10-K 1 tm208260d1_10k.htm FORM 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

 

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

 

For the fiscal year ended December 31, 2019

 

OR

 

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

 

For the transition period from _______________ to _________________________.

 

Commission file number: 0-16084 

 

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA 23-2451943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

 

570-724-3411

(Registrant's telephone number including area code)

 

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

 

Title of Each Class  Trading Symbol  Name of Each Exchange on Which Registered
Common Stock Par Value $1.00  CZNC  NASDAQ Capital Market

 

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 ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (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). Yes x No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company x Emerging growth company ¨

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The aggregate market value of the registrant's common stock held by non-affiliates at June 30, 2019, the registrant’s most recently completed second fiscal quarter, was $348,405,379.

 

The number of shares of common stock outstanding at February 13, 2020 was 13,762,993.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 16, 2020 are incorporated by reference into Parts III and IV of this report.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page(s)
Part I:  
Item 1. Business 3-4
Item 1A. Risk Factors 4-6
Item 1B. Unresolved Staff Comments 6
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Mine Safety Disclosure 7
   
Part II.  
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 8-10
Item 6. Selected Financial Data 11-12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-36
Item 8. Financial Statements and Supplementary Data 37-86
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 87
Item 9A. Controls and Procedures 87-88
Item 9B. Other Information 88
   
Part III:  
Item 10. Directors, Executive Officers and Corporate Governance 88
Item 11. Executive Compensation 88
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 88
Item 13. Certain Relationships and Related Transactions, and Director Independence 88
Item 14. Principal Accountant Fees and Services 88
   
Part IV:  
Item 15. Exhibits and Financial Statement Schedules 89-92
Signatures 93

 

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 (“C&N Bank” or the “Bank”). The Corporation’s other wholly-owned subsidiaries are Citizens & Northern Investment Corporation and Bucktail Life Insurance Company (“Bucktail”). Citizens & Northern Investment Corporation was formed in 1999 to engage in investment activities. Bucktail reinsures credit and mortgage life and accident and health insurance on behalf of C&N Bank.

 

The Corporation’s acquisition of Monument Bancorp, Inc. (“Monument”) was completed April 1, 2019. Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Monument merged with and into the Corporation and Monument Bank merged with and into C&N Bank. Total purchase consideration was $42.7 million, including 1,279,825 shares of the Corporation’s common stock issued with a value of $33.1 million and cash paid totaling $9.6 million. Holders of Monument common stock prior to the consummation of the merger held approximately 9.4% of the Corporation’s common stock outstanding immediately following the merger.

 

In December 2019, the Corporation announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”) in a transaction valued on December 18, 2019 at approximately $77 million. Under the terms of the definitive agreement, the Corporation will pay cash for 25% of the Covenant shares and will convert 75% of Covenant shares to the Corporation’s common stock. Covenant is the holding company for Covenant Bank, which operates banking offices in Bucks and Chester Counties of PA. Covenant had total assets of $516 million at December 31, 2019. Pursuant to the plan of merger, Covenant will merge with and into the Corporation and Covenant Bank will merge with and into C&N Bank The merger is subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval of Covenant’s shareholders. The merger is expected to close in the third quarter 2020.

 

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

 

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

 

In December 2017, C&N Bank established Northern Tier Holding LLC, to acquire, hold and dispose of real property acquired by the Bank. C&N Bank is the sole member of Northern Tier Holding LLC.

 

Over the past few years, the Corporation has begun to execute on a growth strategy. Presently, a majority of C&N Bank’s operations are conducted in its legacy markets in the northern tier of Pennsylvania and southern tier of New York. In 2019, with the acquisition of Monument and the opening of a lending office in York, Pennsylvania, the Bank expanded into new markets in Southeastern and southcentral Pennsylvania. Management expects the acquisition of Covenant to be completed in 2020, which will further increase the volume of activity in southeastern Pennsylvania.

 

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 for deposits. C&N Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management, brokerage and insurance services. The Bank is generally competitive with all financial institutions in our service 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, 2019, C&N Bank had total assets of $1,638,285,000, total deposits of $1,259,440,000, net loans outstanding of $1,172,386,000 and 336 full-time equivalent employees.

 

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

 

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

 

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

 

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

 

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

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

 

Limited Geographic Diversification - The Corporation grants commercial, residential and personal loans to customers primarily in the Corporation’s legacy markets of the northern tier of Pennsylvania and southern tier of New York and, effective with the acquisition of Monument and opening of the York lending office in 2019, 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.

 

4

 

 

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.

 

Growth Strategy –As described in Item 1, in 2019, the Corporation acquired Monument and opened a lending office in York, Pennsylvania. Also, in December 2019, the Corporation entered into an agreement to acquire Covenant. Further, management intends to continue to pursue additional acquisition opportunities. The Corporation’s future financial performance will depend on its ability to execute its strategic plan and manage its future growth. Failure to execute these plans could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

 

Breach of Information Security and Technology Dependence - The Corporation relies on software, communication, and information exchange on a variety of computing platforms and networks and over the Internet. Despite numerous safeguards, the Corporation cannot be certain that its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted, and the Corporation could be exposed to claims from customers. Any of these results could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

 

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 (C&N 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.

 

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.

 

5

 

 

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

 

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, 2019, the total outstanding balance of residential mortgages sold and serviced through the two programs amounted to $178,446,000. 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, 2019, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,770,000. 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.

 

6

 

 

ITEM 2. PROPERTIES

 

Except as noted below, the Bank owns its operating properties. All of the properties are in good condition. None of the owned properties are subject to encumbrance.

 

A listing of properties is as follows:

 

Main administrative offices:

 

90-92 Main Street  or  10 Nichols Street
Wellsboro, PA 16901    Wellsboro, PA 16901

 

Branch offices - Citizens & Northern Bank:

 

  428 S. Main Street   514 Main Street   41 Main Street
  Athens, PA  18810   Laporte, PA  18626   Tioga, PA  16946
           
  10 North Main Street   4534 Williamson Trail   428 Main Street**
  Coudersport, PA  16915   Liberty, PA  16930   Towanda, PA  18848
           
  465 North Main Street   1085 S. Main Street   64 Elmira Street
  Doylestown, PA 18901   Mansfield, PA  16933   Troy, PA  16947
           
  111 W. Main Street   612 James Monroe Avenue   90-92 Main Street
  Dushore, PA  18614   Monroeton, PA  18832   Wellsboro, PA  16901
           
  563 Main Street   3461 Route 405 Highway   1510 Dewey Avenue
  East Smithfield, PA  18817   Muncy, PA  17756   Williamsport, PA  17701
           
  104 W. Main Street   33 Swamp Road, Unit 7**   130 Court Street**
  Elkland, PA  16920   Newtown, PA 18940   Williamsport, PA  17701
           
  135 East Fourth Street   100 Maple Street   1467 Golden Mile Road
  Emporium, PA  15834   Port Allegany, PA  16743   Wysox, PA  18854
           
  230 Railroad Street   1827 Elmira Street   2 East Mountain Avenue**
  Jersey Shore, PA  17740   Sayre, PA  18840   South Williamsport, PA 17702
           
  102 E. Main Street   3 Main Street   6250 County Rte 64
  Knoxville, PA  17740   Canisteo, NY 14823   Hornell, NY 14843

 

Loan production offices of Citizens & Northern Bank:

 

250 East Water Street  2951 Whiteford Road Suite 102**  65 West Street Road Suite A201**
Elmira, NY 14901  York, PA 17402  Warminster, PA 18974

 

Facilities management office:

 

13 Water Street
Wellsboro, PA 16901

 

** designates leased facility

 

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.

 

7

 

 

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, 2019, there were 2,094 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 2019 and 2018.

 

   2019   2018 
           Dividend           Dividend 
           Declared           Declared 
           per           per 
   High   Low   Quarter   High   Low   Quarter 
First quarter  $27.07   $23.60   $0.37   $25.41   $22.00   $0.27 
Second quarter   29.25    25.02    0.27    27.72    22.64    0.27 
Third quarter   27.00    22.52    0.27    28.99    25.42    0.27 
Fourth quarter   28.58    24.23    0.27    28.48    23.72    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 C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.

 

Effective April 21, 2016, the Corporation’s Board of Directors approved a treasury stock repurchase program. Under this program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation's common stock or slightly less than 5% of the Corporation's issued and outstanding shares at April 19, 2016. The Board of Directors’ April 21, 2016 authorization provides that: (1) the treasury stock repurchase program shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. To date, no purchases have been made under this repurchase 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 2019:

 

Period   Total Number of Shares
Purchased
   Average Price Paid per
Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
   Maximum Number of
Shares that May Yet be
Purchased Under the
Plans or Programs
 
October 1 - 31, 2019   0   $-   0   600,000 
November 1 - 30, 2019   0   $-   0   600,000 
December 1 - 31, 2019   0   $-   0   600,000 

 

8

 

 

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, 2014 and ended December 31, 2019. 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  12/31/14   12/31/15   12/31/16   12/31/17   12/31/18   12/31/19 
Citizens & Northern Corporation   100.00   107.01   140.37   134.19   154.24   172.49 
Russell 2000 Index   100.00   95.59   115.95   132.94   118.30   148.49 
Peer Group   100.00   106.24   145.30   171.70   158.94   186.98 

 

Peer Group includes all publicly traded SEC filing Commercial Banks & Thrifts within NJ, NY, OH and PA with assets between $750M and $3.5B as of 9/30/2019

 

Source: S&P Global Market Intelligence

© 2020

 

9

 

 

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, 2019.

 

           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   75,897   $18.69    333,832 
                
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.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

  As of or for the Year Ended December 31,
INCOME STATEMENT (In Thousands)  2019   2018   2017   2016   2015 
Interest and dividend income  $64,771   $50,328   $45,863   $44,098   $44,519 
Interest expense   10,283    4,625    3,915    3,693    4,602 
Net interest income   54,488    45,703    41,948    40,405    39,917 
Provision for loan losses   849    584    801    1,221    845 
Net interest income after provision for loan losses   53,639    45,119    41,147    39,184    39,072 
Noninterest income excluding securities gains   19,284    18,597    16,153    15,511    15,478 
Net gains on securities   23    2,033    257    1,158    2,861 
Loss on prepayment of debt   0    0    0    0    2,573 
Merger-related expenses   4,099    328    0    0    0 
Noninterest expense excluding loss on prepayment of debt and merger-related expenses   45,438    39,158    36,967    34,744    33,030 
Income before income tax provision   23,409    26,263    20,590    21,109    21,808 
Income tax provision   3,905    4,250    7,156    5,347    5,337 
Net income  $19,504   $22,013   $13,434   $15,762   $16,471 
Net income attributable to common shares  $19,404   $21,903   $13,365   $15,677   $16,387 

 

PER COMMON SHARE:                    
Basic earnings per share  $1.46   $1.79   $1.10   $1.30   $1.35 
Diluted earnings per share  $1.46   $1.79   $1.10   $1.30   $1.35 
Cash dividends declared per share  $1.18   $1.08   $1.04   $1.04   $1.04 
Book value per common share at period-end  $17.82   $16.02   $15.43   $15.36   $15.39 
Tangible book value per common share at period-end  $15.66   $15.05   $14.45   $14.37   $14.41 
Weighted average common shares outstanding - basic   13,298,736    12,219,209    12,115,840    12,032,820    12,149,252 
Weighted average common shares outstanding - diluted   13,321,559    12,257,368    12,155,136    12,063,055    12,171,084 
END OF PERIOD BALANCES (Dollars In Thousands)                         
Available-for-sale debt securities  $346,723   $363,273   $355,937   $394,106   $417,904 
Gross loans   1,182,222    827,563    815,713    751,835    704,880 
Allowance for loan losses   9,836    9,309    8,856    8,473    7,889 
Total assets   1,654,145    1,290,893    1,276,959    1,242,292    1,223,417 
Deposits   1,252,660    1,033,772    1,008,449    983,843    935,615 
Borrowings and subordinated debt   144,847    48,768    70,955    64,629    92,263 
Stockholders' equity   244,452    197,368    188,443    186,008    187,487 
Common shares outstanding   13,716,445    12,319,330    12,214,525    12,113,228    12,180,623 
AVERAGE BALANCES (In Thousands)                         
Total assets   1,540,469    1,276,140    1,247,759    1,229,866    1,243,209 
Earning assets   1,437,993    1,205,429    1,169,569    1,147,549    1,159,298 
Gross loans   1,057,559    822,346    780,640    723,076    657,727 
Deposits   1,213,687    1,027,831    990,917    970,447    968,201 
Stockholders' equity   229,446    187,895    188,958    188,373    188,905 

 

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ITEM 6. SELECTED FINANCIAL DATA (Continued)

 

  As of or for the Year Ended December 31,
KEY RATIOS  2019   2018   2017   2016   2015 
Return on average assets   1.27%   1.72%   1.08%   1.28%   1.32%
Return on average equity   8.50%   11.72%   7.11%   8.37%   8.72%
Average equity to average assets   14.89%   14.72%   15.14%   15.32%   15.19%
Net interest margin (1)   3.86%   3.90%   3.82%   3.76%   3.69%
Efficiency (2)   60.73%   59.69%   60.74%   59.22%   56.66%
Cash dividends as a % of diluted earnings per share   80.82%   60.34%   94.55%   80.00%   77.04%
Tier 1 leverage   13.10%   14.78%   14.23%   14.27%   14.31%
Tier 1 risk-based capital   19.19%   23.24%   21.95%   22.48%   23.29%
Total risk-based capital   20.70%   24.42%   23.07%   23.60%   24.40%
Tangible common equity/tangible assets   13.22%   14.50%   13.95%   14.15%   14.49%
Nonperforming assets/total assets   0.80%   1.37%   1.47%   1.43%   1.31%
Nonperforming loans/total loans   0.88%   1.94%   2.10%   2.07%   2.09%
Allowance for loan losses/total loans   0.83%   1.12%   1.09%   1.13%   1.12%
Net charge-offs/average loans   0.03%   0.02%   0.05%   0.09%   0.04%
                          
(1) Rates of return on tax-exempt securities and loans are calculated on a fully-taxable equivalent basis.                         
                          
(2) The efficiency ratio is calculated by dividing: (a) total noninterest expense excluding merger-related expenses and losses from prepayment of debt, by (b) the sum of net interest income (including income from tax-exempt securities and loans on a fully-taxable equivalent basis) and noninterest income excluding securities gains or losses.                         

 

12

 

 

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements in this section and elsewhere in this Annual Report on Form 10-K are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:

 

·changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
·changes in general economic conditions
·legislative or regulatory changes
·downturn in demand for loan, deposit and other financial services in the Corporation’s market area
·increased competition from other banks and non-bank providers of financial services
·technological changes and increased technology-related costs
·changes in accounting principles, or the application of generally accepted accounting principles
·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.

 

COMPLETED AND PENDING ACQUISITIONS

 

The Corporation’s acquisition of Monument Bancorp, Inc. (“Monument”) was completed April 1, 2019. Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Total purchase consideration was $42.7 million, including 1,279,825 shares of the Corporation’s common stock issued with a value of $33.1 million and cash paid totaling $9.6 million. Holders of Monument common stock prior to the consummation of the merger held approximately 9.4% of the Corporation’s common stock outstanding immediately following the merger.

 

In connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with no realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately no realized gain or loss. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition. In the fourth quarter 2019, the Corporation recorded adjustments to various assets acquired and liabilities assumed from the merger, resulting in a net reduction in goodwill of $230,000.

 

Merger-related expenses associated with the Monument transaction totaled $3.8 million for the year ended December 31, 2019, including costs associated with termination of data processing contracts, conversion of Monument’s customer accounting data into the Corporation’s core system, severance and similar expenses, legal and other professional fees and various other costs.

 

In December 2019, the Corporation announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”) in a transaction valued on December 18, 2019 at approximately $77 million. Under the terms of the definitive agreement, the Corporation will pay cash for 25% of the Covenant shares and will convert 75% of Covenant shares to the Corporation’s common stock. Covenant is the holding company for Covenant Bank, which operates banking offices in Bucks and Chester Counties of PA. Covenant had total assets of $516 million at December 31, 2019. The merger is subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval of Covenant’s shareholders. The merger is expected to close in the third quarter 2020. In the fourth quarter 2019, the Corporation incurred merger-related expenses totaling $287,000 related to the planned acquisition of Covenant. Management estimates pre-tax merger-related expenses associated with the Covenant acquisition will total approximately $8 million ($6.6 million, net of tax), with most of the expenses expected to be incurred in the third quarter 2020.

 

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EARNINGS OVERVIEW

 

Net income for the year ended December 31, 2019 was $19,504,000, or $1.46 per diluted share as compared to 2018 net income of $22,013,000 or $1.79 per share. Earnings for the year ended December 31, 2019 were significantly impacted by the Monument acquisition, including the effects of merger-related expenses described earlier. Earnings for the year ended December 31, 2018 included the benefit of a realized gain on a restricted equity security (Visa Inc. Class B stock) partially offset by the impact of a loss on available-for-sale debt securities. In 2018, pre-tax realized gains on Visa Class B stock totaled $2.3 million while pre-tax realized losses on available-for-sale securities totaled $288,000. Excluding the impact of merger-related expenses and net securities gains, adjusted (non-U.S. GAAP) earnings for 2019 would be $22,756,000 or $1.70 per share as compared to similarly adjusted (non-GAAP) earnings of $20,712,000 or $1.68 per share for 2018.

 

The following table provides a reconciliation of the Corporation’s 2019 earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses and realized gains and losses on securities. Management believes disclosure of 2019 and 2018 earnings results, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes.

 

RECONCILIATION OF NET INCOME AND

DILUTED EARNINGS PER SHARE TO NON-U.S.

GAAP MEASURE 

 

   Year Ended Dec. 31, 2019   Year Ended Dec. 31, 2018 
   Income           Diluted   Income           Diluted 
   Before   Income       Earnings   Before   Income       Earnings 
   Income   Tax       per   Income   Tax       per 
   Tax   Provision   Net   Common   Tax   Provision   Net   Common 
(Dollars In Thousands, Except Per Share Data)  Provision   (1)   Income   Share   Provision   (1)   Income   Share 
Results as Presented Under U.S. GAAP  $23,409   $3,905   $19,504   $1.46   $26,263   $4,250   $22,013   $1.79 
Add: Merger-Related Expenses   4,099    829    3,270         328    23    305      
Less: Gain on Restricted Equity Security                       (2,321)   (487)   (1,834)     
Net (Gains) Losses on Available-for-sale Debt                                        
Securities   (23)   (5)   (18)        288    60    228      
Adjusted Earnings, Excluding Effect of Merger-                                        
Related Expenses, Gain on Restricted Equity                                        
Security and Net Gains and Losses on                                        
Available-for-Sale Debt Securities                                        
(Non-U.S. GAAP)  $27,485   $4,729   $22,756   $1.70   $24,558   $3,846   $20,712   $1.68 

 

(1)Income tax has been allocated based on an income tax rate of 21%. The tax benefit associated with merger-related expenses has been adjusted to reflect the estimated nondeductible portion of the expenses.

 

In 2019, interest income on loans acquired from Monument, partially offset by interest expense on deposits, borrowings and subordinated debt assumed, contributed to growth in net interest income, while costs associated with the expansion contributed to an increase in noninterest expenses.

 

Other significant variances were as follows:

 

·Net interest income was up $8,785,000 (19.2%) in 2019 over 2018, reflecting the benefits of growth, particularly from the Monument acquisition as well as loan growth from the York office (opened in March 2019) and organic loan and deposit growth from the Corporation’s legacy markets. The net interest margin was 3.86% for 2019, down from 3.90% in 2018. In 2019, the net interest margin included a net positive impact from accretion and amortization of purchase accounting adjustments of 0.04%. The average yield on earning assets in 2019 was up 0.30% over 2018, while the average rate paid on interest-bearing liabilities was up 0.46% between periods. The Monument acquisition and other factors contributed to growth in average noninterest-bearing demand deposits of $39.4 million and average stockholders’ equity (excluding accumulated other comprehensive income) of $33.8 million, which helped to offset some of the impact on the margin of compression in the interest rate spread.

 

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·The provision for loan losses of $849,000 for 2019 was higher than the 2018 provision by $265,000. The higher provision in 2019 resulted mainly from significant loan growth. The 2019 provision included a net reduction in expense of $232,000 related to specific loans (net decrease in specific allowances on loans of $554,000 and net charge-offs of $322,000), a net $1,193,000 charge attributable to loan growth and a net reduction in expense of $112,000 related to changes in historical loss and qualitative factors and the unallocated portion of the allowance. In comparison, the 2018 provision included $457,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, a charge of $178,000 due to loan growth and a net reduction in expense of $51,000 related to decreases in historical loss and qualitative factors.

 

·Noninterest income increased $687,000, or 3.7%, in 2019 over 2018. Total trust and brokerage revenue increased $516,000 as trust revenue reflected growth in assets under management from market value appreciation as well as new business and brokerage revenue increased as a result of an increase in volume. Increases in volume also led to increases in net gains from sales of mortgage loans of $242,000, interchange revenue from debit card transactions of $208,000 and service charges on deposit accounts of $187,000. Other noninterest income decreased $278,000, as the total for 2018 included income of $438,000 from a life insurance arrangement in which benefits were split between the Corporation and heirs of a former employee. Loan servicing fees, net, decreased $247,000, as the fair value of servicing rights decreased $331,000 in 2019 as compared to a decrease of $83,000 in 2018. The reduction in valuation of servicing fees at December 31, 2019 reflected the impact of higher assumed mortgage prepayments from lower interest rates.

 

·Noninterest expense, excluding merger-related expenses, increased $6,280,000 in 2019 over 2018. Significant variances included the following:

 

ØSalaries and wages expense increased $3,453,000, including $2,707,000 related to the Corporation’s new ventures in southeastern and southcentral Pennsylvania.

 

ØPensions and other employee benefits increased $578,000, mainly due to the increased number of employees resulting from expansion into new markets.

 

ØOther noninterest expense increased $1,454,000. Within other noninterest expense, expenses and net losses on other real estate properties increased $385,000, mainly due to significant costs incurred related to one commercial workout situation. Other increases within this category included increases in advertising expense of $327,000, loan collection expenses of $264,000, amortization of core deposit intangibles of $220,000, consulting related to the overdraft privilege program of $145,000 and credit card operating costs of $111,000. Also, within other noninterest expense, donations expense decreased $249,000 reflecting a 2018 donation of real estate that resulted in expense of $250,000 with no similar item in 2019.

 

ØData processing expenses increased $653,000, including significant increases in software licensing costs associated with lending, Trust and other functions. Other expense increases within this category included consulting expenses related to renegotiation of an interchange processing contract, costs related to product development efforts in connection with a fintech organization and costs from operating two core processing systems for most of the second quarter 2019.

 

ØAutomated teller machine and interchange expense decreased $201,000, reflecting cost reductions pursuant to a renegotiated service contract.

 

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

 

CRITICAL ACCOUNTING POLICIES

 

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

 

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

 

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Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.

 

As described in Note 7 to the consolidated financial statements, management evaluates securities for other-than-temporary impairment (“OTTI”). In making that evaluation, consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery. Management’s assessments of the likelihood and potential for recovery in value of securities are subjective and based on sensitive assumptions.

 

NET INTEREST INCOME

 

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables I, II and III include information regarding the Corporation’s net interest income in 2019 and 2018. 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 $55,532,000 in 2019, $8,528,000 (18.1%) higher than in 2018. Interest income was $14,186,000 higher in 2019 as compared to 2018; interest expense was also higher by $5,658,000 in comparing the same periods. As presented in Table II, the Net Interest Margin was 3.86% in 2019 as compared to 3.90% in 2018, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.56% in 2019 from 3.72% in 2018.

 

Accretion and amortization of purchase accounting-related adjustments had a positive effect on net interest income of $560,000, including an increase in income on loans of $1,100,000 partially offset by increases in interest expense on time deposits of $407,000 and on short-term borrowings of $133,000. The net positive impact to the net interest margin from accretion and amortization of purchase accounting adjustments was 0.04%.

 

INTEREST INCOME AND EARNING ASSETS

 

Interest income totaled $65,815,000 in 2019, an increase of 27.5% from 2018. Interest and fees on loans receivable increased $14,234,000, or 34.3%, to $55,725,000 in 2019 from $41,491,000 in 2018. Table III shows the increase in interest on loans includes $12,696,000 attributable to an increase in volume and $1,538,000 related to an increase in average rate. The average balance of loans receivable increased $235,213,000 (28.6%) to $1,057,559,000 in 2019 from $822,346,000 in 2018. The increase in average balance reflects the Corporation’s purchase of Monument on April 1, 2019 as well as significant commercial loan growth throughout 2019. The average yield on loans in 2019 was 5.27% compared to 5.05% in 2018.

 

Interest income on available-for-sale debt securities totaled $9,531,000 in 2019, a reduction of $156,000 from the total for 2018. As indicated in Table II, average available-for-sale debt securities (at amortized cost) totaled $357,284,000 in 2019, a decrease of $2,839,000 (0.8%) from 2018. The average yield on available-for-sale debt securities decreased to 2.67% in 2019 from 2.69% in 2018.

 

Interest income from interest-bearing deposits in banks totaled $514,000 in 2019, an increase of $99,000 over the total for 2018. 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 increase in interest income from interest-bearing deposits with banks includes the effects of an increase in yield to 2.37% in 2019 from 1.90% in 2018, consistent with market increases in short-term interest rates over the course of 2018 that had a positive impact on short-term asset yields in the earlier months of 2019.

 

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

 

Interest expense increased $5,658,000, or 122.3%, to $10,283,000 in 2019 from $4,625,000 in 2018. Table II shows that the overall cost of funds on interest-bearing liabilities increased to 1.02% in 2019 from 0.56% in 2018.

 

Total average deposit balances (interest-bearing and noninterest-bearing) increased 18.1%, to $1,213,687,000 in 2019 from $1,027,831,000 in 2018, mainly as a result of the Monument acquisition.

 

 16 

 

 

Interest expense on deposits increased $4,488,000 in 2019 over 2018. The average rate on interest-bearing deposits increased to 0.89% in 2019 from 0.48% in 2018. Interest expense on time deposits increased $3,777,000 in 2019 of which $2,373,000 is from an increase in average rate and $1,404,000 due to an increase in volume. The increase in average rate on deposits reflects comparatively higher rates on deposits assumed from Monument, including significant growth in higher-cost time deposits. Amortization of purchase accounting-related adjustments added 0.05% to the average rate on total interest-bearing deposits.

 

Interest expense on borrowed funds increased $1,170,000 in 2019 as compared to 2018. Total average borrowed funds increased $32,277,000 to $82,712,000 in 2019 from $50,435,000 in 2018. The average rate on total borrowed funds was 2.53% in 2019 compared to 1.83% in 2018. The increase in the average rate on borrowed funds in 2019 reflects the impact of increases in market rates over the course of 2018 and the first quarter 2019 and the impact of higher-cost subordinated debt assumed from Monument.

 

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TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

    
             
   Years Ended December 31,   Increase/ 
(In Thousands)  2019   2018   (Decrease) 
INTEREST INCOME               
Interest-bearing due from banks  $514   $415   $99 
Available-for-sale securities               
Taxable   7,008    6,189    819 
Tax-exempt   2,523    3,498    (975)
Total available-for-sale securities   9,531    9,687    (156)
Loans receivable:               
Taxable   53,086    38,667    14,419 
Tax-exempt   2,639    2,824    (185)
Total loans receivable   55,725    41,491    14,234 
Other earning assets   45    36    9 
Total Interest Income   65,815    51,629    14,186 
                
INTEREST EXPENSE               
Interest-bearing deposits:               
Interest checking   1,155    950    205 
Money market   962    549    413 
Savings   246    153    93 
Time deposits   5,827    2,050    3,777 
Total interest-bearing deposits   8,190    3,702    4,488 
Borrowed funds:               
Short-term   733    366    367 
Long-term   1,013    557    456 
Subordinated debt   347    0    347 
Total borrowed funds   2,093    923    1,170 
Total Interest Expense   10,283    4,625    5,658 
                
Net Interest Income  $55,532   $47,004   $8,528 

 

(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 $919,000 in 2019 and $912,000 in 2018.

 

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TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES

                 
   Year       Year     
   Ended   Rate of   Ended   Rate of 
   12/31/2019   Return/   12/31/2018   Return/ 
   Average   Cost of   Average   Cost of 
(Dollars in Thousands)  Balance   Funds %   Balance   Funds % 
EARNING ASSETS                    
Interest-bearing due from banks  $21,711    2.37%  $21,800    1.90%
Available-for-sale securities,                    
at amortized cost:                    
Taxable   284,072    2.47%   262,461    2.36%
Tax-exempt   73,212    3.45%   97,662    3.58%
Total available-for-sale securities   357,284    2.67%   360,123    2.69%
Loans receivable:                    
Taxable   988,560    5.37%   746,309    5.18%
Tax-exempt   68,999    3.82%   76,037    3.71%
Total loans receivable   1,057,559    5.27%   822,346    5.05%
Other earning assets   1,439    3.13%   1,160    3.10%
Total Earning Assets   1,437,993    4.58%   1,205,429    4.28%
Cash   19,906         17,674      
Unrealized gain/loss on securities   1,347         (8,343)     
Allowance for loan losses   (8,876)        (9,033)     
Bank premises and equipment   15,914         15,156      
Intangible Assets   25,531         11,952      
Other assets   48,654         43,305      
Total Assets  $1,540,469        $1,276,140      
                     
INTEREST-BEARING LIABILITIES                    
Interest-bearing deposits:                    
Interest checking  $217,910    0.53%  $217,638    0.44%
Money market   194,849    0.49%   180,835    0.30%
Savings   167,677    0.15%   152,889    0.10%
Time deposits   344,446    1.69%   227,060    0.90%
Total interest-bearing deposits   924,882    0.89%   778,422    0.48%
Borrowed funds:                    
Short-term   33,521    2.19%   25,226    1.45%
Long-term   43,917    2.31%   25,209    2.21%
Subordinated debt   5,274    6.58%   0    0.00%
Total borrowed funds   82,712    2.53%   50,435    1.83%
Total Interest-bearing Liabilities   1,007,594    1.02%   828,857    0.56%
Demand deposits   288,805         249,409      
Other liabilities   14,624         9,979      
Total Liabilities   1,311,023         1,088,245      
Stockholders' equity, excluding                    
other comprehensive income/loss   228,103         194,333      
Other comprehensive income/loss   1,343         (6,438)     
Total Stockholders' Equity   229,446         187,895      
Total Liabilities and Stockholders' Equity  $1,540,469        $1,276,140      
Interest Rate Spread        3.56%        3.72%
Net Interest Income/Earning Assets        3.86%        3.90%
                     
Total Deposits (Interest-bearing                    
and Demand)  $1,213,687        $1,027,831      

 

(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.

 

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TABLE III -  ANALYSIS OF VOLUME AND RATE CHANGES  

 

   Year Ended 12/31/19 vs. 12/31/18 
   Change in   Change in   Total 
(In Thousands)  Volume   Rate   Change 
EARNING ASSETS               
Interest-bearing due from banks  $(2)  $101   $99 
Available-for-sale securities:               
Taxable   525    294    819 
Tax-exempt   (847)   (128)   (975)
Total available-for-sale securities   (322)   166    (156)
Loans receivable:               
Taxable   12,963    1,456    14,419 
Tax-exempt   (267)   82    (185)
Total loans receivable   12,696    1,538    14,234 
Other earning assets   9    0    9 
Total Interest Income   12,381    1,805    14,186 
                
INTEREST-BEARING LIABILITIES               
Interest-bearing deposits:               
Interest checking   1    204    205 
Money market   46    367    413 
Savings   16    77    93 
Time deposits   1,404    2,373    3,777 
Total interest-bearing deposits   1,467    3,021    4,488 
Borrowed funds:               
Short-term   144    223    367 
Long-term   431    25    456 
Subordinated debt   347    0    347 
Total borrowed funds   922    248    1,170 
Total Interest Expense   2,389    3,269    5,658 
                
Net Interest Income  $9,992   $(1,464)  $8,528 

 

(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.

 

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NONINTEREST INCOME

 

The table below presents a comparison of noninterest income, excludes realized gains and losses on securities (which are discussed in the Earnings Overview section of Management’s Discussion and Analysis), and the gain on a restricted equity security (Visa Class B stock) in 2018.

 

TABLE IV - COMPARISON OF NONINTEREST INCOME

                 
   Years Ended         
   December 31,   $   % 
(Dollars in Thousands)  2019   2018   Change   Change 
Trust and financial management revenue  $6,106   $5,838   $268    4.6 
Brokerage revenue   1,266    1,018    248    24.4 
Insurance commissions, fees and premiums   167    105    62    59.0 
Service charges on deposit accounts   5,358    5,171    187    3.6 
Service charges and fees   332    343    (11)   (3.2)
Interchange revenue from debit card transactions   2,754    2,546    208    8.2 
Net gains from sales of loans   924    682    242    35.5 
Loan servicing fees, net   100    347    (247)   (71.2)
Increase in cash surrender value of life insurance   402    394    8    2.0 
Other noninterest income   1,875    2,153    (278)   (12.9)
Total noninterest income, excluding realized gains                    
(losses) on securities, net  $19,284   $18,597   $687    3.7 

 

Total noninterest income, excluding realized gains and losses on securities, increased $687,000 (3.7%) in 2019 compared to 2018. Changes of significance are discussed in the narrative that follows.

 

·Trust and financial management revenue increased $268,000 (4.6%), reflecting growth in the value of trust assets under management attributable to market appreciation, particularly in the latter portion of 2019, as well as new business. At December 31, 2019, the value of trust assets under management was $1,007,113,000, an increase of 16.8% from $862,517,000 at December 31, 2018.

 

·Brokerage revenue increased $248,000 (24.4%), mainly due to increased volume of brokerage transactions compared to 2018.

 

·Service charges on deposit accounts increased $187,000 (3.6%), which includes $52,000 attributable to the assumption of former Monument deposit accounts.

 

·Interchange revenue from debit card transactions increased $208,000 (8.2%), reflecting an increase in transaction volume.

 

·Net gains from sales of loans increased $242,000 (35.5%) due to increased volume of residential mortgage loans sold. The increased sales volume in 2019 reflected a decision to retain fewer mortgage loans on the balance sheet to accommodate funding for increased commercial lending opportunities in southeastern and southcentral Pennsylvania. The increased sales volume was also attributable, in part, to increased refinancing activity consistent with falling interest rates in the latter portion of the year. Gains on sales of loans totaled 3.1% of the origination cost of loans sold in 2019 as compared to 3.2% in 2018.

 

·Loan servicing fees, net, decreased $247,000, as the fair value of mortgage loan servicing rights decreased $331,000 in 2019 as compared to a decrease of $83,000 in 2018. At December 31, 2019, the value of mortgage servicing rights (included in other assets in the consolidated balance sheets) was $1,277,000, or 0.72% of the outstanding balance of loans sold and serviced, down from $1,404,000 or 0.82% of the outstanding balance of loans sold and serviced at December 31, 2018. The reduction in valuation of servicing fees at December 31,2019 reflected the impact of higher assumed mortgage prepayments from lower interest rates.

 

·Other noninterest income decreased $278,000, as the 2018 total included $438,000 from a life insurance arrangement in which benefits were split between the Corporation and heirs of a former employee. Income from tax credits decreased $167,000 to $155,000 in 2019 from $322,000 in 2018 as the 2018 total included $154,000 from a donation of real estate. Dividends on FHLB-Pittsburgh stock increased $167,000 to $487,000 in 2019 from $320,000 in 2018. Interchange revenue from credit card transactions increased $87,000 to $213,000 in 2019 from $126,000 in 2018 and revenue from merchant services increased $50,000 to $424,000 in 2019 from $374,000 in 2018.

 

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NONINTEREST EXPENSE 

 

TABLE V - COMPARISON OF NONINTEREST EXPENSE 

 

             
   Years Ended         
   December 31,   $   % 
(Dollars In Thousands)   2019   2018   Change   Change 
Salaries and wages  $20,644   $17,191   $3,453    20.1 
Pensions and other employee benefits   5,837    5,259    578    11.0 
Occupancy expense, net   2,629    2,497    132    5.3 
Furniture and equipment expense   1,289    1,196    93    7.8 
Data processing expenses   3,403    2,750    653    23.7 
Automated teller machine and interchange expense   1,103    1,304    (201)   (15.4)
Pennsylvania shares tax   1,380    1,318    62    4.7 
Professional fees   1,069    976    93    9.5 
Telecommunications   744    748    (4)   (0.5)
Directors' fees   673    706    (33)   (4.7)
Other noninterest expense   6,667    5,213    1,454    27.9 
Total noninterest expense, excluding merger-                    
related expenses   45,438    39,158    6,280    16.0 
Merger-related expenses   4,099    328    3,771    1,149.7 
Total noninterest expense  $49,537   $39,486   $10,051    25.5 

 

Total noninterest expenses increased $10,051,000 (25.5%) in 2019 as compared to 2018. Total noninterest expenses excluding merger-related expenses increased $6,280,000 (16.0%) in 2019 as compared to 2018. Merger-related expenses are discussed in the Completed and Pending Acquisitions section of Management’s Discussion and Analysis. Other changes of significance are discussed in the narrative that follows.

 

·Salaries and wages expense increased $3,453,000 (20.1%), including $2,707,000 related to new operations in southeastern Pennsylvania (former Monument locations) and the southcentral Pennsylvania (York) location, as well as costs arising from increased staffing for credit administration and other lending support functions. At December 31, 2019, the Corporation had 336 full-time equivalent employees as compared to 299 at December 31, 2018.

 

·Pensions and other employee benefits expense increased $578,000 (11.0%), mainly due to the additional staffing related to the new ventures. Within this category, employee health insurance expense totaled $1,964,000 in 2019, an increase of $48,000 (2.5%) over 2018. In 2019, health insurance expense was reduced by the effect of a credit of $201,000 resulting from prior overpayment of claims on the partially self-insured plan.

 

·Occupancy expense increased $132,000 (5.3%), reflecting the addition of the locations in southeastern and southcentral Pennsylvania.

 

·Data processing expenses increased $653,000 (23.7%), including the impact of increases in software licensing costs associated with lending, trust and other functions. Other expense increases within this category included consulting expenses related to renegotiation of an interchange processing contract, costs related to product development efforts in connection with a fintech organization and costs from operating two core processing systems for most of the second quarter 2019.

 

·Automated teller machine and interchange expense decreased $201,000 from 2018 to 2019 reflecting cost reductions pursuant to a renegotiated service contract.

 

·Other noninterest expense increased $1,454,000. Within this category, significant changes were as follows:

 

ØExpenses and net losses on other real estate properties increased $385,000 and loan collection expenses increased $264,000, including significant costs incurred related to one commercial workout situation.

 

ØAdvertising expense increased $327,000, reflecting costs associated with re-branding and targeted marketing efforts.

 

ØAmortization of core deposit intangibles increased $220,000, reflecting expense associated with the Monument acquisition.

 

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ØConsulting expense related to the overdraft privilege program increased $145,000 to $263,000 in 2019 from $118,000 in 2018, reflecting an increase in amounts payable based on enhancements to the program, including the impact of an under-accrual of $41,000 in 2018.

 

ØWithin this category, credit card operating costs totaled $257,000 in 2019, an increase of $111,000 over 2018.

 

ØDonations expense decreased $249,000 reflecting a 2018 donation of real estate that resulted in expense of $250,000 with no similar item in 2019.

 

INCOME TAXES

 

The effective income tax rate was 16.7% of pre-tax income in 2019, up from 16.2% in 2018.The Corporation’s effective tax rates differed from the statutory rate of 21% mainly because of the effects of tax-exempt interest income. The higher effective income tax rate in 2019 as compared to 2018 reflected the impact of a reduction in tax-exempt interest income, as the Corporation’s average total investment in tax-exempt securities (at amortized cost) and tax-exempt loans was $31.5 million lower in 2019 than in 2018, as proceeds from maturities and calls of tax-exempt assets were reinvested mainly in taxable securities and loans.

 

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, 2019, the net deferred tax asset was $2,618,000, down from the balance at December 31, 2018 of $4,110,000. The most significant change in temporary difference components was a net decrease of $2,079,000 related to unrealized gains or losses on available-for-sale securities. At December 31, 2019, the net deferred tax liability associated with the unrealized gain was $934,000, while at December 31, 2018, the deferred tax asset associated with the unrealized loss was $1,145,000.

 

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, 2019 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, 2019 and 2018. Comparison of the amortized cost totals of available-for-sale debt securities at each year-end presented reflects a decrease of $26,447,000 to $342,278,000 at December 31, 2019 from $368,725,000 at December 31, 2018. The reduction in securities resulted from opportunities for loan growth, as management identified opportunities to reinvest proceeds from maturities and sales of securities into loans. Within the securities portfolio, mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies and tax-exempt obligations of states and political subdivisions (municipal bonds) decreased, while investments in taxable municipal bonds and U.S. Government agency bonds increased. These changes in portfolio mix were based on changes in liquidity and interest rate risk management needs and current market yields for various categories of securities.

 

As reflected in Table VI, the fair value of available-for-sale securities as of December 31, 2019 was $4,445,000, or 1.3%, greater than the total amortized cost basis. In comparison, the aggregate unrealized loss position at December 31, 2018 was $5,452,000, or 1.5% of the total amortized cost basis. The unrealized appreciation in the portfolio in 2019 resulted mainly from a decrease in interest rates.

 

Management has reviewed the Corporation’s holdings as of December 31, 2019 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. Management will continue to closely monitor the status of impaired securities in 2020.

 

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TABLE VI - INVESTMENT SECURITIES                
   2019   2018 
   Amortized   Fair   Amortized   Fair 
(In Thousands)  Cost   Value   Cost   Value 
AVAILABLE-FOR-SALE DEBT SECURITIES:                    
Obligations of U.S. Government agencies  $16,380   $17,000   $12,331   $12,500 
Obligations of states and political subdivisions:                    
Tax-exempt   68,787    70,760    84,204    83,952 
Taxable   35,446    36,303    27,618    27,699 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
Residential pass-through securities   58,875    59,210    54,827    53,445 
Residential collateralized mortgage obligations   115,025    114,723    148,964    145,912 
Commercial mortgage-backed securities   47,765    48,727    40,781    39,765 
Total Available-for-Sale Debt Securities  $342,278   $346,723   $368,725   $363,273 

 

The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2019. 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.

 

(In Thousands, Except for Percentages)  Within
One
Year
   Yield   One-
Five
Years
   Yield   Five-
Ten
Years
   Yield   After
Ten
Years
   Yield   Total   Yield 
AVAILABLE-FOR-SALE DEBT SECURITIES:                                                  
Obligations of U.S. Government agencies  $0    0.00%  $0    0.00%  $7,513    3.16%  $8,867    3.43%  $16,380    3.30%
Obligations of states and political subdivisions:                                                  
Tax-exempt   2,777    3.36%   16,230    3.03%   27,900    2.90%   21,880    3.48%   68,787    3.13%
Taxable   4,439    2.62%   15,396    2.94%   7,296    3.40%   8,315    3.17%   35,446    3.05%
Sub-total  $7,216    2.90%  $31,626    2.99%  $42,709    3.03%  $39,062    3.40%  $120,613    3.13%
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                                                  
Residential pass-through securities                                           58,875    2.41%
Residential collateralized mortgage obligations                                           115,025    1.84%
Commercial mortgage-backed securities                                           47,765    2.61%
Total                                          $342,278    2.50%

 

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.

 

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, 2019, and management does not expect the amount of purchases of bank premises and equipment or the Covenant acquisition to have a material, detrimental effect on the Corporation’s financial condition in 2020.

 

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Table VII shows the composition of the loan portfolio as of the end of the years 2015 through 2019. From December 31, 2015 through December 31, 2018, total loans outstanding increased $122.7 million (17.4%) and the overall mix by segment remained fairly constant, with residential mortgage loans of approximately 55% to 56% of the portfolio at each year-end, and commercial loans of 43% to 44% of the portfolio. At December 31, 2019, gross loans outstanding totaled $1,182,222,000, an increase of $354.7 million (42.9%) from December 31, 2018. As previously noted, a significant portion of the Corporation’s loan growth in 2019 is attributable to the Monument acquisition and to new loans originated in the southeastern and southcentral Pennsylvania markets. In comparing gross outstanding balances at December 31, 2019 and 2018, total commercial loans increased $225.3 million (63.7%) and total residential mortgage loans increased $129.8 million (28.4%). The overall mix of the loan portfolio at December 31, 2019 was slightly less than 50% residential mortgage and 49% commercial loans.

 

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 $64,633,000 at December 31, 2019, down from $67,340,000 at December 31, 2018. At December 31, 2019, the balance of participation loans outstanding includes a total of $46,206,000 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 $9,947,000 at December 31, 2019 and $13,315,000 at December 31, 2018.

 

Table VIII presents loan maturity data as of December 31, 2019. The interest rate simulation model used to prepare Table VIII classifies certain loans under different categories from the categories that appear in Table VII. Fixed-rate loans are shown in Table VIII based on their contractually scheduled principal repayments, and variable-rate loans are shown based on the date of the next change in rate. Table VIII shows that fixed-rate loans are approximately 30% of the loan portfolio and approximately 48% of the portfolio are variable-rate loans that re-price after more than one year. Variable-rate loans re-pricing after more than one year include residential and commercial real estate secured loans. The Corporation’s substantial investment in long-term, fixed-rate loans and variable-rate loans with extended periods until re-pricing is one of the concerns management attempts to address through interest rate risk management practices.

 

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 will not retain servicing rights for loans sold under the MPF Direct Program. In 2019, the Corporation’s activity under the MPF Direct Program was 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, 2019, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,770,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2018 was $2,146,000.

 

At December 31, 2019, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $178,446,000, including loans sold through the MPF Xtra program of $104,707,000 and loans sold through the Original program of $73,739,000. At December 31, 2018, outstanding balances of loans sold and serviced through the two programs totaled $171,742,000, including loans sold through the MPF Xtra program of $96,841,000 and loans sold through the Original Program of $74,901,000. 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, 2019 and December 31, 2018.

 

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, 2019, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,618,000, and the Corporation has recorded a related allowance for credit losses in the amount of $333,000 which is included in Accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2018, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,157,000, and the related allowance for credit losses was $328,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

 

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TABLE VII - Five-year Summary of Loans by Type

 

(Dollars In Thousands)   2019   %   2018   %   2017   %   2016   %   2015   % 
Residential mortgage:                                                  
Residential mortgage loans - first liens  $510,641    43.2   $372,339    45.0   $359,987    44.1   $334,102    44.4   $304,783    43.2 
Residential mortgage loans - junior liens   27,503    2.3    25,450    3.1    25,325    3.1    23,706    3.2    21,146    3.0 
Home equity lines of credit   33,638    2.8    34,319    4.1    35,758    4.4    38,057    5.1    39,040    5.5 
1-4 Family residential construction   14,798    1.3    24,698    3.0    26,216    3.2    24,908    3.3    21,121    3.0 
Total residential mortgage   586,580    49.6    456,806    55.2    447,286    54.8    420,773    56.0    386,090    54.8 
Commercial:                                                  
Commercial loans secured by real estate   301,227    25.5    162,611    19.6    159,266    19.5    150,468    20.0    154,779    22.0 
Commercial and industrial   126,374    10.7    91,856    11.1    88,276    10.8    83,854    11.2    75,196    10.7 
Political subdivisions   53,570    4.5    53,263    6.4    59,287    7.3    38,068    5.1    40,007    5.7 
Commercial construction and land   33,555    2.8    11,962    1.4    14,527    1.8    14,287    1.9    5,122    0.7 
Loans secured by farmland   12,251    1.0    7,146    0.9    7,255    0.9    7,294    1.0    7,019    1.0 
Multi-family (5 or more) residential   31,070    2.6    7,180    0.9    7,713    0.9    7,896    1.1    9,188    1.3 
Agricultural loans   4,319    0.4    5,659    0.7    6,178    0.8    3,998    0.5    4,671    0.7 
Other commercial loans   16,535    1.4    13,950    1.7    10,986    1.3    11,475    1.5    12,152    1.7 
Total commercial   578,901    49.0    353,627    42.7    353,488    43.3    317,340    42.2    308,134    43.7 
Consumer   16,741    1.4    17,130    2.1    14,939    1.8    13,722    1.8    10,656    1.5 
Total   1,182,222    100.0    827,563    100.0    815,713    100.0    751,835    100.0    704,880    100.0 
Less: allowance for loan losses   (9,836)        (9,309)        (8,856)        (8,473)        (7,889)     
Loans, net  $1,172,386        $818,254        $806,857        $743,362        $696,991      

 

TABLE VIII – LOAN MATURITY DISTRIBUTION

 

   As of December 31, 2019 
     
   Fixed-Rate Loans   Variable- or Adjustable-Rate Loans 
   1 Year   1-5   >5       1 Year   1-5   >5     
(In Thousands)  or Less   Years   Years   Total   or Less   Years   Years   Total 
Real Estate  $3,988   $67,529   $187,706   $259,223   $167,318   $320,011   $180,631   $667,959 
Commercial   18,277    24,801    33,266    76,344    99,643    43,483    18,154    161,280 
Consumer   3,768    9,833    3,786    17,387    29    0    0    29 
Total  $26,033   $102,163   $224,758   $352,954   $266,990   $363,494   $198,785   $829,268 

 

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 $9,836,000 at December 31, 2019, up from $9,309,000 at December 31, 2018. Table X shows that the collectively determined portion of the allowance increased $1,081,000 across all loan classes, including an increase in the collectively determined portion of the allowance related to commercial loans of $811,000. This increase was primarily due to loan growth in 2019.

 

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Table X shows total specific allowances on impaired loans decreased $554,000 to $1,051,000 at December 31, 2019 from $1,605,000 at December 31, 2018. This net decrease included the impact of specific allowances totaling $1,365,000 at December 31, 2018 on two commercial loans being eliminated in the first quarter 2019. These two loans were no longer considered impaired at March 31, 2019, were returned to full accrual status in the first quarter 2019 and remained in full accrual status at December 31, 2019. Partially offsetting this reduction, in the third quarter 2019 the Corporation recorded a specific allowance of $678,000 on a commercial construction loan with an outstanding balance of $1,261,000 at December 31, 2019.

 

Loans acquired from Monument that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $441,000 at April 1, 2019 and December 31, 2019. The remainder of the portfolio was deemed to be the performing component of the portfolio. The calculation of the fair value of performing loans at acquisition included a discount for credit losses of $1,914,000, reflecting an estimate of the present value of credit losses based on market expectations. In the last nine months of 2019, the Corporation recognized accretion of the discount of $698,000, with a remaining discount for credit losses of $1,216,000 at December 31, 2019. None of the performing loans purchased were found to be impaired at December 31, 2019, and the purchased performing loans were excluded from the loan pools for which the general component of the allowance for loan losses was calculated. Accordingly, there was no allowance for loan losses at December 31, 2019 on loans purchased from Monument, which was the main reason the allowance dropped to 0.83% of total outstanding loans at December 31, 2019 from 1.12% at December 31, 2018.

 

The provision for loan losses by segment for 2019 and 2018 is as follows:

         
(In Thousands)  2019   2018 
Residential mortgage  $374   $173 
Commercial   197    204 
Consumer   192    207 
Unallocated   86    0 
Total  $849   $584 

 

The provision for loan losses is further detailed as follows:

 

Residential mortgage segment        
(In thousands)  2019   2018 
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs  $238   $144 
           
Increase (decrease) in collectively determined portion of the allowance attributable to:          
Loan growth   171    94 
Changes in historical loss experience factors   47    (65)
Changes in qualitative factors   (82)   0 
Total provision for loan losses -          
Residential mortgage segment  $374   $173 
           

Commercial segment          
(In thousands)   2019    2018 
(Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs  $(614)  $180 
           
Increase (decrease) in collectively determined portion of the allowance attributable to:          
Loan growth   1,025    45 
Changes in historical loss experience factors   (371)   (21)
Changes in qualitative factors   157    0 
Total provision for loan losses -          
Commercial segment  $197   $204 

 

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Consumer segment          
(In thousands)   2019    2018 
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs  $144   $133 
           
Increase (decrease) in collectively determined portion of the allowance attributable to:          
Loan (reduction) growth   (3)   39 
Changes in historical loss experience factors   31    34 
Changes in qualitative factors   20    1 
Total provision for loan losses -          
Consumer segment  $192   $207 
           

Total - All segments          
(In thousands)   2019    2018 
(Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs  $(232)  $457 
           
Increase (decrease) in collectively determined portion of the allowance attributable to:          
Loan growth   1,193    178 
Changes in historical loss experience factors   (293)   (52)
Changes in qualitative factors   95    1 
Sub-total   763    584 
Unallocated   86    0 
Total provision for loan losses -          
All segments  $849   $584 

 

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 loan growth 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 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 2019, net charge-offs were $322,000, including charge-offs of $379,000 and recoveries of $57,000. The Corporation’s overall net charge-off experience in 2019 was consistent with results over the past several years. Table XII shows the average rate of net charge-offs as a percentage of loans was 0.03% in 2019, with an annual average over the five-year period ended December 31, 2019 of 0.04%, and annual average rates ranging from a high of 0.09% in 2016 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 0.88% at December 31, 2019, down from 1.94% at December 31, 2018, and nonperforming assets as a percentage of total assets was 0.80% at December 31, 2019, down from 1.37% at December 31, 2018. Table XI presents data at the end of each of the years ended December 31, 2015 through 2019. Table XI shows that total nonperforming loans as a percentage of loans of 0.88% at December 31, 2019 was lower than the corresponding year-end ratio from 2015 through 2018. Similarly, the December 31, 2019 ratio of total nonperforming assets as a percentage of assets of 0.80% was lower than the corresponding ratio from 2015 through 2018. These improved credit-related ratios reflect the impact of acquired loans from Monument and significant additional loan growth in 2019, with a minimal amount of loans purchased or originated in 2019 classified as nonperforming, as well as a reduction in total nonperforming assets.

 

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Total impaired loans of $5,486,000 at December 31, 2019 are down $4,288,000 from the corresponding amount at December 31, 2018 of $9,774,000. In 2019, the two commercial loans referred to above for which specific allowances were eliminated were not considered to be impaired at December 31, 2019 but were considered impaired at December 31, 2018. Total outstanding balances of these loans were $3,781,000 at December 31, 2018. Table XI shows that the total balance of impaired loans at December 31, 2019 was lower than the year-end amounts over the period 2015-2018, which ranged from a low of $9,511,000 in 2017 to a high of $10,860,000 in 2016.

 

Total nonperforming assets of $13,311,000 at December 31, 2019 are $4,411,000 lower than the corresponding amount at December 31, 2018, summarized as follows:

 

·Total nonaccrual loans at December 31, 2019 of $9,218,000 was $3,895,000 lower than the corresponding December 31, 2018 total of $13,113,000.

 

·Total loans past due 90 days or more and still accruing interest amounted to $1,207,000 at December 31, 2019, a decrease of $1,699,000 from the total at December 31, 2018.

 

·Foreclosed assets held for sale consisted of real estate, and totaled $2,886,000 at December 31, 2019, an increase of $1,173,000 from $1,703,000 at December 31, 2018. Of this increase, $871,000 related to a property acquired through the Monument acquisition. At December 31, 2019, the Corporation held ten such properties for sale, with total carrying values of $292,000 related to residential real estate, $70,000 of land and $2,524,000 related to commercial real estate. At December 31, 2018, the Corporation held six such properties for sale, with total carrying values of $64,000 related to residential real estate, $110,000 of land and $1,529,000 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 $8,889,000 at December 31, 2019, up from $7,142,000 at December 31, 2018 but lower than the amount at December 31, 2017 of $9,449,000. These variances include the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $7,249,000 at December 31, 2019, up from $5,835,000 at December 31, 2018 but slightly lower than the amount at December 31, 2017 of $7,236,000. 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 2019, in evaluating the allowance for loan losses at December 31, 2019.

 

Over the period 2015-2019, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.

 

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of December 31, 2019. 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.

 

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TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

 

   Years Ended December 31, 
(Dollars In Thousands)  2019   2018   2017   2016   2015 
Balance, beginning of year  $9,309   $8,856   $8,473   $7,889   $7,336 
Charge-offs:                         
Residential mortgage   (190)   (158)   (197)   (73)   (217)
Commercial   (6)   (165)   (132)   (597)   (251)
Consumer   (183)   (174)   (150)   (87)   (94)
Total charge-offs   (379)   (497)   (479)   (757)   (562)
Recoveries:                         
Residential mortgage   12    8    19    3    1 
Commercial   6    317    4    35    214 
Consumer   39    41    38    82    55 
Total recoveries   57    366    61    120    270 
Net charge-offs   (322)   (131)   (418)   (637)   (292)
Provision for loan losses   849    584    801    1,221    845 
Balance, end of period  $9,836   $9,309   $8,856   $8,473   $7,889 
Net charge-offs as a % of average loans   0.03%   0.02%   0.05%   0.09%   0.04%

 

 

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

     
   As of December 31, 
(In Thousands)  2019   2018   2017   2016   2015 
ASC 310 - Impaired loans  $1,051   $1,605   $1,279   $674   $820 
ASC 450 - Collective segments:                         
Commercial   3,913    3,102    3,078    3,373    3,103 
Residential mortgage   4,006    3,870    3,841    3,890    3,417 
Consumer   281    233    159    138    122 
Unallocated   585    499    499    398    427 
Total Allowance  $9,836   $9,309   $8,856   $8,473   $7,889 

 

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TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

 

   As of December 31, 
(Dollars In Thousands)  2019   2018   2017   2016   2015 
Impaired loans with a valuation allowance  $3,375   $4,851   $4,100   $3,372   $1,933 
Impaired loans without a valuation allowance   2,111    4,923    5,411    7,488    8,041 
Total impaired loans  $5,486   $9,774   $9,511   $10,860   $9,974 
                          
Total loans past due 30-89 days and still accruing  $8,889   $7,142   $9,449   $7,735   $7,057 
                          
Nonperforming assets:                         
Total nonaccrual loans  $9,218   $13,113   $13,404   $8,736   $11,517 
Total loans past due 90 days or more and still accruing   1,207    2,906    3,724    6,838    3,229 
Total nonperforming loans   10,425    16,019    17,128    15,574    14,746 
Foreclosed assets held for sale (real estate)   2,886    1,703    1,598    2,180    1,260 
Total nonperforming assets  $13,311   $17,722   $18,726   $17,754   $16,006 
                          
Loans subject to troubled debt restructurings (TDRs):                         
Performing  $889   $655   $636   $5,803   $1,186 
Nonperforming   1,737    2,884    3,027    2,874    5,178 
Total TDRs  $2,626   $3,539   $3,663   $8,677   $6,364 
                          
Total nonperforming loans as a % of loans   0.88%   1.94%   2.10%   2.07%   2.09%
Total nonperforming assets as a % of assets   0.80%   1.37%   1.47%   1.43%   1.31%
Allowance for loan losses as a % of total loans   0.83%   1.12%   1.09%   1.13%   1.12%
Allowance for loan losses as a % of nonperforming loans   94.35%   58.11%   51.70%   54.40%   53.50%

 

TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES

 

(Dollars In Thousands)  2019   2018   2017   2016   2015   Average 
Average gross loans  $1,057,559   $822,346   $780,640   $723,076   $657,727   $808,270 
Year-end gross loans   1,182,222    827,563    815,713    751,835    704,880   $856,443 
Year-end allowance for loan losses   9,836    9,309    8,856    8,473    7,889   $8,873 
Year-end nonaccrual loans   9,218    13,113    13,404    8,736    11,517   $11,198 
Year-end loans 90 days or more past due and still accruing   1,207    2,906    3,724    6,838    3,229    3,581 
Net charge-offs   322    131    418    637    292    360 
Provision for loan losses   849    584    801    1,221    845    860 
Earnings coverage of charge-offs   76x   210x   56x   37x   85x   93x
Allowance coverage of charge-offs   31x   71x   21x   13x   27x   33x
Net charge-offs as a % of provision for loan losses   37.93%   22.43%   52.18%   52.17%   34.56%   41.86%
Net charge-offs as a % of average gross loans   0.03%   0.02%   0.05%   0.09%   0.04%   0.04%
Income before income taxes on a fully taxable equivalent basis   24,453    27,564    23,350    23,861    24,710    24,788 

 

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CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

 

The Corporation’s significant fixed and determinable contractual obligations as of December 31, 2019 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 and other commitments at December 31, 2019 are immaterial. Information concerning operating lease commitments 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, 2019, outstanding balances of such loans sold totaled $178,446,000.

 

Also, for loans sold under the MPF Original program, the Corporation provides a credit enhancement. At December 31, 2019, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,618,000, and the Corporation has recorded a related allowance for credit losses in the amount of $333,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets.

 

LIQUIDITY

 

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At December 31, 2019, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $13,455,000.

 

The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.

 

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale securities with a carrying value of $14,728,000 at December 31, 2019.

 

The Corporation’s outstanding, available, and total credit facilities at December 31, 2019 and 2018 are as follows:

 

   Outstanding   Available   Total Credit 
   Dec. 31,   Dec. 31,   Dec. 31,   Dec. 31,   Dec. 31,   Dec. 31, 
(In Thousands)  2019   2018   2019   2018   2019   2018 
Federal Home Loan Bank of Pittsburgh  $136,424   $42,915   $416,122   $318,699   $552,546   $361,614 
Federal Reserve Bank Discount Window   0    0    14,244    15,262    14,244    15,262 
Other correspondent banks   0    0    45,000    45,000    45,000    45,000 
Total credit facilities  $136,424   $42,915   $475,366   $378,961   $611,790   $421,876 

 

The significant increase in credit available from the Federal Home Loan Bank of Pittsburgh in 2019 resulted from an increase in the borrowing base created by the acquisition of real estate secured loans from Monument. At December 31, 2019, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $64,000,000, short-term borrowings of $20,297,000 and long-term borrowings with a total amount of $52,127,000. At December 31, 2018, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $7,000,000 and long-term borrowings with a total amount of $35,915,000. Additional information regarding borrowed funds is included in Note 12 to the consolidated financial statements.

 

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, 2019, the carrying value of available-for-sale debt securities in excess of amounts required to meet pledging or repurchase agreement obligations was $170,948,000.

 

Management believes the Corporation is well-positioned to meet its short-term and long-term obligations.

 

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STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

 

As required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (discussed further in the Recent Legislative Developments section of Management’s Discussion and Analysis), 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, 2019; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

 

Details concerning capital ratios at December 31, 2019 and December 31, 2018 are presented below and in Note 18 to the consolidated financial statements. Management believes, as of December 31, 2019, that C&N 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 C&N Bank’s capital ratios at December 31, 2019 and December 31, 2018 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, 2019:                                                  
Total capital to risk-weighted assets:                                                  
Consolidated  $228,057    20.70%   N/A    N/A    N/A    N/A    N/A    N/A   $115,689    ³10.5% 
C&N Bank   205,863    18.75%   87,817    ³8%    115,260    ³10.5%    109,771    ³10%    115,260    ³10.5% 
Tier 1 capital to risk-weighted assets:                                                  
Consolidated   211,388    19.19%   N/A    N/A    N/A    N/A    N/A    N/A    93,653    ³8.5% 
C&N Bank   195,694    17.83%   65,863    ³6%    93,306    ³8.5%    87,817    ³8%    93,306    ³8.5% 
Common equity tier 1 capital to risk-weighted assets:                                                  
Consolidated   211,388    19.19%   N/A    N/A    N/A    N/A    N/A    N/A    77,126    ³7% 
C&N Bank   195,694    17.83%   49,397    ³4.5%    76,840    ³7.0%    71,351    ³6.5%    76,840    ³7% 
Tier 1 capital to average assets:                                                  
Consolidated   211,388    13.10%   N/A    N/A    N/A    N/A    N/A    N/A    129,126    ³8% 
C&N Bank   195,694    12.24%   63,940    ³4%    N/A    N/A    79,925    ³5%    127,879    ³8% 
                                                   
December 31, 2018:                                                  
Total capital to risk-weighted assets:                                                  
Consolidated  $199,226    24.42%   N/A    N/A    N/A    N/A    N/A    N/A   $85,653    ³10.5% 
C&N Bank   176,499    21.75%   64,916    ³8%    80,130    ³9.875%    81,145    ³10%    85,202    ³10.5% 
Tier 1 capital to risk-weighted assets:                                                  
Consolidated   189,589    23.24%   N/A    N/A    N/A    N/A    N/A    N/A    69,338    ³8.5% 
C&N Bank   166,862    20.56%   48,687    ³6%    63,901    ³7.875%    64,916    ³8%    68,976    ³8.5% 
Common equity tier 1 capital to risk-weighted assets:                                                  
Consolidated   189,589    23.24%   N/A    N/A    N/A    N/A    N/A    N/A    57,102    ³7% 
C&N Bank   166,862    20.56%   36,515    ³4.5%    51,730    ³6.375%    52,744    ³6.5%    56,801    ³7% 
Tier 1 capital to average assets:                                                  
Consolidated   189,589    14.78%   N/A    N/A    N/A    N/A    N/A    N/A    102,634    ³8% 
C&N Bank   166,862