sheet at their fair value on a recurring basis as
of March 31, 2020 and December 31, 2019 by level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
March 31, 2020
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Fair value measurements on a recurring basis:
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Equity securities
|
$
|
649
|
$
|
-
|
$
|
-
|
$
|
649
|
||||||||
|
Available for sale securities:
|
||||||||||||||||
|
U.S. Agency securities
|
-
|
77,510
|
-
|
77,510
|
||||||||||||
|
U.S. Treasury securities
|
28,313
|
-
|
-
|
28,313
|
||||||||||||
|
Obligations of state and
|
||||||||||||||||
|
political subdivisions
|
-
|
74,778
|
-
|
74,778
|
||||||||||||
|
Corporate obligations
|
-
|
3,347
|
-
|
3,347
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
-
|
73,840
|
-
|
73,840
|
||||||||||||
|
|
||||||||||||||||
|
December 31, 2019
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Fair value measurements on a recurring basis:
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Equity securities
|
$
|
701
|
$
|
-
|
$
|
-
|
$
|
701
|
||||||||
|
Available for sale securities:
|
||||||||||||||||
|
U.S. Agency securities
|
-
|
84,863
|
-
|
84,863
|
||||||||||||
|
U.S. Treasuries securities
|
27,661
|
-
|
-
|
27,661
|
||||||||||||
|
Obligations of state and
|
||||||||||||||||
|
political subdivisions
|
-
|
61,455
|
-
|
61,455
|
||||||||||||
|
Corporate obligations
|
-
|
3,328
|
-
|
3,328
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
-
|
63,399
|
-
|
63,399
|
||||||||||||
22
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019 are included in the table below (
in thousands)
:
|
March 31, 2020
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Impaired Loans
|
$
|
-
|
$
|
-
|
$
|
4,178
|
$
|
4,178
|
||||||||
|
Other real estate owned
|
-
|
-
|
2,951
|
2,951
|
||||||||||||
|
|
||||||||||||||||
|
December 31, 2019
|
Level I
|
Level II
|
Level III
|
Total
|
||||||||||||
|
Impaired Loans
|
$
|
-
|
$
|
-
|
$
|
3,860
|
$
|
3,860
|
||||||||
|
Other real estate owned
|
-
|
-
|
3,299
|
3,299
|
||||||||||||
|
•
|
Impaired Loans -
The Company has measured
impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised
value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which
are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is
taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the
loan, then the loan is not included in the table above as it is not currently being carried at its fair value. The fair values above excluded estimated selling costs of $459,000 and $424,000 at March 31, 2020 and December 31, 2019,
respectively.
|
|
•
|
Other Real Estate Owned (OREO) –
OREO is carried
at the lower of cost or fair value, less estimated costs to sell, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan
is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated
realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject
property, and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property
since the appraisal was completed. In these cases, the loans are categorized in the above table as a Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further
declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.
|
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).
|
March 31, 2020
|
Fair Value
|
Valuation Technique(s)
|
Unobservable input
|
Range
|
Weighted average
|
|||||||||
|
Impaired Loans
|
$
|
4,178
|
Appraised Collateral Values
|
Discount for time since appraisal
|
0-100
|
%
|
15.54
|
%
|
||||||
|
|
|
Selling costs
|
5%-10
|
%
|
9.34
|
%
|
||||||||
|
|
|
Holding period
|
0 - 12 months
|
11.93 months
|
||||||||||
|
|
|
|
||||||||||||
|
Other real estate owned
|
2,951
|
Appraised Collateral Values
|
Discount for time since appraisal
|
5-33
|
%
|
16.27
|
%
|
|||||||
|
|
|
|
||||||||||||
23
|
Deceber 31, 2020
|
Fair Value
|
Valuation Technique(s)
|
Unobservable input
|
Range
|
Weighted average
|
|||||||||
|
Impaired Loans
|
$
|
3,860
|
Appraised Collateral Values
|
Discount for time since appraisal
|
0-100
|
%
|
19.22
|
%
|
||||||
|
|
|
Selling costs
|
5%-10
|
%
|
9.26
|
%
|
||||||||
|
|
|
Holding period
|
6- 12 months
|
11.76 months
|
||||||||||
|
|
|
|
||||||||||||
|
Other real estate owned
|
3,299
|
Appraised Collateral Values
|
Discount for time since appraisal
|
5-43
|
%
|
16.37
|
%
|
|||||||
|
|
|
|
||||||||||||
Financial Instruments Not Required to be Measured or Reported at Fair Value
The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a
recurring basis are as follows (in thousands):
|
|
Carrying
|
|||||||||||||||||||
|
March 31, 2020
|
Amount
|
Fair Value
|
Level I
|
Level II
|
Level III
|
|||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Interest bearing time deposits with other banks
|
$
|
14,506
|
$
|
14,962
|
$
|
-
|
$
|
-
|
$
|
14,962
|
||||||||||
|
Loans held for sale
|
2,006
|
2,006
|
-
|
-
|
2,006
|
|||||||||||||||
|
Net loans
|
1,079,473
|
1,073,943
|
-
|
-
|
1,073,943
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
1,205,150
|
1,209,221
|
946,724
|
-
|
262,497
|
|||||||||||||||
|
Borrowed funds
|
83,563
|
84,101
|
-
|
-
|
84,101
|
|||||||||||||||
|
|
||||||||||||||||||||
|
|
Carrying
|
|||||||||||||||||||
|
December 31, 2019
|
Amount
|
Fair Value
|
Level I
|
Level II
|
Level III
|
|||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Interest bearing time deposits with other banks
|
$
|
14,256
|
$
|
14,635
|
$
|
-
|
$
|
-
|
$
|
14,635
|
||||||||||
|
Loans held for sale
|
815
|
815
|
-
|
-
|
815
|
|||||||||||||||
|
Net loans
|
1,101,724
|
1,091,006
|
-
|
-
|
1,091,006
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
1,211,118
|
1,211,200
|
938,387
|
-
|
272,813
|
|||||||||||||||
|
Borrowed funds
|
85,117
|
84,581
|
-
|
-
|
84,581
|
|||||||||||||||
The carrying amounts for cash and due from banks, bank owned life insurance, regulatory stock, accrued interest receivable
and payable approximate fair value and are considered Level I measurements.
Note 10 – Acquisition of MidCoast Community Bancorp, Inc.
On April 17, 2020, Citizens Financial Services, Inc. (Company) and its wholly owned subsidiary, First Citizens Community
Bank (Bank), and MidCoast Community Bancorp, Inc. (MidCoast), and its wholly owned subsidiary, MidCoast Community Bank (“MC Bank”) completed the merger agreed to in 2019, pursuant to which MidCoast merged with and into a wholly-owned acquisition
subsidiary of the Company, with the acquisition subsidiary as the surviving corporation. Concurrent with the merger, MC Bank merged with and into the Bank, with the Bank as the surviving institution.
Each outstanding share of MidCoast common stock was converted into $6.50 in cash or 0.1065 shares of the Company’s common
stock. The merger resulted in 25% of the outstanding shares of MidCoast common stock (including for this purpose, dissenters’ shares) paid in cash and the remainder was paid in the Company’s common stock.
The senior management of the Company and the Bank remained the same following the merger.
Note 11 – Recent Accounting Pronouncements
24
In June 2016, the FASB issued ASU 2016-13,
Financial
Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by
requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be
presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are
expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit
losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With
certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted.
In November 2019, the
FASB issued ASU 2019-10,
Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)
. This Update defers the effective date of ASU 2016-13 for SEC filers
that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
We expect to recognize
a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall
impact of the new guidance on the consolidated financial statements.
In that regard, we have formed a cross-functional working group. The working group is comprised of individuals from various functional areas including credit, loan
origination and finance. We are currently working through our implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other
things. We are also in the process of implementing a third-party vendor solution to assist us in the application of the ASU 2016-13. The adoption of the ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing
from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. While
we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan portfolio as well as the prevailing
economic conditions and forecasts as of the adoption date.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
.
To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the
impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.
Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange
Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10,
Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)
, which deferred the effective date for ASC 350,
Intangibles – Goodwill and Other
,
for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure
Framework – Changes the Disclosure Requirements for Fair Value Measurements
. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for
timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring
Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.
25
In August 2018, the FASB issued ASU 2018-14,
Compensation – Retirement Benefits (Topic 715-20).
This
Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income
expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in
rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective
basis. For all other entities, this Update is effective for fiscal years ending after Dec
ember 15, 2021. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04,
Codification Improvements to Topic 326, Financial Instruments –
Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,
which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance.
Topic 326, Financial Instruments – Credit Losses
amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public
business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021.
Topic 815,
Derivatives and Hedging
amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal
years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the
issuance of this Update.
Topic 825, Financial Instruments
amendments
are effective for fiscal years beginning after December 15, 2019, and interim periods within
fiscal years. In November 2019, the FASB issued ASU 2019-10,
Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)
. This Update defers the effective
date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the
ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.
In May 2019, the FASB issued ASU 2019-05,
Financial Instruments – Credit Losses, Topic 326
, which
allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset
must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either
available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to
opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and
transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption
is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10,
Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)
.
The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those
fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.
26
In July 2019, the FASB issued ASU 2019-07,
Codification Updates to SEC Sections, Amendments
to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates.
This ASU amends various SEC
paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532,
Disclosure Update and Simplification
, and Nos. 33-10231 and 33-10442,
Investment Company
Reporting Modernization
. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.
In November 2019, the FASB issued ASU 2019-10,
Financial Instruments ‒ Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842)
. The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04,
Intangibles ‒ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill)
,
to align with those used for credit losses. Furthermore, the ASU
provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these
ASUs.
In November 2019, the FASB issued ASU 2019-11,
Codification Improvements to Topic 326, Financial
Instruments – Credit Losses
, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the
allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment
assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this
Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740)
, to simplify the accounting
for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not
subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making
an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method
of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this
Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods
within fiscal years beginning after December 15, 2022. 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 2020, the FASB issued ASU 2020-1,
Investments – Equity Securities (Topic 321), Investments –
Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
, to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the
purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for the purpose of applying paragraph 815-10-15-141(a) an entity
should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair
value option, in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years
beginning after December 15, 2021, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
27
In January 2020, the FASB issued ASU 2020-2,
Financial Instruments – Credit Losses (Topic
326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020
, to
add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of
the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Company’s financial statements.
In March 2020, the FASB issued ASU 2020-3
,
Codification
Improvements to Financial Instruments.
This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe
the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice
for most entities. Among its provisions, the ASU clarifies that all entities, other than public
business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825,
Financial Instruments
, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under
Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption
is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those
years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In March 2020, the FASB issued ASU 2020-4,
Reference Rate Reform (Topic 848): Facilitation
of the Effects of Reference Rate Reform on Financial Reporting, March 2020
, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting
burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts
affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also,
entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or
reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the
impact the adoption of the standard will have on the Company’s financial position or results of operations.
28
ITEM 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
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 expected future results of operations of Citizens Financial Services, Inc., First Citizens Community Bank, First Citizens
Insurance Agency, Inc., 1
st
Realty of PA LLC or the combined Company. When we use words such as “believes,” “expects,” “anticipates,” or similar expressions, we are
making forward-looking statements. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements. The Company cautions readers that the following important factors, among others,
could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement:
|
•
|
The scope, duration and severity of the COVID-19 pandemic and its effects on our business and operations, our customers, including their ability to make timely payments
on loans, our service providers, and on the economy and financial markets in general.
|
|
•
|
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 to implement strategic initiatives designed to increase revenues or manage expenses, or we may be unable
to implement those initiatives at all.
|
|
•
|
We may not be able to successfully integrate businesses we acquire or be able to fully realize the expected financial and other benefits from
acquisitions.
|
|
•
|
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, or regulatory practices or requirements.
|
|
•
|
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 some of our customers.
|
|
•
|
Agricultural customers could be affected by factors outside of their control including adverse weather conditions, loss of crops or livestock due to
diseases or other factors, and government policies, regulations and tariffs.
|
|
•
|
Loan concentrations in certain industries could negatively impact financial results, if financial results or economic conditions deteriorate.
|
29
|
•
|
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 that may affect our results are discussed under “Part II – Item 1A – Risk Factors” in this report and in the Company’s 2019
Annual Report on Form 10-K under “Item 1.A/ Risk Factors.” Except as required by applicable law and regulation, we assume no obligation to update or revise any forward-looking statements after the date on which they are made.
Introduction
The following is management's discussion and analysis of the financial condition and results of operations at the dates and for the periods
presented in the accompanying consolidated financial statements for the Company. Our 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 preceding financial statements presented under Part I. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results you may expect
for the full year.
The Company currently engages in the general business of banking throughout our service area of Potter, Tioga, Clinton, Bradford and Centre
counties in north central Pennsylvania, Lebanon, Berks, Schuylkill and Lancaster counties in south central Pennsylvania and Allegany County in southern New York and with the recently closed MidCoast acquisition, the Cities of Wilmington and Dover,
Delaware. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. We maintain our central office in Mansfield, Pennsylvania. Presently we
operate 28 banking facilities, 27 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, Fivepointville, State College and two branches near the city of Lebanon, Pennsylvania. The Fivepointville branch was opened in
the first quarter of 2019. The limited branch office is located in Winfield, Pennsylvania. In New York, our office is in Wellsville. With the merger completed in the second quarter, we added three branches in Delaware with two being in the Wilmington
market and one in Dover.
Covid-19 Pandemic Response and Loan Profile
In response to the Covid-19 pandemic, the Company created a payment relief program that includes the following:
|
•
|
Waiver of late fees for March, April and May
|
|
•
|
Interest only payment options for consumers and businesses for 60-90 days.
|
|
•
|
Deferral of principal payments for consumers and businesses in certain
|
industries for 60-120 days
|
•
|
Waiver of early withdrawal penalties through May 1, 2020 on CDs
|
Through April 30, 2020,
we have
modified 169 loans totaling $52.0 million, which have primarily been business related.
Additionally, in accordance with government regulations, we have paused all foreclosure actions during March and April.
30
We also are participating in the Paycheck Protection Program for loans provided under the auspices of the Small Business
Adminstration (SBA). During the first round of the program, we received approval for 422 loans totaling $47.2 million that will earn interest at 1% and will generate fee revenue of approximately $2.0 million over the next 24 months. A portion of
these loans may be forgiven by the SBA depending on the customers usage of the proceeds. We are currently submitting loans as part of the second phase of this program. As
of April 30, 2020, 557 loans have been approved totaling $52.3 million.
The Company tracks industry concentrations to identify risks that could lead to additional credit exposure. As a result of the Covid 19
pandemic, the Company has determined that Hotels/Motels and restaurants represent a higher level of credit risk. At March 31, 2020, the Company has limited loan concentrations to these industries as follows:
|
•
|
Hotels/Motels - $18.9 million or 1.7% of outstanding loans, and 87.6% pass rated
|
|
•
|
Restaurants - $13.1 million or 1.2% of outstanding loans, and 86.8% pass rated
|
Our agricultural relationships are also being strained by the pandemic as demand for certain products has declined and
processing plant issues have resulted in further strains on our customers as a result of the pandemic. Agricultural lending comprises $346.8 million, or 31.7% of outstanding balances as of March 31, 2020.
Risk Management
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 market 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 policy 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, including fraudulent activity
outside the Company’s control. 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 and compliance risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on
the business of the Company. We cannot predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.
Competition
31
The banking industry in the Bank’s service areas continue to be extremely competitive, both among commercial banks and with other financial
service providers such as consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions, agricultural cooperatives and internet entities for loans and deposits. Competition in our north central Pennsylvania
market has increased as a result of other financial institutions looking to expand into new markets. With larger population centers in our central and south central markets, as well as the new Delaware operations, we experience more competition to
gather deposits and to make loans. Mortgage banking firms, financial companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms and even government agencies provide additional competition for loans,
deposits and other financial services. 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.
Trust and Investment Services; Oil and Gas Services
Our Investment and Trust Services Division offers professional trust administration, investment management services, estate planning and
administration, and custody of securities.
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.
Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the Consolidated Balance Sheets since such items are not assets of the
Company. Revenues and fees of the Trust Department are reflected in trust income in the Consolidated Statement of Income. As of March 31, 2020 and December 31, 2019, the Trust Department had $110.4 million and $134.3 million of assets under
management, respectively.
Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such
as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc. The assets associated with these products are not included in the Consolidated Balance Sheets since such
items are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank’s Investment Representatives decreased from $215.4 million at December 31, 2019 to $200.1 million at March 31, 2020. Fee income from the sale of
these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central and
south central Pennsylvania markets.
Results of Operations
Overview of the Income Statement
The Company had net income of $4,531,000 for the first three months of 2020 compared to $4,405,000 for last year’s comparable
period, an increase of $126,000, or 2.9%. Basic earnings per share for the first three months of 2020 were $1.29, compared to $1.25 last year, representing a 3.2% increase. Annualized return on assets and return on equity for the three months of
2020 were 1.24% and 11.48%, respectively, compared with 1.22% and 12.12% for last year’s comparable period.
Net Interest Income
Net interest income, the most significant component of the Company’s earnings, is the amount by which interest income generated from
interest-earning assets exceeds interest expense paid on interest-bearing liabilities.
Net interest income for the first three months of 2020 was $12,890,000, an increase of $975,000, or 8.2%, compared to the same period in
2019. For the first three months of 2020 and 2019, the provision for loan losses totaled $400,000. Consequently, net interest income after the provision for loan losses was $12,490,000 in the first three months of 2020 compared to $11,515,000
during the first three months of 2019.
The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets,
liabilities and stockholders’ equity, the related rates, net interest income and interest rate spread created for the three months ended March 31, 2020 and 2019 on a tax equivalent basis (dollars in thousands):
32
|
|
Analysis of Average Balances and Interest Rates
|
|||||||||||||||||||||||
|
|
Three Months Ended
|
|||||||||||||||||||||||
|
|
March 31, 2020
|
March 31, 2019
|
||||||||||||||||||||||
|
|
Average
|
Average
|
Average
|
Average
|
||||||||||||||||||||
|
|
Balance (1)
|
Interest
|
Rate
|
Balance (1)
|
Interest
|
Rate
|
||||||||||||||||||
|
(dollars in thousands)
|
$
|
$
|
%
|
$
|
$
|
%
|
||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Short-term investments:
|
||||||||||||||||||||||||
|
Interest-bearing deposits at banks
|
9,538
|
3
|
0.17
|
8,759
|
7
|
0.32
|
||||||||||||||||||
|
Total short-term investments
|
9,538
|
3
|
0.17
|
8,759
|
7
|
0.32
|
||||||||||||||||||
|
Interest bearing time deposits at banks
|
14,272
|
92
|
2.59
|
15,498
|
97
|
2.54
|
||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
Taxable
|
179,893
|
1,217
|
2.71
|
196,187
|
1,242
|
2.53
|
||||||||||||||||||
|
Tax-exempt (3)
|
62,555
|
493
|
3.15
|
55,866
|
451
|
3.23
|
||||||||||||||||||
|
Total investment securities
|
242,448
|
1,710
|
2.82
|
252,053
|
1,693
|
2.69
|
||||||||||||||||||
|
Loans (2)(3)(4):
|
||||||||||||||||||||||||
|
Residential mortgage loans
|
215,838
|
2,843
|
5.30
|
215,670
|
2,825
|
5.31
|
||||||||||||||||||
|
Construction
|
17,726
|
223
|
5.06
|
28,439
|
357
|
5.09
|
||||||||||||||||||
|
Commercial Loans
|
415,199
|
5,534
|
5.36
|
401,813
|
5,423
|
5.47
|
||||||||||||||||||
|
Agricultural Loans
|
360,179
|
4,112
|
4.59
|
334,520
|
3,739
|
4.53
|
||||||||||||||||||
|
Loans to state & political subdivisions
|
94,122
|
939
|
0.01
|
100,922
|
978
|
3.93
|
||||||||||||||||||
|
Other loans
|
9,461
|
171
|
7.27
|
9,768
|
184
|
7.64
|
||||||||||||||||||
|
Loans, net of discount
|
1,112,525
|
13,822
|
5.00
|
1,091,132
|
13,506
|
5.05
|
||||||||||||||||||
|
Total interest-earning assets
|
1,378,783
|
15,627
|
4.56
|
1,367,442
|
15,303
|
4.54
|
||||||||||||||||||
|
Cash and due from banks
|
6,263
|
6,741
|
||||||||||||||||||||||
|
Bank premises and equipment
|
16,062
|
16,263
|
||||||||||||||||||||||
|
Other assets
|
56,983
|
54,278
|
||||||||||||||||||||||
|
Total non-interest earning assets
|
79,308
|
77,282
|
||||||||||||||||||||||
|
Total assets
|
1,458,091
|
1,444,724
|
||||||||||||||||||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
NOW accounts
|
332,068
|
437
|
0.53
|
328,357
|
578
|
0.71
|
||||||||||||||||||
|
Savings accounts
|
225,985
|
184
|
0.33
|
211,149
|
184
|
0.35
|
||||||||||||||||||
|
Money market accounts
|
174,294
|
393
|
0.91
|
161,424
|
505
|
1.27
|
||||||||||||||||||
|
Certificates of deposit
|
261,278
|
973
|
1.50
|
293,385
|
1,047
|
1.45
|
||||||||||||||||||
|
Total interest-bearing deposits
|
993,625
|
1,987
|
0.93
|
994,315
|
2,314
|
0.94
|
||||||||||||||||||
|
Other borrowed funds
|
93,849
|
462
|
1.98
|
113,829
|
788
|
2.81
|
||||||||||||||||||
|
Total interest-bearing liabilities
|
1,087,474
|
2,449
|
0.91
|
1,108,144
|
3,102
|
1.14
|
||||||||||||||||||
|
Demand deposits
|
196,604
|
176,989
|
||||||||||||||||||||||
|
Other liabilities
|
16,082
|
14,199
|
||||||||||||||||||||||
|
Total non-interest-bearing liabilities
|
212,686
|
191,188
|
||||||||||||||||||||||
|
Stockholders' equity
|
157,931
|
145,392
|
||||||||||||||||||||||
|
Total liabilities & stockholders' equity
|
1,458,091
|
1,444,724
|
||||||||||||||||||||||
|
Net interest income
|
13,178
|
12,201
|
||||||||||||||||||||||
|
Net interest spread (5)
|
3.65
|
%
|
3.40
|
%
|
||||||||||||||||||||
|
Net interest income as a percentage
|
||||||||||||||||||||||||
|
of average interest-earning assets
|
3.84
|
%
|
3.62
|
%
|
||||||||||||||||||||
|
Ratio of interest-earning assets
|
||||||||||||||||||||||||
|
to interest-bearing liabilities
|
127
|
%
|
123
|
%
|
||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
(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 21%.
|
||||||||||||||||||||||||
|
(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 revenue is shown on a tax-equivalent basis (non-Gaap) for proper comparison using a federal
statutory income tax rate of 21% for the three months ended March 31, 2020 and 2019. 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 Company’s Federal statutory rate during the corresponding period. The following table represents the
adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended March 31, 2020 and 2019 (in thousands):
33
|
|
For the Three Months
|
|||||||
|
|
Ended March 31,
|
|||||||
|
|
2020
|
2019
|
||||||
|
Interest and dividend income from investment securities
|
||||||||
|
and interest bearing deposits at banks (non-tax adjusted)
|
$
|
1,701
|
$
|
1,703
|
||||
|
Tax equivalent adjustment
|
104
|
94
|
||||||
|
Interest and dividend income from investment securities
|
||||||||
|
and interest bearing deposits at banks (tax equivalent basis)
|
$
|
1,805
|
$
|
1,797
|
||||
|
|
||||||||
|
|
||||||||
|
|
||||||||
|
Interest and fees on loans (non-tax adjusted)
|
$
|
13,638
|
$
|
13,314
|
||||
|
Tax equivalent adjustment
|
184
|
192
|
||||||
|
Interest and fees on loans (tax equivalent basis)
|
$
|
13,822
|
$
|
13,506
|
||||
|
|
||||||||
|
|
||||||||
|
|
||||||||
|
Total interest income
|
$
|
15,339
|
$
|
15,017
|
||||
|
Total interest expense
|
2,449
|
3,102
|
||||||
|
Net interest income
|
12,890
|
11,915
|
||||||
|
Total tax equivalent adjustment
|
288
|
286
|
||||||
|
Net interest income (tax equivalent basis)
|
$
|
13,178
|
$
|
12,201
|
||||
The following table shows the tax-equivalent effect of changes in volume and rate on interest income and expense (in thousands):
|
|
Three months ended March 31, 2020 vs 2019 (1)
|
|||||||||||
|
|
Change in
|
Change
|
Total
|
|||||||||
|
|
Volume
|
in Rate
|
Change
|
|||||||||
|
Interest Income:
|
||||||||||||
|
Short-term investments:
|
||||||||||||
|
Interest-bearing deposits at banks
|
$
|
1
|
$
|
(5
|
)
|
$
|
(4
|
)
|
||||
|
Interest bearing time deposits at banks
|
(7
|
)
|
2
|
(5
|
)
|
|||||||
|
Investment securities:
|
||||||||||||
|
Taxable
|
(143
|
)
|
118
|
(25
|
)
|
|||||||
|
Tax-exempt
|
52
|
(10
|
)
|
42
|
||||||||
|
Total investments
|
(91
|
)
|
108
|
17
|
||||||||
|
Loans:
|
||||||||||||
|
Residential mortgage loans
|
26
|
(8
|
)
|
18
|
||||||||
|
Construction
|
(132
|
)
|
(2
|
)
|
(134
|
)
|
||||||
|
Commercial Loans
|
218
|
(107
|
)
|
111
|
||||||||
|
Agricultural Loans
|
323
|
50
|
373
|
|||||||||
|
Loans to state & political subdivisions
|
(60
|
)
|
21
|
(39
|
)
|
|||||||
|
Other loans
|
(4
|
)
|
(9
|
)
|
(13
|
)
|
||||||
|
Total loans, net of discount
|
371
|
(55
|
)
|
316
|
||||||||
|
Total Interest Income
|
274
|
50
|
324
|
|||||||||
|
Interest Expense:
|
||||||||||||
|
Interest-bearing deposits:
|
||||||||||||
|
NOW accounts
|
13
|
(154
|
)
|
(141
|
)
|
|||||||
|
Savings accounts
|
28
|
(28
|
)
|
-
|
||||||||
|
Money Market accounts
|
51
|
(163
|
)
|
(112
|
)
|
|||||||
|
Certificates of deposit
|
(109
|
)
|
35
|
(74
|
)
|
|||||||
|
Total interest-bearing deposits
|
(17
|
)
|
(310
|
)
|
(327
|
)
|
||||||
|
Other borrowed funds
|
(116
|
)
|
(210
|
)
|
(326
|
)
|
||||||
|
Total interest expense
|
(133
|
)
|
(520
|
)
|
(653
|
)
|
||||||
|
Net interest income
|
$
|
407
|
$
|
570
|
$
|
977
|
||||||
|
(1)
The portion of the total change attributable to both volume and rate
changes, which
can not be separated, has been allocated proportionally to the change due to volume
and the change due to rate prior to allocation.
|
||||||||||||
Tax equivalent net interest income increased from $12,201,000 for the three month
period ended March 31, 2019 to $13,178,000 for the three month period ended March 31, 2020, an increase of $977,000. The tax equivalent net interest margin increased from 3.62% for the first three months of 2019 to 3.84% for the comparable period in
2020. The increase is primarily caused by the decrease in the cost on interest-bearing liabilities and the increase in average outstanding loans.
34
Total tax equivalent interest income for the 2020 three month period increased
$324,000 as compared to the 2019 three month period. This increase was a result of an increase of $274,000 due to a change in volume as average interest-bearing assets increased $11.3 million and due to an increase in the yield on interest-earning
assets of 2 basis points, which corresponds to an increase of $50,000. As a result of converting investment assets to loans, the yield on average interest earning assets increased 2 basis points from 4.54% to 4.56%.
Tax equivalent investment income for the three months ended March 31, 2020 increased
$17,000 over the same period last year. The primary cause of the increase was an increase in the average yield on investment securities of 13 basis points.
|
•
|
The yield on taxable securities increased 18 basis points from 2.53% to 2.71% as a result of calls of investments that were
purchased at a discount. This resulted in an increase in investment income of $118,000. The average balance of taxable securities decreased $16.3 million, which resulted in a decrease in investment income of $143,000.
|
|
•
|
The average balance of tax-exempt securities increased by $6.7 million, which resulted in an increase in investment income of
$52,000. The yield on tax-exempt securities decreased 8 basis points from 3.23% to 3.15%, which corresponds to a decrease in interest income of $10,000. The yield decrease was attributable to higher yielding securities being called and
maturing. For a discussion of the Company’s current investment strategy, see the “Financial Condition – Investments”.
|
Total loan interest income increased $316,000 for the three months ended March 31,
2020 compared to the same period last year, as a result of loan growth achieved in 2019 that occurred primarily in our central and south central Pennsylvania markets.
|
•
|
The average balance of commercial loans increased $13.4 million from a year ago. The growth was attributable to organic growth in
our central and south central Pennsylvania markets as well as completed construction projects. This had a positive impact of $218,000 on total interest income due to volume. The yield decreased 11 basis points to 5.36%, which decreased loan
interest income $107,000.
|
|
•
|
Interest income on agricultural loans increased $373,000 from 2019 to 2020. The increase in the average balance of agricultural
loans of $25.7 million is primarily attributable to loan growth in our central and south central Pennsylvania markets. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $323,000.
The yield on agricultural loans increased 6 basis points to 4.59%, which increased loan interest income $50,000.
|
|
•
|
The average balance of construction loans decreased $10.7 million from a year ago as a result of several large commercial and
agricultural construction projects being completed in 2019. This resulted in a decrease of $132,000 on total interest income due to volume.
|
Total interest expense decreased $653,000 for the three months ended March 31, 2020
compared with the comparative period last year primarily as a result of a decrease in the cost of interest-bearing liabilities. Interest expense decreased $520,000 due to rate as a result of a decrease in the average rate paid on interest-bearing
liabilities from 1.14% to 0.91%. The decrease was driven by the Federal Reserve interest arate cuts in the second half of 2019 and the first quarter of 2020.
|
•
|
The average balance of interest bearing deposits decreased $690,000 from March 31, 2019 to March 31, 2020. The primary decrease was in certificates of deposits, which
decreased $32.1 million due to a decrease in brokered certificate balances of $14.4 million. We also had a municipal customer utilize maturing funds to complete a construction project. We experienced increases in NOW accounts of $3.7
million, savings accounts of $14.8 million and money market accounts of $12.9 million. The cumulative effect of these volume changes was a decrease in interest expense of $17,000. (see also “Financial Condition – Deposits”). The average
rate paid on interest bearing deposits was 0.93% for the first three months of 2020 and 0.94% for the comparable period in 2019. This resulted in a decrease in interest expense of $310,000. The decrease was due to the Federal Reserve
cutting interest rates during 2019 and 2020.
|
35
|
•
|
The average balance of other borrowed funds decreased $20.0 million from a year ago. This resulted in a decrease in interest expense
of $116,000. There was a decrease in the average rate paid on other borrowed funds from 2.81% to 1.98% due to the decrease in the overnight borrowing rate as a result of the Federal Reserve interest rate decreases in 2019 and 2020 resulting
in a decrease in interest expense of $210,000.
|
Provision for Loan Losses
For the three month period ended March 31, 2020 and 2019, we recorded a provision for loan losses of $400,000. The provision remained
consistent in 2020 due to the uncertainty in the economic environment due to the Covid 19 pandemic, which has resulted in an increase in unemployment claims, which offset the fact that loans decreased during the first quarter of 2020. (see “Financial
Condition – Allowance for Loan Losses and Credit Quality Risk”).
Non-interest Income
The following table shows the breakdown of non-interest income for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
Three months ended March 31,
|
Change
|
||||||||||||||
|
|
2020
|
2019
|
Amount
|
%
|
||||||||||||
|
Service charges
|
$
|
1,081
|
$
|
1,099
|
$
|
(18
|
)
|
(1.6
|
)
|
|||||||
|
Trust
|
198
|
232
|
(34
|
)
|
(14.7
|
)
|
||||||||||
|
Brokerage and insurance
|
340
|
293
|
47
|
16.0
|
||||||||||||
|
Gains on loans sold
|
167
|
99
|
68
|
68.7
|
||||||||||||
|
Equity security (losses) gains, net
|
(254
|
)
|
11
|
(265
|
)
|
(2,409.1
|
)
|
|||||||||
|
Earnings on bank owned life insurance
|
156
|
151
|
5
|
3.3
|
||||||||||||
|
Other
|
163
|
148
|
15
|
10.1
|
||||||||||||
|
Total
|
$
|
1,851
|
$
|
2,033
|
$
|
(182
|
)
|
(9.0
|
)
|
|||||||
Non-interest income for the three months ended March 31, 2020 totaled $1,851,000, a decrease of $182,000 when compared to the same period
in 2019. During the first three months of 2020, net equity security losses amounted to $254,000 as a result of market losses associated with the Covid-19 pandemic compared to gains of $11,000 last year. We did not sell any available for sale
securities or equity securities in the first three months of 2020 or 2019.
The increase in brokerage and insurance revenues for the first three months of 2020 is attributable to growth in our south central market.
The decrease in Trust revenues is due to estate settlement fees and lower asset levels in 2020 compared to 2019. The gains on loans sold is attributable to a $1.1 million increase in loans sold.
Non-interest Expense
The following tables reflect the breakdown of non-interest expense for the three months ended March 31, 2020 and 2019 (dollars in thousands):
36
|
Three months ended
|
||||||||||||||||
|
|
March 31,
|
Change
|
||||||||||||||
|
|
2020
|
2019
|
Amount
|
%
|
||||||||||||
|
Salaries and employee benefits
|
$
|
5,414
|
$
|
5,029
|
$
|
385
|
7.7
|
|||||||||
|
Occupancy
|
526
|
592
|
(66
|
)
|
(11.1
|
)
|
||||||||||
|
Furniture and equipment
|
131
|
155
|
(24
|
)
|
(15.5
|
)
|
||||||||||
|
Professional fees
|
325
|
442
|
(117
|
)
|
(26.5
|
)
|
||||||||||
|
FDIC insurance
|
71
|
111
|
(40
|
)
|
(36.0
|
)
|
||||||||||
|
Pennsylvania shares tax
|
275
|
275
|
-
|
-
|
||||||||||||
|
Amortization of intangibles
|
50
|
66
|
(16
|
)
|
(24.2
|
)
|
||||||||||
|
Merger and acquisition
|
376
|
-
|
376
|
NA
|
||||||||||||
|
Software expenses
|
247
|
227
|
20
|
8.8
|
||||||||||||
|
ORE expenses
|
32
|
107
|
(75
|
)
|
(70.1
|
)
|
||||||||||
|
Other
|
1,474
|
1,318
|
156
|
11.8
|
||||||||||||
|
Total
|
$
|
8,921
|
$
|
8,322
|
$
|
599
|
7.2
|
|||||||||
Non-interest expenses increased $599,000 for the three months ended March 31, 2020 compared to the same period in 2019. Salaries and
employee benefits increased $385,000 or 7.7%. The increase was due to merit increases effective at the beginning of 2020 and increased health care expenses.
The decrease in occupancy expenses is due to the closure of one branch in the first quarter of 2020
and lower snow plowing expenses. The decrease in professional fees was due to fees incurred in the first quarter of 2019 to settle litigation with a customer in bankruptcy. The decrease in furniture and fixture is due to replacing a significant
number of computers in 2019. The decrease in OREO expenses is due to improved rental revenues to offset expenses. The increase in merger and acquisition costs was due to costs associated with the MidCoast acquisition that closed in April 2020. The
decrease in FDIC insurance was due to credit received from the FDIC as the Deposit Insurance Fund reserve ratio exceeded 1.38%.
Provision for Income Taxes
The provision for income taxes was $889,000 for the three month period ended March 31, 2020 compared to $821,000 for the same period in 2019.
The increase is primarily attributable to the increase in income before the provision for income taxes of $194,000 for the comparable periods. Through management of our municipal loan and bond portfolios, management is focused on minimizing our
effective tax rate. Our effective tax rate was 16.4% and 15.7% for the first three months of 2020 and 2019, respectively, compared to the statutory rate of 21%.
We are invested in four limited partnerships that have established low-income housing projects in our market areas. We anticipate recognizing
an aggregate of $388,000 of tax credits over the next 2.75 years, with an additional $106,000 anticipated to be recognized during 2020.
Financial Condition
Total assets were $1.46 billion at March 31, 2020, a decrease of $1.6 million from $1.47 billion at December 31, 2019. Cash and cash
equivalents increased $3.0 million to $21.5 million. Available for Sale securities increased $17.1 million and net loans decreased $22.3 million to $1.08 billion at March 31, 2020. Total deposits decreased $6.0 million to $1.21 billion since
year-end 2019, while borrowed funds decreased $1.6 million to $83.6 million.
Cash and Cash Equivalents
Cash and cash equivalents totaled $21.5 million at March 31, 2020 compared to $18.5 million at
December 31, 2019, an increase of $3.0 million.
Management actively measures and evaluates its liquidity position 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 including the Bank’s core deposits, 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.
37
Investments
The following table shows the composition of the investment portfolio (including debt and equity securities) as of March 31, 2020 and December
31, 2019 (dollars in thousands):
|
March 31, 2020
|
December 31, 2019
|
|||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U. S. Agency securities
|
$
|
77,510
|
30.0
|
$
|
84,863
|
35.1
|
||||||||||
|
U. S. Treasury notes
|
28,313
|
11.0
|
27,661
|
11.5
|
||||||||||||
|
Obligations of state & political subdivisions
|
74,778
|
28.9
|
61,455
|
25.5
|
||||||||||||
|
Corporate obligations
|
3,347
|
1.3
|
3,328
|
1.4
|
||||||||||||
|
Mortgage-backed securities in
|
||||||||||||||||
|
government sponsored entities
|
73,840
|
28.6
|
63,399
|
26.2
|
||||||||||||
|
Equity securities
|
649
|
0.2
|
701
|
0.3
|
||||||||||||
|
Total
|
$
|
258,437
|
100.0
|
$
|
241,407
|
100.0
|
||||||||||
|
March 31, 2020/
|
||||||||
|
December 31, 2019
|
||||||||
|
Change
|
||||||||
|
|
Amount
|
%
|
||||||
|
Debt securities:
|
||||||||
|
U. S. Agency securities
|
$
|
(7,353
|
)
|
(8.7
|
)
|
|||
|
U. S. Treasury notes
|
652
|
2.4
|
||||||
|
Obligations of state & political subdivisions
|
13,323
|
21.7
|
||||||
|
Corporate obligations
|
19
|
0.6
|
||||||
|
Mortgage-backed securities in
|
||||||||
|
government sponsored entities
|
10,441
|
16.5
|
||||||
|
Equity securities
|
(52
|
)
|
(7.4
|
)
|
||||
|
Total
|
$
|
17,030
|
7.1
|
|||||
Our investment portfolio increased by $17.0 million, or 7.1%, from December 31, 2019 to March 31, 2020. During 2020, we purchased $5.8 million
of U.S. agency obligations, $23.4 million state and political securities, $12.7 million of mortgage backed securities and $202,000 of equity securities, which was offset by $3.8 million of principal repayments and $25.2 million of calls and
maturities that occurred during the first three months of 2020. As a result of changes in interest rates, the unrealized gain on available for sale investment portfolio increased $4.3 million. We did not sell any investments during the first three
months of 2020. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the three month period ended March 31, 2020 yielded 2.82%, compared to 2.69% in the
comparable period in 2019 on a tax equivalent basis.
The investment strategy for 2020 has been to utilize cashflows from the investment and loan portfolios to purchase mortgage
backed securities in government sponsored entities and obligations of state and political securities. The increase in the investment portfolio was in response to opportunities provided by the Covid-19 pandemic that allowed the Company to purchase
high quality municipal securities and mortgage backed securities with relatively large spreads compared to recent periods. 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 for various rate environments, while providing sufficient cashflows to meet liquidity needs.
Management continues to monitor the earnings performance and the liquidity of the investment portfolio on a regular basis. Through active
balance sheet management and analysis of the investment portfolio, the Company believes it maintains sufficient liquidity to satisfy depositor withdrawal requirements and various credit needs of its customers.
38
Loans
The following table shows the composition of the loan portfolio as of March 31, 2020 and December 31, 2019 (dollars in thousands):
|
|
March 31,
|
December 31,
|
||||||||||||||
|
|
2020
|
2019
|
||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Real estate:
|
||||||||||||||||
|
Residential
|
$
|
216,179
|
19.8
|
$
|
217,088
|
19.5
|
||||||||||
|
Commercial
|
338,490
|
30.9
|
342,023
|
30.7
|
||||||||||||
|
Agricultural
|
300,606
|
27.5
|
311,464
|
27.9
|
||||||||||||
|
Construction
|
17,926
|
1.6
|
15,519
|
1.4
|
||||||||||||
|
Consumer
|
9,533
|
0.9
|
9,947
|
0.8
|
||||||||||||
|
Other commercial loans
|
71,038
|
6.5
|
69,970
|
6.3
|
||||||||||||
|
Other agricultural loans
|
46,170
|
4.2
|
55,112
|
4.9
|
||||||||||||
|
State & political subdivision loans
|
93,778
|
8.6
|
94,446
|
8.5
|
||||||||||||
|
Total loans
|
1,093,720
|
100.0
|
1,115,569
|
100.0
|
||||||||||||
|
Less allowance for loan losses
|
14,247
|
13,845
|
||||||||||||||
|
Net loans
|
$
|
1,079,473
|
$
|
1,101,724
|
||||||||||||
|
|
||||||||||||||||
|
|
March 31, 2020/
|
|||||||||||||||
|
|
December 31, 2019
|
|||||||||||||||
|
|
Change
|
|||||||||||||||
|
|
Amount
|
%
|
||||||||||||||
|
Real estate:
|
||||||||||||||||
|
Residential
|
$
|
(909
|
)
|
(0.4
|
)
|
|||||||||||
|
Commercial
|
(3,533
|
)
|
(1.0
|
)
|
||||||||||||
|
Agricultural
|
(10,858
|
)
|
(3.5
|
)
|
||||||||||||
|
Construction
|
2,407
|
15.5
|
||||||||||||||
|
Consumer
|
(414
|
)
|
(4.2
|
)
|
||||||||||||
|
Other commercial loans
|
1,068
|
1.5
|
||||||||||||||
|
Other agricultural loans
|
(8,942
|
)
|
(16.2
|
)
|
||||||||||||
|
State & political subdivision loans
|
(668
|
)
|
(0.7
|
)
|
||||||||||||
|
Total loans
|
$
|
(21,849
|
)
|
(2.0
|
)
|
|||||||||||
The Bank’s lending efforts have historically been focused in north central Pennsylvania and southern New York. The
acquisition of FNB in 2015 expanded the focus into Lebanon, Lancaster and Schuylkill County markets in south central Pennsylvania. The opening of the Winfield office in 2016 and the acquisition of the State College branch in 2017 has increased our
presence in the central Pennsylvania market. The recently closed MidCoast acquisition has expanded our lending market into Wilmington and Dover, Delaware. We originate loans primarily through direct loans to our existing customer base, with new
customers generated through the strong relationships our lending teams have with their customers and our lenders expertise in certain areas, 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. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors. As of March 31, 2020, the Company had one industry specific loan concentration to the dairy industry,
totaling $149.7 million or 13.7% of total loans.
During the first three months of 2020, the primary driver of the decrease in the loan portfolio was two large
relationships paying off in the first quarter. Commercial and agricultural loan demand is subject to significant competitive pressures, the yield curve, and overall national, regional and local economic conditions.
While the Bank lends to companies that service the exploration for natural gas in our market area, the Bank has not
originated any loans to companies performing the actual drilling and exploration activities. Loans made by the Bank are to service industry customers which include trucking companies, stone quarries and other support businesses, favoring customers
that had a relationship with the Bank prior to supporting the exploration for natural gas. We also have originated loans to businesses and individuals for restaurants, hotels and apartment rentals that have been developed and expanded to meet the
housing and living needs of the gas industry workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities have been originated in accordance with specific policies and procedures for
lending to these entities, which include more stringent loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.
39
Residential real estate loans decreased slightly during the first three months of 2020. Loan demand for conforming mortgages, which the
Company typically sells on the secondary market, increased slightly in 2020 when compared to 2019. For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income.
In response to the Covid-19 pandemic, the Company has implemented programs to assist our customers. These include allowing customers to make
interest only payments for up to 60 days and allowing certain customers in specific industries like hospitality to defer both principal and interest payments for up to 120 days. The Company has also agreed to waive late fees for March, April and May
of 2020.
Allowance for Loan Losses
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 at the balance sheet date. 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 allowance for loan losses and non-performing loans and assets as of and for the three months ended March 31, 2020 and for the years ended December 31, 2019, 2018, 2017 and 2016 (dollars in thousands):
40
|
March 31
|
December 31,
|
|||||||||||||||||||
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
|||||||||||||||
|
Balance
|
||||||||||||||||||||
|
at beginning of period
|
$
|
13,845
|
$
|
12,884
|
$
|
11,190
|
$
|
8,886
|
$
|
7,106
|
||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Residential
|
-
|
32
|
118
|
107
|
85
|
|||||||||||||||
|
Commercial
|
1
|
578
|
66
|
41
|
100
|
|||||||||||||||
|
Agricultural
|
-
|
-
|
-
|
30
|
-
|
|||||||||||||||
|
Consumer
|
8
|
49
|
40
|
130
|
100
|
|||||||||||||||
|
Other commercial loans
|
-
|
38
|
91
|
-
|
55
|
|||||||||||||||
|
Other agricultural loans
|
-
|
60
|
50
|
5
|
-
|
|||||||||||||||
|
Total loans charged-off
|
9
|
757
|
365
|
313
|
340
|
|||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Residential
|
-
|
-
|
69
|
-
|
-
|
|||||||||||||||
|
Commercial
|
1
|
-
|
3
|
11
|
479
|
|||||||||||||||
|
Agricultural
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Consumer
|
8
|
33
|
31
|
49
|
88
|
|||||||||||||||
|
Other commercial loans
|
2
|
10
|
30
|
16
|
33
|
|||||||||||||||
|
Other agricultural loans
|
-
|
-
|
1
|
1
|
-
|
|||||||||||||||
|
Total loans recovered
|
11
|
43
|
134
|
77
|
600
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Net loans (recovered) charged-off
|
(2
|
)
|
714
|
231
|
236
|
(260
|
)
|
|||||||||||||
|
Provision charged to expense
|
400
|
1,675
|
1,925
|
2,540
|
1,520
|
|||||||||||||||
|
Balance at end of year
|
$
|
14,247
|
$
|
13,845
|
$
|
12,884
|
$
|
11,190
|
$
|
8,886
|
||||||||||
|
|
||||||||||||||||||||
|
Loans outstanding at end of period
|
$
|
1,093,720
|
$
|
1,115,569
|
$
|
1,081,883
|
$
|
1,000,525
|
$
|
799,611
|
||||||||||
|
Average loans outstanding, net
|
$
|
1,112,525
|
$
|
1,102,565
|
$
|
1,044,250
|
$
|
883,355
|
$
|
725,881
|
||||||||||
|
Non-performing assets:
|
||||||||||||||||||||
|
Non-accruing loans
|
$
|
11,302
|
$
|
11,536
|
$
|
13,724
|
$
|
10,171
|
$
|
11,454
|
||||||||||
|
Accrual loans - 90 days or more past due
|
164
|
487
|
68
|
555
|
405
|
|||||||||||||||
|
Total non-performing loans
|
$
|
11,466
|
$
|
12,023
|
$
|
13,792
|
$
|
10,726
|
$
|
11,859
|
||||||||||
|
Foreclosed assets held for sale
|
3,056
|
3,404
|
601
|
1,119
|
1,036
|
|||||||||||||||
|
Total non-performing assets
|
$
|
14,522
|
$
|
15,427
|
$
|
14,393
|
$
|
11,845
|
$
|
12,895
|
||||||||||
|
|
||||||||||||||||||||
|
Annualized net charge-offs (recoveries) to average loans
|
0.00
|
%
|
0.06
|
%
|
0.02
|
%
|
0.03
|
%
|
(0.04
|
%)
|
||||||||||
|
Allowance to total loans
|
1.30
|
%
|
1.24
|
%
|
1.19
|
%
|
1.12
|
%
|
1.11
|
%
|
||||||||||
|
Allowance to total non-performing loans
|
124.25
|
%
|
115.15
|
%
|
93.42
|
%
|
104.33
|
%
|
74.93
|
%
|
||||||||||
|
Non-performing loans as a percent of loans
|
||||||||||||||||||||
|
net of unearned income
|
1.05
|
%
|
1.08
|
%
|
1.27
|
%
|
1.07
|
%
|
1.48
|
%
|
||||||||||
|
Non-performing assets as a percent of loans
|
||||||||||||||||||||
|
net of unearned income
|
1.33
|
%
|
1.38
|
%
|
1.33
|
%
|
1.18
|
%
|
1.61
|
%
|
||||||||||
Management believes that it uses the best information available when establishing the allowance for loan losses and that the allowance for
loan losses is adequate as of March 31, 2020. 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. 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 and other commercial and agricultural loans, on non-accrual
are evaluated quarterly for impairment.
41
The allowance for loan losses was $14,247,000 or 1.30% of total loans as of March 31, 2020 as compared to $13,845,000 or 1.24% of loans as of
December 31, 2019. The $402,000 increase in the allowance during the first three months of 2020 is the result of a $400,000 provision and net recoveries of $2,000. The following table shows the distribution of the allowance for loan losses and the
percentage of loans compared to total loans by loan category as of March 31, 2020 and December 31, 2019, 2018, 2017 and 2016 (dollars in thousands):
|
|
March 31,
|
December 31
|
||||||||||||||||||||||||||||||||||||||
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
|||||||||||||||||||||||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
|
$
|
1,154
|
19.8
|
$
|
1,114
|
19.4
|
$
|
1,105
|
19.9
|
$
|
1,049
|
21.4
|
$
|
1,064
|
25.9
|
|||||||||||||||||||||||||
|
Commercial
|
4,729
|
30.9
|
4,549
|
30.7
|
4,115
|
29.5
|
3,867
|
30.8
|
3,589
|
31.6
|
||||||||||||||||||||||||||||||
|
Agricultural
|
4,878
|
27.5
|
5,022
|
27.9
|
4,264
|
26.3
|
3,143
|
24.0
|
1,494
|
15.5
|
||||||||||||||||||||||||||||||
|
Construction
|
56
|
1.6
|
43
|
1.4
|
58
|
3.1
|
23
|
1.3
|
47
|
3.2
|
||||||||||||||||||||||||||||||
|
Consumer
|
117
|
0.9
|
112
|
0.9
|
120
|
0.9
|
124
|
1.0
|
122
|
1.4
|
||||||||||||||||||||||||||||||
|
Other commercial loans
|
835
|
6.5
|
1,255
|
6.3
|
1,354
|
6.9
|
1,272
|
7.2
|
1,327
|
7.3
|
||||||||||||||||||||||||||||||
|
Other agricultural loans
|
1,297
|
4.2
|
961
|
4.9
|
752
|
3.9
|
492
|
3.8
|
312
|
2.9
|
||||||||||||||||||||||||||||||
|
State & political subdivision loans
|
558
|
8.6
|
536
|
8.5
|
762
|
9.5
|
816
|
10.5
|
833
|
12.2
|
||||||||||||||||||||||||||||||
|
Unallocated
|
623
|
N/A
|
253
|
N/A
|
354
|
N/A
|
404
|
N/A
|
98
|
N/A
|
||||||||||||||||||||||||||||||
|
Total allowance for loan losses
|
$
|
14,247
|
100.0
|
$
|
13,845
|
100.0
|
$
|
12,884
|
100.0
|
$
|
11,190
|
100.0
|
$
|
8,886
|
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 total 58.4% of the loan portfolio, 67.4% of the allowance is assigned to this segment of the loan portfolio as these loans have
more inherent credit risk than residential real estate or loans to state and political subdivisions.
The following table identifies amounts of loans contractually past due 30 to 89 days and non-performing loans by loan category, as well as the
change from December 31, 2019 to March 31, 2020 in non-performing loans(dollars in thousands). Non-performing loans include accruing 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.
|
|
March 31, 2020
|
December 31, 2019
|
||||||||||||||||||||||||||||||
|
|
Non-Performing Loans
|
Non-Performing Loans
|
||||||||||||||||||||||||||||||
|
|
30 - 89 Days
|
90 Days
|
30 - 89 Days
|
90 Days
|
||||||||||||||||||||||||||||
|
|
Past Due
|
Past Due
|
Non-
|
Total Non-
|
Past Due
|
Past Due
|
Non-
|
Total Non-
|
||||||||||||||||||||||||
|
(in thousands)
|
Accruing
|
Accruing
|
accrual
|
Performing
|
Accruing
|
Accruing
|
accrual
|
Performing
|
||||||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||||||||||
|
Residential
|
$
|
1,025
|
$
|
-
|
$
|
971
|
$
|
971
|
$
|
933
|
$
|
2
|
$
|
962
|
$
|
964
|
||||||||||||||||
|
Commercial
|
1,609
|
55
|
5,038
|
5,093
|
1,225
|
-
|
5,080
|
5,080
|
||||||||||||||||||||||||
|
Agricultural
|
201
|
98
|
2,464
|
2,562
|
118
|
299
|
2,578
|
2,877
|
||||||||||||||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
|
Consumer
|
140
|
11
|
8
|
19
|
123
|
2
|
6
|
8
|
||||||||||||||||||||||||
|
Other commercial loans
|
134
|
-
|
1,786
|
1,786
|
283
|
184
|
1,837
|
2,021
|
||||||||||||||||||||||||
|
Other agricultural loans
|
50
|
-
|
1,035
|
1,035
|
29
|
-
|
1,073
|
1,073
|
||||||||||||||||||||||||
|
Total nonperforming loans
|
$
|
3,159
|
$
|
164
|
$
|
11,302
|
$
|
11,466
|
$
|
2,711
|
$
|
487
|
$
|
11,536
|
$
|
12,023
|
||||||||||||||||
42
|
|
||||||||
|
|
Change in Non-Performing Loans
|
|||||||
|
|
March 31, 2020 /December 31, 2019
|
|||||||
|
(in thousands)
|
Amount
|
%
|
||||||
|
Real estate:
|
||||||||
|
Residential
|
$
|
7
|
0.7
|
|||||
|
Commercial
|
13
|
0.3
|
||||||
|
Agricultural
|
(315
|
)
|
(10.9
|
)
|
||||
|
Construction
|
-
|
NA
|
||||||
|
Consumer
|
11
|
137.5
|
||||||
|
Other commercial loans
|
(235
|
)
|
(11.6
|
)
|
||||
|
Other agricultural loans
|
(38
|
)
|
(3.5
|
)
|
||||
|
Total nonperforming loans
|
$
|
(557
|
)
|
(4.6
|
)
|
|||
For the three months ended March 31, 2020 and 2019, we recorded a provision for loan losses of $400,000. Non-performing loans decreased
$557,000 or 4.6%, from December 31, 2019 to March 31, 2020, primarily due to two customer relationships that were 90 days past due and accruing returning to current status in the first quarter of 2020. Approximately 59.1% of the Bank’s non-performing
loans at March 31, 2020 are associated with the following three customer relationships:
|
•
|
A commercial loan relationship with $2.4 million outstanding, and additional letters of credit of $2.1 million available, secured by undeveloped
land, stone quarries and equipment, was on non-accrual status as of March 31, 2020. The customer is an excavation company and expanded to meet the needs of the natural gas industry for stone for pad and road development. The decreased
exploration activities have significantly impacted the cash flows of the customer. During 2019, the Company had the underlying equipment collateral appraised. The 2019 appraisal indicated a decrease in collateral values compared to the
appraisal ordered for the loan origination and an appraisal performed in 2017, however, the loan is still considered well secured on a loan to value basis. Management determined that no specific reserve was required as of March 31, 2020.
|
|
•
|
An agricultural customer with a total loan relationship of $2.7 million, secured by real estate, equipment and cattle, was on non-accrual status as
of March 31, 2020. The customer declared bankruptcy during the fourth quarter of 2018 and developed a workout plan that was approved in the fourth quarter of 2019 and resulted in monthly payments resuming in late 2019. Included within these
loans to this customer are $1,022,000 of loans which are subject to Farm Service Agency guarantees. Depressed milk prices have created cash flow difficulties for this customer. Absent a sizable and sustained increase in milk prices, which
is not assured, we will need to rely upon the collateral for repayment of interest and principal. As of March 31, 2020, there was a specific reserve of $199,000 for this relationship.
|
|
•
|
A commercial customer with a loan relationship of $1.7 million, secured by commercial real estate, business assets and vehicles, was on non-accrual
status as of March 31, 2020. The business expanded into a new market, which has not grown as originally expected and has created cashflow issues. Management reviewed the collateral and determined that no specific reserve was required as of
March 31, 2020.
|
Management of the Company believes that the allowance for loan losses as of March
31, 2020 is adequate, which is based on the following factors:
|
•
|
Three loan relationships comprised 59.1% of the non-performing loan balance, which had approximately $199,000 of specific reserves,
as of March 31, 2020
.
|
|
•
|
The
Company has a history of low charge-offs, which have returned to lower levels in the first
quarter of 2020 after being slightly elevated in 2019. Net charge-offs for the first quarter of 2020 were 0.0% and were 0.06% for all of 2019.
|
Bank Owned Life Insurance
43
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 March 31, 2020 and December 31, 2019, the cash
surrender value of the life insurance was $28.3 million and $28.1 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 $156,000 and $151,000 for the three month periods ended March 31, 2020 and 2019, 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.
The Company agreements that were purchased directly from insurance companies are structured 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 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 split-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 March 31, 2020 and December 31, 2019, included in other liabilities on the Consolidated Balance
Sheet was a liability of $685,000 and $684,000, respectively, for the obligation under the split-dollar benefit agreements.
Premises and Equipment
Premises and equipment increased $289,000 to $16.2 million as of March 31, 2020 from December 31, 2019. This occurred primarily as a result of
purchases made in the first quarter of 2020 offset by normal depreciation expense.
Deposits
The following table shows the composition of deposits as of March 31, 2020 and December 31, 2019 (dollars in thousands):
|
|
March 31,
|
December 31,
|
||||||||||||||
|
|
2020
|
2019
|
||||||||||||||
|
|
Amount
|
%
|
Amount
|
%
|
||||||||||||
|
Non-interest-bearing deposits
|
$
|
204,489
|
17.0
|
$
|
203,793
|
16.9
|
||||||||||
|
NOW accounts
|
342,396
|
28.4
|
340,273
|
28.1
|
||||||||||||
|
Savings deposits
|
226,329
|
18.8
|
224,456
|
18.5
|
||||||||||||
|
Money market deposit accounts
|
173,510
|
14.4
|
169,865
|
14.0
|
||||||||||||
|
Certificates of deposit
|
258,426
|
21.4
|
272,731
|
22.5
|
||||||||||||
|
Total
|
$
|
1,205,150
|
100.0
|
$
|
1,211,118
|
100.0
|
||||||||||
|
|
||||||||||||||||
|
|
March 31, 2020/
|
|||||||||||||||
|
|
December 31, 2019
|
|||||||||||||||
|
|
Change
|
|||||||||||||||
|
|
Amount
|
%
|
||||||||||||||
|
Non-interest-bearing deposits
|
$
|
696
|
0.3
|
|||||||||||||
|
NOW accounts
|
2,123
|
0.6
|
||||||||||||||
|
Savings deposits
|
1,873
|
0.8
|
||||||||||||||
|
Money market deposit accounts
|
3,645
|
2.1
|
||||||||||||||
|
Certificates of deposit
|
(14,305
|
)
|
(5.2
|
)
|
||||||||||||
|
Total
|
$
|
(5,968
|
)
|
(0.5
|
)
|
|||||||||||
Deposits decreased $6.0 million since December 31, 2019. The decrease in deposits is driven by a $14.3 million decrease in certificates of
deposit, which is due to a $10.2 million decrease in brokered certificates since December 31, 2019. As of March 31, 2020, the Bank had $4.8 million of brokered certificates of deposit outstanding compared to $15.0 million as of December 31, 2019. We
continue to enhance our cash management services to improve our customer services and to grow deposits through our current customers.
44
Borrowed Funds
Borrowed funds decreased $1.6 million during the first three months of 2020. The decrease was the result of repaying a $20.0 million short term loan
through borrowing $12.5 million of overnight advances from the FHLB and $5.0 million of long-term advances from the FHLB. We also experienced an increase in repurchase agreements of $934,000. The Company’s current strategy for borrowings is to
consider terms and structures to manage interest rate risk and liquidity in a flat to inverted interest rate environment. The Company's daily cash requirements or short-term investments are primarily met by using the financial instruments available
through the Federal Home Loan Bank of Pittsburgh.
Stockholders’ Equity
We evaluate stockholders’ equity in relation to total assets and the risks associated with those assets. The greater the capital resource,
the more likely a corporation will meet its cash obligations and absorb unforeseen losses. For these reasons, capital adequacy has been, and will continue to be, of paramount importance to the Company. As such, the Company has implemented policies
and procedures to ensure that it has adequate capital levels. As part of this process, we routinely stress test our capital levels and identify potential risk and alternative sources of additional capital should the need arise.
Total stockholders’ equity was $159.9 million at March 31, 2020 compared to $154.8 million at December 31, 2019, an increase of $5,149,000, or
3.3%. Excluding accumulated other comprehensive income (loss), stockholders’ equity increased $1.6 million, or 1.0%. The Company purchased 23,412 shares of treasury stock at a weighted average cost of $54.64 per share. The Company reissued 204
shares to employees as a reward for years of services at a weighted average cost of $61.00 per share. For the three months of 2020, the Company had net income of $4.5 million and declared cash dividends of $2.0 million, or $0.55 per share,
representing a cash dividend payout ratio of 43.2%.
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. As a result of changes in the interest rate environment and the defined benefit plan obligations, accumulated other comprehensive income increased approximately $3.5 million from December 31,
2019.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP,
regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Bank to maintain
minimum amounts and ratios of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of March 31, 2020 and December 31, 2019, that the Bank meets all capital adequacy requirements to which it was subject at such dates.
As permitted by applicable federal regulation, the Bank has opted to use the community bank leverage ratio (the “CBLR”) framework for
determining its capital adequacy. Under the CBLR framework a qualifying community bank is considered well-capitalized if its leverage ratio (Tier 1 capital divided by average total consolidated assets) exceeds 9%. At March 31, 2020, the Bank was
considered well-capitalized” under the CBLR framework, with a leverage ratio of 9.45%. Following the passage of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in response to the COVID-19 pandemic, the federal banking regulators
revised the CBLR framework as follows: (i) beginning in the second quarter of 2020, a qualifying community bank need only have a leverage ratio of at least 8%, subject to the other qualifying requirements, and (ii) if a qualifying community bank’s
leverage ratio falls below 8%, then it will have two calendar quarters to maintain a leverage ratio of 7% or greater. These revisions under the CARES Act are effective April 23, 2020 and will terminate upon the earlier of the termination of the
national emergency related to COVID-19 or December 31, 2020. Following such termination there is a grace period for returning to the 9% CBLR threshold. The CBLR will be set at 8% for the remainder of 2020, 8.5% for 2021, and 9% thereafter. The
grace period is also adjusted to account for the graduating increase. As a result, in 2020 and 2021, a qualifying community bank utilizing the grace period must maintain a CBLR of at least 7% and 7.5%, respectively. Thereafter, a qualifying community
bank utilizing the grace period must maintain a CBLR of at least 8%. If a qualifying community bank fails to maintain the applicable minimum CBLR during the grace period, or if it is unable to restore compliance with the CBLR within the grace period,
then it will revert to the Basel III capital framework and the normal Prompt Corrective Action capital categories will apply
.
45
Off-Balance Sheet Activities
Some financial instruments, such as loan commitments, credit lines, and letters of credit, are issued to meet customer financing needs. The
contractual amount of financial instruments with off-balance sheet risk was as follows at March 31, 2020 and December 31, 2019 (in thousands):
|
|
March 31, 2020
|
December 31, 2019
|
||||||
|
Commitments to extend credit
|
$
|
215,529
|
$
|
211,530
|
||||
|
Standby letters of credit
|
16,717
|
17,857
|
||||||
|
|
$
|
232,246
|
$
|
229,387
|
||||
We also offer limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing.
Overdraft charges as a result of ATM withdrawals and one time point of sale (non-recurring) transactions require prior approval of the customer. The non-contractual amount of financial instruments with off-balance sheet risk at March 31, 2020 and
December 31, 2019 was $11,864,000 and $11,872,000, respectively. The Company reserves the right to discontinue this service without prior notice.
Liquidity
Liquidity is a measure of the Company's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. To
maintain proper liquidity, we use funds management policies, which include liquidity target ratios, along with our investment policies to assure we can meet our financial obligations to depositors, credit customers and stockholders. Liquidity is
needed to meet depositors' withdrawal demands, extend credit to meet borrowers' needs, provide funds for normal operating expenses and cash dividends, and to fund other capital expenditures.
Cash generated by operating activities, investing activities and financing activities influences liquidity management. Our Company's
historical activity in this area can be seen in the Consolidated Statement of Cash Flows. The most important source of funds is core deposits. Repayment of principal on outstanding loans and cash flows created from the investment portfolio are also
factors in liquidity management. Other sources of funding include brokered certificates of deposit and the sale of loans or investments, 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 presented. Other uses of funds include purchasing stock from the Federal Home Loan Bank (FHLB) of Pittsburgh, as well as capital expenditures. Capital expenditures (including software purchases), during the first three months of 2020 were
$507,000 compared to $105,000 during the same time period in 2019.
Short-term debt from the FHLB supplements the Bank’s availability of funds. The Bank achieves liquidity primarily from temporary or
short‑term investments in the Federal Reserve and the FHLB. The Bank had a maximum borrowing capacity at the FHLB of approximately $537.8 million, of which $114.1 million was outstanding, at March 31, 2020. The Bank also had two federal funds lines
with third party providers in the total amount of $34.0 million as of March 31, 2020, which are unsecured and undrawn upon. We also have a borrower in custody line with the Federal Reserve Bank of approximately $9.0 million, which also is not drawn
upon as of March 31, 2020. The Company continues to evaluate its liquidity needs and as necessary finds additional sources.
46
Citizens Financial Services, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its
operating expenses, Citizens Financial Services, Inc. is responsible for paying any dividends declared to its shareholders. Citizens Financial also has repurchased shares of its common stock. Citizens Financial Services, Inc.’s primary source of
income is dividends received from the Bank. Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. In particular, the Bank may not, as a state-chartered bank which is a member of the Federal Reserve System,
declare a dividend without approval of the Federal Reserve, 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. The Federal Reserve Board 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 March 31, 2020, Citizens Financial Services, Inc. (on an unconsolidated basis) had liquid assets of $6.6 million.
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.
Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, because we have no
trading portfolio, we are not subject to trading risk. Currently, the Company has equity securities that represent only 0.04% of its total assets and, therefore, equity risk is not significant.
The primary components of interest-sensitive assets include adjustable-rate 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 and short-term borrowings. Savings deposits, NOW accounts and money market
investor accounts are considered core deposits and are not short-term interest sensitive (except for the top-tier money market investor accounts, typically help by local governments, which are paid current market interest rates).
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 our Company's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competitive 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.
The Company 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 Company’s risk exposure. In this analysis, the Company examines the results of movements in
interest rates with additional assumptions made concerning prepayment speeds on mortgage loans and mortgage securities. 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 March 31, 2020 (dollars in thousands):
47
|
|
|
|
|
Change In
|
% Change In
|
|
|
|
Prospective One-Year
|
|
Prospective
|
Prospective
|
|
Changes in Rates
|
|
Net Interest Income
|
|
Net Interest Income
|
Net Interest Income
|
|
|
|
|
|
|
|
|
-100 Shock
|
|
49,991
|
|
(540)
|
(1.07)
|
|
Base
|
|
50,531
|
|
-
|
-
|
|
+100 Shock
|
|
49,115
|
|
(1,416)
|
(2.80)
|
|
+200 Shock
|
|
47,884
|
|
(2,647)
|
(5.24)
|
|
+300 Shock
|
|
46,816
|
|
(3,715)
|
(7.35)
|
|
+400 Shock
|
|
45,618
|
|
(4,913)
|
(9.72)
|
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. It should be noted that the changes in net interest income noted above are in line with Company policy for interest rate risk.
Item 3-Quantitative and Qualitative Disclosure about Market Risk
In the normal course of conducting business activities, the Company is exposed to market risk, principally interest rate risk, through the operations of its
banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments and was discussed previously in this Form 10-Q. Management and a committee
of the Board of Directors manage interest rate risk (see also “Interest Rate and Market Risk Management”).
Item 4-Control and Procedures
(a) Disclosure Controls and Procedures
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 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.
(b) Changes to Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or
are reasonable likely to materially affect, the Company’s internal control over financial reporting.
PART II ‑ OTHER INFORMATION
Item 1 ‑ Legal Proceedings
Management is not aware of any pending or threatened litigation that would have a material adverse effect on the consolidated financial position of the
Company. Any pending proceedings are ordinary, routine litigation incidental to the business of the Company and its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company and
its subsidiary by government authorities.
48
Item 1A – Risk Factors
In addition to the risk factor discussed below and the other information set forth in this report, you should carefully consider the factors discussed in
Part I, “Item 1.A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results. At March 31, 2020, the risk factors of the Company have not
changed materially from those reported in our Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the
ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted and outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the
pandemic.
The COVID-19 pandemic has created extensive disruptions to the global economy and to the lives of individuals throughout the
world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal
and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and the efforts to contain it have disrupted
global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period
or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and the effects of COVID-19 could have a material adverse impact on us in a number of ways as described in more detail
below.
Credit Risk
– Our risks of timely loan repayment and the value of collateral supporting the
loans are affected by the strength of our borrowers’ businesses. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages,
supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause
our customers to be unable to make scheduled loan payments. Hotel and restaurant operators and others in the leisure, hospitality and travel industries and the agricultural industry, among other industries, have been particularly hurt by COVID-19.
If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover
our credit exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial
real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the
event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we
have unfunded commitments to extend credit to customers. During a challenging economic environment like now, our customers depend more on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity.
Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory
requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan
forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.
49
Strategic Risk
– Our success may be affected by a variety of external factors that may affect
the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental
authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing
household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of most
businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating loans.
Operational Risk
– Current and future restrictions on our workforce’s access to our
facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to
information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely
from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to
employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity
attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.
Moreover, we rely on many third parties in our business operations, including the appraiser of the real property collateral,
vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and
courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. If the third-party service providers continue to have limited capacities for a prolonged
period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.
Interest Rate Risk/Market Value Risk
– Our net interest income, lending and investment
activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range
from 0% to 0.25%, citing concerns about the impact of COVID-19 on financial markets and market stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and
negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in prevailing fair market values of our
investment securities and other assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing
liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of
COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home
arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and
adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
50
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
||||||||||||||||
|
|
||||||||||||||||
|
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)
|
||||||||||||
|
|
||||||||||||||||
|
1/1/20 to 1/31/20
|
2,100
|
$
|
64.00
|
2,100
|
46,540
|
|||||||||||
|
2/1/20 to 2/29/20
|
1,612
|
$
|
61.00
|
1,612
|
44,928
|
|||||||||||
|
3/1/20 to 3/31/20
|
19,700
|
$
|
53.12
|
19,700
|
25,228
|
|||||||||||
|
Total
|
23,412
|
$
|
54.64
|
23,412
|
25,228
|
|||||||||||
|
(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.
|
|
(2)
|
On April 21, 2020, the Company announced that the Board of Directors
authorized the Company to repurchase up to an additional 150,000 shares at an aggregate purchase price not to exceed $12.0 million over a period of 36 months. 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.
|
Item 3 ‑ Defaults Upon Senior Securities
Not applicable
.
Item 4 – Mine Safety Disclosure
Not applicable
.
Item 5 ‑ Other Information
None
Item 6 ‑ Exhibits
(a) The following documents are filed as a part of this report:
|
2.1
|
Agreement and Plan of Merger by and between Citizens Financial Services, Inc. and MidCoast Community Bancorp, Inc.
(1)
|
||
|
3.1
|
Articles of Incorporation of Citizens Financial Services, Inc., as amended
(2)
|
||
|
3.2
|
Bylaws of Citizens Financial Services, Inc.
(3)
|
||
|
4.1
|
Form of Common Stock Certificate.
(4)
|
||
|
|
|||
|
|
51
|
|
|
||
|
101
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020, formatted in XBRL (Extensible Business
Reporting Language): (i) The Consolidated Balance Sheet (unaudited), (ii) the Consolidated Statement of Income (unaudited), (iii) the Consolidated Statement of Comprehensive Income (unaudited), (iv) the Consolidated Statement of Changes in
Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows (unaudited) and (vi) related notes (unaudited).
|
(1)
Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on September 18, 2019
(2)
Incorporated by reference to Exhibit
3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, as filed with the Commission on August 9, 2018.
(3)
Incorporated by reference to Exhibit 9.01 to the Company’s Current Report on
Form 8-K, as filed with the Commission on December 24, 2009.
(4)
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.
52
Signatures
Pursuant to the requirements 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)
|
|||
|
May 7, 2020
|
By:
|
/s/ Randall E. Black
|
|
|
Randall E. Black
|
|||
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|||
|
|
|||
|
May 7, 2020
|
By:
|
/s/ Stephen J. Guillaume
|
|
|
Stephen J. Guillaume
|
|||
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|||
53
TABLE OF CONTENTS
Part IItem 1. Financial Statements (unaudited):Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations 29-48Item 3. Quantitative and Qualitative Disclosures About Market Risk 48Item 4. Controls and Procedures 48Part II Other InformationPart IIItem 1. Legal Proceedings 48Item 1A. Risk Factors 49-50Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds 51Item 3. Defaults Upon Senior Securities 51Item 4. Mine Safety Disclosures 51Item 5. Other Information 51Item 6. Exhibits 51-52Note 1 - Basis Of PresentationNote 2 Revenue RecognitionNote 3 - Earnings Per ShareNote 4 InvestmentsNote 5 LoansNote 6 Goodwill and Other Intangible AssetsNote 7 - Employee Benefit PlansNote 8 Accumulated Comprehensive Income LossNote 9 Fair Value MeasurementsNote 10 Acquisition Of Midcoast Community Bancorp, IncNote 11 Recent Accounting PronouncementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3-quantitative and Qualitative Disclosure About Market RiskItem 4-control and ProceduresItem 1 Legal ProceedingsItem 1A Risk FactorsItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3 Defaults Upon Senior SecuritiesItem 4 Mine Safety DisclosureItem 5 Other InformationItem 6 Exhibits