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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the fiscal year ended
OR
For the transition period from _______________ to _________________________.
Commission file number:
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on Which Registered |
|
|
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 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 ◻
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2021, the registrant’s most recently completed second fiscal quarter, was $
The number of shares of common stock outstanding at February 18, 2022 was
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 21, 2022 are incorporated by reference into Parts III and IV of this report.
TABLE OF CONTENTS
2
PART I
ITEM 1. BUSINESS
Citizens Northern Corporation (“Corporation”) is a holding company whose principal activity is community banking. The Corporation’s principal office is located in Wellsboro, Pennsylvania. The largest subsidiary is Citizens Northern Bank (“CN Bank” or the “Bank”). The Corporation’s other wholly-owned subsidiaries are Citizens Northern Investment Corporation and Bucktail Life Insurance Company (“Bucktail”). Citizens Northern Investment Corporation was formed in 1999 to engage in investment activities. Bucktail reinsures credit and mortgage life and accident and health insurance on behalf of CN Bank.
Over the past few years, the Corporation has been employing a growth strategy. While a majority of the Corporation’s operations are conducted in its legacy markets in the Northern tier/Northcentral region of Pennsylvania and Southern tier of New York, the Corporation has expanded into Southeastern Pennsylvania by acquisitions and Southcentral Pennsylvania by opening new branches. The Corporation acquired Covenant Financial, Inc. (“Covenant”), effective July 1, 2020. Covenant was the parent company of Covenant Bank, a commercial bank which operated a community bank office in Bucks County, Pennsylvania and another in Chester County, Pennsylvania. The Covenant acquisition followed the 2019 acquisition of Monument Bancorp, Inc. (“Monument”), a commercial bank with offices in Bucks County. In Southcentral Pennsylvania, in 2021, the Corporation converted the lending office in York, Pennsylvania to a full-service branch and established a new branch in Lancaster, Pennsylvania. Mainly as a result of the acquisitions, the Corporation’s consolidated total assets at December 31, 2021 of $2.3 billion were up 80% from the corresponding total at December 31, 2018. Similarly, gross loans of $1.6 billion at December 31, 2021 were up 89% from December 31, 2018 and total deposits of $1.9 billion were up 86% from December 31, 2018.
CN Bank is a Pennsylvania banking institution that was formed by the consolidation of Northern National Bank of Wellsboro and Citizens National Bank of Towanda in 1971. CN Bank has held its current name since May 6, 1975, at which time CN Bank changed its charter from a national bank to a Pennsylvania bank. The Bank has expanded its presence over the past several decades through a series of mergers as well as by opening new branch and lending offices and providing access to banking services via the internet and through ATMs. At December 31, 2021, the Bank had 31 branch offices, including 23 in the Northern tier/Northcentral region of Pennsylvania, 2 in the Southern tier of New York State, 4 in Southeastern Pennsylvania (3 in Bucks County and 1 in Chester County) and 2 in Southcentral Pennsylvania (York and Lancaster). In addition to its branch locations, the Bank has a lending office in Elmira, New York.
CN Bank provides an extensive range of banking services, including deposit and loan products for personal and commercial customers. The Bank also maintains a trust department that provides a wide range of financial services, such as 401(k) plans, retirement planning, estate planning, estate settlements and asset management. CN Financial Services Corporation (“CNFSC”), a wholly-owned subsidiary of the Bank, is a licensed insurance agency that provides insurance products to individuals and businesses and through its broker-dealer division, offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. CNFSC’s operations are not significant in relation to the total operations of the Corporation.
In 2017, CN Bank established Northern Tier Holding LLC, to acquire, hold and dispose of real property acquired by the Bank. CN Bank is the sole member of Northern Tier Holding LLC.
All phases of the Bank’s business are competitive. The Bank competes with online financial institutions, local commercial banks headquartered in our market areas and other commercial banks with branches in our market area. Many of the online financial institutions and some of the banks that have branches in our market areas are larger in overall size. With respect to lending activities and attracting deposits, the Bank also competes with savings banks, savings and loan associations, insurance companies, regulated small loan companies and credit unions. Also, the Bank competes with mutual funds, exchange-traded funds and other investment vehicles for deposits. CN Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management, brokerage and insurance services. The Bank is generally competitive with all financial institutions in our service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The Bank serves a diverse customer base and is not economically dependent on any small group of customers or on any individual industry.
3
At December 31, 2021, CN Bank had total assets of $2,311,213,000, total deposits of $1,959,117,000 and net loans outstanding of $1,551,312,000.
Most activities of the Corporation and its subsidiaries are regulated by federal or state agencies. The primary regulatory relationships are described as follows:
| ● | The Corporation is a bank holding company formed under the provisions of Section 3 of the Federal Reserve Act. The Corporation is under the direct supervision of the Federal Reserve and must comply with the reporting requirements of the Federal Bank Holding Company Act. |
| ● | CN Bank is a state-chartered, nonmember bank, supervised by the Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of Banking and Securities. |
| ● | The Pennsylvania Department of Insurance regulates CNFSC’s insurance activities. Brokerage products are offered through third party networking agreements. |
| ● | Bucktail is incorporated in the state of Arizona and supervised by the Arizona Department of Insurance. |
A copy of the Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current events reports on Form 8-K, and amendments to these reports, will be furnished without charge upon written request to the Corporation’s Treasurer at P.O. Box 58, Wellsboro, PA 16901. Copies of these reports will be furnished as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission. The information is also available through the Corporation’s web site at www.cnbankpa.com
Human Capital
The Corporation’s Board of Directors and executive leadership team have established the following mission, vision and values:
Mission: Creating value through lifelong relationships with our customers, teammates, shareholders and communities.
Vision: Every customer says “CN is the ONLY bank I need.”
Values: Teamwork, Respect, Responsibility and Accountability, Excellence, Integrity, Client Focus, Have Fun.
We recognize that our ability to create value on a consistent basis is highly dependent upon the effectiveness of our team.
The Corporation’s key human capital management objectives are to attract and retain diverse raw and seasoned talent that fits our values and culture. Our talent strategy focuses on acquiring new employees through branding and outreach programs, developing employees though a robust onboarding program, ongoing training, and performance management, and retaining employees through recognition, engagement, and an attractive total rewards package.
Diversity and Inclusion
At CN Bank, we are committed to creating value through relationships. At the heart of this mission is a promise of excellence in service to all people, as demonstrated by our commitment to equity of opportunity, inclusion and our fostering of a spirit of belonging. We live our values of respect, integrity and excellence by creating access and providing support to help our diverse constituents of customers, teammates, shareholders and communities in achieving their financial goals. We embrace inclusion of all of our stakeholders as an important component of our vision to be the ONLY bank our customers need.
4
Compensation and Benefits
The Corporation offers competitive compensation to attract and retain talent. Our generous total rewards package includes market-competitive salary, bonuses or sales commissions, short-term and long-term equity incentives, healthcare and retirement benefits, and paid time off. Employees have regular performance reviews and salary raises commensurate with performance. Employees have access to a holistic suite of items within our employee assistance program that caters to physical, emotional, and mental wellbeing for the employee and their family.
Training and Development
The Corporation provides a robust training and development program that supports our culture, prepares employees for their immediate role, develops them for long term success at the Bank and supports personal enrichment. We offer functional training, culture building exercises, personal development, CN Bank history, CN Bank integration and ongoing technical training throughout each year. Employees also have access to additional educational and development opportunities including tuition reimbursement and certification programs.
Communication and Engagement
At CN, we believe in the importance of employee communication and engagement. We utilize several methods to foster engagement, including activities such as Employee Recognition programs, Service Anniversary Awards, Bank wide monthly calls, semi-annual Bank wide events, annual employee surveys, focus groups, daily huddles, and the Giving Back, Giving Together community service program. We believe keeping our team well informed, connected, and appreciated adds to the success of our organization.
ITEM 1A. RISK FACTORS
The Corporation is subject to the many risks and uncertainties applicable to all banking companies, as well as risks specific to the Corporation’s geographic locations. Although the Corporation seeks to effectively manage risks, and maintains a level of equity that exceeds the banking regulatory agencies’ thresholds for being considered “well capitalized” (see Note 18 to the consolidated financial statements), management cannot predict the future and cannot eliminate the possibility of credit, operational or other losses. Accordingly, actual results may differ materially from management’s expectations. Some of the Corporation’s significant risks and uncertainties are discussed below.
Coronavirus Outbreak – The COVID-19 pandemic has caused significant disruptions in the international and U.S. economies as well as the Corporation’s local economy. The ultimate effect of COVID-19 on the local or broader economy is not known. Moreover, the Federal Reserve took action to lower the Federal Funds rate in 2020 and maintained a rate of 0% to 0.25% throughout 2021 but has recently signaled its intent to raise the rate in an effort to contain inflation. Fluctuations in interest rates triggered by the Federal Reserve’s actions may negatively affect interest income and, therefore, earnings. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus outbreak, and there is no guarantee that the Corporation’s efforts to address the adverse impacts of the coronavirus will be effective. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of new variants of the coronavirus and actions taken to contain the coronavirus or its impact.
The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation’s business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation’s financial reporting and internal controls; and declines in the demand for loans and other banking services and products.
Risk Related to Acquisition Activity – As described in Item 1, the Corporation has completed two acquisitions of banking companies over the past two years (Covenant and Monument) and expanded its geographic footprint to Southeastern and Southcentral Pennsylvania. Further, management intends to continue to pursue additional acquisition opportunities. Potential acquisitions may disrupt the
5
Corporation’s business and dilute shareholder value. We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial service companies. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including: potential exposure to unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, difficulty and expense of integrating the operations and personnel of the target company, potential disruption to the Corporation’s business, potential diversion of management’s time and attention, the possible loss of key employees and customers of the target company, difficulty in estimating the value of the target company and potential changes in banking or tax laws or regulations that may affect the target company. Acquisitions may involve the payment of a premium over book and market values, and, therefore, some dilution of the Corporation’s tangible book value and net income per share of common stock may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue projections, cost savings, increases in geographic or product presence, and/or other projected benefits from recent or future acquisitions could have a material adverse effect on the Corporation’s financial condition or results of operations.
Credit Risk from Lending Activities - A significant source of risk is the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most of the Corporation’s loans are secured, but some loans are unsecured. With respect to secured loans, the collateral securing the repayment of these loans may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when it is not. The Corporation has adopted underwriting and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss. Also, as discussed further in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis, the Corporation attempts to estimate the amount of losses that may be inherent in the portfolio through a quarterly evaluation process that includes several members of management and that addresses specifically identified problem loans, as well as other quantitative data and qualitative factors. Such risk management and accounting policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from deposits with no stated maturities, term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Limited Geographic Diversification - The Corporation grants commercial, residential and personal loans to customers primarily in the Corporation’s legacy markets of the Northern tier/Northcentral regions of Pennsylvania and Southern tier of New York and in Southeastern and Southcentral Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within these regions. Deterioration in economic conditions could adversely affect the quality of the Corporation’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Competition - All phases of the Corporation’s business are competitive. Some competitors are much larger in total assets and capitalization than the Corporation, have greater access to capital markets and can offer a broader array of financial services. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Inability to Attract and Develop Qualified Personnel – The Corporation believes that our future success will depend in large part on our ability to attract, develop and retain highly qualified management, lending, financial, technological, marketing, sales, and support personnel. Competition for qualified personnel is intense and we cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time. Our ability to retain key officers and employees may be further impacted by legislation and regulation affecting the financial services industry. For example, legislation and bank regulatory action that places restrictions on executive compensation at, and the pay practices of, financial institutions may further impact our ability to compete for talent with other industries
6
that are not subject to the same limitations as financial institutions. Any inability to attract, develop and retain significant numbers of qualified management and other personnel would have a material adverse effect on our business, results of operations and financial condition.
Cyber Security Risks and Technology Dependence – In the ordinary course of business, the Corporation collects and stores sensitive data, including proprietary business information and personally identifiable information of our customers and employees in systems and on networks. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf. The secure processing, maintenance and use of this information is critical to operations and our business strategy.
The Corporation has invested in accepted technologies, and continually reviews processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access, and maintains an information security risk insurance policy. On an on-going basis the Corporation assesses its cyber security procedures and controls and performs network penetration tests on at least an annual basis. All employees receive monthly information security awareness training.
Despite these security measures, the Corporation’s computer systems and infrastructure or those of third parties used by us to compile, process or store such information may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Corporation’s reputation, which could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Government Regulation and Monetary Policy - The Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the way the Corporation conducts its business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit the Corporation’s shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects short-term interest rates and credit conditions, and any unfavorable change in these conditions could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Bank Secrecy Act and Related Laws and Regulations - These laws and regulations have significant implications for all financial institutions. In recent years, they have increased due diligence requirements and reporting obligations for financial institutions, created new crimes and penalties, and required the federal banking agencies, in reviewing merger and other acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering activities. Even innocent noncompliance and inconsequential failure to follow the regulations could result in significant fines or other penalties, which could have a material adverse impact on the Corporation’s financial condition, results of operations or liquidity.
The Federal Home Loan Bank of Pittsburgh - Through its subsidiary (CN Bank), the Corporation is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. The Corporation has a line of credit with the FHLB-Pittsburgh that is secured by a blanket lien on its loan portfolio. Access to this line of credit is critical if a funding need arises. However, there can be no assurance that the FHLB-Pittsburgh will be able to provide funding when needed, nor can there be assurance that the FHLB-Pittsburgh will provide funds specifically to the Corporation should its financial condition deteriorate and/or regulators prevent that access. The inability to access this source of funds could have a materially adverse effect on the Corporation’s financial flexibility if alternate financing is not available at acceptable interest rates. The failure of the FHLB-Pittsburgh or the FHLB system in general, may materially impair the Corporation’s ability to meet short- and long-term liquidity needs or to meet growth plans.
The Corporation owns common stock of the FHLB-Pittsburgh to qualify for membership in the FHLB system and access services from the FHLB-Pittsburgh. The FHLB-Pittsburgh faces a variety of risks in its operations including interest rate risk, counterparty credit risk, and adverse changes in its regulatory framework. In addition, the 11 Federal Home Loan Banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB cannot meet its obligations, other FHLBs can be called upon to make required payments. Such risks affecting the FHLB-Pittsburgh could adversely impact the value of the Corporation’s investment in the common stock of the FHLB-Pittsburgh and/or affect its access to credit.
7
Soundness of Other Financial Institutions - In addition to the FHLB-Pittsburgh, the Corporation maintains other credit facilities that provide it with additional liquidity. These facilities include secured and unsecured borrowings from the Federal Reserve Bank and third-party commercial banks. The Corporation believes that it maintains a strong liquidity position and that it is well positioned to withstand foreseeable market conditions. However, legal agreements with counterparties typically include provisions allowing them to restrict or terminate the Corporation’s access to these credit facilities with or without advance notice and at their sole discretion.
Financial institutions are interconnected because of trading, clearing, counterparty, and other relationships. Financial market conditions have been negatively impacted in the past and such disruptions or adverse changes in the Corporation’s results of operations or financial condition could, in the future, have a negative impact on available sources of liquidity. Such a situation may arise due to circumstances that are outside the Corporation’s control, such as general market disruptions or operational problems affecting the Corporation or third parties. The Corporation’s efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in available liquidity. In such events, the Corporation’s cost of funds may increase, thereby reducing net interest income, or the Corporation may need to sell a portion of its securities and/or loan portfolio, which, depending upon market conditions, could necessitate realizing a loss.
Securities Markets – The fair value of the Corporation’s available-for-sale debt securities, as well as the revenues the Corporation earns from its wealth management services, are sensitive to price fluctuations and market events.
Declines in the values of the Corporation’s securities holdings, combined with adverse changes in the expected cash flows from these investments, could result in other-than-temporary impairment charges. For additional information regarding debt securities, see the “Securities” section of Management’s Discussion and Analysis and Note 7 to the consolidated financial statements.
The Corporation’s trust revenue is determined, in part, from the value of the underlying investment portfolios. Accordingly, if the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in securities markets.
Mortgage Banking – Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program. Since 2014, the Corporation has also originated and sold residential mortgage loans to the secondary market through the MPF Original program. Both of these programs are administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, 2021, the total outstanding balance of residential mortgages sold and serviced through the two programs amounted to $334,741,000. The Corporation must strictly adhere to the MPF Xtra and MPF Original program guidelines for origination, underwriting and servicing loans, and failure to do so may result in the Corporation being forced to repurchase loans or being dropped from the program. As of December 31, 2021, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,571,000. If the volume of such forced repurchases of loans were to increase significantly, or if the Corporation were to be dropped from the programs, it could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
8
ITEM 2. PROPERTIES
A summary of the Corporation’s operating properties is as follows:
Number | Number of | Number of | ||||
of | Owned | Leased | ||||
Locations | Properties | Properties | ||||
Branches | 31 | 25 | 6 | |||
Limited Purpose Office-Lending | 1 | 1 | 0 | |||
Administrative/Multi-purpose | 2 | 1 | 1 | |||
Ancillary Facilities | 2 | 1 | 1 | |||
Total | 36 | 28 | 8 |
ITEM 3. LEGAL PROCEEDINGS
The Corporation and the Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material adverse effect on the Corporation’s financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
QUARTERLY SHARE DATA
Trades of the Corporation’s stock are executed through various brokers who maintain a market in the Corporation’s stock. The Corporation’s stock is listed on the NASDAQ Capital Market with the trading symbol CZNC. As of December 31, 2021, there were 2,143 shareholders of record of the Corporation’s common stock.
The following table sets forth the high and low sales prices of the common stock and dividends declared per quarter during 2021 and 2020.
2021 | 2020 | |||||||||||||||||
Dividend | Dividend | |||||||||||||||||
Declared | Declared | |||||||||||||||||
per | per | |||||||||||||||||
| High |
| Low |
| Quarter |
| High |
| Low |
| Quarter | |||||||
First quarter | $ | 24.99 | $ | 18.98 | $ | 0.27 | $ | 29.06 | $ | 15.69 | $ | 0.27 | ||||||
Second quarter |
| 25.69 |
| 23.00 |
| 0.28 |
| 22.89 |
| 16.20 |
| 0.27 | ||||||
Third quarter |
| 25.97 |
| 23.73 |
| 0.28 |
| 20.76 |
| 14.92 |
| 0.27 | ||||||
Fourth quarter |
| 27.99 |
| 24.52 |
| 0.28 |
| 20.84 |
| 16.05 |
| 0.27 | ||||||
Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, the Corporation and CN Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.
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Effective February 18, 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of the Corporation’s common stock, or 6.25% of the Corporation’s issued and outstanding shares at February 18, 2021. As of December 31, 2021, 299,059 shares have been repurchased under the repurchase program. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.
Consistent with the previously approved program, the Board of Directors' February 18, 2021 approval provides that: (1) the treasury stock repurchase program, as amended to increase the repurchase authorization to 1,000,000 shares, shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program.
The following table sets forth a summary of purchases by the Corporation, in the open market, of its equity securities during the fourth quarter 2021:
|
|
| Total Number of |
| Maximum | ||||
Shares | Number of | ||||||||
Purchased | Shares that May | ||||||||
as Part of | Yet | ||||||||
Publicly | be Purchased | ||||||||
Total Number | Average | Announced | Under | ||||||
of Shares | Price Paid | Plans | the Plans or | ||||||
Period | Purchased | per Share | or Programs | Programs | |||||
October 1 - 31, 2021 |
| 0 | $ | 0 |
| 292,100 |
| 707,900 | |
November 1 - 30, 2021 |
| 2,600 | $ | 24.92 |
| 294,700 |
| 705,300 | |
December 1 - 31, 2021 |
| 4,359 | $ | 25.00 |
| 299,059 |
| 700,941 | |
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PERFORMANCE GRAPH
Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the Russell 2000 and a Peer Group Index of similar banking organizations selected by the Corporation for the five-year period commencing December 31, 2016 and ended December 31, 2021. The index values are market-weighted dividend-reinvestment numbers, which measure the total return for investing $100.00 five years ago. This meets Securities Exchange Commission requirements for showing dividend reinvestment share performance over a five-year period and measures the return to an investor for placing $100.00 into a group of bank stocks and reinvesting any and all dividends into the purchase of more of the same stock for which dividends were paid.
Period Ending | ||||||||||||
Index |
| 12/31/16 |
| 12/31/17 |
| 12/31/18 |
| 12/31/19 |
| 12/31/20 |
| 12/31/21 |
Citizens Northern Corporation |
| 100.00 |
| 95.62 |
| 109.88 |
| 122.93 |
| 91.24 |
| 125.90 |
Russell 2000 Index |
| 100.00 |
| 114.65 |
| 102.02 |
| 128.06 |
| 153.62 |
| 176.39 |
Peer Group |
| 100.00 |
| 116.26 |
| 105.87 |
| 126.29 |
| 101.09 |
| 137.51 |
Peer Group includes all publicly traded SEC filing Commercial Banks Thrifts within NJ, NY, OH, PA, MD, and WV with assets between 0.5 times and 2.0 times CZNC as of 9/30/2021
Source: SP Global Market Intelligence
© 2022
11
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information concerning the Stock Incentive Plan and Independent Directors Stock Incentive Plan, both of which have been approved by the Corporation’s shareholders. The figures shown in the table below are as of December 31, 2021.
|
| Number of | |||||
Number of | Weighted- | Securities | |||||
Securities to be | average | Remaining | |||||
Issued Upon | Exercise | for Future | |||||
Exercise of | Price of | Issuance Under | |||||
Outstanding | Outstanding | Equity Compen- | |||||
| Options |
| Options |
| sation Plans | ||
Equity compensation plans approved by shareholders |
| 24,218 | $ | 20.01 |
| 207,109 | |
Equity compensation plans not approved by shareholders |
| 0 |
| N/A |
| 0 | |
More details related to the Corporation’s equity compensation plans are provided in Notes 1 and 13 to the consolidated financial statements.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this Annual Report on Form 10-K are forward-looking statements. Citizens Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, should, “likely”, expect, “plan”, anticipate, “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
| ● | changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates |
| ● | the effect of the novel coronavirus (COVID-19) and related events |
| ● | technological changes and increased technology-related costs |
| ● | information security breach or other technology difficulties or failures |
| ● | failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
12
CORONAVIRUS (COVID-19) OUTBREAK
Loan Payment Deferral Program
Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.
On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions that broadly address additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from TDRs established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates.
In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the Financial Accounting Standards Board (“FASB”) staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.
To work with clients impacted by COVID-19, the Corporation offered short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to merging with the Corporation on July 1, 2020, Covenant had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower was required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts have been moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at December 31, 2021. Most of the modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days.
At December 31, 2021, there were no loans in deferral status under the program. In comparison, at December 31, 2020, there were 45 loans in deferral status with a total recorded investment of $37,397,000, including 27 commercial loans with a total recorded investment of $35,002,000.
Paycheck Protection Program
The Corporation began accepting and processing applications for loans under the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. Under the PPP, the Corporation provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.
13
The maximum term of PPP loans is five years, though the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Fees on PPP loans, net of origination costs and a market rate adjustment on PPP loans acquired from Covenant, are recognized in interest income as a yield adjustment over the term of the loans.
The recorded investment in PPP loans at December 31, 2021 was $26.9 million, with contractual principal balances totaling $27.8 million, reduced $0.9 million by the impact of net deferred loan origination fees. The recorded investment in PPP loans at December 31, 2021 decreased $105.4 million from $132.3 million at December 31, 2020, reflecting the impact of loans forgiven and repaid by the SBA. Interest and fees on PPP loans totaled $6.5 million in 2021 and $2.9 million in 2020.
Capital Strength
While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, Citizens Northern Bank (“CN Bank”), entered the crisis from a position of strength. This is especially apparent in the capital ratios, which are at levels that demonstrate the capacity to absorb significant losses if they arise while continuing to meet the requirements to be considered well capitalized.
CN Bank’s leverage ratio (Tier 1 capital to average assets) at December 31, 2021 of 10.52% is significantly higher than the well-capitalized threshold of 5%, an excess capital amount of $125.1 million. Similarly, the total capital to risk-weighted assets ratio at December 31, 2021 is 16.04%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $95.1 million.
Additional details regarding the Corporation’s and CN Bank’s regulatory capital position are provided in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MDA”).
EARNINGS OVERVIEW
Net income for the year ended December 31, 2021 was $30,554,000, or $1.92 per diluted share as compared to 2020 net income of $19,222,000 or $1.30 per share. Effective July 1, 2020, CN acquired Covenant Financial, Inc. (“Covenant”). CN incurred pre-tax merger-related expenses related to the Covenant transaction of $7.7 million for the year ended December 31, 2020. In the fourth quarter 2020, CN incurred a pre-tax loss of $1.6 million on prepayment of long-term borrowings (Federal Home Loan Bank of Pittsburgh advances) with outstanding balances totaling $48.0 million. The borrowings included several advances maturing in 2022 through 2024 with a weighted-average interest rate of 1.77% and a weighted-average duration of 2.3 years. Excluding the impact of merger-related expenses and loss on prepayment of borrowings, adjusted (non-U.S. GAAP) earnings for 2020 would be $26,648,000 or $1.80 per share.
The following table provides a reconciliation of the Corporation’s 2021 earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses and loss on prepayment of borrowings. Management believes disclosure of 2021 and 2020 earnings results, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes.
14
RECONCILIATION OF NET INCOME AND
DILUTED EARNINGS PER SHARE TO NON-U.S.
GAAP MEASURE
(Dollars In Thousands, Except Per Share Data)
| Year Ended December 31, 2021 |
| Year Ended December 31, 2020 | |||||||||||||||||||||
Income | Diluted | Income | Diluted | |||||||||||||||||||||
Before | Earnings | Before | Earnings | |||||||||||||||||||||
Income | Income | per | Income | Income | per | |||||||||||||||||||
Tax | Tax | Net | Common | Tax | Tax | Net | Common | |||||||||||||||||
Provision | Provision | Income | Share | Provision | Provision | Income | Share | |||||||||||||||||
Earnings Under U.S. GAAP | $ | 37,687 | $ | 7,133 | $ | 30,554 | $ | 1.92 | $ | 23,212 | $ | 3,990 | $ | 19,222 | $ | 1.30 | ||||||||
Add: Merger-Related Expenses (1) |
| 0 |
| 0 |
| 0 |
|
| 7,708 |
| 1,574 |
| 6,134 |
|
| |||||||||
Add: Loss on Prepayment of Borrowings (1) | 0 | 0 | 0 | 1,636 | 344 | 1,292 | ||||||||||||||||||
Adjusted Earnings (Non-U.S. GAAP) | $ | 37,687 | $ | 7,133 | $ | 30,554 | $ | 1.92 | $ | 32,556 | $ | 5,908 | $ | 26,648 | $ | 1.80 | ||||||||
| (1) | Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision is adjusted for the estimated nondeductible portion of the expenses. |
Other significant variances were as follows:
| ● | Net interest income was up $10,374,000 (15.4%) in 2021 over 2020, reflecting growth mainly attributable to the Covenant acquisition that closed July 1, 2020. In 2021, annual average outstanding loans totaled $1.597 billion, an increase of $151.7 million over 2020, annual average interest-bearing cash and due from banks of $156.2 million were up $75.6 million, annual average available-for-sale debt securities of $390.2 million were up $61.7 million, and annual average total deposits of $1.905 billion were up $319.0 million, while annual average borrowed funds were lower by $42.4 million. The net interest margin was 3.69% for 2021, unchanged from 2020. The average yield on earning assets in 2021 was down 0.22% from 2020, while the average rate on interest-bearing liabilities was down 0.28% between periods. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $2,659,000 for 2021 as compared to a net positive impact of $3,272,000 for 2020. |
| ● | The provision for loan losses of $3,661,000 for 2021 was lower than the 2020 provision by $252,000. In 2021, the provision included the impact of partial charge-offs totaling $1,463,000 on a commercial loan. At December 31, 2021, the recorded investment in this loan was $1,391,000. In total, the provision for 2021 included a net charge of $1,324,000 related to specific loans (net charge-offs of $1,509,000 offset by a net decrease in specific allowances on loans of $185,000), an increase of $2,251,000 in the collectively determined potion of the allowance and an $86,000 increase in the unallocated allowance. The increase in the collectively determined portion of the allowance reflected the impact of an increase in volume of commercial loans, excluding PPP loans. In comparison, the 2020 provision of $3,913,000 included the impact of a charge-off of $2,219,000 on one commercial loan. |
| ● | Noninterest income increased $1,513,000, or 6.2% in 2021 over 2020. Significant variances include the following: |
| Ø | Trust revenue totaled $7,234,000 in 2021, an increase of $913,000 over 2020, reflecting the impact of growth in average trust assets under management including the impact of market value appreciation. |
| Ø | Interchange revenue from debit card transactions totaled $3,855,000, an increase of $761,000 over 2020, reflecting an increase in transaction volumes. |
| Ø | Loan servicing fees, net, totaled $694,000, an increase of $755,000 over the 2020 total of negative $61,000 (a decrease in revenue). The net increase reflects growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights decreased $68,000 in 2021 as compared to a reduction in fair value of $576,000 in 2020 mainly due to changes in assumptions related to prepayments of mortgage loans. |
| Ø | Service charges on deposit accounts totaled $4,633,000, an increase of $402,000 over 2020, as consumer and business activity increased. |
15
| Ø | Brokerage and insurance revenue totaled $1,860,000, an increase of $374,000 over 2020, due to commissions on higher transaction volume. |
| Ø | Other noninterest income totaled $3,580,000, an increase of $225,000 over 2020. Within this category, significant variances included the following: |
| ● | Income from realization of tax credits of $772,000 was $268,000 higher in 2021 as compared to 2020 due to higher PA Educational Improvement Tax Credit Program donations. |
| ● | Credit card interchange income of $434,000 increased $144,000 due to higher transaction volume. |
| ● | Fee income for providing credit enhancement on mortgage loans sold of $348,000 increased $122,000. |
| ● | Other noninterest income decreased $272,000 as the Corporation recognized income of $279,000 in the third quarter 2020 from a life insurance arrangement in which benefits were split between the Corporation and heirs of a former employee. |
| ● | Dividend income from Federal Home Loan Bank stock of $514,000 decreased $140,000. |
| Ø | Net gains from sales of loans totaled $3,428,000, a decrease of $1,975,000 from 2020, reflecting a decrease in volume of mortgage loans sold, resulting mainly from lower refinancing activity and overall market conditions. |
| ● | Noninterest expense increased $6,863,000, or 12.3% in 2021 over 2020, excluding merger-related expenses and loss on prepayment of borrowings. Significant variances included the following: |
| Ø | Salaries and employee benefits expense totaled $37,603,000, an increase of $4,541,000 over 2020, reflecting the inclusion of the former Covenant operations for twelve months in 2021 as compared to six months in 2020, as well as increases in lending, human resources, information technology and other personnel needed to accommodate growth, and increases in health care expense due to higher claims on the Corporation’s partially self-insured plan. |
| Ø | Data processing and telecommunications expenses totaled $5,903,000, an increase of $587,000 over 2020, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs. |
| Ø | Professional fees expense totaled $2,243,000, an increase of $551,000 over 2020, mainly due to increases in recruiting services and PPP loan processing professional fees. |
| Ø | Net occupancy and equipment expense totaled $4,984,000, an increase of $523,000, primarily reflecting an increase due to the Covenant acquisition. |
| Ø | Pennsylvania shares tax expense totaled $1,951,000, an increase of $262,000, reflecting the increase in in CN Bank’s stockholder’s equity. |
| Ø | Automated teller machine and interchange expense totaled $1,433,000, an increase of $202,000, reflecting increased volume of activity. |
| Ø | Other noninterest expense totaled $8,355,000, an increase of $197,000 over 2020. Within this category, significant variances included the following: |
| ● | FDIC insurance expense of $581,000 increased $258,000. |
| ● | Business development expenses of $452,000 increased $220,000, due primarily to an increase in public relations expense. |
| ● | Donations expense of $847,000 increased $208,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program. |
| ● | Other increases include legal fees and expenses of $83,000, bank insurance of $56,000, accounting and auditing expense of $51,000, and credit card reward redemption expense of $50,000. |
16
| ● | Other operational losses of $199,000 decreased $405,000, including a reduction in charges principally related to Trust Department tax compliance and preparation matters. |
| ● | Gains on other real estate properties totaled $100,000 in 2021 as compared to net losses of $146,000 in 2020. |
| ● | The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $236,000 in 2021 as compared to a reduction in expense of $70,000 in 2020. |
| ● | The income tax provision was $7,133,000 for the year ended December 31, 2021, up from $3,990,000 for the year ended December 31, 2020. Pre-tax income was $14,475,000 higher in 2021 as compared to 2020. The effective tax rate was 18.9% for 2021, higher than the 17.2% effective tax rate for 2020. The tax benefit of tax-exempt interest income was 2.4% of pre-tax income in 2021 as compared to a 3.5% benefit in 2020. |
More detailed information concerning the Corporation’s earnings results are provided in other sections of Management’s Discussion and Analysis.
ACQUISITION OF COVENANT FINANCIAL, INC.
The Corporation’s acquisition of Covenant was completed July 1, 2020. Covenant was the parent company of Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into CN Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. The acquisition of Covenant followed the acquisition of Monument Bancorp, Inc. (“Monument”) on April 1, 2019. Monument was the parent company of Monument Bank, with banking and lending offices in Bucks County, Pennsylvania. The total transaction value of the Monument acquisition was $42.7 million.
In connection with the Covenant acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing subject to adjustment for up to one year subsequent to the acquisition. There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition in the year ended December 31, 2021.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
17
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables I, II and III include information regarding the Corporation’s net interest income in 2021 and 2020. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.
Fully taxable equivalent net interest income was $79,074,000 in 2021, $10,529,000 (15.4%) higher than in 2020. Interest income was $7,496,000 higher in 2021 as compared to 2020; interest expense was lower by $3,033,000 in comparing the same periods. As presented in Table II, the Net Interest Margin was 3.69% in 2021, unchanged from 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.55% in 2021 from 3.49% in 2020. The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and income from the PPP loan program.
Accretion and amortization of purchase accounting adjustments related to the Covenant and Monument acquisitions had a positive effect on net interest income in 2021 of $2,659,000, including an increase in income on loans of $1,289,000 and net reductions in interest expense on time deposits and borrowed funds totaling $1,370,000. In comparison, the net positive impact on net interest income of purchase accounting adjustments was $3,272,000 in 2020. The net positive impact to the net interest margin from purchase accounting adjustments was 0.13% in 2021 and 0.18% in 2020.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $85,636,000 in 2021, an increase of 9.6% from 2020. Interest and fees on loans receivable increased $7,175,000, or 10.3%, to $76,781,000 in 2021 from $69,606,000 in 2020. Interest and fees on PPP loans totaled $6,530,000 in 2021, an increase of $3,606,000 over the total in 2020. Table III shows the increase in interest on loans including $8,016,000 attributable to an increase in volume and a decrease of $841,000 related to a decrease in average yield.
The average balance of loans receivable increased $151,658,000 (10.5%) to $1,596,756,000 in 2021 from $1,445,098,000 in 2020. The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020.
The fully taxable equivalent yield on loans in 2021 was 4.81% compared to 4.82% in 2020. In 2021, rates on variable rate loans and rates on most new loan originations decreased, and prepayments of loans increased, consistent with falling market interest rates throughout most of 2020 and 2021. Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before the acquisition. The overall yield on loans in 2021 included a benefit from the acceleration of fees recognized on PPP loans as repayments have been received from the SBA. As shown in Table II, in 2021, the average balance of 1st Draw PPP loans was $44,735,000 with an average yield of 7.77% and the average balance of 2nd Draw PPP loans was $52,917,000 with an average yield of 5.77%.
Interest income on available-for-sale debt securities totaled $8,471,000 in 2021, an increase of $268,000 from the total for 2020. As indicated in Table II, average available-for-sale debt securities (at amortized cost) totaled $390,163,000 in 2021, an increase of $61,718,000 (18.8%) from 2020. The average yield on available-for-sale debt securities decreased to 2.17% in 2021 from 2.50% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent, lower market rates.
Interest income from interest-bearing deposits in banks totaled $318,000 in 2021, an increase of $67,000 from the total for 2020. The most significant categories of assets within this category include interest-bearing balances held with the Federal Reserve and investments in certificates of deposit issued by other banks. The average balance increased $75,565,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. The average balance of interest-bearing due from banks was 7.3% of average earning assets in 2021 as compared to 4.3% in 2020. The average yield on interest-bearing due from banks fell to 0.20% in 2021 from 0.31% in 2020, due to a decrease in market rates.
18
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense decreased $3,033,000, or 31.6%, to $6,562,000 in 2021 from $9,595,000 in 2020. Table II shows that the overall cost of funds on interest-bearing liabilities decreased to 0.44% in 2021 from 0.72% in 2020.
Total average deposit balances (interest-bearing and noninterest-bearing) increased $318,991,000 to $1,905,400,000 in 2021 from $1,586,409,000 in 2020. The increase in average deposits includes the impact of the Covenant acquisition. The average rate on interest-bearing deposits decreased to 0.33% in 2021 from 0.60% in 2020. The decrease in average rate on deposits includes decreases of 0.54% on time deposits, 0.12% on money market accounts, 0.09% on interest checking accounts and 0.02% on saving accounts. The average balance of time deposits fell to 17.2% of average total deposits in 2021 from 25.1% in 2020, further contributing to the reduction in average rate on deposits.
Interest expense on short-term borrowings decreased $344,000 to $23,000 in 2021 from $367,000 in 2020. The average balance of short-term borrowings decreased to $6,269,000 in 2021 from $34,212,000 in 2020. The average rate on short-term borrowings decreased to 0.37% in 2021 from 1.07% in 2020.
Interest expense on long-term borrowings (FHLB advances) decreased $892,000 to $399,000 in 2021 from $1,291,000 in 2020. The average balance of long-term borrowings was $44,026,000 in 2021, down from an average balance of $83,500,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.91% in 2021 compared to 1.55% in 2020. The reduction in both average balance and rate reflects the prepayment of higher cost borrowings of $48,036,000 in December 2020.
Interest expense on the senior notes issued in May 2021 totaled $293,000 in 2021. The average balance of the senior notes was $9,129,000 in 2021 with an average rate of 3.21%.
Interest expense on subordinated debt increased $603,000 to $1,309,000 in 2021 from $706,000 in 2020. The average balance of subordinated debt increased to $27,399,000 in 2021 from $11,553,000 in 2020 reflecting the net impact of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020, the new issue of subordinated debt of $24,437,000, net, in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 4.78% in 2021 from 6.11% in 2020.
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TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
Year Ended | |||||||||
December 31, | Increase/ | ||||||||
(In Thousands) |
| 2021 |
| 2020 |
| (Decrease) | |||
INTEREST INCOME | |||||||||
Interest-bearing due from banks | $ | 318 | $ | 251 | $ | 67 | |||
Available-for-sale debt securities: |
|
|
| ||||||
Taxable |
| 5,114 |
| 5,534 |
| (420) | |||
Tax-exempt |
| 3,357 |
| 2,669 |
| 688 | |||
Total available-for-sale debt securities |
| 8,471 |
| 8,203 |
| 268 | |||
Loans receivable: |
|
|
| ||||||
Taxable |
| 68,019 |
| 64,460 |
| 3,559 | |||
Paycheck Protection Program - 1st Draw | 3,476 | 2,924 | 552 | ||||||
Paycheck Protection Program - 2nd Draw | 3,054 | 0 | 3,054 | ||||||
Tax-exempt |
| 2,232 |
| 2,222 |
| 10 | |||
Total loans receivable |
| 76,781 |
| 69,606 |
| 7,175 | |||
Other earning assets |
| 66 |
| 80 |
| (14) | |||
Total Interest Income |
| 85,636 |
| 78,140 |
| 7,496 | |||
INTEREST EXPENSE |
|
|
| ||||||
Interest-bearing deposits: |
|
|
| ||||||
Interest checking |
| 897 |
| 948 |
| (51) | |||
Money market |
| 1,156 |
| 1,172 |
| (16) | |||
Savings |
| 231 |
| 230 |
| 1 | |||
Time deposits |
| 2,254 |
| 4,881 |
| (2,627) | |||
Total interest-bearing deposits |
| 4,538 |
| 7,231 |
| (2,693) | |||
Borrowed funds: |
|
|
| ||||||
Short-term |
| 23 |
| 367 |
| (344) | |||
Long-term - FHLB advances |
| 399 |
| 1,291 |
| (892) | |||
Senior notes, net | 293 | 0 | 293 | ||||||
Subordinated debt, net |
| 1,309 |
| 706 |
| 603 | |||
Total borrowed funds |
| 2,024 |
| 2,364 |
| (340) | |||
Total Interest Expense |
| 6,562 |
| 9,595 |
| (3,033) | |||
Net Interest Income | $ | 79,074 | $ | 68,545 | $ | 10,529 | |||
| (1) | Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. |
| (2) | Fees on loans are included with interest on loans and amounted to $7,958,000 in 2021 and $4,314,000 in 2020. |
20
TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(Dollars In Thousands) | Year |
| Year | ||||||||||
Ended | Rate of | Ended | Rate of | ||||||||||
12/31/2021 | Return/ | 12/31/2020 | Return/ | ||||||||||
| Average | Cost of |
| Average | Cost of | ||||||||
| Balance |
| Funds% |
| Balance |
| Funds% | ||||||
EARNING ASSETS |
|
|
|
|
|
| |||||||
Interest-bearing due from banks | $ | 156,152 | 0.20 | % | $ | 80,587 | 0.31 | % | |||||
Available-for-sale debt securities, at amortized cost: |
|
|
|
| |||||||||
Taxable |
| 262,880 |
| 1.95 | % |
| 238,407 |
| 2.32 | % | |||
Tax-exempt |
| 127,283 |
| 2.64 | % |
| 90,038 |
| 2.96 | % | |||
Total available-for-sale debt securities |
| 390,163 |
| 2.17 | % |
| 328,445 |
| 2.50 | % | |||
Loans receivable: |
|
|
|
| |||||||||
Taxable |
| 1,426,150 |
| 4.77 | % |
| 1,285,383 |
| 5.01 | % | |||
Paycheck Protection Program - 1st Draw | 44,735 | 7.77 | % | 98,466 | 2.97 | % | |||||||
Paycheck Protection Program - 2nd Draw | 52,917 | 5.77 | % | 0 | 0.00 | % | |||||||
Tax-exempt |
| 72,954 |
| 3.06 | % |
| 61,249 |
| 3.63 | % | |||
Total loans receivable |
| 1,596,756 |
| 4.81 | % |
| 1,445,098 |
| 4.82 | % | |||
Other earning assets |
| 2,404 |
| 2.75 | % |
| 2,357 |
| 3.39 | % | |||
Total Earning Assets |
| 2,145,475 |
| 3.99 | % |
| 1,856,487 |
| 4.21 | % | |||
Cash |
| 24,132 |
|
|
| 25,439 |
|
| |||||
Unrealized gain on securities |
| 10,676 |
|
|
| 12,487 |
|
| |||||
Allowance for loan losses |
| (12,354) |
|
|
| (11,018) |
|
| |||||
Bank-owned life insurance | 30,373 | 24,415 | |||||||||||
Bank premises and equipment |
| 20,814 |
|
| 19,826 |
| |||||||
Intangible assets |
| 56,086 |
|
| 43,330 |
| |||||||
Other assets |
| 44,032 |
|
| 38,859 |
| |||||||
Total Assets | $ | 2,319,234 | $ | 2,009,825 | |||||||||
INTEREST-BEARING LIABILITIES | |||||||||||||
Interest-bearing deposits: | |||||||||||||
Interest checking | $ | 399,130 | 0.22 | % | $ | 310,782 | 0.31 | % | |||||
Money market | 433,508 | 0.27 | % | 298,736 | 0.39 | % | |||||||
Savings | 228,411 | 0.10 | % | 189,316 | 0.12 | % | |||||||
Time deposits | 327,816 | 0.69 | % | 397,974 | 1.23 | % | |||||||
Total interest-bearing deposits |
| 1,388,865 |
| 0.33 | % |
| 1,196,808 |
| 0.60 | % | |||
Borrowed funds: |
|
|
|
| |||||||||
Short-term |
| 6,269 |
| 0.37 | % |
| 34,212 |
| 1.07 | % | |||
Long-term - FHLB advances |
| 44,026 |
| 0.91 | % |
| 83,500 |
| 1.55 | % | |||
Senior notes, net | 9,129 |
| 3.21 | % |
| 0 | 0.00 | % | |||||
Subordinated debt, net |
| 27,399 |
| 4.78 | % |
| 11,553 |
| 6.11 | % | |||
Total borrowed funds |
| 86,823 |
| 2.33 | % |
| 129,265 |
| 1.83 | % | |||
Total Interest-bearing Liabilities. |
| 1,475,688 |
| 0.44 | % |
| 1,326,073 |
| 0.72 | % | |||
Demand deposits | 516,535 | 389,601 | |||||||||||
Other liabilities | 25,785 | 20,800 | |||||||||||
Total Liabilities | 2,018,008 | 1,736,474 | |||||||||||
Stockholders' equity, excluding other comprehensive income | 292,683 | 263,253 | |||||||||||
Accumulated other comprehensive income | 8,543 | 10,098 | |||||||||||
Total Stockholders' Equity | 301,226 | 273,351 | |||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,319,234 | $ | 2,009,825 | |||||||||
Interest Rate Spread | 3.55 | % | 3.49 | % | |||||||||
Net Interest Income/Earning Assets | 3.69 | % | 3.69 | % | |||||||||
Total Deposits (Interest-bearing and Demand) | $ | 1,905,400 | $ | 1,586,409 | |||||||||
| (1) | Rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. |
| (2) | Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. |
21
TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands) |
| Year Ended 12/31/2021 vs. 12/31/2020 | |||||||
|
| Change in | Change in | Total | |||||
|
| Volume |
| Rate |
| Change | |||
EARNING ASSETS |
|
|
|
|
| ||||
Interest-bearing due from banks | $ | 176 | $ | (109) | $ | 67 | |||
Available-for-sale debt securities: |
|
|
| ||||||
Taxable |
| 532 |
| (952) |
| (420) | |||
Tax-exempt |
| 1,008 |
| (320) |
| 688 | |||
Total available-for-sale debt securities |
| 1,540 |
| (1,272) |
| 268 | |||
Loans receivable: |
|
|
| ||||||
Taxable |
| 6,821 |
| (3,262) |
| 3,559 | |||
Paycheck Protection Program - 1st Draw | (2,247) | 2,799 | 552 | ||||||
Paycheck Protection Program - 2nd Draw | 3,054 | 0 | 3,054 | ||||||
Tax-exempt |
| 388 |
| (378) |
| 10 | |||
Total loans receivable |
| 8,016 |
| (841) |
| 7,175 | |||
Other earning assets |
| 2 |
| (16) |
| (14) | |||
Total Interest Income |
| 9,734 |
| (2,238) |
| 7,496 | |||
|
|
|
|
|
| ||||
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
| |||
Interest-bearing deposits: |
|
|
|
|
|
| |||
Interest checking |
| 233 |
| (284) |
| (51) | |||
Money market |
| 430 |
| (446) |
| (16) | |||
Savings |
| 43 |
| (42) |
| 1 | |||
Time deposits |
| (752) |
| (1,875) |
| (2,627) | |||
Total interest-bearing deposits |
| (46) |
| (2,647) |
| (2,693) | |||
Borrowed funds: |
|
|
| ||||||
Short-term |
| (191) |
| (153) |
| (344) | |||
Long-term - FHLB advances |
| (476) |
| (416) |
| (892) | |||
Senior notes, net | 293 | 0 | 293 | ||||||
Subordinated debt, net |
| 786 |
| (183) |
| 603 | |||
Total borrowed funds |
| 412 |
| (752) |
| (340) | |||
Total Interest Expense |
| 366 |
| (3,399) |
| (3,033) | |||
|
|
| |||||||
Net Interest Income | $ | 9,368 | $ | 1,161 | $ | 10,529 | |||
| (1) | Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. |
| (2) | The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. |
22
NONINTEREST INCOME
TABLE IV - COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands) | Year Ended |
| ||||||||||
| December 31, | $ | % |
| ||||||||
|
| 2021 | 2020 |
| Change | Change |
| |||||
Trust revenue | $ | 7,234 | $ | 6,321 | $ | 913 | 14.4 | % | ||||
Brokerage and insurance revenue |
| 1,860 | 1,486 | 374 | 25.2 | % | ||||||
Service charges on deposit accounts |
| 4,633 | 4,231 | 402 | 9.5 | % | ||||||
Interchange revenue from debit card transactions |
| 3,855 | 3,094 | 761 | 24.6 | % | ||||||
Net gains from sales of loans |
| 3,428 | 5,403 | (1,975) | (36.6) | % | ||||||
Loan servicing fees, net |
| 694 | (61) | 755 | N/M | |||||||
Increase in cash surrender value of life insurance |
| 573 | 515 | 58 | 11.3 | % | ||||||
Other noninterest income |
| 3,580 | 3,355 | 225 | 6.7 | % | ||||||
Total noninterest income, excluding realized gains on securities, net | 25,857 | 24,344 | 1,513 | 6.2 | % | |||||||
Realized gains on available-for-sale debt securities, net | 24 | 169 | (145) | (85.8) | % | |||||||
Total noninterest income | $ | 25,881 | $ | 24,513 | $ | 1,368 | 5.6 | % | ||||
Total noninterest income, excluding realized gains and losses on securities, increased $1,513,000 (6.2%) in 2021 compared to 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.
NONINTEREST EXPENSE
TABLE V - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands) | Year Ended |
| ||||||||||
December 31, | $ | % |
| |||||||||
2021 | 2020 | Change | Change |
| ||||||||
Salaries and employee benefits |
| $ | 37,603 |
| $ | 33,062 |
| $ | 4,541 |
| 13.7 | % |
Net occupancy and equipment expense |
| 4,984 |
| 4,461 |
| 523 |
| 11.7 | % | |||
Data processing and telecommunications expense |
| 5,903 |
| 5,316 |
| 587 |
| 11.0 | % | |||
Automated teller machine and interchange expense |
| 1,433 |
| 1,231 |
| 202 |
| 16.4 | % | |||
Pennsylvania shares tax |
| 1,951 |
| 1,689 |
| 262 |
| 15.5 | % | |||
Professional fees |
| 2,243 |
| 1,692 |
| 551 |
| 32.6 | % | |||
Other noninterest expense |
| 8,355 |
| 8,158 |
| 197 |
| 2.4 | % | |||
Total noninterest expense, excluding merger-related expenses and loss on prepayment of borrowings |
| 62,472 |
| 55,609 |
| 6,863 |
| 12.3 | % | |||
Merger-related expenses |
| 0 |
| 7,708 |
| (7,708) |
| (100.0) | % | |||
Loss on prepayment of borrowings | 0 | 1,636 | (1,636) | (100.0) | % | |||||||
Total noninterest expense | $ | 62,472 | $ | 64,953 | $ | (2,481) |
| (3.8) | % | |||
Total noninterest expenses decreased $2,481,000 (3.8%) in 2021 as compared to 2020. Total noninterest expenses increased $6,863,000 (12.3%) in 2021 excluding Covenant merger-related expenses and loss on prepayment of borrowings in 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.
INCOME TAXES
The effective income tax rate was 18.9% of pre-tax income in 2021, up from 17.2% in 2020. The Corporation’s effective tax rates differed from the federal statutory rate of 21% mainly because of the effects of tax-exempt interest income. The higher effective income tax rate in 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income.
23
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At December 31, 2021, the net deferred tax asset was $5,887,000, up from the balance at December 31, 2020 of $2,705,000. The most significant changes in temporary difference components included a net decrease of $1,826,000 in the deferred tax liability resulting from a reduction in the unrealized gain on available-for-sale debt securities attributable to higher interest rates, as well as fluctuations related to bank premises and equipment, the allowance for loan losses, and acquisition-related adjustments to loans.
The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. Further, the value of the benefit from realization of deferred tax assets would be impacted if income tax rates were changed from currently enacted levels.
Management believes the recorded net deferred tax asset at December 31, 2021 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.
Additional information related to income taxes is presented in Note 14 to the consolidated financial statements.
SECURITIES
The objectives of the Corporation’s available-for-sale debt securities (investment) portfolio are to maintain high credit quality, achieve good portfolio balance, support liquidity needs, maximize return on earning assets within reasonable risk parameters, provide an adequate amount of pledgeable securities, support local communities by purchasing securities they issue for public projects and programs, provide a means to hedge the Corporation’s interest rate risk exposure, and minimize taxes. Management continually evaluates the size and mix of securities held in the available-for-sale debt securities portfolio while considering these objectives.
Table VI shows the composition of the available-for-sale debt securities portfolio at December 31, 2021 and 2020. The amortized cost of available-for-sale debt securities increased to $511,592,000 at December 31, 2021 from $334,552,000 at December 31, 2020. The increase in the securities portfolio resulted from management’s decision to invest excess funds available from the fast growth in deposits and loan repayments throughout most of 2020 and 2021. At December 31, 2021, the largest categories of securities held as a percentage of total amortized cost, were as follows: (1) tax-exempt and taxable municipal bonds, 42.1%; (2) residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies, including pass-through securities and collateralized mortgage obligations, 27.8%; and (3) commercial mortgage-backed securities issued or guaranteed by U.S. Government sponsored agencies, 17.0%.
As reflected in Table VI, the fair value of available-for-sale securities as of December 31, 2021 was $6,087,000, or 1.2% greater than the total amortized cost basis. In comparison, the aggregate unrealized gain position at December 31, 2020 was $14,780,000, or 4.4% of the total amortized cost basis. The unrealized decrease in fair value of the portfolio in 2021 resulted from an increase in interest rates.
Management has reviewed the Corporation’s holdings as of December 31, 2021 and concluded that unrealized losses on all of the securities in an unrealized loss position are considered temporary. Note 7 to the consolidated financial statements provides more detail concerning the Corporation’s processes for evaluating securities for other-than-temporary impairment.
24
TABLE VI - INVESTMENT SECURITIES
2021 | 2020 | |||||||||||
Amortized | Fair | Amortized | Fair | |||||||||
(In Thousands) |
| Cost |
| Value |
| Cost |
| Value | ||||
AVAILABLE-FOR-SALE DEBT SECURITIES: |
|
|
|
|
|
|
|
| ||||
Obligations of the U.S. Treasury | $ | 25,058 | $ | 24,912 | $ | 12,184 | $ | 12,182 | ||||
Obligations of U.S. Government agencies | 23,936 | 24,091 | 25,349 | 26,344 | ||||||||
Bank holding company debt securities | 18,000 | 17,987 | 0 | 0 | ||||||||
Obligations of states and political subdivisions: |
|
|
|
| ||||||||
Tax-exempt |
| 143,427 |
| 148,028 |
| 116,427 |
| 122,401 | ||||
Taxable |
| 72,182 |
| 72,765 |
| 45,230 |
| 47,452 | ||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
| ||||
Residential pass-through securities |
| 98,048 |
| 98,181 |
| 36,853 |
| 38,176 | ||||
Residential collateralized mortgage obligations |
| 44,015 |
| 44,247 |
| 56,048 |
| 57,467 | ||||
Commercial mortgage-backed securities |
| 86,926 |
| 87,468 |
| 42,461 |
| 45,310 | ||||
Total Available-for-Sale Debt Securities | $ | 511,592 | $ | 517,679 | $ | 334,552 | $ | 349,332 | ||||
The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2021. Yields on tax-exempt securities are presented on a fully taxable-equivalent basis. For callable securities, yields on securities purchased at a discount are based on yield-to-maturity, while yields on securities purchased at a premium are based on yield to the first call date. Yields on mortgage-backed securities are estimated and include the effects of prepayment assumptions. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
| Within |
|
| One- |
|
| Five- |
|
| After |
|
|
|
| ||||||||||||
One | Five | Ten | Ten |
| ||||||||||||||||||||||
(Dollars In Thousands) | Year | Yield | Years | Yield | Years | Yield | Years | Yield | Total | Yield |
| |||||||||||||||
AVAILABLE-FOR-SALE DEBT SECURITIES: | ||||||||||||||||||||||||||
Obligations of the U.S. Treasury | $ | 6,044 | 0.12 | % | $ | 7,011 | 0.60 | % | $ | 12,003 | 1.32 | % | $ | 0 | 0.00 | % | $ | 25,058 | 0.83 | % | ||||||
Obligations of U.S. Government agencies | 0 |
| 0.00 | % | 10,000 |
| 0.55 | % | 7,505 |
| 2.06 | % | 6,431 |
| 3.41 | % | 23,936 |
| 1.79 | % | ||||||
Bank holding company debt securities | 0 |
| 0.00 | % | 0 |
| 0.00 | % | 18,000 |
| 3.18 | % | 0 |
| 0.00 | % | 18,000 |
| 3.18 | % | ||||||
Obligations of states and political subdivisions: |
| |||||||||||||||||||||||||
Tax-exempt |
| 2,365 |
| 2.66 | % |
| 25,618 |
| 2.58 | % |
| 24,919 |
| 2.92 | % |
| 90,525 |
| 2.39 | % |
| 143,427 |
| 2.52 | % | |
Taxable |
| 6,045 |
| 3.06 | % |
| 15,932 |
| 1.88 | % |
| 17,105 |
| 1.95 | % |
| 33,100 |
| 2.50 | % |
| 72,182 |
| 2.28 | % | |
Sub-total | $ | 14,454 |
| 1.77 | % | $ | 58,561 |
| 1.81 | % | $ | 79,532 |
| 2.45 | % | $ | 130,056 |
| 2.47 | % | $ | 282,603 |
| 2.29 | % | |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential pass-through securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 98,048 |
| 1.48 | % | ||||||||
Residential collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 44,015 |
| 1.79 | % | ||||||||
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 86,926 |
| 1.89 | % | ||||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 511,592 |
| 2.02 | % | ||||||||
The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period.
25
FINANCIAL CONDITION
This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at December 31, 2021, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2022.
Table VII shows the composition of the loan portfolio as of the end of the years 2017 through 2021. At December 31, 2021, gross loans outstanding totaled $1,564,849,000, a decrease of $79.4 million (4.8%) from December 31, 2020 as the outstanding balance of PPP loans decreased $105.4 million. The total recorded investment in loans at December 31, 2021 was $749.1 million (92%) higher than the total at December 31, 2017, with most of the growth attributable to the Monument acquisition in 2019, Covenant acquisition in 2020 and expansion in Southcentral Pennsylvania, mainly in 2020 and 2021. Over the period 2017-2021, the Corporation has increased the proportion of residential mortgage loans sold into the secondary market. Consistent with these trends, commercial segment loans increased to 63% of the recorded investment in the portfolio at December 31, 2021 from 43% at December 31, 2017, while residential mortgage segment loans decreased to 36% at December 31, 2021 from 55% at December 31, 2017.
While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to $54,372,000 at December 31, 2021, down from $65,741,000 at December 31, 2020. At December 31, 2021, the balance of participation loans outstanding includes a total of $30,196,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $7,468,000 at December 31, 2021 and $8,437,000 at December 31, 2020.
Table VIII presents loan maturity data as of December 31, 2021. Fixed-rate loans are shown in Table VIII based on their contractually scheduled principal repayments, and variable-rate loans are shown based on the date of the next change in rate. Table VIII presents a well-balanced maturity and repricing mix. Total fixed rate loans maturing within one year and variable or adjustable loans repricing within one year amount to $439,016,000 or 28% of the portfolio. Table VIII shows that fixed-rate loans total approximately 44% of the loan portfolio and approximately 33% of the portfolio are variable-rate loans that re-price after more than one year.
Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through December 31, 2021, the Corporation’s activity under the MPF Direct Program has been minimal.
For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At December 31, 2021, the total outstanding balance of loans the Corporation has
26
repurchased as a result of identified instances of noncompliance amounted to $1,571,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2020 was $1,714,000.
At December 31, 2021, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $334,741,000, including loans sold through the MPF Xtra program of $165,668,000 and loans sold through the Original program of $169,073,000. At December 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original Program of $129,394,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 2021 and December 31, 2020.
For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the Corporation has recorded a related allowance for credit losses in the amount of $635,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the related allowance for credit losses was $500,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $348,000 in 2021 and $227,000 in 2020. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $135,000 was recorded in 2021 compared to $167,000 in 2020. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.
The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Covenant had also been a participating SBA lender. Pursuant to the Covenant acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the loans originated through the various SBA loan programs acquired from Covenant as of July 1, 2020 and recorded an allowance for SBA claim adjustments of $800,000. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on loans originated by Covenant was $12,856,000 at December 31, 2021 and $17,041,000 at December 31, 2020 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $457,000 at December 31, 2021 and $730,000 at December 31, 2020. In the year ended December 31, 2021, the Corporation recorded charges against the allowance for SBA claims totaling $37,000 and a reduction in other noninterest expense of $236,000 representing amounts realized on SBA claims in excess of prior estimates. In comparison, in 2020, there were no charges against the allowance for SBA claims and the Corporation recognized a reduction in other noninterest expense of $70,000.
27
TABLE VII – Five-year Summary of Loans by Type
(Dollars In Thousands) |
| 2021 |
| % | 2020 |
| % | 2019 |
| % | 2018 |
| % | 2017 |
| % | |||||||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial loans secured by real estate | $ | 569,840 |
| 36.4 | $ | 531,810 |
| 32.3 | $ | 301,227 |
| 25.5 | $ | 162,611 |
| 19.6 | $ | 159,266 |
| 19.5 | |||||
Commercial and industrial |
| 159,073 |
| 10.2 |
| 159,577 |
| 9.7 |
| 126,374 |
| 10.7 |
| 91,856 |
| 11.1 |
| 88,276 |
| 10.8 | |||||
Paycheck Protection Program - 1st Draw | 1,356 | 0.1 | 132,269 | 8.0 | 0 | 0.0 | 0 | 0.0 | 0 | 0.0 | |||||||||||||||
Paycheck Protection Program - 2nd Draw | 25,508 | 1.6 | 0 | 0.0 | 0 | 0.0 | 0 | 0.0 | 0 | 0.0 | |||||||||||||||
Political subdivisions |
| 81,301 |
| 5.2 |
| 53,221 |
| 3.2 |
| 53,570 |
| 4.5 |
| 53,263 |
| 6.4 |
| 59,287 |
| 7.3 | |||||
Commercial construction and land |
| 60,579 |
| 3.9 |
| 42,874 |
| 2.6 |
| 33,555 |
| 2.8 |
| 11,962 |
| 1.4 |
| 14,527 |
| 1.8 | |||||
Loans secured by farmland |
| 11,121 |
| 0.7 |
| 11,736 |
| 0.7 |
| 12,251 |
| 1.0 |
| 7,146 |
| 0.9 |
| 7,255 |
| 0.9 | |||||
Multi-family (5 or more) residential |
| 50,089 |
| 3.2 |
| 55,811 |
| 3.4 |
| 31,070 |
| 2.6 |
| 7,180 |
| 0.9 |
| 7,713 |
| 0.9 | |||||
Agricultural loans |
| 2,351 |
| 0.2 |
| 3,164 |
| 0.2 |
| 4,319 |
| 0.4 |
| 5,659 |
| 0.7 |
| 6,178 |
| 0.8 | |||||
Other commercial loans |
| 17,153 |
| 1.0 |
| 17,289 |
| 1.1 |
| 16,535 |
| 1.4 |
| 13,950 |
| 1.7 |
| 10,986 |
| 1.3 | |||||
Total commercial |
| 978,371 |
| 62.5 |
| 1,007,751 |
| 61.2 |
| 578,901 |
| 49.0 |
| 353,627 |
| 42.7 |
| 353,488 |
| 43.3 | |||||
Residential mortgage: | |||||||||||||||||||||||||
Residential mortgage loans - first liens | 483,629 |
| 30.9 | 532,947 |
| 32.4 | 510,641 |
| 43.2 | 372,339 |
| 45.0 | 359,987 |
| 44.1 | ||||||||||
Residential mortgage loans - junior liens |
| 23,314 |
| 1.5 |
| 27,311 |
| 1.7 |
| 27,503 |
| 2.3 |
| 25,450 |
| 3.1 |
| 25,325 |
| 3.1 | |||||
Home equity lines of credit |
| 39,252 |
| 2.5 |
| 39,301 |
| 2.4 |
| 33,638 |
| 2.8 |
| 34,319 |
| 4.1 |
| 35,758 |
| 4.4 | |||||
1-4 Family residential construction |
| 23,151 |
| 1.5 |
| 20,613 |
| 1.3 |
| 14,798 |
| 1.3 |
| 24,698 |
| 3.0 |
| 26,216 |
| 3.2 | |||||
Total residential mortgage |
| 569,346 |
| 36.4 |
| 620,172 |
| 37.8 |
| 586,580 |
| 49.6 |
| 456,806 |
| 55.2 |
| 447,286 |
| 54.8 | |||||
Consumer |
| 17,132 |
| 1.1 |
| 16,286 |
| 1.0 |
| 16,741 |
| 1.4 |
| 17,130 |
| 2.1 |
| 14,939 |
| 1.8 | |||||
Total |
| 1,564,849 |
| 100.0 |
| 1,644,209 |
| 100.0 |
| 1,182,222 |
| 100.0 |
| 827,563 |
| 100.0 |
| 815,713 |
| 100.0 | |||||
Less: allowance for loan losses |
| (13,537) |
|
| (11,385) |
|
| (9,836) |
|
| (9,309) |
|
| (8,856) |
|
| |||||||||
Loans, net | $ | 1,551,312 | $ | 1,632,824 | $ | 1,172,386 | $ | 818,254 | $ | 806,857 |
|
| |||||||||||||
TABLE VIII – LOAN MATURITY DISTRIBUTION
As of December 31, 2021 | |||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||
Fixed-Rate Loans | Variable- or Adjustable-Rate Loans |
| All Loans | ||||||||||||||||||||||||||
1 Year | 1-5 | 5 | 1 Year | 1-5 | 5 |
| |||||||||||||||||||||||
(In Thousands) |
| or Less |
| Years |
| Years |
| Total |
|
| or Less |
| Years |
| Years |
| Total | Total | |||||||||||
Commercial: | |||||||||||||||||||||||||||||
Commercial loans secured by real estate | $ | 28,232 | $ | 114,404 | $ | 77,419 | $ | 220,055 | $ | 153,384 | $ | 178,051 | $ | 18,350 | $ | 349,785 | $ | 569,840 | |||||||||||
Commercial and industrial |
| 15,894 |
| 33,420 |
| 4,937 |
| 54,251 |
| 82,969 |
| 21,323 |
| 530 |
| 104,822 | 159,073 | ||||||||||||
Paycheck Protection Program - 1st Draw | 781 |
| 575 |
| 0 |
| 1,356 |
| 0 |
| 0 |
| 0 |
| 0 | 1,356 | |||||||||||||
Paycheck Protection Program - 2nd Draw | 0 | 25,508 | 0 | 25,508 | 0 | 0 | 0 | 0 | 25,508 | ||||||||||||||||||||
Political subdivisions | 2,164 | 5,709 | 65,371 | 73,244 | 1,247 | 299 | 6,511 | 8,057 | 81,301 | ||||||||||||||||||||
Commercial construction and land | 1,287 | 3,959 | 43,630 | 48,876 | 8,049 | 1,650 | 2,004 | 11,703 | 60,579 | ||||||||||||||||||||
Loans secured by farmland | 49 | 183 | 890 | 1,122 | 2,129 | 7,688 | 182 | 9,999 | 11,121 | ||||||||||||||||||||
Multi-family (5 or more) residential | 1,569 | 11,045 | 5,980 | 18,594 | 14,163 | 10,339 | 6,993 | 31,495 | 50,089 | ||||||||||||||||||||
Agricultural loans | 120 | 830 | 0 | 950 | 1,214 | 187 | 0 | 1,401 | 2,351 | ||||||||||||||||||||
Other commercial loans | 3 | 1,043 | 3,009 | 4,055 | 9,765 | 2,977 | 356 | 13,098 | 17,153 | ||||||||||||||||||||
Total commercial | 50,099 | 196,676 | 201,236 | 448,011 | 272,920 | 222,514 | 34,926 | 530,360 | 978,371 | ||||||||||||||||||||
Residential mortgage: | |||||||||||||||||||||||||||||
Residential mortgage loans - first liens | 10,198 | 31,761 | 144,308 | 186,267 | 57,760 | 119,418 | 120,184 | 297,362 | 483,629 | ||||||||||||||||||||
Residential mortgage loans - junior liens | 381 | 2,800 | 12,825 | 16,006 | 3,434 | 3,455 | 419 | 7,308 | 23,314 | ||||||||||||||||||||
Home equity lines of credit | 95 | 0 | 250 | 345 | 38,815 | 0 | 92 | 38,907 | 39,252 | ||||||||||||||||||||
1-4 Family residential construction | 0 | 3,198 | 11,488 | 14,686 | 725 | 589 | 7,151 | 8,465 | 23,151 | ||||||||||||||||||||
Total residential mortgage | 10,674 | 37,759 | 168,871 | 217,304 | 100,734 | 123,462 | 127,846 | 352,042 | 569,346 | ||||||||||||||||||||
Consumer | 3,827 | 9,754 | 2,789 | 16,370 | 762 | 0 | 0 | 762 | 17,132 | ||||||||||||||||||||
Total | $ | 64,600 | $ | 244,189 | $ | 372,896 | $ | 681,685 | $ | 374,416 | $ | 345,976 | $ | 162,772 | $ | 883,164 | $ | 1,564,849 | |||||||||||
28
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses.
While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
The allowance for loan losses was $13,537,000 at December 31, 2021, up from $11,385,000 at December 31, 2020. Table X shows that the collectively determined portion of the allowance increased by a net $2,251,000 across all loan classes, including an increase in the collectively determined portion of the allowance related to commercial loans of $2,008,000. This increase was primarily due to an increase in loan volume, excluding PPP loans.
Table X shows total specific allowances on impaired loans decreased $185,000 to $740,000 at December 31, 2021 from $925,000 at December 31, 2020. At December 31, 2021, there were 3 commercial loans with specific allowances. The total recorded investment in these loans at December 31, 2021 was $6,540,000, including 2 loans secured by hotel properties with total recorded investments of $6,468,000.
Loans acquired from Covenant that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $6,648,000 at July 1, 2020 and $6,259,000 at December 31, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Covenant are presented net of a discount for credit losses of $3,059,000 at December 31, 2021 and $5,362,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $7,219,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.
Loans acquired from Monument that were identified as having a deterioration in credit quality (PCI) were valued at $441,000 at April 1, 2019 and $299,000 at December 31, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $276,000 at December 31, 2021 and $617,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.
Table XI shows the allowance for loan losses totaled 0.87% of gross loans outstanding at December 31, 2021, up from 0.69% at December 31, 2020 and 0.83% at December 31, 2019, and down from levels in excess of 1.00% prior to the Covenant and Monument acquisitions from 2017 to 2018. Table XI also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.08% at December 31, 2021, up from 1.05% at December 31, 2020 and 0.93% at December 31, 2019, and in line with ratios from the previous years.
The provision for loan losses by segment for 2021 and 2020 is as follows:
(In Thousands) |
| 2021 |
| 2020 | ||
Commercial | $ | 3,427 | $ | 3,847 | ||
Residential mortgage | 90 | 27 | ||||
Consumer |
| 58 |
| 39 | ||
Unallocated |
| 86 |
| 0 | ||
Total | $ | 3,661 | $ | 3,913 | ||
29
The provision for loan losses is further detailed as follows:
Commercial segment
(In Thousands) |
| 2021 |
| 2020 | ||
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs | $ | 1,419 | $ | 2,215 | ||
Increase in collectively determined portion of the allowance attributable to: |
|
|
|
| ||
Changes in loan volume |
| 1,879 |
| 432 | ||
Changes in historical loss experience factors |
| 129 |
| 831 | ||
Changes in qualitative factors |
| 0 |
| 369 | ||
Total provision for loan losses - Commercial segment | $ | 3,427 | $ | 3,847 | ||
Residential mortgage segment
(In Thousands) |
| 2021 |
| 2020 | ||
Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs | $ | (157) | $ | (58) | ||
Increase (decrease) in collectively determined portion of the allowance attributable to: |
|
|
|
| ||
Changes in loan volume |
| 348 |
| (240) | ||
Changes in historical loss experience factors |
| (56) |
| (88) | ||
Changes in qualitative factors |
| (45) |
| 413 | ||
Total provision for loan losses - Residential mortgage segment | $ | 90 | $ | 27 | ||
Consumer segment
(In Thousands) |
| 2021 |
| 2020 | ||
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs | $ | 62 | $ | 81 | ||
Increase (decrease) in collectively determined portion of the allowance attributable to: |
|
|
|
| ||
Changes in loan volume |
| 14 |
| (30) | ||
Changes in historical loss experience factors |
| (23) |
| (15) | ||
Changes in qualitative factors |
| 5 |
| 3 | ||
Total provision for loan losses - Consumer segment | $ | 58 | $ | 39 | ||
Total – All segments
(In Thousands) |
| 2021 | 2020 | |||
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs | $ | 1,324 | $ | 2,238 | ||
Increase (decrease) in collectively determined portion of the allowance attributable to: |
|
|
| |||
Changes in loan volume |
| 2,241 |
| 162 | ||
Changes in historical loss experience factors |
| 50 |
| 728 | ||
Changes in qualitative factors |
| (40) |
| 785 | ||
Sub-total |
| 3,575 |
| 3,913 | ||
Unallocated |
| 86 |
| 0 | ||
Total provision for loan losses - All segments | $ | 3,661 | $ | 3,913 | ||
For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off.
In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to changes in loan volume was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase in loans outstanding (excluding loans specifically evaluated for impairment) for the period.
The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding
30
period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment).
In 2021, net charge-offs were $1,509,000, including charge-offs of $1,575,000 and recoveries of $66,000. In 2021, the Corporation recorded partial charge-offs totaling $1,463,000 on a commercial loan. At December 31, 2021, the recorded investment in this loan was $1,391,000. In 2020, the Corporation recorded a charge-off of $2,219,000 on one commercial loan for which there was no recorded investment at December 31, 2021 and 2020. Table XII shows the average rate of net charge-offs as a percentage of loans was 0.09% in 2021, with an annual average over the five-year period ended December 31, 2021 of 0.08%, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.
Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 1.36% at December 31, 2021, down from 1.42% at December 31, 2020, and nonperforming assets as a percentage of total assets was 0.94% at December 31, 2021, down from 1.10% at December 31, 2020. Table XI presents data at the end of each of the years ended December 31, 2017 through 2021. Table XI shows that total nonperforming loans as a percentage of loans of 1.36% at December 31, 2021, though up from the low of 0.88% at December 31, 2019, was lower than the corresponding ratio at December 31, 2017, 2018 and 2020. Similarly, the December 31, 2021 ratio of total nonperforming assets as a percentage of assets of 0.94% was up from the low of 0.80% at December 31, 2019, but lower than the corresponding ratio at December 31, 2017, 2018 and 2020.
Total impaired loans of $15,734,000 at December 31, 2021 are down $2,084,000 from the corresponding amount at December 31, 2020 of $17,818,000. Table XI shows that while the total balance of impaired loans at December 31, 2021 was lower than the amount at December 31, 2020, it was higher than the amounts over the periods of 2017-2019, which ranged from a low of $5,486,000 in 2019 to the high of $9,774,000 at December 31, 2018. The increase in total impaired loans in 2020 and 2021 includes the impact of purchased credit impaired loans acquired from Covenant and Monument.
Total nonperforming assets of $21,902,000 at December 31, 2021 are $2,827,000 lower than the corresponding amount at December 31, 2020, summarized as follows:
| ● | Total nonaccrual loans at December 31, 2021 of $18,999,000 was $2,417,000 lower than the corresponding December 31, 2020 total of $21,416,000. |
| ● | Total loans past due 90 days or more and still accruing interest amounted to $2,219,000 at December 31, 2021, an increase of $244,000 from the total at December 31, 2020. |
| ● | Foreclosed assets held for sale consisted of real estate, and totaled $684,000 at December 31, 2021, a decrease of $654,000 from $1,338,000 at December 31, 2020. At December 31, 2021, the Corporation held four such properties for sale, with total carrying values of $256,000 related to residential real estate and $428,000 related to commercial real estate. At December 31, 2020, the Corporation held six such properties for sale, with total carrying values of $80,000 related to residential real estate and $1,258,000 related to commercial real estate. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property. |
As reflected in Table XI, total loans past due 30-89 days and still accruing interest amounted to $5,106,000 at December 31, 2021, down from $5,918,000 at December 31, 2020. This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $4,347,000 at December 31, 2021, down from $5,084,000 at December 31, 2020. Management monitors the status of delinquent residential mortgage loans on an ongoing basis and has considered delinquency trends, which were generally favorable throughout most of 2021, in evaluating the allowance for loan losses at December 31, 2021.
Over the period 2017-2021, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans and may significantly impact the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as
31
of December 31, 2021. Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.
Tables IX through XII present historical data related to the allowance for loan losses.
TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars In Thousands) | Years Ended December 31, | |||||||||||||||
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| ||||||
Balance, beginning of year | $ | 11,385 | $ | 9,836 | $ | 9,309 | $ | 8,856 | $ | 8,473 | ||||||
Charge-offs: |
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
| (1,464) |
| (2,343) |
| (6) |
| (165) |
| (132) | ||||||
Residential mortgage |
| (11) |
| 0 |
| (190) |
| (158) |
| (197) | ||||||
Consumer |
| (100) |
| (122) |
| (183) |
| (174) |
| (150) | ||||||
Total charge-offs |
| (1,575) |
| (2,465) |
| (379) |
| (497) |
| (479) | ||||||
Recoveries: |
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
| 22 |
| 16 |
| 6 |
| 317 |
| 4 | ||||||
Residential mortgage |
| 6 |
| 44 |
| 12 |
| 8 |
| 19 | ||||||
Consumer |
| 38 |
| 41 |
| 39 |
| 41 |
| 38 | ||||||
Total recoveries |
| 66 |
| 101 |
| 57 |
| 366 |
| 61 | ||||||
Net charge-offs |
| (1,509) |
| (2,364) |
| (322) |
| (131) |
| (418) | ||||||
Provision for loan losses |
| 3,661 |
| 3,913 |
| 849 |
| 584 |
| 801 | ||||||
Balance, end of period | $ | 13,537 | $ | 11,385 | $ | 9,836 | $ | 9,309 | $ | 8,856 | ||||||
Net charge-offs as a % of average loans |
| 0.09 | % |
| 0.16 | % |
| 0.03 | % |
| 0.02 | % |
| 0.05 | % | |
TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands) | As of December 31, | ||||||||||||||
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 | ||||||
ASC 310 - Impaired loans - individually evaluated | $ | 740 | $ | 925 | $ | 1,051 | $ | 1,605 | $ | 1,279 | |||||
ASC 450 - Collectively evaluated: |
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
| 7,553 |
| 5,545 |
| 3,913 |
| 3,102 |
| 3,078 | |||||
Residential mortgage |
| 4,338 |
| 4,091 |
| 4,006 |
| 3,870 |
| 3,841 | |||||
Consumer |
| 235 |
| 239 |
| 281 |
| 233 |
| 159 | |||||
Unallocated |
| 671 |
| 585 |
| 585 |
| 499 |
| 499 | |||||
Total Allowance | $ | 13,537 | $ | 11,385 | $ | 9,836 | $ | 9,309 | $ | 8,856 | |||||
32
TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(Dollars In Thousands) | As of December 31, |
| ||||||||||||||
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| ||||||
Impaired loans with a valuation allowance | $ | 6,540 | $ | 8,082 | $ | 3,375 | $ | 4,851 | $ | 4,100 | ||||||
Impaired loans without a valuation allowance |
| 2,636 |
| 2,895 |
| 1,670 |
| 4,923 |
| 5,411 | ||||||
Purchased credit impaired loans | 6,558 | 6,841 | 441 | 0 | 0 | |||||||||||
Total impaired loans | $ | 15,734 | $ | 17,818 | $ | 5,486 | $ | 9,774 | $ | 9,511 | ||||||
Total loans past due 30-89 days and still accruing | $ | 5,106 | $ | 5,918 | $ | 8,889 | $ | 7,142 | $ | 9,449 | ||||||
Nonperforming assets: |
|
|
|
|
|
|
|
|
|
| ||||||
Purchased credit impaired loans | $ | 6,558 | $ | 6,841 | $ | 441 | $ | 0 | $ | 0 | ||||||
Other nonaccrual loans | 12,441 | 14,575 | 8,777 | 13,113 | 13,404 | |||||||||||
Total nonaccrual loans | 18,999 | 21,416 | 9,218 | 13,113 | 13,404 | |||||||||||
Total loans past due 90 days or more and still accruing |
| 2,219 |
| 1,975 |
| 1,207 |
| 2,906 |
| 3,724 | ||||||
Total nonperforming loans |
| 21,218 |
| 23,391 |
| 10,425 |
| 16,019 |
| 17,128 | ||||||
Foreclosed assets held for sale (real estate) |
| 684 |
| 1,338 |
| 2,886 |
| 1,703 |
| 1,598 | ||||||
Total nonperforming assets | $ | 21,902 | $ | 24,729 | $ | 13,311 | $ | 17,722 | $ | 18,726 | ||||||
Loans subject to troubled debt restructurings (TDRs): |
|
|
|
|
|
|
|
|
|
| ||||||
Performing | $ | 288 | $ | 166 | $ | 889 | $ | 655 | $ | 636 | ||||||
Nonperforming |
| 5,517 |
| 7,285 |
| 1,737 |
| 2,884 |
| 3,027 | ||||||
Total TDRs | $ | 5,805 | $ | 7,451 | $ | 2,626 | $ | 3,539 | $ | 3,663 | ||||||
Total nonperforming loans as a % of loans |
| 1.36 | % |
| 1.42 | % |
| 0.88 | % |
| 1.94 | % |
| 2.10 | % | |
Total nonperforming assets as a % of assets |
| 0.94 | % |
| 1.10 | % |
| 0.80 | % |
| 1.37 | % |
| 1.47 | % | |
Allowance for loan losses as a % of total loans |
| 0.87 | % |
| 0.69 | % |
| 0.83 | % |
| 1.12 | % |
| 1.09 | % | |
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a) | 1.08 | % | 1.05 | % | 0.93 | % | 1.12 | % | 1.09 | % | ||||||
Allowance for loan losses as a % of nonperforming loans |
| 63.80 | % |
| 48.67 | % |
| 94.35 | % |
| 58.11 | % |
| 51.70 | % | |
(a) Credit adjustment on purchased non-impaired loans at end of period | $ | 3,335 | $ | 5,979 | $ | 1,216 | $ | 0 | $ | 0 | ||||||
Allowance for loan losses | 13,537 | 11,385 | 9,836 | 9,309 | 8,856 | |||||||||||
Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1) | $ | 16,872 | $ | 17,364 | $ | 11,052 | $ | 9,309 | $ | 8,856 | ||||||
Total loans receivable | $ | 1,564,849 | $ | 1,644,209 | $ | 1,182,222 | $ | 827,563 | $ | 815,713 | ||||||
Credit adjustment on purchased non-impaired loans at end of period | 3,335 | 5,979 | 1,216 | 0 | 0 | |||||||||||
Total (2) | $ | 1,568,184 | $ | 1,650,188 | $ | 1,183,438 | $ | 827,563 | $ | 815,713 | ||||||
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2) | 1.08 | % | 1.05 | % | 0.93 | % | 1.12 | % | 1.09 | % | ||||||
33
TABLE XII – FIVE-YEAR HISTORY OF LOAN LOSSES
(Dollars In Thousands) |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Average |
| ||||||
Average gross loans | $ | 1,596,756 | $ | 1,445,098 | $ | 1,057,559 | $ | 822,346 | $ | 780,640 | $ | 1,140,480 | |||||||
Year-end gross loans |
| 1,564,849 |
| 1,644,209 |
| 1,182,222 |
| 827,563 |
| 815,713 | $ | 1,206,911 | |||||||
Year-end allowance for loan losses |
| 13,537 |
| 11,385 |
| 9,836 |
| 9,309 |
| 8,856 | $ | 10,585 | |||||||
Year-end nonaccrual loans |
| 18,999 |
| 21,416 |
| 9,218 |
| 13,113 |
| 13,404 | $ | 15,230 | |||||||
Year-end loans 90 days or more past due and still accruing |
| 2,219 |
| 1,975 |
| 1,207 |
| 2,906 |
| 3,724 |
| 2,406 | |||||||
Net charge-offs |
| 1,509 |
| 2,364 |
| 322 |
| 131 |
| 418 |
| 949 | |||||||
Provision for loan losses |
| 3,661 |
| 3,913 |
| 849 |
| 584 |
| 801 |
| 1,962 | |||||||
Earnings coverage of charge-offs |
| 26 | x |
| 10 | x |
| 76 | x |
| 210 | x |
| 56 | x |
| 29 | x | |
Allowance coverage of charge-offs |
| 9 | x |
| 5 | x |
| 31 | x |
| 71 | x |
| 21 | x |
| 11 | x | |
Net charge-offs as a % of provision for loan losses |
| 41.22 | % |
| 60.41 | % |
| 37.93 | % |
| 22.43 | % |
| 52.18 | % |
| 48.37 | % | |
Net charge-offs as a % of average gross loans |
| 0.09 | % |
| 0.16 | % |
| 0.03 | % |
| 0.02 | % |
| 0.05 | % |
| 0.08 | % | |
Income before income taxes on a fully taxable equivalent basis |
| 38,822 |
| 24,192 |
| 24,453 |
| 27,564 |
| 23,350 |
| 27,676 | |||||||
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Corporation’s significant fixed and determinable contractual obligations as of December 31, 2021 include repayment obligations related to time deposits and borrowed funds. Information related to maturities of time deposits is provided in Note 11 to the consolidated financial statements. Information related to maturities of borrowed funds is provided in Note 12 to the consolidated financial statements. The Corporation’s operating lease commitments with terms of one year or less and other commitments at December 31, 2021 are immaterial. Information concerning operating lease commitments with terms greater than one year is provided in Note 17 to the consolidated financial statements. The Corporation’s significant off-balance sheet arrangements include commitments to extend credit and standby letters of credit. Off-balance sheet arrangements are described in Note 16 to the consolidated financial statements.
As described in more detail in the Financial Condition section of Management’s Discussion and Analysis, the Corporation sells residential mortgage loans for which the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. At December 31, 2021, outstanding balances of such loans sold totaled $334,741,000.
Also, for loans sold under the MPF Original program, the Corporation provides a credit enhancement. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the Corporation has recorded a related allowance for credit losses in the amount of $635,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets.
As discussed in the Financial Condition section of Management’s Discussion and Analysis, the Corporation is a participating SBA lender and may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. In some cases, the Corporation may sell the SBA-guaranteed portion of the loan back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. If it is determined that the ongoing compliance requirements are not met, the Corporation could be subject to claim adjustments on SBA guaranteed loans. At December 31, 2021, the Corporation’s total exposure to SBA guarantees was $12,856,000 with a recorded claims adjustment allowance of $457,000, included in accrued interest and other liabilities in the consolidated balance sheets.
34
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At December 31, 2021, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $79,119,000. The Corporation’s cash position throughout 2021 has been elevated in comparison to historical levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash.
The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale securities with a carrying value of $14,034,000 at December 31, 2021.
The Corporation’s outstanding, available, and total credit facilities at December 31, 2021 and 2020 are as follows:
Outstanding | Available | Total Credit | ||||||||||||||||
(In Thousands) |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, |
| December 31, | ||||||
2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||
Federal Home Loan Bank of Pittsburgh | $ | 33,311 | $ | 72,222 | $ | 723,557 | $ | 698,977 | $ | 756,868 | $ | 771,199 | ||||||
Federal Reserve Bank Discount Window |
| 0 |
| 0 |
| 13,642 |
| 14,654 |
| 13,642 |
| 14,654 | ||||||
Other correspondent banks |
| 0 |
| 0 |
| 45,000 |
| 45,000 |
| 45,000 |
| 45,000 | ||||||
Total credit facilities | $ | 33,311 | $ | 72,222 | $ | 782,199 | $ | 758,631 | $ | 815,510 | $ | 830,853 | ||||||
At December 31, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $27,727,000 and letters of credit totaling $5,584,000. At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit.
Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale debt securities to meet its obligations. At December 31, 2021, the carrying value of available-for-sale debt securities in excess of amounts required to meet pledging or repurchase agreement obligations was $307,387,000.
Management believes the Corporation is well-positioned to meet its short-term and long-term obligations.
STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY
Details concerning capital ratios at December 31, 2021 and December 31, 2020 are presented in Note 18 to the consolidated financial statements. Management believes, as of December 31, 2021, that CN Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, the Corporation’s and CN Bank’s capital ratios at December 31, 2021 and December 31, 2020 exceed the Corporation’s Board policy threshold levels. Management expects CN Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future.
Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and CN Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability
35
to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold sufficient capital commensurate with its overall risk profile.
To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At December 31, 2021, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
Minimum common equity tier 1 capital ratio |
| 4.5 | % |
Minimum common equity tier 1 capital ratio plus capital conservation buffer |
| 7.0 | % |
Minimum tier 1 capital ratio |
| 6.0 | % |
Minimum tier 1 capital ratio plus capital conservation buffer |
| 8.5 | % |
Minimum total capital ratio |
| 8.0 | % |
Minimum total capital ratio plus capital conservation buffer |
| 10.5 | % |
A banking organization with a buffer greater than 2.5% would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The rule also prohibits a banking organization from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer |
| Maximum Payout |
|
(as a % of risk-weighted assets) | (as a % of eligible retained income) |
| |
Greater than 2.5% | No payout limitation applies | ||
≤2.5% and 1.875% | 60 | % | |
≤1.875% and 1.25% | 40 | % | |
≤1.25% and 0.625% | 20 | % | |
≤0.625% | 0 | % |
At December 31, 2021, CN Bank’s Capital Conservation Buffer (determined based on the minimum total capital ratio) was 8.04%.
The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains on available-for-sale debt securities, net of deferred income tax, amounted to $4,809,000 at December 31, 2021 and $11,676,000 at December 31, 2020. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 7 to the consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at December 31, 2021.
Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income related to defined benefit plans, net of deferred income tax, was $217,000 at December 31, 2021 and $119,000 at December 31, 2020.
INFLATION
Inflation affects the cost of labor, supplies and services used to provide banking services as well as interest rates. After many years of low inflation, disruptions to labor markets and supply chains triggered by the COVID-19 pandemic and government policies have led to an annual inflation rate in 2021, based on changes in the Consumer Price Index, of 7%.
36
The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. In March of 2020, in response to significant concerns about the impact of the COVID-19 pandemic on the U.S. economy, the Federal Reserve lowered the fed funds target rate from 1.75% to 0.25%, which it has maintained through December 31, 2021. Also, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. The Federal Reserve has purchased large amounts of securities in an effort to keep interest rates low and stimulate economic growth. The Federal Open Market Committee (FOMC) has noted in its most recent statement that indicators of economic activity and employment have continued to strengthen and that inflationary concerns may no longer be considered transitory in nature. The Committee noted its desire to achieve maximum employment and inflation at a rate of 2 percent over the longer run and with inflation currently well above that level with a strong labor market, it expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee also decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March of 2022.
Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including indicators of inflationary pressures, in managing interest rate and other financial risks.
37
ITEM 8. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
| December 31, |
| December 31, | |||
(In Thousands, Except Share and Per Share Data) | 2021 | 2020 | ||||
ASSETS |
|
|
|
| ||
Cash and due from banks: |
|
|
|
| ||
Noninterest-bearing | $ | | $ | | ||
Interest-bearing |
| |
| | ||
Total cash and due from banks |
| |
| | ||
Available-for-sale debt securities, at fair value |
| |
| | ||
Loans receivable |
| |
| | ||
Allowance for loan losses |
| ( |
| ( | ||
Loans, net |
| |
| | ||
Bank-owned life insurance |
| |
| | ||
Accrued interest receivable |
| |
| | ||
Bank premises and equipment, net |
| |
| | ||
Foreclosed assets held for sale |
| |
| | ||
Deferred tax asset, net |
| |
| | ||
Goodwill |
| |
| | ||
Core deposit intangibles, net |
| |
| | ||
Other assets |
| |
| | ||
TOTAL ASSETS | $ | | $ | | ||
LIABILITIES |
|
| ||||
Deposits: |
|
| ||||
Noninterest-bearing | $ | | $ | | ||
Interest-bearing |
| |
| | ||
Total deposits |
| |
| | ||
Short-term borrowings |
| |
| | ||
Long-term borrowings - FHLB advances |
| |
| | ||
Senior notes, net | | |||||
Subordinated debt, net |
| |
| | ||
Accrued interest and other liabilities |
| |
| | ||
TOTAL LIABILITIES |
| |
| | ||
STOCKHOLDERS' EQUITY |
|
| ||||
Preferred stock, $ |
|
| ||||
preference per share; |
| |
| | ||
Common stock, par value $ |
|
| ||||
issued |
|
| ||||
issued |
| |
| | ||
Paid-in capital |
| |
| | ||
Retained earnings |
| |
| | ||
Treasury stock, at cost; |
|
| ||||
shares at December 31, 2020 |
| ( |
| ( | ||
Accumulated other comprehensive income |
| |
| | ||
TOTAL STOCKHOLDERS' EQUITY |
| |
| | ||
TOTAL LIABILITIES STOCKHOLDERS' EQUITY | $ | | $ | | ||
The accompanying notes are an integral part of the consolidated financial statements.
38
Consolidated Statements of Income
| Years Ended December 31, | |||||
(In Thousands Except Per Share Data) | 2021 | 2020 | ||||
INTEREST INCOME |
|
|
|
| ||
Interest and fees on loans: |
|
|
|
| ||
Taxable | $ | | $ | | ||
Tax-exempt |
| |
| | ||
Income from available-for-sale debt securities: |
|
| ||||
Taxable |
| |
| | ||
Tax-exempt |
| |
| | ||
Other interest and dividend income |
| |
| | ||
Total interest and dividend income |
| |
| | ||
INTEREST EXPENSE |
|
|
|
| ||
Interest on deposits |
| |
| | ||
Interest on short-term borrowings |
| |
| | ||
Interest on long-term borrowings - FHLB advances |
| |
| | ||
Interest on senior notes, net | | |||||
Interest on subordinated debt, net | |
| | |||
Total interest expense |
| |
| | ||
Net interest income |
| |
| | ||
Provision for loan losses |
| |
| | ||
Net interest income after provision for loan losses |
| |
| | ||
NONINTEREST INCOME |
|
|
|
| ||
Trust revenue |
| |
| | ||
Brokerage and insurance revenue |
| |
| | ||
Service charges on deposit accounts |
| |
| | ||
Interchange revenue from debit card transactions |
| |
| | ||
Net gains from sale of loans |
| |
| | ||
Loan servicing fees, net |
| |
| ( | ||
Increase in cash surrender value of life insurance |
| |
| | ||
Other noninterest income |
| |
| | ||
Sub-total | | | ||||
Realized gains on available-for-sale debt securities, net | | | ||||
Total noninterest income |
| |
| | ||
NONINTEREST EXPENSE |
|
|
|
| ||
Salaries and employee benefits | | | ||||
Net occupancy and equipment expense | | | ||||
Data processing and telecommunications expense | | | ||||
Automated teller machine and interchange expense |
| |
| | ||
Pennsylvania shares tax |
| |
| | ||
Professional fees |
| |
| | ||
Loss on prepayment of borrowings | | |||||
Merger-related expenses |
|
| | |||
Other noninterest expense |
| |
| | ||
Total noninterest expense |
| |
| | ||
Income before income tax provision |
| |
| | ||
Income tax provision |
| |
| | ||
NET INCOME | $ | | $ | | ||
EARNINGS PER COMMON SHARE - BASIC | $ | | $ | | ||
EARNINGS PER COMMON SHARE - DILUTED | $ | | $ | | ||
The accompanying notes are an integral part of consolidated financial statements.
39
Consolidated Statements of Comprehensive Income
| Years Ended December 31, | |||||
(In Thousands) |
| 2021 |
| 2020 | ||
Net income | $ | | $ | | ||
Available-for-sale debt securities: |
|
| ||||
Unrealized holding (losses) gains on available-for-sale debt securities | ( | | ||||
Reclassification adjustment for (gains) realized in income | ( | ( | ||||
Other comprehensive (loss) income on available-for-sale debt securities | ( | | ||||
Unfunded pension and postretirement obligations: |
|
| ||||
Changes from plan amendments and actuarial gains and losses |
| |
| ( | ||
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost |
| ( |
| ( | ||
Other comprehensive income (loss) on pension and postretirement obligations |
| |
| ( | ||
Other comprehensive (loss) income before income tax |
| ( |
| | ||
Income tax related to other comprehensive loss (income) |
| |
| ( | ||
Net other comprehensive (loss) income |
| ( |
| | ||
Comprehensive income | $ | | $ | | ||
The accompanying notes are an integral part of the consolidated financial statements.
40
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands Except Share and Per Share Data)
|
|
|
|
|
| Accumulated |
|
| ||||||||||||||
Other | ||||||||||||||||||||||
Common | Treasury | Common | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||||
Shares | Shares | Stock | Capital | Earnings | Income | Stock | Total | |||||||||||||||
Balance, January 1, 2020 |
| |
| | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income |
|
|
|
|
|
|
| |
|
|
|
|
| | ||||||||
Other comprehensive income, net |
|
|
|
|
|
|
|
|
| |
|
|
| | ||||||||
Cash dividends declared on common stock, $ |
|
|
|
|
|
|
| ( |
|
|
|
|
| ( | ||||||||
Shares issued for dividend reinvestment plan |
|
| ( |
|
| |
|
|
|
|
| |
| | ||||||||
Shares issued from treasury and redeemed related to exercise of stock options |
|
| ( |
|
| ( |
|
|
|
|
| |
| | ||||||||
Restricted stock granted |
|
| ( |
|
| ( |
|
|
|
|
| |
| | ||||||||
Forfeiture of restricted stock |
|
| |
|
| |
|
|
|
|
| ( |
| | ||||||||
Stock-based compensation expense |
|
|
|
|
| |
|
|
|
|
|
| | |||||||||
Purchase of restricted stock for tax withholding |
|
| |
|
|
|
|
|
|
|
| ( |
| ( | ||||||||
Shares issued for acquisition of Covenant Financial, Inc., net of equity issuance costs |
| |
|
| |
| |
|
|
|
|
|
| | ||||||||
Balance, December 31, 2020 |
| |
| | | | | | ( | | ||||||||||||
Net income |
|
|
|
|
|
|
| |
|
|
|
|
| | ||||||||
Other comprehensive loss, net |
|
|
|
|
|
|
|
|
| ( |
|
|
| ( | ||||||||
Cash dividends declared on common stock, $ |
|
|
|
|
|
|
| ( |
|
|
|
|
| ( | ||||||||
Shares issued for dividend reinvestment plan |
| |
| ( |
|
| |
|
|
|
|
| |
| | |||||||
Shares issued from treasury and redeemed related to exercise of stock options |
|
| ( |
|
| ( |
|
|
|
|
| |
| | ||||||||
Restricted stock granted |
| |
| ( |
|
| ( |
|
|
|
|
| |
| | |||||||
Forfeiture of restricted stock |
|
| |
|
| |
|
|
|
|
| ( |
| | ||||||||
Stock-based compensation expense |
|
|
|
|
| |
|
|
|
|
|
| | |||||||||
Purchase of restricted stock for tax withholding |
|
| |
|
|
|
|
|
|
|
| ( |
| ( | ||||||||
Treasury stock purchases |
|
| |
|
|
|
|
|
| ( |
| ( | ||||||||||
Balance, December 31, 2021 |
| |
| | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | |||||
(In Thousands) | 2021 |
| 2020 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses |
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Loss on prepayment of borrowings | | |||||
Realized gains on available-for-sale debt securities, net |
| ( |
| ( | ||
Net amortization of securities | | | ||||
Increase in cash surrender value of life insurance |
| ( |
| ( | ||
Depreciation and amortization of bank premises and equipment |
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Net accretion of purchase accounting adjustments |
| ( |
| ( | ||
Stock-based compensation |
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Deferred income taxes |
| ( |
| ( | ||
Decrease in fair value of servicing rights |
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Gains on sales of loans, net |
| ( |
| ( | ||
Origination of loans held for sale |
| ( |
| ( | ||
Proceeds from sales of loans held for sale |
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Decrease (increase) in accrued interest receivable and other assets |
| |
| ( | ||
Increase in accrued interest payable and other liabilities |
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Other |
| ( |
| ( | ||
Net Cash Provided by Operating Activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Net cash and cash equivalents provided by business combination | | | ||||
Purchase of certificates of deposit | ( | ( | ||||
Proceeds from maturities of certificates of deposit |
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Proceeds from sales of available-for-sale debt securities |
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Proceeds from calls and maturities of available-for-sale debt securities |
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Purchase of available-for-sale debt securities |
| ( |
| ( | ||
Redemption of Federal Home Loan Bank of Pittsburgh stock |
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Purchase of Federal Home Loan Bank of Pittsburgh stock |
| ( |
| ( | ||
Net decrease in loans |
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Proceeds from bank owned life insurance |
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Proceeds from sales of premises and equipment | | | ||||
Purchase of premises and equipment |
| ( |
| ( | ||
Proceeds from sale of foreclosed assets |
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Other |
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Net Cash (Used in) Provided by Investing Activities |
| ( |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net increase in deposits |
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Net decrease in short-term borrowings |
| ( |
| ( | ||
Proceeds from long-term borrowings - FHLB advances |
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Repayments of long-term borrowings - FHLB advances |
| ( |
| ( | ||
Proceeds from issuance of senior notes, net of issuance costs | | |||||
Proceeds from issuance of subordinated debt, net of issuance costs | | |||||
Redemption of subordinated debt | ( | |||||
Sale of treasury stock |
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Purchases of treasury stock |
| ( |
| ( | ||
Common dividends paid |
| ( |
| ( | ||
Net Cash Provided by (Used in) Financing Activities |
| |
| ( | ||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| ( |
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CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
| |
| | ||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | | $ | | ||
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, | ||||||
(In Thousands) | 2021 |
| 2020 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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|
|
| ||
(Decrease) increase in accrued purchase of available-for-sale debt securities | $ | ( | $ | | ||
Accrued income from life insurance claim | $ | | $ | | ||
Assets acquired through foreclosure of real estate loans | $ | | $ | | ||
Leased assets obtained in exchange for new operating lease liabilities | $ | | $ | | ||
Interest paid | $ | | $ | | ||
Income taxes paid | $ | | $ | | ||
NONCASH INVESTING ASSETS ACQUIRED IN BUSINESS COMBINATION: | ||||||
Available-for-sale debt securities | $ | $ | ||||
Loans receivable | $ | $ | ||||
Bank-owned life insurance | $ | $ | ||||
Foreclosed assets held for sale | $ | $ | ||||
NONCASH FINANCING ACTIVITY RELATED TO BUSINESS COMBINATION: | ||||||
Common stock issued | $ | $ | ||||
Liabilities assumed: | ||||||
Deposits | $ | $ | ||||
Short-term borrowings | $ | $ | ||||
Long-term borrowings | $ | $ | ||||
Subordinated debt | $ | $ | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION – The consolidated financial statements include the accounts of Citizens Northern Corporation and its subsidiaries, Citizens Northern Bank (“CN Bank”), Bucktail Life Insurance Company and Citizens Northern Investment Corporation (collectively, “Corporation”), as well as CN Bank’s wholly-owned subsidiaries, CN Financial Services Corporation and Northern Tier Holding LLC. CN Bank is the sole member of Northern Tier Holding LLC. All material intercompany balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS – The Corporation’s principal office is located in Wellsboro, Pennsylvania. The majority of the Corporation’s operations are conducted in the Northern tier/Northcentral region of Pennsylvania and Southern tier of New York. As discussed further in Note 3, in 2020 the Corporation expanded its presence in Southeastern Pennsylvania by acquiring Covenant Financial, Inc. (“Covenant”). The Covenant acquisition follows the acquisition of Monument Bancorp, Inc. (“Monument”) in 2019, as well as the opening of offices in York and Lancaster, which are located in Southcentral Pennsylvania.
The Corporation provides banking and related services to individual and corporate customers. Lending products include commercial, mortgage and consumer loans, as well as specialized instruments such as commercial letters-of-credit. Deposit products include various types of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, Individual Retirement Accounts and certificates of deposit.
The Corporation provides wealth management services through its trust department, including administration of trusts and estates, retirement plans, and other employee benefit plans, and investment management services. The Corporation offers a variety of personal and commercial insurance products through CN Financial Services Corporation. CN Financial Services Corporation also offers mutual funds, annuities, educational savings accounts and other investment products through registered agents.
Management has determined that the Corporation has
The Corporation is subject to competition from other financial institutions. It is also subject to regulation by certain federal and state agencies and undergoes periodic examination by those regulatory authorities. As a consequence, the Corporation’s business is particularly susceptible to being affected by future federal and state legislation and regulations.
USE OF ESTIMATES – The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions in the United States of America (“U.S. GAAP”). In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates.
Material estimates that are particularly susceptible to change include: (1) the allowance for loan losses and (2) fair values of available-for-sale debt securities based on estimates from independent valuation services or from brokers.
INVESTMENT SECURITIES – Investment securities are accounted for as follows:
Available-for-sale debt securities – includes debt securities not classified as held-to-maturity or trading. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (loss), net of tax. Premiums on non-amortizing available-for-sale debt securities are amortized using the level yield method to the earliest call date, while discounts on non-amortizing securities are amortized to the maturity date. Premiums and discounts on amortizing securities (mortgage-backed securities) are amortized using the level yield method over the remaining contractual life of the securities, adjusted for actual prepayments. Realized gains and losses on sales of available-for-sale securities are computed on the basis of specific identification of the adjusted cost of each security. Securities within the available-for-sale portfolio may be used as part of the Corporation’s asset and liability management strategy and may be sold in response to changes in interest rate risk, prepayment risk or other factors.
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Other-than-temporary impairment – Credit-related declines in the fair value of available-for-sale debt securities that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment (OTTI) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis. The credit-related impairment is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. For debt securities classified as held-to-maturity, if any, the amount of noncredit-related impairment is recognized in other comprehensive income and accreted over the remaining life of the debt security as an increase in the carrying value of the security.
Marketable equity security – The marketable equity security is carried at fair value with unrealized gains and losses included in other noninterest income in the consolidated statements of income.
Restricted equity securities – Restricted equity securities consist primarily of Federal Home Loan Bank of Pittsburgh stock, and are carried at cost and evaluated for impairment. Holdings of restricted equity securities are included in Other Assets in the consolidated balance sheets, and dividends received on restricted securities are included in Other Income in the consolidated statements of income.
DERIVATIVES – The Corporation is a party to derivative financial instruments. These financial instruments consist of interest rate swap agreements which contain master netting and collateral provisions designed to protect the party at risk. Interest rate swaps with commercial banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures. These derivatives are not designated as hedges and are not speculative. Rather, these derivatives result from a service provided to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. Interest differentials paid or received under the swap agreements are reflected as adjustments to interest and fees on loans. The notional amounts of the interest rate swaps are not exchanged and do not represent exposure to credit loss. The fair value of interest rate derivatives is included in the balance of other assets and other liabilities in the consolidated balance sheets.
LOANS HELD FOR SALE – Mortgage loans held for sale are reported at the lower of cost or fair value, determined in the aggregate.
LOANS RECEIVABLE – Loans originated by the Corporation which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method.
The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential mortgage segment includes the following classes: first and junior lien residential mortgages, home equity lines of credit and residential construction loans. The most significant classes of commercial loans are commercial loans secured by real estate, non-real estate secured commercial and industrial loans, loans to political subdivisions, commercial construction, multi-family residential and loans secured by farmland.
Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally ) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
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PURCHASED LOANS – The Corporation purchased loans in 2019 and 2020, some of which had, at the acquisition dates, shown evidence of credit deterioration since origination. The Corporation considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors include loans or more past due, loans with an internal risk rating of substandard or below, loans classified as nonaccrual by the acquired institution and loans that have been previously modified in a troubled debt restructuring. The purchased loans that showed evidence of credit impairment were designated as the purchased credit impaired (“PCI”) loans and were recorded at fair value, with no carryover of the allowance for loan losses. The PCI loans acquired are secured by real estate and the fair value of each loan at the acquisition date was determined based on the estimated proceeds to be derived from selling the collateral, net of selling costs. The PCI loans were placed into nonaccrual status upon acquisition (and remained in nonaccrual status at December 31, 2021 and 2020) as the Corporation cannot reasonably estimate cash flows expected to be collected in order to compute yield on the loans.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable yield. The nonaccretable yield represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require us to evaluate the need for an allowance for credit losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable yield which we then reclassify as accretable yield that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect is performed in a similar manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable yield portion of the fair value adjustment.
ALLOWANCE FOR LOAN LOSSES – The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the collection of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than when they are past due on a contractual basis, or earlier in the event of bankruptcy or if there is an amount deemed uncollectible.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of December 31, 2021 and 2020, management determined that
The allowance consists primarily of two major components – (1) a specific component based on a detailed assessment of certain larger loan relationships, mainly commercial purpose, determined on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio based on a collective evaluation of pools of loans with similar risk characteristics. The general component is assigned to each pool of loans based on both historical net charge-off experience, and an evaluation of certain qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the above methodologies for estimating specific and general losses in the portfolio.
The specific component relates to loans that are classified as impaired based on a detailed assessment of certain larger loan relationships evaluated by a management committee referred to as the Watch List Committee. Specific loan relationships are identified for evaluation based on the related credit risk rating. For individual loans classified as impaired, an allowance is established when the collateral value less estimated selling costs, present value of discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan.
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The scope of loans reviewed individually each quarter to determine if they are impaired include all commercial loan relationships greater than $
The general component covers pools of loans by loan class including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such a loan: (1) is subject to a restructuring agreement, (2) has an outstanding balance of $
The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors.
Purchased loans that did not show evidence of credit deterioration at the acquisition dates were initially recorded at fair value, including a discount for credit losses reflecting an estimate of the present value of credit losses based on market expectations. The general component of the allowance on purchased loans is evaluated separately from the rest of the portfolio. This evaluation includes consideration of the qualitative risk factors described above as well as the remaining purchased discount.
Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
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Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve reductions in required payments, an extension of a loan’s stated maturity date or a temporary reduction in interest rate. Loans classified as troubled debt restructurings are designated as impaired. Nonaccrual troubled debt restructurings may be restored to accrual status if the ultimate collectability of principal and interest payments under the modified terms is not in doubt, and there has been a period (generally, for at least six consecutive months) of satisfactory payment performance by the borrower either immediately before or after the restructuring.
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. Provisions of the CARES Act Section 4013 largely mirrored the provisions of the interagency statement, providing that modified loans were not to be considered TDRs if they were performing at December 31, 2019 and other considerations set forth in the interagency statements were met. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented or at December 31, 2019. Consistent with this guidance, the Corporation has not reported loans that were modified in response to COVID-19 as past due, nonaccrual or as TDRs.
BANK PREMISES AND EQUIPMENT – Bank premises and equipment are stated at cost less accumulated depreciation. Repair and maintenance expenditures which extend the useful lives of assets are capitalized, and other repair and maintenance expenditures are expensed as incurred. Depreciation expense is computed using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS – The Corporation reviews long-lived assets, such as premises and equipment and intangibles, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. These changes in circumstances may include a significant decrease in the market value of an asset or the manner in which an asset is used. If there is an indication the carrying value of an asset may not be recoverable, future undiscounted cash flows expected to result from use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset, a loss is recognized for the difference between the carrying value and fair market value of the asset.
FORECLOSED ASSETS HELD FOR SALE – Foreclosed assets held for sale consist of real estate acquired by foreclosure and are initially recorded at fair value, less estimated selling costs.
GOODWILL – Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill is tested at least annually at December 31 for impairment, or more often if events or circumstances indicate there may be impairment. The Corporation has the option of performing a qualitative assessment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually.
CORE DEPOSIT INTANGIBLES – Amortization of core deposit intangibles is calculated using an accelerated method. In determining amortization using the accelerated method for any given period, the amount of expected cash flows for that period that were used in determining the acquisition-date fair value is divided by the total amount of expected cash flows over the life of the asset. That percentage is multiplied by the initial carrying amount of the asset to arrive at amortization expense for that period. If the Corporation’s cash flow patterns differ significantly from the initial estimates, the amortization schedule would be adjusted prospectively.
SERVICING RIGHTS – The estimated fair value of servicing rights related to mortgage loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. The valuation of servicing rights is adjusted quarterly, with changes in fair value included in Loan Servicing Fees, Net, in the consolidated statements of income. Significant inputs to the valuation include expected net servicing income to be received, the expected life of the underlying loans and the discount rate. The servicing rights asset is included in Other Assets in the consolidated balance sheets.
INCOME TAXES – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted
48
tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence. Tax benefits from investments in limited partnerships that have qualified for federal low-income tax credits are recognized as a reduction in the provision for income tax over the term of the investment using the effective yield method. The Corporation includes income tax penalties in the provision for income tax. The Corporation has
STOCK COMPENSATION PLANS – The Corporation’s stock-based compensation policy applies to all forms of stock-based compensation including stock options and restricted stock. All stock-based compensation is accounted for under the fair value method as required by U.S. GAAP. The expense associated with stock-based compensation is recognized over the vesting period of each individual arrangement.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option valuation model. The fair value of restricted stock is based on the current market price on the date of grant.
TREASURY STOCK – Common stock held in treasury is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. The shares may be purchased in the open market or in privately negotiated transactions from time to time depending upon market conditions and other factors.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS – In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
CASH FLOWS – The Corporation utilizes the net reporting of cash receipts and cash payments for certain deposit and lending activities. Cash equivalents include federal funds sold and all cash and amounts due from depository institutions and interest-bearing deposits in other banks with original maturities of three months or less.
REVENUE RECOGNITION – The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in the determination of the amount and timing of revenue from contracts with customers.
Additional disclosures related to the Corporation’s largest sources of noninterest income within the consolidated statements of income from contracts with customers that are subject to Accounting Standards Codification (ASC) Topic 606 are as follows:
Trust and financial management revenue – CN Bank’s trust department provides a wide range of financial services, including wealth management services for individuals, businesses and retirement funds, administration of 401(k) and other retirement plans, retirement planning, estate planning and estate settlement services. Trust clients are located primarily within the Corporation’s geographic markets. Assets held in a fiduciary capacity by CN Bank are not the Corporation’s assets and are therefore not included in the consolidated balance sheets. The fair value of trust assets under management was approximately $
Trust revenue is recorded on a cash basis, which is not materially different from the accrual basis. The majority (approximately
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Service charges on deposit accounts – Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts. All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within noninterest expense in the consolidated statements of income.
Interchange revenue from debit card transactions – The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements of income.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issues ASUs to the FASB ASC. This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the foreseeable future.
Recently Issued But Not Yet Effective Accounting Pronouncements
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The effect of implementing this ASU is recorded through a cumulative-effect adjustment to retained earnings. The Corporation has formed a cross functional management team and is working with an outside vendor assessing alternative loss estimation methodologies and the Corporation’s data and system needs to evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.
ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:
| ● | Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. |
| ● | Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue. |
The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. The Corporation expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04.
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3. BUSINESS COMBINATION
On July 1, 2020, the Corporation completed its acquisition of Covenant, which operated banking offices in Bucks and Chester Counties of Pennsylvania. In connection with the transaction, the Corporation recorded goodwill of $
Merger-related expenses related to the acquisition of Covenant totaled $
4. PER SHARE DATA
Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.
Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using weighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation’s common stock during the period.
(In Thousands, Except Share and Per Share Data) | Years Ended | |||||
December 31, | December 31, | |||||
| 2021 |
| 2020 | |||
Basic |
|
|
| |||
Net income | $ | | $ | | ||
Less: Dividends and undistributed earnings allocated to participating securities |
| ( |
| ( | ||
Net income attributable to common shares | $ | | $ | | ||
Basic weighted-average common shares outstanding |
| |
| | ||
Basic earnings per common share (a) | $ | | $ | | ||
Diluted |
|
|
|
| ||
Net income attributable to common shares | $ | | $ | | ||
Basic weighted-average common shares outstanding |
| |
| | ||
Dilutive effect of potential common stock arising from stock options |
| |
| | ||
Diluted weighted-average common shares outstanding |
| |
| | ||
Diluted earnings per common share (a) | $ | | $ | | ||
Weighted-average nonvested restricted shares outstanding |
| |
| | ||
| (a) | Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares with nonforfeitable dividends (participating securities). |
Anti-dilutive stock options are excluded from net income per share calculations. There were
51
5. COMPREHENSIVE INCOME
Comprehensive income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income (loss). The components of other comprehensive income (loss), and the related tax effects, are as follows:
(In Thousands) |
| Before-Tax |
| Income Tax |
| Net-of-Tax | |||
Amount | Effect | Amount | |||||||
2021 |
|
|
|
|
|
| |||
Available-for-sale debt securities: | |||||||||
Unrealized holding losses on available-for-sale debt securities | $ | ( | $ | | $ | ( | |||
Reclassification adjustment for (gains) realized in income | ( | ( | |||||||
Other comprehensive loss from available-for-sale debt securities | ( | ( | |||||||
Unfunded pension and postretirement obligations: |
|
|
|
|
|
| |||
Changes from plan amendments and actuarial gains and losses | | ( | | ||||||
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost |
| ( |
| |
| ( | |||
Other comprehensive income on unfunded retirement obligations | | ( | | ||||||
Total other comprehensive loss | $ | ( | $ | | $ | ( | |||
(In Thousands) |
| Before-Tax |
| Income Tax |
| Net-of-Tax | |||
Amount | Effect | Amount | |||||||
2020 |
|
|
|
|
|
| |||
Available-for-sale debt securities: | |||||||||
Unrealized holding gains on available-for-sale debt securities | $ | | $ | ( | $ | | |||
Reclassification adjustment for (gains) realized in income | ( | ( | |||||||
Other comprehensive income from available-for-sale debt securities | | ( | | ||||||
Unfunded pension and postretirement obligations: |
|
|
|
|
|
| |||
Changes from plan amendments and actuarial gains and losses | ( | | ( | ||||||
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost |
| ( |
| |
| ( | |||
Other comprehensive loss on unfunded retirement obligations | ( | | ( | ||||||
Total other comprehensive income | $ | | $ | ( | $ | | |||
Items reclassified out of each component of accumulated other comprehensive income are as follows:
Affected Line Item in the | ||
Description |
| Consolidated Statements of Income |
Reclassification adjustment for (gains) realized in income (before-tax) | Realized gains on available-for-sale debt securities, net | |
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost (before-tax) |
| Other noninterest expense |
Income tax effect | Income tax provision |
52
Changes in the components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:
(In Thousands) |
|
|
| Accumulated | |||||
Unrealized | Unfunded | Other | |||||||
| Gains |
| Retirement |
| Comprehensive | ||||
| on Securities |
| Obligations |
| Income | ||||
2021 |
|
|
|
|
|
| |||
Balance, beginning of period | $ | | $ | | $ | | |||
Other comprehensive loss during year ended December 31, 2021 |
| ( |
| |
| ( | |||
Balance, end of period | $ | | $ | | $ | | |||
2020 |
|
|
|
|
|
| |||
Balance, beginning of period | $ | | $ | | $ | | |||
Other comprehensive income during year ended December 31, 2020 |
| |
| ( |
| | |||
Balance, end of period | $ | | $ | | $ | | |||
6. CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2021 and 2020 include the following:
(In Thousands) |
| December 31, |
| December 31, | ||
2021 | 2020 | |||||
Cash and cash equivalents | $ | | $ | | ||
Certificates of deposit |
| |
| | ||
Total cash and due from banks | $ | | $ | | ||
Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit. The Corporation has not experienced any losses in such accounts.
Historically, CN Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, CN Bank had
53
7. SECURITIES
Amortized cost and fair value of available-for-sale debt securities at December 31, 2021 and 2020 are summarized as follows:
(In Thousands) |
| December 31, 2021 | ||||||||||
Gross | Gross | |||||||||||
Unrealized | Unrealized | |||||||||||
| Amortized |
| Holding |
| Holding |
| Fair | |||||
| Cost |
| Gains |
| Losses |
| Value | |||||
Obligations of the U.S. Treasury | $ | | $ | | $ | ( | $ | | ||||
Obligations of U.S. Government agencies | | | ( | | ||||||||
Bank holding company debt securities | | | ( | | ||||||||
Obligations of states and political subdivisions: |
|
|
|
|
| |||||||
Tax-exempt |
| |
| |
| ( |
| | ||||
Taxable |
| |
| |
| ( |
| | ||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
| ||||
Residential pass-through securities |
| |
| |
| ( |
| | ||||
Residential collateralized mortgage obligations |
| |
| |
| ( |
| | ||||
Commercial mortgage-backed securities |
| |
| |
| ( |
| | ||||
Total available-for-sale debt securities | $ | | $ | | $ | ( | $ | | ||||
(In Thousands) |
| December 31, 2020 | ||||||||||
Gross | Gross | |||||||||||
|
| Unrealized | Unrealized | |||||||||
| Amortized |
| Holding |
| Holding |
| Fair | |||||
| Cost |
| Gains |
| Losses |
| Value | |||||
Obligations of the U.S. Treasury | $ | | $ | | $ | ( | $ | | ||||
Obligations of U.S. Government agencies | | | ( | | ||||||||
Obligations of states and political subdivisions: |
|
|
|
|
|
| ||||||
Tax-exempt |
| |
| |
| ( |
| | ||||
Taxable |
| |
| |
| ( |
| | ||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
| ||||
Residential pass-through securities |
| |
| |
| |
| | ||||
Residential collateralized mortgage obligations |
| |
| |
| ( |
| | ||||
Commercial mortgage-backed securities |
| |
| |
|
| | |||||
Total available-for-sale debt securities | $ | | $ | | $ | ( | $ | | ||||
54
The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at December 31, 2021 and 2020:
December 31, 2021 |
| Less Than 12 Months |
| 12 Months or More |
| Total | ||||||||||||
(In Thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | |||||||
Obligations of the U.S. Treasury | $ | | $ | ( | $ | $ | $ | | $ | ( | ||||||||
Obligations of U.S. Government agencies | | ( | | ( | | ( | ||||||||||||
Bank holding company debt securities | | ( | | ( | ||||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||
Tax-exempt | | ( | ( | | ( | |||||||||||||
Taxable |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential pass-through securities | | ( | | ( | ||||||||||||||
Residential collateralized mortgage obligations |
| |
| ( |
|
|
| |
| ( | ||||||||
Commercial mortgage-backed securities |
| |
| ( |
| |
|
| |
| ( | |||||||
Total temporarily impaired available-for-sale debt securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
December 31, 2020 |
| Less Than 12 Months |
| 12 Months or More |
| Total | ||||||||||||
(In Thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | |||||||
Obligations of the U.S. Treasury | $ | | $ | ( | $ | $ | $ | | $ | ( | ||||||||
Obligations of U.S. Government agencies | | ( | | ( | ||||||||||||||
Obligations of states and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
| |||||||
Tax-exempt | | ( | | | | ( | ||||||||||||
Taxable |
| |
| ( |
| |
| |
| |
| ( | ||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies, |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential collateralized mortgage obligations |
| |
| ( |
| |
| |
| |
| ( | ||||||
Total temporarily impaired available-for-sale debt securities | $ | | $ | ( | $ | | $ | | $ | | $ | ( | ||||||
Gross realized gains and losses from available-for-sale securities and the related income tax provision were as follows:
(In Thousands) | 2021 | 2020 | ||||
Gross realized gains from sales | $ | | $ | | ||
Gross realized losses from sales |
| ( |
| ( | ||
Net realized gains | $ | | $ | | ||
Income tax provision related to net realized gains | $ | | $ | | ||
55
The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of December 31, 2021. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands) | December 31, 2021 | |||||
Amortized | Fair | |||||
| Cost |
| Value | |||
Due in one year or less | $ | | $ | | ||
Due from one year through five years |
| |
| | ||
Due from five years through ten years |
| |
| | ||
Due after ten years |
| |
| | ||
Sub-total |
| |
| | ||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
| ||
Residential pass-through securities |
| |
| | ||
Residential collateralized mortgage obligations |
| |
| | ||
Commercial mortgage-backed securities |
| |
| | ||
Total | $ | | $ | | ||
The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.
Investment securities carried at $
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery.
A summary of information management considered in evaluating debt and equity securities for OTTI at December 31, 2021 and 2020 is provided below.
Debt Securities
At December 31, 2021 and 2020, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of these debt securities at December 31, 2021 and 2020 to be temporary.
Equity Securities
CN Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, CN Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. CN Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheets, was $
56
recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.
The Corporation’s marketable equity security, with a carrying value of $
8. LOANS
The loans receivable portfolio is segmented into commercial, residential mortgage and consumer loans. Loans outstanding at December 31, 2021 and December 31, 2020 are summarized by segment, and by classes within each segment, as follows:
Summary of Loans by Type
(In Thousands)
| December 31, |
| December 31, | |||
2021 | 2020 | |||||
Commercial: |
|
|
|
| ||
Commercial loans secured by real estate | $ | | $ | | ||
Commercial and industrial |
| |
| | ||
Paycheck Protection Program - 1st Draw | | | ||||
Paycheck Protection Program - 2nd Draw | | |||||
Political subdivisions |
| |
| | ||
Commercial construction and land |
| |
| | ||
Loans secured by farmland |
| |
| | ||
Multi-family (5 or more) residential |
| |
| | ||
Agricultural loans |
| |
| | ||
Other commercial loans |
| |
| | ||
Total commercial |
| |
| | ||
Residential mortgage: |
|
|
|
| ||
Residential mortgage loans - first liens | | | ||||
Residential mortgage loans - junior liens |
| |
| | ||
Home equity lines of credit |
| |
| | ||
1-4 Family residential construction |
| |
| | ||
Total residential mortgage |
| |
| | ||
Consumer |
| |
| | ||
Total |
| |
| | ||
Less: allowance for loan losses |
| ( |
| ( | ||
Loans, net | $ | | $ | | ||
In the table above, outstanding loan balances are presented net of deferred loan origination fees of $
The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in Northcentral Pennsylvania, the Southern tier of New York State, Southeastern Pennsylvania and Southcentral Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to
57
small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. Information related to PPP loans advanced pursuant to the CARES Act are labeled “1st Draw” within the tables.
Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until 60 days after the date on which the national emergency concerning the coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.
In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.
On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions that broadly address additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates. The CAA also includes additional funding for the PPP with additional eligibility requirements for borrowers with generally the same loan terms as provided under the CARES Act. Information related to PPP loans advanced pursuant to the CAA are labeled “2nd Draw” within the tables.
The maximum term of PPP loans is five years. Most of the Corporation’s 1st Draw PPP loans have two-year terms, while 2nd Draw PPP loans have five-year terms and the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Fees on PPP loans, net of origination costs and a market rate adjustment on PPP loans acquired from Covenant, are recognized in interest income as a yield adjustment over the term of the loans.
The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. As of December 31, 2021, the recorded investment in 1st Draw PPP loans was $
To work with clients impacted by COVID-19, the Corporation offered short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to the merger, Covenant had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts were designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each
58
borrower was required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts have been moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at December 31, 2021 and 2020. Most of the initial modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. At December 31, 2021, there were
As described in Note 3, effective July 1, 2020, the Corporation acquired loans pursuant to its acquisition of Covenant. In 2019, the Corporation acquired loans pursuant to the acquisition of Monument Bancorp, Inc. (“Monument”). Acquired loans were recorded at their initial fair value, with adjustments made to the gross amortized cost of loans based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequent to the acquisitions, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on non-impaired (performing) loans, and a partial recovery of purchased credit impaired (PCI) loans. For the years ended December 31, 2021 and 2020, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:
(In Thousands) | Year Ended | |||||
December 31, | December 31, | |||||
2021 | 2020 | |||||
Market Rate Adjustment |
|
|
|
| ||
Adjustments to gross amortized cost of loans at beginning of period | $ | | $ | ( | ||
Market rate adjustment recorded in acquisition | | |||||
Amortization recognized in interest income | ( | ( | ||||
Adjustments to gross amortized cost of loans at end of period | $ | ( | $ | | ||
Credit Adjustment on Non-impaired Loans | ||||||
Adjustments to gross amortized cost of loans at beginning of period | $ | ( | $ | ( | ||
Credit adjustment recorded in acquisition | ( | |||||
Accretion recognized in interest income |
| |
| | ||
Adjustments to gross amortized cost of loans at end of period | $ | ( | $ | ( | ||
59
A summary of PCI loans held at December 31, 2021 and December 31, 2020 is as follows:
(In Thousands) | December 31, | December 31, | ||||
| 2021 |
| 2020 | |||
Outstanding balance | $ | | $ | | ||
Carrying amount |
| |
| | ||
Transactions within the allowance for loan losses, summarized by segment and class, were as follows:
| December 31, |
|
|
|
| December 31, | |||||||||
Year Ended December 31, 2021 | 2020 | Provision | 2021 | ||||||||||||
(In Thousands) | Balance | Charge-offs | Recoveries | (Credit) | Balance | ||||||||||
Allowance for Loan Losses: |
|
|
|
|
| ||||||||||
Commercial: |
|
|
|
|
|
|
|
|
|
| |||||
Commercial loans secured by real estate | $ | | $ | $ | $ | $ | |||||||||
Commercial and industrial |
| |
| ( |
|
|
| ||||||||
Commercial construction and land |
| |
|
|
|
| |||||||||
Loans secured by farmland |
| |
|
|
| ( |
| ||||||||
Multi-family (5 or more) residential |
| |
|
|
| ( |
| ||||||||
Agricultural loans |
| |
|
|
| ( |
| ||||||||
Other commercial loans |
| |
|
|
|
| |||||||||
Total commercial |
| |
| ( |
|
|
| ||||||||
Residential mortgage: |
|
|
|
|
|
|
|
|
|
| |||||
Residential mortgage loans - first liens | | ( | |||||||||||||
Residential mortgage loans - junior liens |
| |
|
|
| ( |
| ||||||||
Home equity lines of credit |
| |
|
|
|
| |||||||||
1-4 Family residential construction |
| |
|
|
|
| |||||||||
Total residential mortgage |
| |
| ( |
|
|
| ||||||||
Consumer |
| |
| ( |
|
|
| ||||||||
Unallocated |
| |
|
|
|
| |||||||||
Total Allowance for Loan Losses | $ | | $ | ( | $ | | $ | | $ | | |||||
60
| December 31, |
|
|
|
| December 31, | |||||||||
Year Ended December 31, 2020 | 2019 | Provision | 2020 | ||||||||||||
(In Thousands) | Balance | Charge-offs | Recoveries | (Credit) | Balance | ||||||||||
Allowance for Loan Losses: |
|
|
|
|
| ||||||||||
Commercial: |
|
|
|
|
|
|
|
|
|
| |||||
Commercial loans secured by real estate | $ | | $ | $ | $ | $ | |||||||||
Commercial and industrial |
| |
| ( |
|
|
| ||||||||
Commercial construction and land |
| |
| ( |
|
| ( |
| |||||||
Loans secured by farmland |
| |
|
|
| ( |
| ||||||||
Multi-family (5 or more) residential |
| |
|
|
|
| |||||||||
Agricultural loans |
| |
|
|
| ( |
| ||||||||
Other commercial loans |
| |
|
|
|
| |||||||||
Total commercial |
| |
| ( |
|
|
| ||||||||
Residential mortgage: |
|
|
|
|
|
|
|
|
|
| |||||
Residential mortgage loans - first liens | | ||||||||||||||
Residential mortgage loans - junior liens |
| |
|
|
| ( |
| ||||||||
Home equity lines of credit |
| |
|
|
|
| |||||||||
1-4 Family residential construction |
| |
|
|
| ( |
| ||||||||
Total residential mortgage |
| |
|
|
|
| |||||||||
Consumer |
| |
| ( |
|
|
| ||||||||
Unallocated |
| |
|
|
|
| |||||||||
Total Allowance for Loan Losses | $ | | $ | ( | $ | | $ | | $ | | |||||
For the year ended December 31, 2021, the provision for loan losses was $
In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” column in the table that follows.
61
The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of December 31, 2021 and 2020:
December 31, 2021 |
|
|
|
|
| Purchased |
| |||||||||||
(In Thousands) | Special | Credit | ||||||||||||||||
Pass | Mention | Substandard | Doubtful | Impaired | Total | |||||||||||||
Commercial: |
|
|
|
|
|
| ||||||||||||
Commercial loans secured by real estate | $ | | $ | | $ | | $ | $ | | $ | | |||||||
Commercial and Industrial |
| |
| |
| |
|
| |
| | |||||||
Paycheck Protection Program - 1st Draw | | | ||||||||||||||||
Paycheck Protection Program - 2nd Draw | | | ||||||||||||||||
Political subdivisions |
| |
|
|
|
|
| | ||||||||||
Commercial construction and land |
| |
| |
| |
|
|
| | ||||||||
Loans secured by farmland |
| |
| |
| |
|
|
| | ||||||||
Multi-family (5 or more) residential |
| |
|
| |
|
| |
| | ||||||||
Agricultural loans |
| |
|
| |
|
|
| | |||||||||
Other commercial loans |
| |
|
|
|
|
| | ||||||||||
Total commercial |
| |
| |
| |
|
| |
| | |||||||
Residential Mortgage: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential mortgage loans - first liens | | | | | | |||||||||||||
Residential mortgage loans - junior liens |
| |
| |
| |
|
| |
| | |||||||
Home equity lines of credit |
| |
| |
| |
|
|
| | ||||||||
1-4 Family residential construction |
| |
|
|
|
|
| | ||||||||||
Total residential mortgage |
| |
| |
| |
|
|
| | ||||||||
Consumer |
| |
|
| |
|
|
| | |||||||||
Totals | $ | | $ | | $ | | $ | $ | | $ | | |||||||
December 31, 2020 |
|
|
|
|
| Purchased |
| |||||||||||
(In Thousands) | Special | Credit | ||||||||||||||||
Pass | Mention | Substandard | Doubtful | Impaired | Total | |||||||||||||
Commercial: |
|
|
|
|
|
| ||||||||||||
Commercial loans secured by real estate | $ | | $ | | $ | | $ | $ | | $ | | |||||||
Commercial and Industrial |
| |
| |
| |
|
| |
| | |||||||
Paycheck Protection Program - 1st Draw | | | ||||||||||||||||
Political subdivisions |
| |
|
|
|
|
| | ||||||||||
Commercial construction and land |
| |
| |
| |
|
|
| | ||||||||
Loans secured by farmland |
| |
| |
| |
|
|
| | ||||||||
Multi-family (5 or more) residential |
| |
| |
| |
|
| |
| | |||||||
Agricultural loans |
| |
|
| |
|
|
| | |||||||||
Other commercial loans |
| |
|
|
|
|
| | ||||||||||
Total commercial |
| |
| |
| |
|
| |
| | |||||||
Residential Mortgage: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential Mortgage loans - first liens | | | | | | |||||||||||||
Residential Mortgage loans - junior liens |
| |
| |
| |
|
| |
| | |||||||
Home equity lines of credit |
| |
| |
| |
|
|
| | ||||||||
1-4 Family residential construction |
| |
|
|
|
|
| | ||||||||||
Total residential mortgage |
| |
| |
| |
|
|
| | ||||||||
Consumer |
| |
|
| |
|
|
| | |||||||||
Totals | $ | | $ | | $ | | $ | $ | | $ | | |||||||
62
The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of December 31, 2021 and 2020:
December 31, 2021 |
| Loans: | Allowance for Loan Losses: | |||||||||||||||
(In Thousands) | ||||||||||||||||||
Individually | Collectively | Individually | Collectively |
| ||||||||||||||
| Evaluated |
| Evaluated |
| Totals |
| Evaluated |
| Evaluated |
| Totals | |||||||
Commercial: |
|
|
|
|
|
| ||||||||||||
Commercial loans secured by real estate | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Commercial and industrial |
| |
| |
| |
| |
| |
| | ||||||
Paycheck Protection Program - 1st Draw |
| |
| |
| |
| |
| |
| | ||||||
Paycheck Protection Program - 2nd Draw | | | | | | | ||||||||||||
Political subdivisions |
| |
| |
| |
| |
| |
| | ||||||
Commercial construction and land |
| |
| |
| |
| |
| |
| | ||||||
Loans secured by farmland |
| |
| |
| |
| |
| |
| | ||||||
Multi-family (5 or more) residential |
| |
| |
| |
| |
| |
| | ||||||
Agricultural loans |
| |
| |
| |
| |
| |
| | ||||||
Other commercial loans |
| |
| |
| |
| |
| |
| | ||||||
Total commercial |
| |
| |
| |
| |
| |
| | ||||||
Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential mortgage loans - first liens | | | | | | |||||||||||||
Residential mortgage loans - junior liens |
| |
| |
| |
|
| |
| | |||||||
Home equity lines of credit |
| |
| |
| |
| |
| |
| | ||||||
1-4 Family residential construction |
| |
| |
| |
| |
| |
| | ||||||
Total residential mortgage |
| |
| |
| |
|
| |
| | |||||||
Consumer |
|
| |
| |
|
| |
| | ||||||||
Unallocated |
|
|
|
|
|
|
|
|
|
|
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
63
December 31, 2020 |
| Loans: | Allowance for Loan Losses: | |||||||||||||||
(In Thousands) | ||||||||||||||||||
Individually | Collectively | Individually | Collectively |
| ||||||||||||||
| Evaluated |
| Evaluated |
| Totals |
| Evaluated |
| Evaluated |
| Totals | |||||||
Commercial: |
|
|
|
|
|
| ||||||||||||
Commercial loans secured by real estate | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Commercial and industrial |
| |
| |
| |
| |
| |
| | ||||||
Paycheck Protection Program - 1st Draw |
| |
| |
| |
| |
| |
| | ||||||
Political subdivisions |
| |
| |
| |
| |
| |
| | ||||||
Commercial construction and land |
| |
| |
| |
| |
| |
| | ||||||
Loans secured by farmland |
| |
| |
| |
| |
| |
| | ||||||
Multi-family (5 or more) residential |
| |
| |
| |
| |
| |
| | ||||||
Agricultural loans |
| |
| |
| |
| |
| |
| | ||||||
Other commercial loans |
| |
| |
| |
| |
| |
| | ||||||
Total commercial |
| |
| |
| |
| |
| |
| | ||||||
Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential mortgage loans - first liens | | | | | | | ||||||||||||
Residential mortgage loans - junior liens |
| |
| |
| |
| |
| |
| | ||||||
Home equity lines of credit |
| |
| |
| |
| |
| |
| | ||||||
1-4 Family residential construction |
| |
| |
| |
| |
| |
| | ||||||
Total residential mortgage |
| |
| |
| |
| |
| |
| | ||||||
Consumer |
|
| |
| |
|
| |
| | ||||||||
Unallocated |
|
|
|
|
|
|
|
|
|
|
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Summary information related to impaired loans as of December 31, 2021 and 2020 is as follows:
(In Thousands) | December 31, 2021 | December 31, 2020 | ||||||||||||||||
Unpaid | Unpaid | |||||||||||||||||
Principal | Recorded | Related | Principal | Recorded | Related | |||||||||||||
| Balance |
| Investment |
| Allowance |
| Balance |
| Investment |
| Allowance | |||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial loans secured by real estate | $ | | $ | | $ | $ | | $ | | $ | ||||||||
Commercial and industrial |
| |
| |
|
| |
| |
| ||||||||
Residential mortgage loans - first liens | | | | | ||||||||||||||
Residential mortgage loans - junior liens |
| |
| |
|
| |
| |
| ||||||||
Loans secured by farmland |
|
|
|
|
|
| ||||||||||||
Multi-family (5 or more) residential | ||||||||||||||||||
Total with no related allowance recorded |
| |
| |
|
| |
| |
| ||||||||
With a related allowance recorded: |
|
|
|
|
|
| ||||||||||||
Commercial loans secured by real estate | | | | | | | ||||||||||||
Commercial and industrial |
| |
| |
| |
| |
| |
| | ||||||
Residential mortgage loans - first liens |
|
|
|
| |
| |
| | |||||||||
Residential mortgage loans - junior liens |
|
|
|
| |
| |
| | |||||||||
Total with a related allowance recorded |
| |
| |
| |
| |
| |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
64
The average balance of impaired loans and interest income recognized on impaired loans is as follows:
(In Thousands) | Interest Income Recognized on | |||||||||||
Average Investment in | on Impaired Loans | |||||||||||
Impaired Loans | on a Cash Basis | |||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||
| 2021 | 2020 |
| 2021 |
| 2020 | ||||||
Commercial: |
|
| ||||||||||
Commercial loans secured by real estate | $ | | $ | | $ | | $ | | ||||
Commercial and industrial | | |
| |
| | ||||||
Commercial construction and land | | |
| |
| | ||||||
Loans secured by farmland | | |
| |
| | ||||||
Multi-family (5 or more) residential | | | ||||||||||
Agricultural loans | | |
| |
| | ||||||
Other commercial loans | | |
|
| | |||||||
Total commercial | | |
| |
| | ||||||
Residential mortgage: |
|
|
|
|
| |||||||
Residential mortgage loans - first lien | | | | | ||||||||
Residential mortgage loans - junior lien | | |
| |
| | ||||||
Home equity lines of credit | | |
|
| | |||||||
Total residential mortgage | | |
| |
| | ||||||
Total | $ | | $ | | $ | | $ | | ||||
The breakdown by portfolio segment and class of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:
(In Thousands) | December 31, 2021 | December 31, 2020 | ||||||||||
Past Due | Past Due | |||||||||||
90+ Days and | 90+ Days and | |||||||||||
| Accruing |
| Nonaccrual |
| Accruing |
| Nonaccrual | |||||
Commercial: |
|
|
|
|
|
| ||||||
Commercial loans secured by real estate | $ | | $ | | $ | | $ | | ||||
Commercial and industrial |
| |
| |
| |
| | ||||
Commercial construction and land |
|
| |
|
| | ||||||
Loans secured by farmland |
| |
| |
| |
| | ||||
Multi-family (5 or more) residential | | | ||||||||||
Agricultural loans | ||||||||||||
Other commercial |
|
|
|
| ||||||||
Total commercial |
| |
| |
| |
| | ||||
Residential mortgage: |
|
|
|
|
|
|
|
| ||||
Residential mortgage loans - first liens | | | | | ||||||||
Residential mortgage loans - junior liens |
| |
| |
| |
| | ||||
Home equity lines of credit |
| |
| |
| |
| | ||||
Total residential mortgage |
| |
| |
| |
| | ||||
Consumer |
| |
| |
| |
| | ||||
Totals | $ | | $ | | $ | | $ | | ||||
Loans past due 90 days or more for which interest continues to be accrued have been evaluated and determind to be well secured and in the process of collection. The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual. PCI loans with a total recorded investment of $
65
The table below presents a summary of the contractual aging of loans as of December 31, 2021 and 2020. Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19, as described above, are included in the current and past due less than 30 days category in the table that follows:
(In Thousands) | As of December 31, 2021 | As of December 31, 2020 | ||||||||||||||||||||||
| Current |
|
|
|
| Current |
|
|
| |||||||||||||||
Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | |||||||||||||||||||
Less than | 30-89 | 90+ | Less than | 30-89 | 90+ | |||||||||||||||||||
30 Days | Days | Days | Total | 30 Days | Days | Days | Total | |||||||||||||||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Commercial loans secured by real estate | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Commercial and industrial |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Paycheck Protection Program - 1st Draw | | | | | ||||||||||||||||||||
Paycheck Protection Program - 2nd Draw | | | ||||||||||||||||||||||
Political subdivisions |
| |
|
|
| |
| |
|
|
| | ||||||||||||
Commercial construction and land |
| |
| |
|
| |
| |
| |
|
| | ||||||||||
Loans secured by farmland |
| |
|
| |
| |
| |
| |
| |
| | |||||||||
Multi-family (5 or more) residential |
| |
|
|
| |
| |
|
|
| | ||||||||||||
Agricultural loans |
| |
|
|
| |
| |
| |
|
| | |||||||||||
Other commercial loans |
| |
|
|
| |
| |
|
|
| | ||||||||||||
Total commercial |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Residential mortgage loans - first liens | | | | | | | | | ||||||||||||||||
Residential mortgage loans - junior liens |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Home equity lines of credit |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
1-4 Family residential construction |
| |
|
|
| |
| |
| |
|
| | |||||||||||
Total residential mortgage |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Consumer |
| |
| |
| |
| |
| |
| |
| |
| | ||||||||
Totals | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Nonaccrual loans are included in the contractual aging immediately above. A summary of the contractual aging of nonaccrual loans at December 31, 2021 and 2020 is as follows:
(In Thousands) | Current |
| ||||||||||
Past Due | Past Due | Past Due |
| |||||||||
Less than | 30-89 | 90+ |
| |||||||||
| 30 Days |
| Days |
| Days |
| Total | |||||
December 31, 2021 Nonaccrual Totals | $ | | $ | | $ | | $ | | ||||
December 31, 2020 Nonaccrual Totals | $ | | $ | | $ | | $ | | ||||
Loans whose terms are modified are classified as TDRs if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as the contractual aging information at December 31, 2021 and 2020 is as follows:
66
Troubled Debt Restructurings (TDRs):
(In Thousands) | Current |
|
| ||||||||||||
Past Due | Past Due | Past Due |
|
| |||||||||||
Less than | 30-89 | 90+ |
|
| |||||||||||
| 30 Days |
| Days |
| Days |
| Nonaccrual |
| Total | ||||||
December 31, 2021 Totals | $ | | $ | $ | | $ | | $ | | ||||||
December 31, 2020 Totals | $ | | $ | | $ | | $ | | $ | | |||||
At December 31, 2021 and 2020, there were
A summary of TDRs that occurred during 2021 and 2020 is as follows:
(Balances in Thousands) | 2021 |
| 2020 | |||||||
|
| Post- |
|
| Post- | |||||
Number | Modification |
| Number | Modification | ||||||
of | Recorded |
| of | Recorded | ||||||
Loans | Investment |
| Loans | Investment | ||||||
Residential mortgage - first liens: |
|
|
|
|
|
|
| |||
Reduced monthly payments and extended maturity date |
| | $ | | | $ | | |||
Reduced monthly payments for a fifteen-month period | | | ||||||||
Residential mortgage - junior liens, |
|
|
|
|
| |||||
New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted |
| |
| | |
| | |||
Home equity lines of credit: | ||||||||||
Reduced monthly payments and extended maturity date | | | | | ||||||
Reduced monthly payments for an eighteen-month period | | | | | ||||||
Commercial loans secured by real estate: | ||||||||||
Interest only payments for a nine-month period | | | | | ||||||
Principal and interest payment deferral non-COVID related | | | | | ||||||
Multi-family (5 or more) residential, | ||||||||||
Principal and interest payment deferral non-COVID related | | | | | ||||||
Total |
| | $ | | | $ | | |||
In the year ended December 31, 2020, the Corporation recorded a specific allowance for loan losses of $
In 2021 and 2020, payment defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:
2021 |
| 2020 | ||||||||
Number | Number | |||||||||
of | Recorded | of | Recorded | |||||||
(Balances in Thousands) |
| Loans |
| Investment |
| Loans |
| Investment | ||
Commercial loans secured by real estate |
| | $ | |
| | $ | | ||
Total |
| | $ | |
| | $ | | ||
67
The default that occurred in 2021 was on the loan referred to above with a specific allowance of $
The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in Foreclosed assets held for sale in the consolidated balance sheets) is as follows:
(In Thousands) |
| December 31, |
| December 31, | ||
2021 | 2020 | |||||
Foreclosed residential real estate | $ | | $ | | ||
The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:
(In Thousands) |
| December 31, |
| December 31, | ||
2021 | 2020 | |||||
Residential real estate in process of foreclosure | $ | | $ | | ||
9. BANK PREMISES AND EQUIPMENT
(In Thousands) | December 31, | |||||
2021 | 2020 | |||||
Land | $ | $ | ||||
Buildings and improvements | ||||||
Furniture and equipment | ||||||
Construction in progress | ||||||
Total | ||||||
Less: accumulated depreciation | ( | ( | ||||
Net | $ | $ | ||||
Depreciation expense is included in the following line items of the consolidated statements of income:
(In Thousands) | 2021 | 2020 | ||||
Net occupancy and equipment expense | $ | $ | ||||
Data processing and telecommunications expense | ||||||
Total | $ | $ | ||||
10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Information related to the core deposit intangibles is as follows:
(In Thousands) |
| December 31, | ||||
2021 | 2020 | |||||
Gross amount | $ | | $ | | ||
Accumulated amortization |
| ( |
| ( | ||
Net | $ | | $ | | ||
68
Amortization expense related to core deposit intangibles is included in other noninterest expense in the consolidated statements of income, as follows:
(In Thousands) | Year Ended | |||||
December 31, | December 31, | |||||
2021 | 2020 | |||||
Amortization expense | $ | | $ | | ||
The amount of amortization expense to be recognized in each of the ensuing five years is as follows:
(In Thousands) |
| ||
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Changes in the carrying amount of goodwill are summarized in the following table:
(In Thousands) | Year Ended | |||||
December 31, | December 31, | |||||
2021 | 2020 | |||||
Balance, beginning of period | $ | | $ | | ||
Goodwill arising in business combination | | |||||
Balance, end of period | $ | | $ | | ||
In testing goodwill for impairment at December 31, 2021, the Corporation by-passed performing a qualitative assessment and performed a quantitative assessment based on comparison of the Corporation’s market capitalization to its stockholders’ equity, resulting in the determination that the fair value of its reporting unit, its community banking operation, exceeded its carrying amount. Accordingly, there was
There were
69
11. DEPOSITS
At December 31, 2021 the scheduled maturities of time deposits are as follows:
(In Thousands) | |||
2022 | $ | ||
2023 | |||
2024 | |||
2025 | |||
2026 | |||
Total | $ |
Time deposits of more than $250,000 totaled $
(In Thousands) | |||
Three months or less | $ | ||
Over 3 months through 12 months | |||
Over 1 year through 3 years | |||
Over 3 years | |||
Total | $ |
12. BORROWED FUNDS
SHORT-TERM BORROWINGS
Short-term borrowings (initial maturity within one year) include the following:
(In Thousands) |
| December 31, |
| December 31, | ||
2021 | 2020 | |||||
FHLB-Pittsburgh borrowings | $ | $ | | |||
Customer repurchase agreements |
| |
| | ||
Total short-term borrowings | $ | | $ | | ||
The weighted average interest rate on total short-term borrowings outstanding was
The Corporation had available credit with other correspondent banks totaling $
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At December 31, 2021, the Corporation had available credit in the amount of $
The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was
70
The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $
At December 31, 2021, there were no overnight borrowings or short-term advances from FHLB-Pittsburgh. At December 31, 2020, other short-term advances from FHLB-Pittsburgh included
LONG-TERM BORROWINGS – FHLB ADVANCES
Long-term borrowings from FHLB-Pittsburgh are as follows:
(In Thousands) |
| December 31, |
| December 31, | ||
2021 | 2020 | |||||
Loans matured in 2021 | $ | $ | | |||
Loans maturing in 2022 with a weighted-average rate of | | | ||||
Loans maturing in 2023 with a weighted-average rate of | | | ||||
Loan maturing in 2024 with a rate of | | |||||
Loan maturing in 2025 with a rate of | | | ||||
Total long-term FHLB-Pittsburgh borrowings | $ | | $ | | ||
Note: Weighted-average rates are presented as of December 31, 2021.
SENIOR NOTES
On May 19, 2021, the Corporation issued and sold $
The Senior Notes were recorded, net of debt issuance costs of $
At December 31, 2021 and December 31, 2020, outstanding Senior Notes are as follows:
(In Thousands) |
| December 31, |
| December 31, | ||
2021 | 2020 | |||||
Senior Notes with an aggregate par value of $ | $ | $ | ||||
Total carrying value | $ | | $ | |||
SUBORDINATED DEBT
On
71
plus
The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation. The Subordinated Notes rank junior in right to payment to the Corporation's current and future senior indebtedness, including the Senior Notes (described above). The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.
The Subordinated Notes were recorded, net of debt issuance costs of $
At December 31, 2021 and 2020, outstanding subordinated debt agreements are as follows:
(In Thousands) |
| December 31, |
| December 31, | ||
2021 | 2020 | |||||
Agreements with an aggregate par value of $ | $ | $ | ||||
Agreements with an aggregate par value of $ | | | ||||
Agreement with a par value of $ | | |||||
Agreements with a par value of $ | | |||||
Total carrying value | $ | | $ | | ||
13. EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS
DEFINED BENEFIT PLANS
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. The plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at December 31, 2021 and 2020 and are not expected to significantly affect the Corporation’s future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.
In an acquisition in 2007, the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan. This plan covers certain employees who were employed by Citizens Trust Company on December 31, 2002, when the plan was amended to discontinue admittance of any future participant and to freeze benefit accruals. Information related to the Citizens Trust Company Retirement Plan has been included in the tables that follow. The Corporation uses a December 31 measurement date for this plan.
72
The following table shows the funded status of the defined benefit plans:
| Pension |
| Postretirement | |||||||||
(In Thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
CHANGE IN BENEFIT OBLIGATION: |
| |||||||||||
Benefit obligation at beginning of year | $ | | $ | | $ | | $ | | ||||
Service cost |
|
|
| |
| | ||||||
Interest cost |
| |
| |
| |
| | ||||
Plan participants' contributions |
|
|
| |
| | ||||||
Actuarial loss (gain) |
| |
| |
| ( |
| | ||||
Benefits paid |
| ( |
| ( |
| ( |
| ( | ||||
Benefit obligation at end of year | $ | | $ | | $ | | $ | | ||||
CHANGE IN PLAN ASSETS: | ||||||||||||
Fair value of plan assets at beginning of year | $ | | $ | | $ | $ | ||||||
Actual return on plan assets |
| |
| |
|
| ||||||
Employer contribution |
|
|
| |
| | ||||||
Plan participants' contributions |
|
|
| |
| | ||||||
Benefits paid |
| ( |
| ( |
| ( |
| ( | ||||
Fair value of plan assets at end of year | $ | | $ | | $ | $ | ||||||
Funded status at end of year | $ | | $ | ( | $ | ( | $ | ( | ||||
At December 31, 2021 and 2020, the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance sheets:
Pension | Postretirement | |||||||||||
(In Thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Other assets | $ | | $ | $ | $ | |||||||
Accrued interest and other liabilities | | | | |||||||||
At December 31, 2021 and 2020, the following items included in accumulated other comprehensive income had not been recognized as components of expense:
| Pension | Postretirement | ||||||||||
(In Thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Prior service cost | $ | $ | $ | ( | $ | ( | ||||||
Net actuarial loss (gain) |
| |
| |
| ( |
| ( | ||||
Total | $ | | $ | | $ | ( | $ | ( | ||||
For the defined benefit pension plan, amortization of the net actuarial loss is expected to be $
The accumulated benefit obligation for the defined benefit pension plan was $
73
The components of net periodic benefit costs from defined benefit plans are as follows:
| Pension | Postretirement | ||||||||||
(In Thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Service cost | $ | $ | $ | | $ | | ||||||
Interest cost |
| |
| |
| |
| | ||||
Expected return on plan assets |
| ( |
| ( |
|
| ||||||
Amortization of prior service cost |
|
|
| ( |
| ( | ||||||
Recognized net actuarial loss (gain) |
| |
| |
| ( |
| ( | ||||
Total net periodic benefit cost | $ | | $ | | $ | | $ | | ||||
The weighted-average assumptions used to determine net periodic benefit cost are as follows:
| Pension | Postretirement |
| ||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |
Discount rate |
| | % | | % | | % | | % |
Expected return on plan assets |
| | % | | % | N/A |
| N/A | |
Rate of compensation increase |
| N/A |
| N/A |
| N/A |
| N/A | |
The weighted-average assumptions used to determine benefit obligations as of December 31, 2021 and 2020 are as follows:
| Pension |
| Postretirement | ||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||
Discount rate |
| | % | | % | | % | | % |
Rate of compensation increase |
| N/A |
| N/A |
| N/A |
| N/A | |
Estimated future benefit payments, including only estimated employer contributions for the postretirement plan, which reflect expected future service, are as follows:
(In Thousands) |
| Pension |
| Postretirement | ||
2022 | $ | | $ | | ||
2023 |
| |
| | ||
2024 |
| |
| | ||
2025 |
| |
| | ||
2026 |
| |
| | ||
2027-2031 |
| |
| | ||
The expected return on pension plan assets is a significant assumption used in the calculation of net periodic benefit cost. This assumption reflects the average long-term rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation.
The fair values of pension plan assets at December 31, 2021 and 2020 are as follows:
| 2021 |
| 2020 |
| |
Mutual funds invested principally in: |
| ||||
Cash and cash equivalents |
| | % | | % |
Debt securities |
| | % | | % |
Equity securities |
| | % | | % |
Alternative funds |
| | % | | % |
Total |
| | % | | % |
74
CN Bank’s Wealth Management Department manages the investment of the pension plan assets. The Plan’s securities include mutual funds invested principally in debt securities, a diversified mix of large, mid- and small-capitalization U.S. stocks, foreign stocks and alternative asset classes such as real estate, commodities, and inflation-protected securities. The fair values of plan assets are determined based on Level 1 inputs (as described in Note 22). The Plan’s assets do not include any shares of the Corporation’s common stock.
PROFIT SHARING AND DEFERRED COMPENSATION PLANS
The Corporation has a profit sharing plan that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation’s matching contributions to the Plan depend upon the tax deferred contributions of employees. The Corporation’s total basic and matching contributions were $
The Corporation has an Employee Stock Ownership Plan (ESOP). Contributions to the ESOP are discretionary, and the ESOP uses funds contributed to purchase Corporation stock for the accounts of ESOP participants. These purchases are made in the market (not directly from the Corporation), and employees are not permitted to purchase Corporation stock under the ESOP. The ESOP includes a diversification feature, which allows participants, upon reaching age
Dividends paid on shares held by the ESOP are charged to retained earnings. All Corporation shares owned through the ESOP are included in the calculation of weighted-average shares outstanding for purposes of calculating earnings per share – basic and diluted. The ESOP held
The Corporation has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were $
In connection with the Covenant acquisition, the Corporation assumed an obligation to provide a supplemental retirement benefit to a former Covenant executive. Under the terms of the agreement, the executive or his heirs will receive monthly payments totaling $
The Corporation also has a nonqualified deferred compensation plan that allows selected officers the option to defer receipt of cash compensation, including base salary and any cash bonuses or other cash incentives. This nonqualified deferred compensation plan does not provide for Corporation contributions.
STOCK-BASED COMPENSATION PLANS
The Corporation has a Stock Incentive Plan for a selected group of senior officers. A total of
Also, the Corporation has an Independent Directors Stock Incentive Plan. This plan permits awards of nonqualified stock options and/or restricted stock to non-employee directors. A total of
75
prices of all stock options awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant. There are
Total stock-based compensation expense is as follows:
(In Thousands) |
| 2021 |
| 2020 | ||
Restricted stock | $ | | $ | | ||
Stock options |
|
| ||||
Total | $ | | $ | | ||
The following summarizes non-vested restricted stock activity for the year ended December 31, 2021:
|
|
| Weighted | ||
Average | |||||
Number | Grant Date | ||||
| of Shares |
| Fair Value | ||
Outstanding, December 31, 2020 |
| | $ | | |
Granted |
| | $ | | |
Vested |
| ( | $ | | |
Forfeited |
| ( | $ | | |
Outstanding, December 31, 2021 |
| | $ | | |
Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. As of December 31, 2021, there was $
In 2021 and 2020, the Corporation awarded shares of restricted stock under the Stock Incentive Plan, as follows:
| 2021 |
| 2020 | |
Time-based awards to independent directors | | | ||
Time-based awards to employees |
| |
| |
Performance-based awards to employees |
| |
| |
Total |
| |
| |
Time-based restricted stock awards granted under the Independent Directors Stock Incentive Plan in 2021 and 2020 vest over
76
There were
| 2021 |
| 2020 | |||||||
Weighted | Weighted | |||||||||
Average | Average | |||||||||
Exercise | Exercise | |||||||||
| Shares |
| Price |
| Shares |
| Price | |||
Outstanding, beginning of year |
| | $ | |
| | $ | | ||
Granted |
|
|
|
| ||||||
Exercised |
| ( | $ | |
| ( | $ | | ||
Forfeited |
| ( | $ | |
| ( | $ | | ||
Expired |
| ( | $ | |
| $ | ||||
Outstanding, end of year |
| | $ | |
| | $ | | ||
Options exercisable at year-end |
| | $ | |
| | $ | | ||
Weighted-average fair value of options forfeited |
| $ | |
| $ | | ||||
The weighted-average remaining contractual term of outstanding stock options at December 31, 2021 was
The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2021. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2022.
In January 2022, the Corporation awarded
14. INCOME TAXES
The net deferred tax asset at December 31, 2021 and 2020 represents the following temporary difference components:
| December 31, | December 31, | ||||
(In Thousands) |
| 2021 |
| 2020 | ||
Deferred tax assets: | ||||||
Allowance for loan losses | $ | | $ | | ||
Purchase accounting adjustments on loans |
| |
| | ||
Net operating loss carryforward | | | ||||
Operating leases liability | | | ||||
Other deferred tax assets |
| |
| | ||
Total deferred tax assets |
| |
| | ||
Deferred tax liabilities: |
|
|
|
| ||
Unrealized holding gains on securities |
| |
| | ||
Defined benefit plans - ASC 835 |
| |
| | ||
Bank premises and equipment |
| |
| | ||
Core deposit intangibles |
| |
| | ||
Right-of-use assets from operating leases | | | ||||
Other deferred tax liabilities |
| |
| | ||
Total deferred tax liabilities |
| |
| | ||
Deferred tax asset, net | $ | | $ | | ||
77
The provision for income taxes includes the following:
(In Thousands) |
| 2021 |
| 2020 | ||
Currently payable | $ | | $ | | ||
Tax expense resulting from allocations of certain tax benefits |
| |
| | ||
Deferred |
| ( |
| ( | ||
Total provision | $ | | $ | | ||
A reconciliation of income tax at the statutory rate to the Corporation’s effective rate is as follows:
| 2021 | 2020 | ||||||||
(Dollars In Thousands) |
| Amount |
| % |
| Amount |
| % | ||
Expected provision | $ | |
| | $ | |
| | ||
Tax-exempt interest income |
| ( |
| ( |
| ( |
| ( | ||
Increase in cash surrender value and other income from life insurance, net |
| ( |
| ( |
| ( |
| ( | ||
ESOP dividends |
| ( |
| ( |
| ( |
| ( | ||
State income tax, net of Federal benefit |
| |
| |
| |
| | ||
Other, net |
| |
|
| |
| | |||
Effective income tax provision | $ | |
| | $ | |
| | ||
In connection with the 2020 Covenant merger, the Corporation received a net operating loss (“NOL”) available to be carried forward against future federal taxable income of $
The Corporation has
15. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiaries and any associates of the foregoing persons are as follows:
| Beginning |
| New |
|
|
| Other |
| Ending | ||||||
(In Thousands) |
| Balance |
| Loans |
| Repayments |
| Changes |
| Balance | |||||
$ | | $ | | $ | ( | $ | | $ | | ||||||
$ | | $ | | $ | ( | $ | | $ | | ||||||
In the table above, other changes represent net changes in the balance of existing lines of credit and transfers in and out of the related party category.
Deposits from related parties held by the Corporation amounted to $
16. OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial instruments.
78
The Corporation’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at December 31, 2021 and 2020 are as follows:
(In Thousands) |
| 2021 |
| 2020 | ||
Commitments to extend credit | $ | | $ | | ||
Standby letters of credit |
| |
| | ||
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, for extensions of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the Corporation guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Some of the standby letters of credit are collateralized by real estate or other assets, and others are unsecured. The extent to which proceeds from liquidation of collateral would be expected to cover the maximum potential amount of future payments related to standby letters of credit is not estimable. The Corporation has recorded
Standby letters of credit as of December 31, 2021 expire as follows:
Year of Expiration |
| (In Thousands) | |
2022 | $ | | |
2023 |
| | |
2024 | | ||
2026 | | ||
Total | $ | | |
17. OPERATING LEASE COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
Operating leases in which the Corporation is the lessee are recorded as operating lease Right of Use (ROU) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the Consolidated Balance Sheets. The Corporation does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities were recognized as of the date of adoption of ASU 2017-02 based on the present value of the remaining lease payments using a discount rate that represented the then Corporation’s incremental borrowing rate at the date of initial application.
Operating lease expense, which is comprised of amortization of the ROU assets and the implicit interest accreted on the operating lease liability, is recognized on a straight line basis over the remaining lease term of the operating lease, and is recorded in office occupancy expense in the Consolidated Statements of Income. The leases relate to Bank branches with remaining lease terms of generally to
The Corporation leases certain branch locations, office space and equipment. All leases are classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
79
Certain leases include options to renew, with renewal terms that can extend the lease term from to
As shown in the table below, at December 31, 2021, right-of-use assets of $
December 31, | December 31, | |||||
(In Thousands) |
| 2021 |
| 2020 | ||
Other assets | $ | | $ | | ||
Other liabilities | $ | | $ | | ||
In 2021 and 2020, operating lease expenses are included in the following line item of the consolidated statements of income:
(In Thousands) |
| 2021 |
| 2020 | ||
Net occupancy and equipment expense | $ | | $ | | ||
Total | $ | | $ | | ||
A maturity analysis of the Corporation’s lease liabilities at December 31, 2021 is as follows:
(In Thousands)
Lease Payments Due
2022 |
| $ | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total lease payments |
| | |
Discount on cash flows |
| ( | |
Total lease liabilities | $ | |
Litigation Matters
In the normal course of business, the Corporation is subject to pending and threatened litigation in which claims for monetary damages are asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of these legal proceedings.
Trust Department Tax Reporting Contingency
The Corporation has incurred operational losses from compliance oversight related to trust department tax preparation and administration activities that occurred prior to 2020. In 2020, the Corporation made changes in internal controls and personnel responsible for trust department tax administration activities. Management implemented the changes in internal controls and personnel in an effort to mitigate and prevent the likelihood of new instances of non-compliance from trust department tax administration activities. Losses related to trust department tax compliance matters totaled $
80
expense in the consolidated statements of income. The balance of accrued interest and other liabilities in the consolidated balance sheets includes $
18. REGULATORY MATTERS
In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at December 31, 2021; however, CN Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
Details concerning capital ratios at December 31, 2021 and December 31, 2020 are presented below. Management believes, as of December 31, 2021, that CN Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and CN Bank’s capital ratios at December 31, 2021 and December 31, 2020 exceed the Corporation’s Board policy threshold levels.
|
|
|
|
|
|
|
|
|
| Minimum To Be Well |
|
|
| ||||||||||
|
|
| Minimum | Minimum To Maintain | Capitalized Under | Minimum To Meet | |||||||||||||||||
|
|
| Capital | Capital Conservation | Prompt Corrective | the Corporation's | |||||||||||||||||
| Actual | Requirement |
| Buffer at Reporting Date | Action Provisions | Policy Thresholds | |||||||||||||||||
(Dollars In Thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |||
December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total capital to risk-weighted assets: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated | $ | |
| | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A | $ | |
| ³ | % | ||
CN Bank |
| |
| | % | |
| ³ | % | |
| ³ | % | |
| ³ | % |
| |
| ³ | % | |
Tier 1 capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Consolidated |
| |
| | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |
| ³ | % | ||
CN Bank |
| |
| | % | |
| ³ | % | |
| ³ | % | |
| ³ | % |
| |
| ³ | % | |
Common equity tier 1 capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| |
| | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |
| ³ | % | ||
CN Bank |
| |
| | % | |
| ³ | % | |
| ³ | % | |
| ³ | % |
| |
| ³ | % | |
Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Consolidated |
| |
| | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |
| ³ | % | ||
CN Bank |
| |
| | % | |
| ³ | % | N/A |
| N/A |
| |
| ³ | % |
| |
| ³ | % | |
December 31, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total capital to risk-weighted assets: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated | $ | |
| | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A | $ | |
| ³ | % | ||
CN Bank |
| |
| | % | |
| ³ | % | |
| ³ | % | |
| ³ | % |
| |
| ³ | % | |
Tier 1 capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| |
| | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |
| ³ | % | ||
CN Bank |
| |
| | % | |
| ³ | % | |
| ³ | % | |
| ³ | % |
| |
| ³ | % | |
Common equity tier 1 capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| |
| | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |
| ³ | % | ||
CN Bank |
| |
| | % | |
| ³ | % | |
| ³ | % | |
| ³ | % |
| |
| ³ | % | |
Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| |
| | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| |
| ³ | % | ||
CN Bank |
| |
| | % | |
| ³ | % | N/A |
| N/A |
| |
| ³ | % |
| |
| ³ | % | |
Federal regulatory authorities impose a capital rule providing that, to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is
81
measured relative to risk-weighted assets. At December 31, 2021, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
Minimum common equity tier 1 capital ratio |
| | % |
Minimum common equity tier 1 capital ratio plus capital conservation buffer |
| | % |
Minimum tier 1 capital ratio |
| | % |
Minimum tier 1 capital ratio plus capital conservation buffer |
| | % |
Minimum total capital ratio |
| | % |
Minimum total capital ratio plus capital conservation buffer |
| | % |
A banking organization with a buffer greater than
Capital Conservation Buffer |
| Maximum Payout |
|
(as a % of risk-weighted assets) | (as a % of eligible retained income) |
| |
Greater than |
| No payout limitation applies |
|
≤ | | % | |
≤ | | % | |
≤ | | % | |
≤ | | % |
At December 31, 2021, CN Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was
Banking regulators limit the amount of dividends that may be paid by CN Bank to the Corporation. Retained earnings against which dividends may be paid without prior approval of the banking regulators amounted to approximately $
Restrictions imposed by federal law prohibit the Corporation from borrowing from CN Bank unless the loans are secured in specific amounts. Such secured loans to the Corporation are generally limited to
82
19. PARENT COMPANY ONLY
The following is condensed financial information for Citizens Northern Corporation:
CONDENSED BALANCE SHEET |
| Dec. 31, |
| Dec. 31, | ||
(In Thousands) | 2021 | 2020 | ||||
ASSETS |
|
|
|
| ||
Cash | $ | | $ | | ||
Investment in subsidiaries: |
|
|
|
| ||
Citizens Northern Bank |
| |
| | ||
Citizens Northern Investment Corporation |
| |
| | ||
Bucktail Life Insurance Company |
| |
| | ||
Other assets |
| |
| | ||
TOTAL ASSETS | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
| ||
Senior notes, net | $ | | $ | |||
Subordinated debt, net |
| |
| | ||
Other liabilities |
| |
| | ||
Stockholders' equity |
| |
| | ||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | | $ | | ||
CONDENSED INCOME STATEMENT |
|
|
| |||
(In Thousands) |
| 2021 |
| 2020 | ||
Dividends from Citizens Northern Bank | $ | | $ | | ||
Expenses |
| ( |
| ( | ||
Income before equity in undistributed income (excess distributions) of subsidiaries |
| |
| | ||
Equity in undistributed income (excess distributions) of subsidiaries |
| |
| ( | ||
NET INCOME | $ | | $ | | ||
83
CONDENSED STATEMENT OF CASH FLOWS |
|
|
| |||
(In Thousands) |
| 2021 |
| 2020 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| ||
Accretion of purchase accounting adjustment | ( | ( | ||||
Amortization of debt issuance costs |
|
| ||||
Equity in (undistributed income) excess distributions of subsidiaries |
| ( |
| | ||
(Increase) decrease in other assets |
| ( |
| | ||
(Decrease) increase in other liabilities |
| ( |
| |||
Net Cash Provided by Operating Activities |
| |
| | ||
CASH FLOWS FROM INVESTING ACTIVITIES, |
|
|
|
| ||
Net cash used in business combination |
|
| ( | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
| ||
Proceeds from issuance of senior notes and subordinated debt |
|
| ||||
Repayment of subordinated debt |
| ( |
| |||
Proceeds from sale of treasury stock |
| |
| | ||
Purchase of treasury stock |
| ( |
| ( | ||
Dividends paid |
| ( |
| ( | ||
Net Cash Provided by (Used in) Financing Activities |
| |
| ( | ||
INCREASE IN CASH AND CASH EQUIVALENTS |
| |
| | ||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
| |
| | ||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
| ||
Investment of net assets acquired in business combination in Citizens Northern Bank | $ | $ | | |||
Common equity issued in business combination | $ | $ | | |||
Subordinated debt assumed in business combination | $ | $ | | |||
Other liabilities assumed in business combination | $ | $ | | |||
Interest paid | $ | | $ | | ||
84
20. SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
The following tables present summarized quarterly financial data for 2021 and 2020:
2021 Quarter Ended | ||||||||||||
March 31, | June 30, | Sept. 30, | Dec. 31, | |||||||||
(In Thousands Except Per Share Data) (Unaudited) |
| 2021 |
| 2021 |
| 2021 |
| 2021 | ||||
Interest income | $ | | $ | | $ | | $ | | ||||
Interest expense |
| |
| |
| |
| | ||||
Net interest income |
| |
| |
| |
| | ||||
Provision for loan losses |
| |
| |
| |
| | ||||
Net interest income after provision for loan losses |
| |
| |
| |
| | ||||
Noninterest income |
| |
| |
| |
| | ||||
Net gains (losses) on available-for-sale debt securities |
| |
| |
| |
| ( | ||||
Other noninterest expenses |
| |
| |
| |
| | ||||
Income before income tax provision |
| |
| |
| |
| | ||||
Income tax provision |
| |
| |
| |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Net income attributable to common shares | $ | | $ | | $ | | $ | | ||||
Net income per share – basic | $ | | $ | | $ | | $ | | ||||
Net income per share – diluted | $ | | $ | | $ | | $ | | ||||
| 2020 Quarter Ended | |||||||||||
March 31, | June 30, | Sept. 30, | Dec. 31, | |||||||||
(In Thousands Except Per Share Data) (Unaudited) |
| 2020 |
| 2020 |
| 2020 |
| 2020 | ||||
Interest income | $ | | $ | | $ | | $ | | ||||
Interest expense |
| |
| |
| |
| | ||||
Net interest income |
| |
| |
| |
| | ||||
Provision (credit) for loan losses |
| |
| ( |
| |
| | ||||
Net interest income after provision (credit) for loan losses |
| |
| |
| |
| | ||||
Noninterest income |
| |
| |
| |
| | ||||
Net gains on available-for-sale debt securities |
| |
| |
| |
| | ||||
Loss on prepayment of borrowings | | | | | ||||||||
Merger-related expenses |
| |
| |
| |
| | ||||
Other expenses |
| |
| |
| |
| | ||||
Income before income tax provision |
| |
| |
| |
| | ||||
Income tax provision |
| |
| |
| |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Net income attributable to common shares | $ | | $ | | $ | | $ | | ||||
Net income per share – basic | $ | | $ | | $ | | $ | | ||||
Net income per share – diluted | $ | | $ | | $ | | $ | | ||||
85
21. DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation is a party to derivative financial instruments. These financial instruments consist of interest rate swap agreements which contain master netting and collateral provisions designed to protect the party at risk.
Interest rate swaps with commercial loan banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party, such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures. These derivatives are not designated as hedges and are not speculative. Rather, these derivatives result from a service provided to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
The aggregate notional amount of interest rate swaps was $
The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at December 31, 2021:
(In Thousands) | At December 31, 2021 | At December 31, 2020 | |||||||||||||||||||||
Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | ||||||||||||||||||||
Notional | Fair | Notional | Fair | Notional | Fair | Notional | Fair | ||||||||||||||||
Amount | Value (1) | Amount | Value (2) | Amount | Value (1) | Amount | Value (2) | ||||||||||||||||
Interest rate swap agreements | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
| (1) | Included in other assets in the consolidated balance sheets. |
| (2) | Included in accrued interest and other liabilities in the consolidated balance sheets. |
The Corporation’s agreement with its derivative counterparty provides that if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. Further, if the Corporation were to fail to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Available-for-sale securities with a carrying value of $
22. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices
86
in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.
Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.
The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.
At December 31, 2021 and 2020, assets measured at fair value and the valuation methods used are as follows:
December 31, 2021 | ||||||||||||
| Quoted |
|
|
| ||||||||
Prices | Other | |||||||||||
in Active | Observable | Unobservable | Total | |||||||||
Markets | Inputs | Inputs | Fair | |||||||||
(In Thousands) | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||
Recurring fair value measurements, assets: |
|
|
|
|
|
|
|
| ||||
AVAILABLE-FOR-SALE DEBT SECURITIES: |
|
|
|
|
|
|
|
| ||||
Obligations of the U.S. Treasury | $ | | $ | $ | $ | | ||||||
Obligations of U.S. Government agencies | | | ||||||||||
Bank holding company debt securities | | | ||||||||||
Obligations of states and political subdivisions: |
|
|
|
|
|
| ||||||
Tax-exempt |
|
| |
|
| | ||||||
Taxable |
|
| |
|
| | ||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
| ||||
Residential pass-through securities |
|
| |
|
| | ||||||
Residential collateralized mortgage obligations |
|
| |
|
| | ||||||
Commercial mortgage-backed securities |
|
| |
|
| | ||||||
Total available-for-sale debt securities |
| |
| |
|
| | |||||
Marketable equity security |
| |
|
|
| | ||||||
Servicing rights |
|
|
| |
| | ||||||
Interest rate swap agreements, assets | | |||||||||||
Total recurring fair value measurements, assets | $ | | $ | | $ | | $ | | ||||
Recurring fair value measurements, liabilities, | ||||||||||||
Interest rate swap agreements, liabilities | $ | | $ | | $ | | $ | | ||||
Nonrecurring fair value measurements, assets: |
|
|
|
|
|
|
|
| ||||
Impaired loans, net | $ | $ | $ | | $ | | ||||||
Foreclosed assets held for sale |
|
|
| |
| | ||||||
Total nonrecurring fair value measurements, assets | $ | $ | $ | | $ | | ||||||
87
December 31, 2020 | ||||||||||||
| Quoted |
|
|
| ||||||||
Prices | Other | |||||||||||
in Active | Observable | Unobservable | Total | |||||||||
Markets | Inputs | Inputs | Fair | |||||||||
(In Thousands) | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||
Recurring fair value measurements, assets: |
|
|
|
|
|
|
|
| ||||
AVAILABLE-FOR-SALE DEBT SECURITIES: |
|
|
|
|
|
|
|
| ||||
Obligations of the U.S. Treasury | $ | | $ | $ | $ | | ||||||
Obligations of U.S. Government agencies | | | ||||||||||
Obligations of states and political subdivisions: |
|
|
|
|
|
| ||||||
Tax-exempt |
|
| |
|
| | ||||||
Taxable |
|
| |
|
| | ||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
| ||||
Residential pass-through securities |
|
| |
|
| | ||||||
Residential collateralized mortgage obligations |
|
| |
|
| | ||||||
Commercial mortgage-backed securities |
|
| |
|
| | ||||||
Total available-for-sale debt securities |
| |
| |
|
| | |||||
Marketable equity security |
| |
|
|
| | ||||||
Servicing rights |
|
|
| |
| | ||||||
Interest rate swap agreements, assets | | |||||||||||
Total recurring fair value measurements, assets | $ | | $ | | $ | | $ | | ||||
Recurring fair value measurements, liabilities, | ||||||||||||
Interest rate swap agreements, liabilities | $ | | $ | | $ | | $ | | ||||
Nonrecurring fair value measurements, assets: |
|
|
|
|
|
|
|
| ||||
Impaired loans, net | $ | $ | $ | | $ | | ||||||
Foreclosed assets held for sale |
|
|
| |
| | ||||||
Total nonrecurring fair value measurements, assets | $ | $ | $ | | $ | | ||||||
88
Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management. The following table shows quantitative information regarding significant techniques and inputs used at December 31, 2021 and 2020 for servicing rights assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:
| Fair Value at |
|
|
|
|
|
|
|
| |||
12/31/2021 | Valuation | Unobservable | Method or Value As of | |||||||||
Asset | (In Thousands) | Technique | Input(s) | 12/31/2021 | ||||||||
Servicing rights | $ | |
| Discounted cash flow |
| Discount rate |
| % | Rate used through modeling period | |||
|
| Loan prepayment speeds | % | Weighted-average PSA | ||||||||
|
| Servicing fees | % | of loan balances | ||||||||
| % | of payments are late | ||||||||||
| % | late fees assessed | ||||||||||
$ | | Miscellaneous fees per account per month | ||||||||||
|
| Servicing costs | $ | | Monthly servicing cost per account | |||||||
$ | | Additional monthly servicing cost per loan on loans more than 30 days delinquent | ||||||||||
| % | of loans more than 30 days delinquent | ||||||||||
|
| % | annual increase in servicing costs | |||||||||
| Fair Value at |
|
|
|
|
|
|
|
| |||
12/31/2020 | Valuation | Unobservable | Method or Value As of | |||||||||
Asset | (In Thousands) | Technique | Input(s) | 12/31/2020 | ||||||||
Servicing rights | $ | |
| Discounted cash flow |
| Discount rate |
| | % | Rate used through modeling period | ||
|
| Loan prepayment speeds | | % | Weighted-average PSA | |||||||
|
| Servicing fees | | % | of loan balances | |||||||
| | % | of payments are late | |||||||||
| % | late fees assessed | ||||||||||
$ | |
| Miscellaneous fees per account per month | |||||||||
| Servicing costs | $ | | Monthly servicing cost per account | ||||||||
$ | | Additional monthly servicing cost per loan on loans more than 30 days delinquent | ||||||||||
| % | of loans more than 30 days delinquent | ||||||||||
|
| | % | annual increase in servicing costs | ||||||||
The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans.
Following is a reconciliation of activity for Level 3 assets (servicing rights) measured at fair value on a recurring basis:
(In Thousands) | Years Ended December 31, | |||||
| 2021 |
| 2020 | |||
Servicing rights balance, beginning of period | $ | | $ | | ||
Originations of servicing rights |
| |
| | ||
Unrealized loss included in earnings |
| ( |
| ( | ||
Servicing rights balance, end of period | $ | | $ | | ||
89
Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
At December 31, 2021 and 2020, quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (Level 3 methodologies) are as follows:
(Dollars In Thousands) |
|
|
|
|
|
|
|
|
|
| Weighted |
| ||||
Valuation |
|
|
| Average |
| |||||||||||
Balance at | Allowance at | Fair Value at | Valuation | Unobservable | Discount at |
| ||||||||||
Asset | 12/31/2021 | 12/31/2021 | 12/31/2021 | Technique | Inputs | 12/31/2021 | ||||||||||
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial: |
|
|
|
|
|
|
|
|
| |||||||
Commercial loans secured by real estate | $ | | $ | | $ | |
| Sales comparison |
| Discount to appraised value |
| | % | |||
Commercial and industrial | | | Liquidation of assets |
| Discount to appraised value |
| | % | ||||||||
Total impaired loans | $ | | $ | | $ | |
|
|
|
|
|
| ||||
Foreclosed assets held for sale - real estate: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial real estate | $ | | $ | $ | |
| Sales comparison |
| Discount to appraised value |
| | % | ||||
Residential (1-4 family) | | |
| Sales comparison |
| Discount to appraised value |
| | % | |||||||
Total foreclosed assets held for sale | $ | | $ | $ | |
|
|
|
|
| ||||||
(Dollars In Thousands) |
|
|
|
|
|
|
|
|
|
| Weighted |
| ||||
Valuation |
|
|
| Average |
| |||||||||||
Balance at | Allowance at | Fair Value at | Valuation | Unobservable | Discount at |
| ||||||||||
Asset | 12/31/2020 | 12/31/2020 | 12/31/2020 | Technique | Inputs | 12/31/2020 |
| |||||||||
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial: |
|
|
|
|
|
|
|
|
| |||||||
Commercial loans secured by real estate | $ | | $ | | $ | |
| Sales comparison |
| Discount to appraised value |
| | % | |||
Commercial and industrial |
| |
| |
|
| Liquidation of assets |
| Discount to appraised value |
| | % | ||||
Residential mortgage loans - first and junior liens | | | |
| Sales comparison |
| Discount to appraised value |
| | % | ||||||
Total impaired loans | $ | | $ | | $ | |
|
|
|
|
|
| ||||
Foreclosed assets held for sale - real estate: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial real estate | $ | | $ | $ | |
| Sales comparison |
| Discount to appraised value |
| | % | ||||
Residential (1-4 family) | | |
| Sales comparison |
| Discount to appraised value |
| | % | |||||||
Total foreclosed assets held for sale | $ | | $ | $ | |
|
|
|
|
|
| |||||
Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.
90
The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:
(In Thousands) | Fair Value | December 31, 2021 | December 31, 2020 | |||||||||||
Hierarchy | Carrying | Fair | Carrying | Fair | ||||||||||
| Level |
| Amount |
| Value |
| Amount |
| Value | |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| Level 1 | $ | | $ | | $ | | $ | | ||||
Certificates of deposit |
| Level 2 |
| |
| |
| |
| | ||||
Restricted equity securities (included in Other Assets) |
| Level 2 |
| |
| |
| |
| | ||||
Loans, net |
| Level 3 |
| |
| |
| |
| | ||||
Accrued interest receivable |
| Level 2 |
| |
| |
| |
| | ||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Deposits with no stated maturity |
| Level 2 |
| |
| |
| |
| | ||||
Time deposits |
| Level 2 |
| |
| |
| |
| | ||||
Short-term borrowings |
| Level 2 |
| |
| |
| |
| | ||||
Long-term borrowings |
| Level 2 |
| |
| |
| |
| | ||||
Senior debt | Level 2 | | | |||||||||||
Subordinated debt | Level 2 | | | | | |||||||||
Accrued interest payable |
| Level 2 |
| |
| |
| |
| | ||||
91
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors of
Citizens Northern Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Citizens Northern Corporation and subsidiaries (collectively the Corporation) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation's consolidated financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Qualitative Factors
Critical Audit Matter Description
As disclosed in Note 8 to the Corporation's consolidated financial statements, the Corporation's loan portfolio totaled $1,564,849,000 as of December 31, 2021, and the related allowance for loan losses was $13,537,000. As described in Note 1 and Note 8, the allowance for loan losses consists of two major components: (1) a specific component consisting of the valuation allowance for loans individually evaluated for impairment (“specific component”), representing $740,000 and (2) a general component consisting of the valuation allowance for pools of loans with similar risk characteristics collectively evaluated for impairment (“general reserves”), representing $12,797,000. The general reserves are further broken down as reserves assigned to each pool of loans based on both historical net charge-off experience ($1,332,000) and reserves related to qualitative factors ($11,465,000).
The determination of the allowance for loan losses requires significant estimates and subjective assumptions which require a high degree of judgment relating to how those assumptions impact probable incurred credit losses within the loan portfolio. Changes in these assumptions could have a material effect on the Corporation’s financial results. Qualitative risk factors are evaluated for the impact on each of the three distinct loan segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. Management has designed qualitative factors that include such factors as 1) economic conditions within its market area, 2) the Corporation’s lending policies, 3) changes or trends in the portfolio, 4) risk profile, 5) competition, and 6) regulatory requirements. To formulate the additional allocations to the allowance for loan losses for general reserve qualitative factors, management multiplies the outstanding principal balance of the various loan classes by the applicable qualitative factor.
Management’s identification and analysis of these issues requires significant judgment. We identified the estimate of the general reserve's qualitative factors of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors requires significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.
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How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included, among others:
| ● | Obtaining an understanding of the management review control over the determination, review and approval of the qualitative factors, including controls over the underlying internal and external data inputs, and testing such control for design and operating effectiveness. |
| ● | Evaluating the reasonableness of management’s judgments related to qualitative factor adjustments to determine if they are calculated in accordance with management’s policies and consistently applied. |
| ● | Evaluating the relevance and reliability of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroborating these inputs by comparing to the Corporation’s lending practices, historical loan portfolio performance, and third-party macroeconomic data, as well as considering current economic factors. |
| ● | Analytically evaluate changes that occurred in the allowance for loan losses. |
/s/
We have served as the Corporation’s auditor since 1979.
February 22, 2022
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation’s management, under the supervision of and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensure that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Corporation’s management is responsible for establishing and maintaining effective internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Corporation’s system of internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Corporation’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Corporation’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of the Corporation’s management and directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
There were no changes in the Corporation’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2021, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on that assessment, we concluded that, as of December 31, 2021, the Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).
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Baker Tilly US, LLP, the independent registered public accounting firm that audited the Corporation’s consolidated financial statements, has issued an audit report on the Corporation’s internal control over financial reporting as of December 31, 2021. That report appears immediately prior to this report.
February 22, 2022 | By: | /s/ J. Bradley Scovill |
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| President and Chief Executive Officer |
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February 22, 2022 | By: | /s/ Mark A. Hughes |
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| Treasurer and Chief Financial Officer |
ITEM 9B. OTHER INFORMATION
There was no information the Corporation was required to disclose in a report on Form 8-K during the fourth quarter 2021 that was not disclosed.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning Directors and Executive Officers is incorporated herein by reference to disclosure under the captions “Proposal 1 – Election of Directors,” “Executive Officers,” “Information Concerning Security Ownership” and “Meetings and Committees of the Board of Directors” of the Corporation’s proxy statement dated March 11, 2022 for the annual meeting of stockholders to be held on April 21, 2022.
The Corporation’s Board of Directors has adopted a Code of Ethics, available on the Corporation’s web site at www.cnbankpa.com for the Corporation’s employees, officers and directors. (The provisions of the Code of Ethics are also included in the Corporation’s employee handbook.)
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by reference to disclosure under the captions “Compensation Discussion and Analysis” and “Executive Compensation Tables” of the Corporation’s proxy statement dated March 11, 2022 for the annual meeting of stockholders to be held on April 21, 2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to disclosure under the caption “Beneficial Ownership of Executive Officers and Directors” of the Corporation’s proxy statement dated March 11, 2022 for the annual meeting of stockholders to be held on April 21, 2022.
“Equity Compensation Plan Information” as required by Item 201(d) of Regulation S-K is incorporated by reference herein from Item 5 (Market for Registrant’s Common Equity and Related Stockholder Matters) of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning loans and deposit balances with Directors and Executive Officers is provided in Note 15 to the Consolidated Financial Statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K. Additional information, including information concerning director independence, is incorporated herein by reference to disclosure appearing under the captions “Director Independence” and “Related Person Transaction and Policies” of the Corporation’s proxy statement dated March 11, 2022 for the annual meeting of stockholders to be held on April 21, 2022.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning services provided by the Corporation’s independent auditor Baker Tilly US, LLP, the audit committee’s pre-approval policies and procedures for such services, and fees paid by the Corporation to that firm, is incorporated herein by reference to disclosure under the caption “Fees of Independent Public Accountants” of the Corporation’s proxy statement dated March 11, 2022 for the annual meeting of stockholders to be held on April 21, 2022.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | (1). The following consolidated financial statements are set forth in Part II, Item 8: |
| (a) | (2) Financial statement schedules are not applicable or included in the financial statements or related notes. |
2. Plan of acquisition, reorganization, arrangement, liquidation or succession: | |||
Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018 | |||
Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed December 18, 2019 | |||
Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed September 21, 2009 | |||
Incorporated by reference to Exhibit 3.1 of the Corporation's Form 8-K filed February 18, 2022 | |||
4. Instruments defining the rights of securities holders, including Indentures | |||
Incorporated by reference to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021 | |||
Incorporated by reference to Exhibit A-2 to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021 | |||
Incorporated by reference to Exhibit 4.3 of the Corporation’s Form 8-K filed May 19, 2021 | |||
Incorporated by reference to Exhibit 4.(vi) of the Corporation’s Form 10-K filed February 20, 2020 | |||
9. Voting trust agreement | Not applicable | ||
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10. Material contracts: | |||
Filed herewith | |||
Filed herewith | |||
Filed herewith | |||
Filed herewith | |||
Filed herewith | |||
Filed herewith | |||
Filed herewith | |||
10.8 2022 Annual Performance Incentive Award Plan - Mortgage Lenders | Filed herewith | ||
10.9 First Amendment to Deferred Compensation Agreement dated June 17, 2021 | Filed herewith | ||
10.10 Deferred Compensation Agreement dated December 17, 2015 | Incorporated by reference to Exhibit 10.8 filed with Corporation’s Form 10-K on February 15, 2018 | ||
Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on August 24, 2018 | |||
Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on June 27, 2017 | |||
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10.13 Employment agreement dated March 2, 2015 between the Corporation and J. Bradley Scovill | Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on February 9, 2015 | ||
10.14 Employment agreement dated September 19, 2013 between the Corporation and Mark A. Hughes | Incorporated by reference to Exhibit 10.2 filed with Corporation’s Form 8-K on September 19, 2013 | ||
10.15 Employment agreement dated September 19, 2013 between the Corporation and Harold F. Hoose, III | Incorporated by reference to Exhibit 10.3 filed with Corporation’s Form 8-K on September 19, 2013 | ||
10.16 Employment agreement dated December 18, 2019 between the Corporation and Blair T. Rush | Incorporated by reference to Exhibit 10.15 filed with Corporation’s Form 10-K on March 5, 2021 | ||
10.17 Employment agreement dated April 6, 2021 between the Corporation and Alexander Balagour | Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on August 6, 2021 | ||
Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on November 1, 2018 | |||
Incorporated by reference to Exhibit 10.6 filed with Corporation’s Form 10-K on February 15, 2018 | |||
Incorporated by reference to Exhibit 10.9 filed with Corporation’s Form 10-K on February 26, 2015 | |||
Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 10-K on February 21, 2013 | |||
Incorporated by reference to Exhibit 10.8 filed with Corporation’s Form 10-K on March 1, 2011 | |||
Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-K on March 14, 2005 | |||
Incorporated by reference to Exhibit 10.23 filed with Corporation’s Form 10-K on March 5, 2021 | |||
10.25 Change in Control Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins | Incorporated by reference to Exhibit 10.7 filed with Corporation’s Form 10-K on February 15, 2018 | ||
10.26 Change in Control Agreement dated March 17, 2015 between the Corporation and Stan R. Dunsmore | Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on May 8, 2015 | ||
Incorporated by reference to Exhibit 10.7 filed with Corporation’s Form 10-K on February 21, 2013 | |||
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10.28 Change in Control Agreement dated January 20, 2005 between the Corporation and John M. Reber | Incorporated by reference to Exhibit 10.18 filed with Corporation’s Form 10-K on February 18, 2016 | ||
Incorporated by reference to Exhibit 10.2 filed with the Corporation’s Form 10-K on March 14, 2005 | |||
10.30 Executive Compensation Recoupment Policy dated September 19, 2013 | Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 8-K on September 19, 2013 | ||
10.31 Fifth Amendment to Citizens Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.1 filed with Form 8-K on December 21, 2018 | ||
Incorporated by reference to Exhibit 10.6 filed with Corporation’s Form 8-K on September 19, 2013 | |||
10.33 Third Amendment to Citizens Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit A to the Corporation’s proxy statement dated March 18, 2008 for the annual meeting of stockholders held on April 15, 2008 | ||
10.34 Second Amendment to Citizens Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.5 filed with the Corporation’s Form 10-K on March 10, 2004 | ||
10.35 First Amendment to Citizens Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.6 filed with the Corporation’s Form 10-K on March 10, 2004 | ||
Incorporated by reference to Exhibit 10.7 filed with the Corporation’s Form 10-K on March 10, 2004 | |||
10.37 Second Amendment to Citizens Northern Independent Directors Stock Incentive Plan | Incorporated by reference to Exhibit 10.2 filed with Form 8-K on December 21, 2018 | ||
10.38 First Amendment to Citizens Northern Corporation Independent Directors Stock Incentive Plan | Incorporated by reference to Exhibit B to the Corporation’s proxy statement dated March 18, 2008 for the annual meeting of stockholders held on April 15, 2008 | ||
10.39 Citizens Northern Corporation Independent Directors Stock Incentive Plan | Incorporated by reference to Exhibit A to the Corporation’s proxy statement dated March 19, 2001 for the annual meeting of stockholders held on April 17, 2001. | ||
10.40 Citizens Northern Corporation Supplemental Executive Retirement Plan (as amended and restated) | Incorporated by reference to Exhibit 10.21 filed with the Corporation’s Form 10-K on March 6, 2009 | ||
Incorporated by reference to Exhibit 10.1 filed with the Corporation’s Form 10-Q filed August 6, 2018 | |||
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Incorporated by reference to Exhibit 10.4 filed with the Corporation's Form 10-Q on August 6, 2020 | |||
Incorporated by reference to Exhibit 10.5 filed with the Corporation's Form 10-Q on August 6, 2020 | |||
Incorporated by reference to Exhibit 10.2 filed with the Corporation’s Form 10-Q on August 6, 2021 | |||
Incorporated by reference to Exhibit 10.1 filed with the Corporation’s Form 10-Q on November 8, 2021 | |||
11. Statement re: computation of per share earnings | Information concerning the computation of earnings per share is provided in Note 4 to the Consolidated Financial Statements, which is included in Part II, Item 8 of Form 10-K | ||
12. Statements re: computation of ratios | Not applicable | ||
13. Annual report to security holders, Form 10-Q or quarterly report to security holders | Not applicable | ||
14. Code of ethics | The Code of Ethics is available through the Corporation’s website at www.cnbankpa.com. To access the Code of Ethics, click on “About,” “Investor Relations,” “Corporate Governance Policies,” and “Code of Ethics.” | ||
16. Letter re: change in certifying accountant | Not applicable | ||
18. Letter re: change in accounting principles | Not applicable | ||
Filed herewith | |||
22. Published report regarding matters submitted to vote of security holders | Not applicable | ||
23. Consent of Independent Registered Public Accounting Firm | Filed herewith | ||
24. Power of attorney | Not applicable | ||
31. Rule 13a-14(a)/15d-14(a) certifications: | |||
Filed herewith | |||
Filed herewith | |||
Filed herewith | |||
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33. Report on assessment of compliance with servicing criteria for asset-backed securities | Not applicable | ||
34. Attestation report on assessment of compliance with servicing criteria for asset-backed securities | Not applicable | ||
35. Service compliance statement | Not applicable | ||
99. Additional exhibits: | |||
Filed herewith | |||
100. XBRL-related documents | Not applicable | ||
101. Interactive data file | Filed herewith | ||
104. Cover page interactive data file | (Formatted as Inline XBRL and contained in Exhibit 101) | ||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
By: | /s/ J. Bradley Scovill |
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President and Chief Executive Officer |
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Date: February 22, 2022 |
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By: | /s/ Mark A. Hughes |
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Treasurer and Principal Accounting Officer |
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Date: February 22, 2022 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
BOARD OF DIRECTORS
/s/ | Stephen M. Dorwart | /s/ | Frank G. Pellegrino |
| Stephen M. Dorwart |
| Frank G. Pellegrino |
| Date: February 22, 2022 |
| Date: February 22, 2022 |
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/s/ | Clark S. Frame | /s/ | Helen S. Santiago |
| Clark S. Frame |
| Helen S. Santiago |
| Date: February 22, 2022 |
| Date: February 22, 2022 |
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/s/ | Susan E. Hartley | /s/ | Timothy E. Schoener |
| Susan E. Hartley |
| Timothy E. Schoener |
| Date: February 22, 2022 |
| Date: February 22, 2022 |
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/s/ | Bobbi J. Kilmer | /s/ | J. Bradley Scovill |
| Bobbi J. Kilmer |
| J. Bradley Scovill |
| Date: February 22, 2022 |
| Date: February 22, 2022 |
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/s/ | Leo F. Lambert | /s/ | Kate Shattuck |
| Leo F. Lambert |
| Kate Shattuck |
| Date: February 22, 2022 |
| Date: February 22, 2022 |
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/s/ | Terry L. Lehman | /s/ | Aaron K. Singer |
| Terry L. Lehman |
| Aaron K. Singer |
| Date: February 22, 2022 |
| Date: February 22, 2022 |
/s/ | Robert G. Loughery | ||
| Robert G. Loughery | ||
| Date: February 22, 2022 |
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