Company Quick10K Filing
Quick10K
Citizens & Northern
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.71 14 $379
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-07 Regulation FD, Exhibits
8-K 2019-07-18 Officers, Exhibits
8-K 2019-07-18 Earnings, Other Events, Exhibits
8-K 2019-06-12 Regulation FD, Exhibits
8-K 2019-04-18 Regulation FD, Exhibits
8-K 2019-04-18 Earnings, Other Events, Exhibits
8-K 2019-04-18 Shareholder Vote
8-K 2019-04-01 M&A, Officers, Other Events, Exhibits
8-K 2019-03-01 Officers, Exhibits
8-K 2019-01-17 Earnings, Other Events, Exhibits
8-K 2018-12-20 Officers, Exhibits
8-K 2018-10-18 Earnings, Other Events, Exhibits
8-K 2018-09-27 Enter Agreement, Regulation FD, Exhibits
8-K 2018-08-24 Officers, Exhibits
8-K 2018-08-08 Regulation FD, Exhibits
8-K 2018-07-19 Earnings, Other Events, Exhibits
8-K 2018-06-11 Regulation FD, Exhibits
8-K 2018-04-19 Shareholder Vote
8-K 2018-01-18 Earnings, Other Events, Exhibits
TCF TCF Financial 6,254
BANR Banner 1,937
SBCF Seacoast Banking of Florida 1,205
EFSC Enterprise Financial Services 1,046
CNOB Connectone Bancorp 719
AMNB American National Bankshares 383
BLMT BSB Bancorp 349
MCBC Macatawa Bank 340
HFBC Hopfed Bancorp 130
SSFN Stewardship Financial 102
CZNC 2019-06-30
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6. Exhibits
EX-10.1 tv526699_ex10-1.htm
EX-31.1 tv526699_ex31-1.htm
EX-31.2 tv526699_ex31-2.htm
EX-32 tv526699_ex32.htm

Citizens & Northern Earnings 2019-06-30

CZNC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv526699_10q.htm FORM 10-Q

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 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: 000-16084

 

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

 

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 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 definition 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

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Common Stock ($1.00 par value) 13,687,999 Shares Outstanding on August 6, 2019

 

 

 

 

  

CITIZENS & NORTHERN CORPORATION

Index      

 

Part I.  Financial Information  
   
Item 1.  Financial Statements  
   
Consolidated Balance Sheets (Unaudited) – June 30, 2019 and  December 31, 2018 Page    3
   
Consolidated Statements of Income (Unaudited) – Three-month and  Six-month Periods Ended June 30, 2019 and 2018 Page    4
   
Consolidated Statements of Comprehensive Income (Unaudited) - Three-month and Six-month Periods Ended June 30, 2019 and 2018 Page    5
   
Consolidated Statements of Cash Flows (Unaudited) – Six-month Periods Ended June 30, 2019 and 2018 Page    6
   
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Six-month Periods Ended June 30, 2019 and 2018 Page    7
   
Notes to Unaudited Consolidated Financial Statements Pages 8 – 40
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 41 – 63
   
Item 4.  Controls and Procedures Page  65
   
Part II.  Other Information Pages 65 – 66
   
Signatures Page  67
   
Exhibit 31.1.  Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer  
   
Exhibit 31.2.  Rule 13a-14(a)/15d-14(a) Certification -Chief Financial Officer  
   
Exhibit 32.  Section 1350 Certifications  

 

  2 

 

  

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS    

 

(In Thousands, Except Share and Per Share Data) (Unaudited)  June 30,   December 31, 
   2019   2018 
ASSETS        
Cash and due from banks:          
Noninterest-bearing  $20,693   $20,970 
Interest-bearing   18,812    16,517 
Total cash and due from banks   39,505    37,487 
Available-for-sale debt securities, at fair value   363,465    363,273 
Marketable equity security   976    950 
Loans held for sale   1,131    213 
           
Loans receivable   1,116,683    827,563 
Allowance for loan losses   (8,200)   (9,309)
Loans, net   1,108,483    818,254 
           
Bank-owned life insurance   18,430    19,035 
Accrued interest receivable   5,306    3,968 
Bank premises and equipment, net   16,114    14,592 
Foreclosed assets held for sale   3,305    1,703 
Deferred tax asset, net   2,171    4,110 
Goodwill and other intangibles, net   30,013    11,951 
Other assets   20,786    15,357 
TOTAL ASSETS  $1,609,685   $1,290,893 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $299,638   $272,520 
Interest-bearing   984,505    761,252 
Total deposits   1,284,143    1,033,772 
Short-term borrowings   27,493    12,853 
Long-term borrowings   38,273    35,915 
Subordinated debt   7,000    0 
Accrued interest and other liabilities   13,060    10,985 
TOTAL LIABILITIES   1,369,969    1,093,525 
           
STOCKHOLDERS' EQUITY          
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation  preference per share; no shares issued   0    0 
Common stock, par value $1.00 per share; authorized 20,000,000 shares; issued 13,934,996 and outstanding 13,687,999 at June 30, 2019; issued 12,655,171 and outstanding 12,319,330 December 31, 2018   13,935    12,655 
Paid-in capital   103,953    72,602 
Retained earnings   123,112    122,643 
Treasury stock, at cost; 246,997 shares at June 30, 2019 and 335,841 shares at December 31, 2018   (4,716)   (6,362)
Accumulated other comprehensive income (loss)   3,432    (4,170)
TOTAL STOCKHOLDERS' EQUITY   239,716    197,368 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY  $1,609,685   $1,290,893 

 

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

 

  3 

 

  

Consolidated Statements of Income  3 Months Ended   6 Months Ended 
(In Thousands Except Per Share Data) (Unaudited)  June 30,   June 30,   June 30,   June 30, 
   2019   2018   2019   2018 
INTEREST INCOME                    
 Interest and fees on loans:                    
      Taxable  $14,098   $9,575   $24,046   $18,776 
      Tax-exempt   524    560    1,088    1,116 
 Interest on mortgages held for sale   6    4    9    6 
 Interest on balances with depository institutions   149    96    265    146 
 Income from available-for-sale debt securities:                    
      Taxable   1,826    1,381    3,660    2,744 
      Tax-exempt   531    712    1,125    1,425 
 Dividends on marketable equity security   5    6    11    11 
 Total interest and dividend income   17,139    12,334    30,204    24,224 
 INTEREST EXPENSE                    
 Interest on deposits   2,363    879    3,416    1,608 
 Interest on short-term borrowings   228    82    307    281 
 Interest on long-term borrowings   228    118    446    183 
 Interest on subordinated debt   115    0    115    0 
 Total interest expense   2,934    1,079    4,284    2,072 
 Net interest income   14,205    11,255    25,920    22,152 
 (Credit) Provision for loan losses   (4)   (20)   (961)   272 
 Net interest income after (credit) provision for loan losses   14,209    11,275    26,881    21,880 
 NONINTEREST INCOME                    
 Trust and financial management revenue   1,583    1,526    2,943    2,948 
 Brokerage revenue   361    271    668    483 
 Insurance commissions, fees and premiums   48    13    78    57 
 Service charges on deposit accounts   1,277    1,302    2,527    2,506 
 Service charges and fees   89    82    168    168 
 Interchange revenue from debit card transactions   699    641    1,342    1,220 
 Net gains from sale of loans   221    166    308    350 
 Loan servicing fees, net   35    61    63    189 
 Increase in cash surrender value of life insurance   99    98    191    195 
 Other noninterest income   437    529    967    979 
  Sub-total   4,849    4,689    9,255    9,095 
 Gain on restricted equity security   0    1,750    0    1,750 
 Realized gains (losses) on available-for-sale debt securities, net   7    (282)   7    (282)
 Total noninterest income   4,856    6,157    9,262    10,563 
 NONINTEREST EXPENSE                    
 Salaries and wages   5,276    4,193    9,769    8,317 
 Pensions and other employee benefits   1,225    1,200    2,843    2,810 
 Occupancy expense, net   665    613    1,322    1,250 
 Furniture and equipment expense   333    313    634    584 
 Data processing expenses   962    694    1,765    1,335 
 Automated teller machine and interchange expense   277    319    466    641 
 Pennsylvania shares tax   347    336    694    672 
 Professional fees   331    279    553    555 
 Telecommunications   176    157    340    390 
 Directors' fees   141    168    324    352 
 Merger-related expenses   3,301    0    3,612    0 
 Other noninterest expense   1,689    1,412    3,408    2,673 
 Total noninterest expense   14,723    9,684    25,730    19,579 
 Income before income tax provision   4,342    7,748    10,413    12,864 
 Income tax provision   693    1,377    1,674    2,118 
 NET INCOME  $3,649   $6,371   $8,739   $10,746 
 EARNINGS PER COMMON SHARE - BASIC  $0.27   $0.52   $0.67   $0.88 
 EARNINGS PER COMMON SHARE - DILUTED  $0.27   $0.52   $0.67   $0.87 

 

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

 

  4 

 

 

Consolidated Statements of Comprehensive Income  Three Months Ended   Six Months Ended 
(In Thousands) (Unaudited)  June 30,   June 30, 
   2019   2018   2019   2018 
Net income  $3,649   $6,371   $8,739   $10,746 
                     
Unrealized gains (losses) on available-for-sale debt securities:                    
Unrealized holding gains (losses) on available-for-sale debt securities   5,170    (1,292)   9,431    (6,131)
Reclassification adjustment for (gains) losses realized in income   (7)   282    (7)   282 
Other comprehensive gain (loss) on available-for-sale debt securities   5,163    (1,010)   9,424    (5,849)
                     
Unfunded pension and postretirement obligations:                    
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain (loss)   0    0    214    93 
  Amortization of prior service cost and net actuarial loss included in net periodic benefit cost   (7)   (5)   (15)   (10)
Other comprehensive (loss) gain on unfunded retirement obligations   (7)   (5)   199    83 
                     
Other comprehensive income (loss) before income tax   5,156    (1,015)   9,623    (5,766)
Income tax related to other comprehensive (income) loss   (1,083)   214    (2,021)   1,211 
                     
Net other comprehensive income (loss)   4,073    (801)   7,602    (4,555)
                     
Comprehensive income  $7,722   $5,570   $16,341   $6,191 

 

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

 

  5 

 

  

CONSOLIDATED STATEMENTS OF CASH FLOWS  6 Months Ended 
(In Thousands) (Unaudited)  June 30,   June 30, 
   2019   2018 
 CASH FLOWS FROM OPERATING ACTIVITIES:          
   Net income  $8,739   $10,746 
   Adjustments to reconcile net income to net cash provided by operating activities:          
     (Credit) provision for loan losses   (961)   272 
     Realized (gains) losses on available-for-sale debt securities, net   (7)   282 
     Unrealized (gain) loss on marketable equity security   (26)   23 
     Gain on restricted equity security   0    (1,750)
     Depreciation and amortization expense   843    850 
     Accretion and amortization on securities, net   505    512 
     Increase in cash surrender value of life insurance   (191)   (195)
     Stock-based compensation and other expense   431    338 
     Deferred income taxes   583    196 
     Decrease in fair value of servicing rights   148    26 
     Gains on sales of loans, net   (308)   (350)
     Origination of loans held for sale   (9,783)   (10,730)
     Proceeds from sales of loans held for sale   9,107    11,571 
     Increase in accrued interest receivable and other assets   (254)   (454)
     (Decrease) increase in accrued interest payable and other liabilities   (1,188)   677 
     Other   (54)   193 
       Net Cash Provided by Operating Activities   7,584    12,207 
 CASH FLOWS FROM INVESTING ACTIVITIES:          
   Net cash and cash equivalents used in business combination   (1,778)   0 
   Proceeds from maturities of certificates of deposit   100    820 
   Purchase of certificates of deposit   0    (350)
   Proceeds from sales of available-for-sale debt securities   95,139    0 
   Proceeds from calls and maturities of available-for-sale debt securities   34,825    23,605 
   Purchase of available-for-sale debt securities   (26,662)   (22,355)
   Redemption of Federal Home Loan Bank of Pittsburgh stock   6,723    4,020 
   Purchase of Federal Home Loan Bank of Pittsburgh stock   (3,148)   (2,542)
   Net increase in loans   (30,385)   (5,712)
   Proceeds from bank owned life insurance   796    1,443 
   Purchase of premises and equipment   (925)   (687)
   Proceeds from sale of foreclosed assets   227    1,243 
   Other   75    84 
        Net Cash Provided by (Used in) Investing Activities   74,987    (431)
 CASH FLOWS FROM FINANCING ACTIVITIES:          
   Net increase in deposits   26,931    32,450 
   Net decrease in short-term borrowings   (96,990)   (44,597)
   Proceeds from long-term borrowings   22,500    18,000 
   Repayments of long-term borrowings and subordinated debt   (25,517)   (135)
   Sale of treasury stock   198    65 
   Purchase of vested restricted stock   (189)   0 
   Common dividends paid   (7,386)   (5,858)
        Net Cash Used in Financing Activities   (80,453)   (75)
 INCREASE IN CASH AND CASH EQUIVALENTS   2,118    11,701 
 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR   32,827    37,004 
 CASH AND CASH EQUIVALENTS, END OF PERIOD  $34,945   $48,705 
 SUPPLEMENTAL DISCLOSURES:          
   Right-of-use assets recognized at adoption of ASU 2016-02  $1,132   $0 
   Leased assets obtained in exchange for new operating lease liabilities  $745   $0 
   Assets acquired through foreclosure of real estate loans  $824   $2,486 
   Interest paid  $3,846   $2,011 
   Income taxes paid  $950   $1,275 

  

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

 

  6 

 

 

Consolidated Statements of Changes in Stockholders' Equity

(In Thousands Except Share and Per Share Data) (Unaudited)                                    

 

                       Accumulated         
                       Other         
   Common   Treasury   Common   Paid-in   Retained   Comprehensive   Treasury     
   Shares   Shares   Stock   Capital   Earnings   Income (Loss)   Stock   Total 
                                 
Six Months Ended June 30, 2019                                        
Balance, December 31, 2018   12,655,171    335,841   $12,655   $72,602   $122,643   $(4,170)  $(6,362)  $197,368 
Net income                       8,739              8,739 
Other comprehensive income, net                            7,602         7,602 
Cash dividends declared on common stock, $.64 per share                       (8,270)             (8,270)
Shares issued for dividend reinvestment plan        (33,172)        251              633    884 
Shares issued from treasury and redeemed related to exercise of stock options        (18,071)        (146)             344    198 
Restricted stock granted        (48,137)        (918)             918    0 
Forfeiture of restricted stock        3,144         60              (60)   0 
Stock-based compensation expense                  431                   431 
Purchase of restricted stock for tax withholding        7,392                        (189)   (189)
Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs   1,279,825         1,280    31,673                   32,953 
Balance, June 30, 2019   13,934,996    246,997   $13,935   $103,953   $123,112   $3,432   $(4,716)  $239,716 
                                         
Six Months Ended June 30, 2018                                        
Balance, December 31, 2017   12,655,171    440,646   $12,655   $72,035   $113,608   $(1,507)  $(8,348)  $188,443 
Impact of change in enacted income tax rate (a)                       325    (325)        0 
Impact of change in method of premium amortization of callable debt securities (b)                       (26)   26         0 
Impact of change in method of accounting for marketable equity security (c)                       (22)   22         0 
Net income                       10,746              10,746 
Other comprehensive loss, net                            (4,555)        (4,555)
Cash dividends declared on common stock, $.54 per share                       (6,619)             (6,619)
Shares issued for dividend reinvestment plan        (31,572)        163              598    761 
Shares issued from treasury and redeemed related to exercise of stock options        (7,417)        (75)             140    65 
Restricted stock granted        (34,552)        (655)             655    0 
Forfeiture of restricted stock        7,528         141              (141)   0 
Stock-based compensation expense                  338                   338 
Balance, June 30, 2018   12,655,171    374,633   $12,655   $71,947   $118,012   $(6,339)  $(7,096)  $189,179 

  

(a)As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of Accounting Standards Update (ASU) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, effective January 1, 2018.

 

(b)As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), effective January 1, 2018.

 

(c)As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, effective January 1, 2018.

 

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

 

  7 

 

 

Notes to Unaudited Consolidated Financial Statements

 

1. BASIS OF INTERIM PRESENTATION AND STATUS OF RECENT ACCOUNTING PRONOUNCEMENTS

 

The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”). The consolidated financial statements also include C&N Bank’s wholly-owned subsidiaries, C&N Financial Services Corporation, and Northern Tier Holding LLC. C&N Bank is the sole member of Northern Tier Holding LLC. All material intercompany balances and transactions have been eliminated in consolidation.

 

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 2018, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain 2018 information has been reclassified for consistency with the 2019 presentation.

 

Operating results reported for the three-month and six-month periods ended June 30, 2019 might not be indicative of the results for the year ending December 31, 2019. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.

 

Recent Accounting Pronouncements - Adopted

 

Effective January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842), as modified by subsequent ASUs, which changed GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. Topic 842, as modified, does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from prior U.S. GAAP. For leases with a term of 12 months or less, the Corporation made an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. The Corporation elected to adopt this pronouncement using an optional transition method resulting in recognition of right-of-use assets and lease liabilities for operating leases of $1,132,000 on its consolidated balance sheets at January 1, 2019, with no adjustment to stockholders’ equity and no material impact to its consolidated statements of income. At June 30, 2019, right-of-use assets of $1,760,000 were included in other assets, and the related liabilities totaling the same amount were included in accrued interest and other liabilities, in the unaudited consolidated balance sheets.

 

Effective January 1, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The Corporation applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Corporation’s interest income and certain noninterest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Corporation’s largest sources of noninterest revenue which are subject to the guidance include Trust and financial management revenue, service charges on deposit accounts and interchange revenue from debit card transactions. Adoption of ASU 2014-09 did not change the timing and pattern of the Corporation’s revenue recognition related to scoped-in noninterest income. Disclosures required by the ASU have been included in Note 12.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits, but does not require, entities to reclassify tax effects stranded in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income. The Corporation elected early adoption and adopted this standard update, effective January 1, 2018. The Corporation’s stranded tax effects were related to valuation of the net deferred tax asset attributable to items of accumulated other comprehensive income (loss), which are unrealized gains (losses) on available-for-sale debt securities and unfunded defined benefit plan obligations. Adoption resulted in a reclassification between two categories of stockholders’ equity at January 1, 2018, with an increase of $325,000 in retained earnings and a decrease in accumulated other comprehensive loss for the same amount (no net change in stockholders’ equity).

 

  8 

 

 

 

Effective January 1, 2018, the Corporation elected early adoption of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). This Update shortens the amortization period for certain callable debt securities held at a premium. Discounts will continue to be amortized to maturity. Adoption resulted in a reduction in retained earnings and corresponding increase in accumulated other comprehensive loss (no net change in stockholders’ equity) of $26,000 at January 1, 2018 for the cumulative after-tax impact of the change in accounting for debt securities held as of that date.

 

Effective January 1, 2018, the Corporation adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 was effective for the Corporation on January 1, 2018 and resulted in the following changes:

 

·A marketable equity security previously included in available-for-sale securities on the consolidated balance sheets is presented as a separate asset.

 

·Changes in the fair value of the marketable equity security are captured in the consolidated statements of income.

 

·Retained earnings was reduced and a corresponding increase in accumulated other comprehensive loss was recognized (no net change in stockholders’ equity) of $22,000 at January 1, 2018 for the after-tax impact of the change in accounting for the unrealized loss on the marketable equity security.

 

·Adoption of ASU 2016-01 also resulted in the use of an exit price to determine the fair value of financial instruments not measured at fair value in the consolidated balance sheets. Further information regarding valuation of financial instruments is provided in Note 13.

 

Recently Issued But Not Yet Effective Accounting Pronouncements

 

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The effect of implementing this ASU is recorded through a cumulative-effect adjustment to retained earnings. The Corporation has formed a cross functional management team and is working with an outside vendor assessing alternative loss estimation methodologies, the Corporation’s data and system needs and the impact of loans acquired in the merger with Monument Bancorp, Inc. (described in more detail in Note 2) to evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations. The amendments in ASU 2016-13 would be effective for the Corporation beginning in the first quarter 2020. In July 2019, the FASB tentatively decided to delay the required implementation date of ASU 2016-13 for smaller reporting companies. If the decision to delay required implementation is finalized, the Corporation would be required to implement the ASU on January 1, 2023.

 

ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) simplifies the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This Update will become effective for the Corporation’s annual and interim goodwill impairment tests beginning in the first quarter 2020. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

 

  9 

 

 

ASU 2018-13, Fair Value Measurement (Topic 820) modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for the Corporation beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial position or results of operations.

 

ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans – General (Subtopic 715-20) modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for the Corporation beginning in the first quarter 2021. Adoption on a retrospective basis for all periods presented is required. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

 

ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance will become effective for the Corporation beginning in the first quarter 2020, with early adoption permitted. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

 

2. BUSINESS COMBINATION - MONUMENT BANCORP, INC.

 

The Corporation completed its acquisition of 100% of the common stock of Monument Bancorp, Inc. (“Monument”) on 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. Pursuant to the merger, Monument was merged into Citizens & Northern Corporation and Monument Bank was merged into C&N Bank. Management believes the acquisition provides an opportunity to leverage the Corporation’s capital and deposits in a higher growth market and aligns with the Corporation’s focus to proactively deploy capital to enhance long-term shareholder value.

 

The unaudited consolidated financial statements include the formerly separate Monument operations from April 1, 2019 through June 30, 2019. Since the activities of the former Monument operations have been combined with those of the Corporation, separate disclosure of Monument-related financial information included in the unaudited consolidated financial statements is not practicable.

 

Total purchase consideration was $42,651,000, including cash paid to former Monument shareholders totaling $9,517,000 and 1,279,825 shares of Corporation common stock issued with a value of $32,953,000, (net of costs directly related to stock issuance of $181,000 included in the cash portion of merger consideration transferred in the table below).

 

The merger was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available.

 

The preliminary fair value of assets acquired, excluding goodwill, totaled $374,922,000, while the preliminary fair value of liabilities assumed totaled $348,947,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At April 1, 2019, the Corporation recognized preliminary goodwill of $16,676,000 associated with the acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of the Corporation’s market into Southeastern Pennsylvania. Goodwill acquired in the Monument merger is not deductible for tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

 

  10 

 

 

The following table summarizes the consideration paid for Monument and the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

(In Thousands)    
Fair value of consideration transferred:     
  Cash  $9,698 
  Common stock issued   32,953 
Total consideration transferred  $42,651 
      
Preliminary estimated fair values of assets acquired and (liabilities) assumed:     
  Cash and cash equivalents  $7,920 
  Available-for-sale debt securities   94,568 
  Loans receivable   259,295 
  Accrued interest receivable   1,593 
  Bank premises and equipment   1,465 
  Foreclosed assets held for sale   1,064 
  Deferred tax asset, net   664 
  Core deposit intangible   1,461 
  Goodwill   16,676 
  Other assets   6,892 
  Deposits   (223,303)
  Short-term borrowings   (111,568)
  Subordinated debt   (12,375)
  Accrued interest and other liabilities   (1,701)
Estimated excess fair value of assets acquired over liabilities assumed  $42,651 

 

In the consolidated statements of cash flows, noncash investing and financing activities include the issuance of common stock as part of the merger consideration as well as the following categories of assets acquired and liabilities assumed from Monument as reflected in the table above: available-for-sale debt securities, loans receivable, bank premises and equipment, foreclosed assets held for sale, core deposit intangible, goodwill, Federal Home Loan Bank of Pittsburgh stock of $5,478,000 (included in other assets above), deposits, short-term borrowings and subordinated debt.

 

Acquisition date fair values for available-for-sale securities were determined using Level 1 inputs consistent with the methods discussed further in Note 13. The Corporation sold the acquired securities in April 2019 for approximately no realized gain or loss.

 

The determination of estimated fair values of the acquired loans required the Corporation to make certain estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. Based on such factors as past due status, nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were evaluated, and four loans (from three relationships) displayed evidence of credit quality deterioration. These loans are accounted for under ASC 310-30 (purchased credit impaired, or “PCI”). The majority of the purchased loans did not display evidence of impairment, and thus are accounted for under ASC 310-20. Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of loss given default. These assumptions were developed using both Monument’s historical experience and the portfolio characteristics as of the acquisition date as well as available market research. The fair value estimates for acquired loans were based on the amount and timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing market interest rates applicable to the types of acquired loans, which the Corporation considers Level 3 fair value measurements.

 

  11 

 

 

Loans acquired from Monument were measured at fair value at the acquisition date with no carryover of an allowance for loan losses. The following table presents performing and PCI loans acquired, by loan segment and class, at April 1, 2019:

 

(In Thousands)            
   Performing   PCI   Total 
Residential mortgage:               
  Residential mortgage loans - first liens  $107,645   $77   $107,722 
  Residential mortgage loans - junior liens   2,433    0    2,433 
  Home equity lines of credit   2,674    0    2,674 
  1-4 Family residential construction   510    0    510 
Total residential mortgage   113,262    77    113,339 
Commercial:               
  Commercial loans secured by real estate   113,821    364    114,185 
  Commercial and industrial   7,571    0    7,571 
  Commercial construction and land   4,617    0    4,617 
  Loans secured by farmland   267    0    267 
  Multi-family (5 or more) residential   17,493    0    17,493 
  Other commercial loans   835    0    835 
Total commercial   144,604    364    144,968 
Consumer   988    0    988 
Total  $258,854   $441   $259,295 

 

The following table presents the preliminary fair value adjustments made to the amortized cost basis of loans acquired at April 1, 2019:

 

(In Thousands)                    
Gross amortized cost at acquisition  $263,334                 
Market rate adjustment   (1,807)                
Credit fair value adjustment on non-credit impaired loans   (1,914)                
Credit fair value adjustment on impaired loans   (318)                
Estimated fair value of acquired loans  $259,295                 

 

The market rate adjustment represents the movement in interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit adjustment made on non-PCI loans represents changes in credit quality of the underlying borrowers from loan inception to the acquisition date.

 

The credit adjustment on PCI loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that have been deemed uncollectible for each loan. The PCI loans are secured by real estate and the fair value of each loan was determined based on the estimated proceeds to be derived from selling the collateral, net of selling costs. The PCI loans were placed into nonaccrual status upon acquisition (and remained in nonaccrual status at June 30, 2019) as the Corporation cannot reasonably estimate cash flows expected to be collected in order to compute yield on the loans.

 

The Corporation recognized a core deposit intangible of $1,461,000. The core deposit intangible represents the estimated value of lower-cost funding provided by the nonmaturity deposits assumed in comparison with the Corporation’s estimated cost of borrowing funds in the market. The core deposit intangible will be amortized over a weighted-average life of 4.4 years.

 

Deposit liabilities assumed were segregated into two categories: (1) nonmaturity deposits (checking, savings and money market), and (2) time deposits (deposit accounts with a stated maturity). The fair values of both categories of deposits were determined using level 2 fair value measurements. For nonmaturity deposits, the acquisition date outstanding balance of the assumed demand deposit accounts approximates fair value. In determining the fair value of time deposits, the Corporation discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration.

 

  12 

 

 

Short-term borrowings assumed consisted of advances from the Federal Home Loan Bank of Pittsburgh. The fair value of short-term borrowings was determined using Level 2 measurements by discounting the contractual cash flows of the borrowings using Federal Home Loan Bank interest rates available April 1, 2019 for advances to the same maturities as those of the deposits assumed.

 

Subordinated debt assumed included two issues: (1) agreements with par values totaling $5,375,000 which were redeemed on April 1, 2019; and (2) agreements with par values totaling $7,000,000, maturing April 1, 2027 and which may be redeemed at par beginning April 1, 2022. The fair value of subordinated debt was determined using Level 2 measurements by comparing the interest rates on the debt to the rates on similar recent issues of comparable size by other similar-sized banking companies.

 

The Corporation incurred merger-related expenses of $3,301,000 in the second quarter 2019. For the six months ended June 30, 2019, merger-related expenses totaled $3,612,000. Merger-related expenses include 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.

 

The following table presents pro forma information as if the merger between the Corporation and Monument had been completed on January 1, 2018. The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger taken place at the beginning of 2018. The supplemental pro forma information excludes merger-related expenses totaling $3,301,000 in the second quarter 2019, or $2,628,000 net of tax. Similarly, the pro forma information excludes merger-related expenses totaling $4,078,000 in the six months ended June 30, 2019 (including $466,000 incurred by Monument), or $3,270,000 net of tax. The pro forma information does not include the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.

 

(In Thousands Except Per Share Data)  3 Months Ended   6 Months Ended 

(Unaudited)

  June 30,   June 30,   June 30,   June 30, 
   2019   2018   2019   2018 
Interest income  $17,012   $16,511   $34,466   $32,053 
Interest expense   2,730    2,511    5,861    4,764 
Net interest income   14,282    14,000    28,605    27,289 
(Credit) provision for loan losses   (4)   (10)   (916)   277 
Net interest income after (credit) provision for loan losses   14,286    14,010    29,521    27,012 
Noninterest income   4,849    4,739    9,271    9,172 
Net gains on securities   7    1,468    7    2,198 
Other noninterest expenses   11,464    11,524    23,883    23,092 
Income before income tax provision   7,678    8,693    14,916    15,290 
Income tax provision   1,373    1,573    2,600    2,613 
Net income  $6,305   $7,120   $12,316   $12,677 
                     
Earnings per common share - basic  $0.46   $0.53   $0.90   $0.94 
Earnings per common share - diluted  $0.46   $0.52   $0.90   $0.93 

 

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3. PER SHARE DATA

 

Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.

 

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

 

(In Thousands, Except Share and Per Share Data)

   3 Months Ended   6 Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2019   2018   2019   2018 
Basic                    
Net income  $3,649,000   $6,371,000   $8,739,000   $10,746,000 
Less: Dividends and undistributed earnings allocated to participating securities   (19,000)   (32,000)   (46,000)   (55,000)
Net income attributable to common shares  $3,630,000   $6,339,000   $8,693,000   $10,691,000 
Basic weighted-average common shares outstanding   13,597,848    12,210,902    12,956,916    12,200,245 
Basic earnings per common share (a)  $0.27   $0.52   $0.67   $0.88 
                     
Diluted                    
Net income attributable to common shares  $3,630,000   $6,339,000   $8,693,000   $10,691,000 
Basic weighted-average common shares outstanding   13,597,848    12,210,902    12,956,916    12,200,245 
Dilutive effect of potential common stock arising from stock options   25,106    37,243    25,445    36,273 
Diluted weighted-average common shares outstanding   13,622,954    12,248,145    12,982,361    12,236,518 
Diluted earnings per common share (a)  $0.27   $0.52   $0.67   $0.87 
Weighted-average nonvested restricted shares outstanding   70,366    61,172    68,016    63,175 

  

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

 

Anti-dilutive stock options are excluded from net income per share calculations. There were no anti-dilutive instruments in the three-month or six-month periods ended June 30, 2019 and 2018.

 

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4. COMPREHENSIVE INCOME

 

Comprehensive income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income (loss). The components of other comprehensive income (loss), and the related tax effects, are as follows:

 

(In Thousands)  Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Six Months Ended June 30, 2019            
Unrealized gains on available-for-sale debt securities:               
Unrealized holding gains on available-for-sale securities  $9,431   $(1,980)  $7,451 
Reclassification adjustment for (gains) realized in income   (7)   1    (6)
Other comprehensive income on available-for-sale debt securities   9,424    (1,979)   7,445 
                
Unfunded pension and postretirement obligations:               
Changes from plan amendments and actuarial gains and losses included in other comprehensive income   214    (45)   169 
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost   (15)   3    (12)
Other comprehensive income on unfunded retirement obligations   199    (42)   157 
                
Total other comprehensive income  $9,623   $(2,021)  $7,602 

  

(In Thousands)  Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Six Months Ended June 30, 2018               
Unrealized losses on available-for-sale debt securities:               
Unrealized holding losses on available-for-sale securities  $(6,131)  $1,287   $(4,844)
Reclassification adjustment for losses realized in income   282    (59)   223 
Other comprehensive loss on available-for-sale debt securities   (5,849)   1,228    (4,621)
                
Unfunded pension and postretirement obligations:               
Changes from plan amendments and actuarial gains and losses included in other comprehensive income   93    (19)   74 
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost   (10)   2    (8)
Other comprehensive income on unfunded retirement obligations   83    (17)   66 
                
Total other comprehensive loss  $(5,766)  $1,211   $(4,555)

 

  15 

 

 

(In Thousands)  Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Three Months Ended June 30, 2019            
Unrealized gains on available-for-sale debt securities:               
Unrealized holding gains on available-for-sale debt securities  $5,170   $(1,085)  $4,085 
Reclassification adjustment for (gains) realized in income   (7)   1    (6)
Other comprehensive income on available-for-sale debt securities   5,163    (1,084)   4,079 
                
Unfunded pension and postretirement obligations:               
Changes from plan amendments and actuarial gains and losses included in other comprehensive income   0    0    0 
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost   (7)   1    (6)
Other comprehensive loss on unfunded retirement obligations   (7)   1    (6)
                
Total other comprehensive income  $5,156   $(1,083)  $4,073 

  

(In Thousands)  Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Three Months Ended June 30, 2018            
Unrealized losses on available-for-sale debt securities:               
Unrealized holding losses on available-for-sale debt securities  $(1,292)  $272   $(1,020)
Reclassification adjustment for losses realized in income   282    (59)   223 
Other comprehensive loss on available-for-sale debt securities   (1,010)   213    (797)
                
Unfunded pension and postretirement obligations:               
Changes from plan amendments and actuarial gains and losses included in other comprehensive income   0    0    0 
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost   (5)   1    (4)
Other comprehensive loss on unfunded retirement obligations   (5)   1    (4)
                
Total other comprehensive loss  $(1,015)  $214   $(801)

  

  16 

 

 

Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax:

 

(In Thousands)  Unrealized       Accumulated 
   Gains   Unfunded   Other 
   (Losses)   Retirement   Comprehensive 
   on Securities   Obligations   Income (Loss) 
Six Months Ended June 30, 2019               
Balance, beginning of period  $(4,307)  $137   $(4,170)
Other comprehensive income during six months ended June 30, 2019   7,445    157    7,602 
Balance, end of period  $3,138   $294   $3,432 
                
Six Months Ended June 30, 2018               
Balance, beginning of period  $(1,566)  $59   $(1,507)
Impact of change in enacted income tax rate   (337)   12    (325)
Impact of change in the method of premium amortization of callable debt securities   26    0    26 
Impact of change in the method of accounting for marketable equity security   22    0    22 
Other comprehensive (loss) income during six months ended June 30, 2018   (4,621)   66    (4,555)
Balance, end of period  $(6,476)  $137   $(6,339)
               
Three Months Ended June 30, 2019               
Balance, beginning of period  $(941)  $300   $(641)
Other comprehensive income (loss) during three months ended June 30, 2019   4,079    (6)   4,073 
Balance, end of period  $3,138   $294   $3,432 
                
Three Months Ended June 30, 2018               
Balance, beginning of period  $(5,679)  $141   $(5,538)
Other comprehensive (loss) during three months ended June 30, 2018   (797)   (4)   (801)
Balance, end of period  $(6,476)  $137   $(6,339)

  

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

 

For the Six Months Ended June 30, 2019       
(In Thousands)  Reclassified from    
   Accumulated Other    
Details about Accumulated Other  Comprehensive   Affected Line Item in the Consolidated
Comprehensive Income (Loss) Components  Income (Loss)   Statements of Income
Unrealized gains and losses on available-for-sale debt securities  $(7)  Realized gains on available-for-sale debt securities, net
    1   Income tax provision
    (6)  Net of tax
Amortization of defined benefit pension and postretirement items:        
Prior service cost   (15)  Other noninterest expense
    3   Income tax provision
    (12)  Net of tax
Total reclassifications for the period  $(18)   

  

  17 

 

 

For the Six Months Ended June 30, 2018       
(In Thousands)       
   Reclassified from    
   Accumulated Other    
Details about Accumulated Other  Comprehensive   Affected Line Item in the Consolidated
Comprehensive Income (Loss) Components  Income (Loss)   Statements of Income
Unrealized gains and losses on available-for-sale debt securities  $282   Realized losses on available-for-sale debt securities, net
    (59)  Income tax provision
    223   Net of tax
Amortization of defined benefit pension and postretirement items:        
Prior service cost   (16)  Other noninterest expense
Actuarial loss   6   Other noninterest expense
    (10)  Total before tax
    2   Income tax provision
    (8)  Net of tax
Total reclassifications for the period  $215    

 

For the Three Months Ended June 30, 2019

       
(In Thousands)       
   Reclassified from    
   Accumulated Other    
Details about Accumulated Other  Comprehensive   Affected Line Item in the Consolidated
Comprehensive Income (Loss) Components  Income (Loss)   Statements of Income
Unrealized gains and losses on available-for-sale debt securities  $(7)  Realized gains on available-for-sale debt securities, net
    1   Income tax provision
    (6)  Net of tax
Amortization of defined benefit pension and postretirement items:        
Prior service cost   (7)  Other noninterest expense
    1   Income tax provision
    (6)  Net of tax
Total reclassifications for the period  $(12)   

 

For the Three Months Ended June 30, 2018       
(In Thousands)       
   Reclassified from    
   Accumulated Other    
Details about Accumulated Other  Comprehensive   Affected Line Item in the Consolidated
Comprehensive Income (Loss) Components  Income (Loss)   Statements of Income
Unrealized gains and losses on available-for-sale debt securities  $282   Realized losses on available-for-sale debt securities, net
    (59)  Income tax provision
    223   Net of tax
Amortization of defined benefit pension and postretirement items:        
Prior service cost   (8)  Other noninterest expense
Actuarial loss   3   Other noninterest expense
    (5)  Total before tax
    1   Income tax provision
    (4)  Net of tax
Total reclassifications for the period  $219    

  

5. CASH AND DUE FROM BANKS

 

Cash and due from banks at June 30, 2019 and December 31, 2018 include the following:

 

(In thousands)  June 30,   Dec. 31, 
   2019   2018 
Cash and cash equivalents  $34,945   $32,827 
Certificates of deposit   4,560    4,660 
Total cash and due from banks  $39,505   $37,487 

 

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

 

  18 

 

 

The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $17,335,000 at June 30, 2019 and $18,141,000 at December 31, 2018.

 

6. SECURITIES

 

Amortized cost and fair value of available-for-sale debt securities at June 30, 2019 and December 31, 2018 are summarized as follows:

 

      June 30, 2019   
      Gross  Gross   
      Unrealized  Unrealized   
   Amortized  Holding  Holding  Fair
(In Thousands)  Cost  Gains  Losses  Value
             
Obligations of U.S. Government agencies  $16,918   $652   $0   $17,570 
Obligations of states and political subdivisions:                    
     Tax-exempt   73,897    1,676    (74)   75,499 
     Taxable   30,591    927    (9)   31,509 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
     Residential pass-through securities   55,098    365    (322)   55,141 
     Residential collateralized mortgage obligations   139,513    610    (639)   139,484 
     Commercial mortgage-backed securities   43,476    1,020    (234)   44,262 
Total available-for-sale debt securities  $359,493   $5,250   $(1,278)  $363,465 

 

      December 31, 2018   
      Gross  Gross   
      Unrealized  Unrealized   
   Amortized  Holding  Holding  Fair
(In Thousands)  Cost  Gains  Losses  Value
             
Obligations of U.S. Government agencies  $12,331   $169   $0   $12,500 
Obligations of states and political subdivisions:                    
     Tax-exempt   84,204    949    (1,201)   83,952 
     Taxable   27,618    208    (127)   27,699 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
     Residential pass-through securities   54,827    48    (1,430)   53,445 
     Residential collateralized mortgage obligations   148,964    238    (3,290)   145,912 
     Commercial mortgage-backed securities   40,781    166    (1,182)   39,765 
Total available-for-sale debt securities  $368,725   $1,778   $(7,230)  $363,273 

 

  19 

 

 

The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018:

  

June 30, 2019  Less Than 12 Months   12 Months or More   Total 
(In Thousands)  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
Obligations of states and political subdivisions:                              
     Tax-exempt  $0   $0   $10,872   $(74)  $10,872   $(74)
     Taxable   0    0    3,790    (9)   3,790    (9)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                              
     Residential pass-through securities   0    0    35,572    (322)   35,572    (322)
     Residential collateralized mortgage obligations   0    0    56,230    (639)   56,230    (639)
     Commercial mortgage-backed securities   0    0    9,098    (234)   9,098    (234)
Total temporarily impaired available-for-sale debt securities  $0   $0   $115,562   $(1,278)  $115,562   $(1,278)

 

December 31, 2018  Less Than 12 Months   12 Months or More   Total 
(In Thousands)  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
Obligations of states and political subdivisions:                              
     Tax-exempt  $5,084   $(11)  $32,684   $(1,190)  $37,768   $(1,201)
     Taxable   980    (2)   11,418    (125)   12,398    (127)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                              
     Residential pass-through securities   5,592    (4)   42,309    (1,426)   47,901    (1,430)
     Residential collateralized mortgage obligations   1,892    (8)   101,662    (3,282)   103,554    (3,290)
     Commercial mortgage-backed securities   0    0    32,552    (1,182)   32,552    (1,182)
Total temporarily impaired available-for-sale debt securities  $13,548   $(25)  $220,625   $(7,205)  $234,173   $(7,230)

 

Gross realized gains and losses from available-for-sale securities were as follows:

 

(In Thousands)  3 Months Ended   6 Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2019   2018   2019   2018 
Gross realized gains from sales  $7   $0   $7   $0 
Losses from other-than-temporary impairment   0    (282)   0    (282)
Net realized gains (losses)  $7   $(282)  $7   $(282)

 

  20 

 

 

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of June 30, 2019. 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.

 

   Amortized   Fair 
(In Thousands)  Cost   Value 
         
Due in one year or less  $11,329   $11,372 
Due from one year through five years   37,122    37,822 
Due from five years through ten years   42,498    43,451 
Due after ten years   30,457    31,933 
Sub-total   121,406    124,578 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:          
    Residential pass-through securities   55,098    55,141 
    Residential collateralized mortgage obligations   139,513    139,484 
    Commercial mortgage-backed securities   43,476    44,262 
Total  $359,493   $363,465 

 

The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.

 

Investment securities carried at $211,400,000 at June 30, 2019 and $229,418,000 at December 31, 2018 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 9 for information concerning securities pledged to secure borrowing arrangements.

 

Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery.

 

A summary of information management considered in evaluating debt and equity securities for other-than-temporary impairment (“OTTI”) at June 30, 2019 is provided below.

 

Debt Securities

 

At June 30, 2019 and December 31, 2018, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of debt securities at June 30, 2019 and December 31, 2018 to be temporary.

 

In the second quarter 2018, the Corporation recorded a pre-tax impairment loss on available-for-sale debt securities of $282,000. The loss represents the unrealized loss at June 30, 2018 on securities that were sold in July 2018. The securities sold included obligations of U.S. Government agencies and states and political subdivisions. The realized losses on the sales totaled $329,000, including $282,000 recorded in the second quarter 2018. Proceeds from the sales totaling $17,858,000 were reinvested in residential collateralized mortgage obligations.

 

Equity Securities

 

The Corporation’s marketable equity security, with a carrying value of $976,000 at June 30, 2019 and $950,000 at December 31, 2018, consisted exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $24,000 at June 30, 2019 and $50,000 at December 31, 2018. There was a decrease in the unrealized loss of $14,000 in the second quarter 2019 and an increase in the unrealized loss of $8,000 in the second quarter 2018. There was a decrease in the unrealized loss of $26,000 in the six months ended June 30,2019 and an increase of $23,000 in the unrealized loss in the six months ended June 30, 2018. Changes in the unrealized losses on this security are included in other noninterest income in the consolidated statements of income.

 

  21 

 

 

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheet, was $7,485,000 at June 30, 2019 and $5,582,000 at December 31, 2018. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at June 30, 2019 and December 31, 2018. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

 

In the second quarter 2018, the Corporation recorded a pre-tax gain on a restricted equity security (Visa Class B stock) of $1,750,000. The Corporation had received 19,789 shares of Visa Class B stock pursuant to Visa’s 2007 initial public offering. Until the second quarter 2018, the carrying value of the shares was $0, which represented the Corporation’s cost basis. Class B shares are subject to restrictions on transfer, essentially limiting their transferability to other owners of Class B shares. In June 2018, the Corporation sold 10,000 of the shares for a price of $88.43 per share in a transaction that settled in July 2018. As required by ”U.S. GAAP”, companies must consider the pricing of observable transactions in determining the carrying value of equity securities that do not have readily determinable fair values. Accordingly, the Corporation’s second quarter 2018 gain was based on the price per share of the sale initiated in June 2018, applied to the total of 19,789 shares. In the third quarter 2018, the Corporation sold the remaining 9,789 shares for $1,437,000, recognizing an additional gain of $571,000.

 

A summary of the realized and unrealized gains and losses recognized on equity securities is as follows:

 

(In Thousands)                
   3 Months Ended   6 Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2019   2018   2019   2018 
Net gains recognized during the period on equity securities  $14   $1,742   $26   $1,727 
Less: net gains recognized during the period on equity securities sold during the period   0    (884)   0    (884)
                     
Unrealized gains recognized during the period on equity securities still held at the reporting date  $14   $858   $26   $843 

 

  22 

 

  

7. LOANS

 

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at June 30, 2019 and December 31, 2018 are summarized by segment, and by classes within each segment, as follows:

 

Summary of Loans by Type        
(In Thousands)  June 30,   Dec. 31, 
   2019   2018 
Residential mortgage:          
Residential mortgage loans - first liens  $484,479   $372,339 
Residential mortgage loans - junior liens   28,880    25,450 
Home equity lines of credit   35,224    34,319 
1-4 Family residential construction   27,994    24,698 
Total residential mortgage   576,577    456,806 
Commercial:          
Commercial loans secured by real estate   279,267    162,611 
Commercial and industrial   115,264    91,856 
Political subdivisions   52,308    53,263 
Commercial construction and land   21,197    11,962 
Loans secured by farmland   7,251    7,146 
Multi-family (5 or more) residential   26,749    7,180 
Agricultural loans   5,234    5,659 
Other commercial loans   13,037    13,950 
Total commercial   520,307    353,627 
Consumer   19,799    17,130 
Total   1,116,683    827,563 
Less: allowance for loan losses   (8,200)   (9,309)
Loans, net  $1,108,483   $818,254 

 

In the table above, outstanding loan balances are presented net of deferred loan origination fees of $2,063,000 at June 30, 2019 and $1,999,000 at December 31, 2018.

 

As described in Note 2, effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument. The loans acquired from Monument were recorded at an initial fair value of $259,295,000. As described in Note 2, the gross amortized cost of loans acquired from Monument on April 1, 2019 was reduced $1,807,000 based on movements in interest rates (market rate adjustment) and was also reduced $1,914,000 based on a credit fair value adjustment on non-impaired loans and by $318,000 based on a credit fair value adjustment on impaired loans. In the second quarter 2019, accretion was recognized (included in Interest and fees on loans in the consolidated statements of income) on the market rate adjustment of $149,000 and on the credit fair value adjustment on non-impaired loans of $261,000, and income of $3,000 was recognized from recovery of principal on purchased credit impaired loans. At June 30, 2019, the outstanding loan balances in the table above are presented net of the unaccreted market rate adjustment of $1,658,000, the unaccreted credit fair value adjustment of $1,653,000 and the credit fair value adjustment on impaired loans of $315,000.

 

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in northcentral Pennsylvania, the southern tier of New York State and southeastern Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either June 30, 2019 or December 31, 2018.

 

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. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of June 30, 2019 and December 31, 2018, management determined that no allowance for credit losses related to unfunded loan commitments was required.

 

  23 

 

 

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month periods and six-month periods ended June 30, 2019 and 2018 were as follows:

 

Three Months Ended June 30, 2019  March 31,               June 30, 
(In Thousands)  2019
Balance
   Charge-offs   Recoveries   Provision
(Credit)
   2019
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $3,178   $(33)  $1   $(16)  $3,130 
Residential mortgage loans - junior liens   329    0    0    4    333 
Home equity lines of credit   286    0    1    (7)   280 
1-4 Family residential construction   198    0    0    22    220 
Total residential mortgage   3,991    (33)   2    3    3,963 
Commercial:                         
Commercial loans secured by real estate   1,887    0    0    (310)   1,577 
Commercial and industrial   1,069    (6)   1    182    1,246 
Commercial construction and land   114    0    0    38    152 
Loans secured by farmland   98    0    0    4    102 
Multi-family (5 or more) residential   112    0    0    38    150 
Agricultural loans   43    0    0    (1)   42 
Other commercial loans   121    0    0    (2)   119 
Total commercial   3,444    (6)   1    (51)   3,388 
Consumer   236    (29)   13    44    264 
Unallocated   585    0    0    0    585 
Total Allowance for Loan Losses  $8,256   $(68)  $16   $(4)  $8,200 

 

Three Months Ended June 30, 2018  March 31,               June 30, 
(In Thousands)  2018
Balance
   Charge-offs   Recoveries   Provision
(Credit)
   2018
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $3,067   $(34)  $1   $21   $3,055 
Residential mortgage loans - junior liens   351    0    2    0    353 
Home equity lines of credit   286    (12)   0    18    292 
1-4 Family residential construction   239    0    0    8    247 
Total residential mortgage   3,943    (46)   3    47    3,947 
Commercial:                         
Commercial loans secured by real estate   2,635    0    0    (22)   2,613 
Commercial and industrial   1,036    (133)   1    69    973 
Commercial construction and land   137    0    0    (2)   135 
Loans secured by farmland   102    0    0    4    106 
Multi-family (5 or more) residential   169    0    0    5    174 
Agricultural loans   205    0    0    (159)   46 
Other commercial loans   149    0    0    (15)   134 
Total commercial   4,433    (133)   1    (120)   4,181 
Consumer   174    (32)   9    53    204 
Unallocated   499    0    0    0    499 
Total Allowance for Loan Losses  $9,049   $(211)  $13   $(20)  $8,831 

 

  24 

 

  

Six Months Ended June 30, 2019  Dec. 31,               June 30, 
(In Thousands)  2018
Balance
   Charge-offs   Recoveries   Provision (Credit)   2019
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $3,156   $(83)  $2   $55   $3,130 
Residential mortgage loans - junior liens   325    (24)   0    32    333 
Home equity lines of credit   302    0    4    (26)   280 
1-4 Family residential construction   203    0    0    17    220 
Total residential mortgage   3,986    (107)   6    78    3,963 
Commercial:                         
Commercial loans secured by real estate   2,538    0    0    (961)   1,577 
Commercial and industrial   1,553    (6)   3    (304)   1,246 
Commercial construction and land   110    0    0    42    152 
Loans secured by farmland   102    0    0    0    102 
Multi-family (5 or more) residential   114    0    0    36    150 
Agricultural loans   46    0    0    (4)   42 
Other commercial loans   128    0    0    (9)   119 
Total commercial   4,591    (6)   3    (1,200)   3,388 
Consumer   233    (66)   22    75    264 
Unallocated   499    0    0    86    585 
Total Allowance for Loan Losses  $9,309   $(179)  $31   $(961)  $8,200 

 

Six Months Ended June 30, 2018  Dec. 31,               June 30, 
(In Thousands)  2017
Balance
   Charge-offs   Recoveries   Provision (Credit)   2018
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $3,200   $(87)  $2   $(60)  $3,055 
Residential mortgage loans - junior liens   224    0    3    126    353 
Home equity lines of credit   296    (12)   0    8    292 
1-4 Family residential construction   243    0    0    4    247 
Total residential mortgage   3,963    (99)   5    78    3,947 
Commercial:                         
Commercial loans secured by real estate   2,584    (21)   0    50    2,613 
Commercial and industrial   1,065    (133)   3    38    973 
Commercial construction and land   150    0    0    (15)   135 
Loans secured by farmland   105    0    0    1    106 
Multi-family (5 or more) residential   172    0    0    2    174 
Agricultural loans   57    0    0    (11)   46 
Other commercial loans   102    0    0    32    134 
Total commercial   4,235    (154)   3    97    4,181 
Consumer   159    (73)   21    97    204 
Unallocated   499    0    0    0    499 
Total Allowance for Loan Losses  $8,856   $(326)  $29   $272   $8,831 

 

In the evaluation of the loan portfolio, management determines two major components for the allowance for loan losses – (1) a specific component based on an assessment of certain larger relationships, mainly commercial purpose loans, on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio, except for performing loans recently purchased from Monument, based on a collective evaluation of pools of loans with similar risk characteristics. The general component is assigned to each pool of loans based on both historical net charge-off experience, and an evaluation of certain qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the above methodologies for estimating specific and general losses in the portfolio.

 

  25 

 

 

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 June 30, 2019. The remainder of the portfolio was deemed to be the performing component of the portfolio. The calculation of the preliminary fair value of performing loans included a discount for credit losses of $1,914,000, reflecting a preliminary estimate of the present value of credit losses based on market expectations. As noted above, the balance of the credit fair value mark on performing (non-impaired) loans was $1,653,000 at June 30, 2019. None of the performing loans purchased were found to be impaired in the second quarter 2019, and the recently purchased performing loans were excluded from the loan pools for which the general component of the allowance for loan losses was calculated.

 

The credit for loan losses (reduction in expense) was $961,000 in the first six months of 2019 as compared to a provision of $272,000 in the first six months of 2018. The credit for loan losses in 2019 reflects the impact of eliminations of specific allowances on commercial loans that are no longer considered impaired. Specific allowances totaling $1,365,000 at December 31, 2018 on two commercial loans were eliminated in the first quarter 2019 as these two loans were no longer considered impaired and were returned to full accrual status in the first quarter 2019. In total, the credit for loan losses in the first six months of 2019 included a credit of $1,160,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, partially offset by a net increase of $199,000 in the collectively determined and unallocated portions of the allowance for loan losses.

 

In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” column in the table that follows.

 

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of June 30, 2019 and December 31, 2018:

 

June 30, 2019                        
(In Thousands)                        
   Pass  

Special

Mention

   Substandard   Doubtful   Purchased
Credit
Impaired
   Total 
Residential Mortgage:                              
     Residential mortgage loans - first liens  $475,592   $644   $8,081   $85   $77   $484,479 
     Residential mortgage loans - junior liens   28,289    85    506    0    0    28,880 
     Home equity lines of credit   34,620    59    545    0    0    35,224 
     1-4 Family residential construction   27,813    0    181    0    0    27,994 
Total residential mortgage   566,314    788    9,313    85    77    576,577 
Commercial:                              
     Commercial loans secured by real estate   267,985    5,494    5,424    0    364    279,267 
     Commercial and Industrial   104,548    7,736    2,980    0    0    115,264 
     Political subdivisions   52,308    0    0    0    0    52,308 
     Commercial construction and land   16,343    4,781    73    0    0    21,197 
     Loans secured by farmland   4,953    314    1,984    0    0    7,251 
     Multi-family (5 or more) residential   26,749    0    0    0    0    26,749 
     Agricultural loans   4,159    398    677    0    0    5,234 
     Other commercial loans   12,917    0    120    0    0    13,037 
Total commercial   489,962    18,723    11,258    0    364    520,307 
Consumer   19,765    0    34    0    0    19,799 
Totals  $1,076,041   $19,511   $20,605   $85   $441   $1,116,683 

 

  26 

 

 

December 31, 2018                    
(In Thousands)      Special             
   Pass   Mention   Substandard   Doubtful   Total 
Residential Mortgage:                         
     Residential mortgage loans - first liens  $363,407   $937   $7,944   $51   $372,339 
     Residential mortgage loans - junior liens   24,841    176    433    0    25,450 
     Home equity lines of credit   33,659    59    601    0    34,319 
     1-4 Family residential construction   24,698    0    0    0    24,698 
Total residential mortgage   446,605    1,172    8,978    51    456,806 
Commercial:                         
     Commercial loans secured by real estate   156,308    740    5,563    0    162,611 
     Commercial and Industrial   84,232    5,230    2,394    0    91,856 
     Political subdivisions   53,263    0    0    0    53,263 
     Commercial construction and land   11,887    0    75    0    11,962 
     Loans secured by farmland   5,171    168    1,796    11    7,146 
     Multi-family (5 or more) residential   7,180    0    0    0    7,180 
     Agricultural loans   4,910    84    665    0    5,659 
     Other commercial loans   13,879    0    71    0    13,950 
Total commercial   336,830    6,222    10,564    11    353,627 
Consumer   17,116    0    14    0    17,130 
Totals  $800,551   $7,394   $19,556   $62   $827,563 

 

The general component of the allowance for loan losses covers pools of loans including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such a loan: (1) is subject to a restructuring agreement, or (2) has an outstanding balance of $400,000 or more and a credit grade of Special Mention, Substandard or Doubtful. The pools of loans are evaluated for loss exposure based upon average historical net charge-off rates for each loan class, adjusted for qualitative factors (described in the following paragraphs). The time period used in determining the average historical net charge-off rate for each loan class is based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio. At June 30, 2019 and December 31, 2018, a five-year average net charge-off rate was used for commercial loans secured by real estate and for multi-family residential loans, while a three-year average net charge-off rate was used for all other loan classes.

 

Qualitative risk factors are evaluated for the impact on each of the three segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. The adjustment for qualitative factors is applied as an increase or decrease to the average net charge-off rate for each loan class within each segment.

 

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors.

 

Loans are classified as impaired, when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans, by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.

 

  27 

 

 

The scope of loans reviewed individually each quarter to determine if they are impaired include all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Loans that are individually reviewed, but which are determined to not be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance. The loans that have been individually reviewed, but which have been determined to not be impaired, are included in the “Collectively Evaluated” column in the table summarizing the allowance and associated loan balances as of June 30, 2019 and December 31, 2018. All loans classified as troubled debt restructurings (discussed in more detail below) and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment.

 

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of June 30, 2019 and December 31, 2018. For some classes of purchased performing loans, the outstanding balances at June 30, 2019 exceeded the corresponding totals at April 1, 2019 (as shown in Note 2) because of additional advances made on acquired loans in the second quarter 2019 on lines of credit, construction loans and other loans.

 

June 30, 2019  Loans:   Allowance for Loan Losses: 
(In Thousands)                            
    Individually
Evaluated
    Collectively
Evaluated
  

Purchased

Performing
Loans

    Totals    Individually
Evaluated
    Collectively
Evaluated
     Totals 
Residential mortgage:                                   
Residential mortgage loans - first liens  $970   $376,837   $106,672   $484,479   $0   $3,130   $3,130 
Residential mortgage loans - junior liens   289    26,113    2,478    28,880    114    219    333 
Home equity lines of credit   0    32,490    2,734    35,224    0    280    280 
1-4 Family residential construction   0    27,555    439    27,994    0    220    220 
Total residential mortgage   1,259    462,995    112,323    576,577    114    3,849    3,963 
Commercial:                                   
Commercial loans secured by real estate   1,649    166,555    111,063    279,267    0    1,577    1,577 
Commercial and industrial   1,230    110,026    4,008    115,264    135    1,111    1,246 
Political subdivisions   0    52,308    0    52,308    0    0    0 
Commercial construction and land   0    16,079    5,118    21,197    0    152    152 
Loans secured by farmland   1,531    5,456    264    7,251    48    54    102 
Multi-family (5 or more) residential   0    9,203    17,546    26,749    0    150    150 
Agricultural loans   595    4,639    0    5,234    0    42    42 
Other commercial loans   0    12,570    467    13,037    0    119    119 
Total commercial   5,005    376,836    138,466    520,307    183    3,205    3,388 
Consumer   0    18,811    988    19,799    0    264    264 
Unallocated                                 585 
                                    
Total  $6,264   $858,642   $251,777   $1,116,683   $297   $7,318   $8,200 

 

  28 

 

  

December 31, 2018  Loans:   Allowance for Loan Losses: 
(In Thousands)                        
   Individually   Collectively       Individually   Collectively     
   Evaluated   Evaluated   Totals   Evaluated   Evaluated   Totals 
Residential mortgage:                              
Residential mortgage loans - first liens  $991   $371,348   $372,339   $0   $3,156   $3,156 
Residential mortgage loans - junior liens   293    25,157    25,450    116    209    325 
Home equity lines of credit   0    34,319    34,319    0    302    302 
1-4 Family residential construction   0    24,698    24,698    0    203    203 
Total residential mortgage   1,284    455,522    456,806    116    3,870    3,986 
Commercial:                              
Commercial loans secured by real estate   4,302    158,309    162,611    781    1,757    2,538 
Commercial and industrial   2,157    89,699    91,856    659    894    1,553 
Political subdivisions   0    53,263    53,263    0    0    0 
Commercial construction and land   0    11,962    11,962    0    110    110 
Loans secured by farmland   1,349    5,797    7,146    49    53    102 
Multi-family (5 or more) residential   0    7,180    7,180    0    114    114 
Agricultural loans   665    4,994    5,659    0    46    46 
Other commercial loans   0    13,950    13,950    0    128    128 
Total commercial   8,473    345,154    353,627    1,489    3,102    4,591 
Consumer   17    17,113    17,130    0    233    233 
Unallocated                            499 
                               
Total  $9,774   $817,789   $827,563   $1,605   $7,205   $9,309 

 

Summary information related to impaired loans at June 30, 2019 and December 31, 2018 is provided in the table immediately below. Purchased credit impaired loans are excluded from the table.

 

(In Thousands)  June 30, 2019   December 31, 2018 
   Unpaid           Unpaid         
   Principal   Recorded   Related   Principal   Recorded   Related 
   Balance   Investment   Allowance   Balance   Investment   Allowance 
With no related allowance recorded:                              
Residential mortgage loans - first liens  $729   $701   $0   $750   $721   $0 
Residential mortgage loans - junior liens   50    50    0    54    54    0 
Commercial loans secured by real estate   1,649    1,649    0    1,787    1,787    0 
Commercial and industrial   436    436    0    817    817    0 
Loans secured by farmland   1,048    1,048    0    862    862    0 
Agricultural loans   595    595    0    665    665    0 
Consumer   0    0    0    17    17    0 
Total with no related allowance recorded   4,507    4,479    0    4,952    4,923    0 
                               
With a related allowance recorded:                              
Residential mortgage loans - first liens   269    269    0    270    270    0 
Residential mortgage loans - junior liens   239    239    114    239    239    116 
Commercial loans secured by real estate   0    0    0    2,515    2,515    781 
Commercial and industrial   794    794    135    1,340    1,340    659 
Loans secured by farmland   483    483    48    487    487    49 
Total with a related allowance recorded   1,785    1,785    297    4,851    4,851    1,605 
Total  $6,292   $6,264   $297   $9,803   $9,774   $1,605 

 

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

 

  29 

 

 

The average balance of impaired loans, excluding purchased credit impaired loans, and interest income recognized on these impaired loans is as follows:

 

   Average Investment in Impaired Loans  

Interest Income Recognized on

Impaired Loans on a Cash Basis

 
(In Thousands)  3 Months Ended   6 Months Ended   3 Months Ended   6 Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2019   2018   2019   2018   2019   2018   2019   2018 
Residential mortgage:                                        
Residential mortgage loans - first lien  $970   $1,108   $977   $1,077   $8   $11   $18   $30 
Residential mortgage loans - junior lien   289    299    290    300    0    4    2    7 
Total residential mortgage   1,259    1,407    1,267    1,377    8    15    20    37 
Commercial:                                        
Commercial loans secured by real estate   1,722    4,592    2,582    5,237    7    35    17    70 
Commercial and industrial   1,241    280    1,546    394    8    1    34    7 
Loans secured by farmland   1,533    1,360    1,471    1,362    18    10    19    16 
Multi-family (5 or more) residential   0    392    0    392    0    0    0    0 
Agricultural loans   626    568    639    457    12    7    24    18 
Total commercial   5,122    7,192    6,238    7,842    45    53    94    111 
Consumer   0    19    6    19    0    0    0    0 
Total  $6,381   $8,618   $7,511   $9,238   $53   $68   $114   $148 

 

Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans, including impaired loans, is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

 

The breakdown by portfolio segment and class of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:

 

(In Thousands)  June 30, 2019   December 31, 2018 
   Past Due       Past Due     
   90+ Days and       90+ Days and     
   Accruing   Nonaccrual   Accruing   Nonaccrual 
Residential mortgage:                    
Residential mortgage loans - first liens  $1,677   $3,426   $1,633   $4,750 
Residential mortgage loans - junior liens   106    239    151    239 
Home equity lines of credit   57    73    219    27 
Total residential mortgage   1,840    3,738    2,003    5,016 
Commercial:                    
Commercial loans secured by real estate   225    2,224    394    3,958 
Commercial and industrial   59    1,170    18    2,111 
Commercial construction and land   0    52    0    52 
Loans secured by farmland   476    1,483    459    1,297 
Agricultural loans   5    595    0    665 
Total commercial   765    5,524    871    8,083 
Consumer   26    27    32    14 
Totals  $2,631   $9,289   $2,906   $13,113 

 

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual.

  

  30 

 

 

The table below presents a summary of the contractual aging of loans as of June 30, 2019 and December 31, 2018:

 

   As of June 30, 2019   As of December 31, 2018 
   Current &               Current &             
(In Thousands)  Past Due   Past Due   Past Due       Past Due   Past Due   Past Due     
   Less than   30-89   90+       Less than   30-89   90+     
   30 Days   Days   Days   Total   30 Days   Days   Days   Total 
Residential mortgage:                                        
Residential mortgage loans - first liens  $476,950   $4,091   $3,438   $484,479   $361,362   $6,414   $4,563   $372,339 
Residential mortgage loans - junior liens   28,482    53    345    28,880    24,876    184    390    25,450 
Home equity lines of credit   34,739    428    57    35,224    33,611    480    228    34,319 
1-4 Family residential construction   27,994    0    0    27,994    24,531    167    0    24,698 
Total residential mortgage   568,165    4,572    3,840    576,577    444,380    7,245    5,181    456,806 
                                         
Commercial:                                        
Commercial loans secured by real estate   276,687    566    2,014    279,267    160,668    226    1,717    162,611 
Commercial and industrial   115,078    78    108    115,264    90,915    152    789    91,856 
Political subdivisions   52,308    0    0    52,308    53,263    0    0    53,263 
Commercial construction and land   21,145    0    52    21,197    11,910    0    52    11,962 
Loans secured by farmland   5,292    493    1,466    7,251    5,390    487    1,269    7,146 
Multi-family (5 or more) residential   26,749    0    0    26,749    7,104    76    0    7,180 
Agricultural loans   5,215    8    11    5,234    5,624    29    6    5,659 
Other commercial loans   13,037    0    0    13,037    13,950    0    0    13,950 
Total commercial   515,511    1,145    3,651    520,307    348,824    970    3,833    353,627 
Consumer   19,609    137    53    19,799    16,991    93    46    17,130 
Totals  $1,103,285   $5,854   $7,544   $1,116,683   $810,195   $8,308   $9,060   $827,563 

 

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at June 30, 2019 and December 31, 2018 is as follows:

 

   Current &             
(In Thousands)  Past Due   Past Due   Past Due     
   Less than   30-89   90+     
   30 Days   Days   Days   Total 
June 30, 2019 Nonaccrual Totals  $2,929   $1,447   $4,913   $9,289 
December 31, 2018 Nonaccrual Totals  $5,793   $1,166   $6,154   $13,113 

 

Loans whose terms are modified are classified as Troubled Debt Restructurings (TDRs) if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at June 30, 2019 and December 31, 2018 is as follows:

 

   Current &                 
(In Thousands)  Past Due   Past Due   Past Due         
   Less than   30-89   90+         
   30 Days   Days   Days   Nonaccrual   Total 
June 30, 2019 Totals  $972   $0   $74   $415   $1,461 
December 31, 2018 Totals  $612   $43   $0   $2,884   $3,539 

  

At June 30, 2019 and December 31, 2018, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

 

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There were no TDRs that occurred during the three-month periods ended June 30, 2019 and 2018. TDRs that occurred during the six-month periods ended June 30, 2019 and 2018 are as follows:

 

(Balances in Thousands)        
   2019   2018 
       Post-       Post- 
   Number   Modification   Number   Modification 
   of   Recorded   of   Recorded 
   Loans   Investment   Loans   Investment 
Residential mortgage - first liens,                    
Reduced monthly payments for a six-month period   0   $0    1   $80 
Residential mortgage - junior liens,                    
Reduced monthly payments and extended maturity date   1    18    0    0 
Commercial loans secured by real estate,                    
Extended interest only payments for a six-month period   0    0    2    36 
Commercial and industrial:                    
Extended interest only payments for a six-month period   0    0    1    46 
Reduced monthly payments and extended maturity date   9    448    0    0 
Agricultural loans,                    
Reduced monthly payments and extended maturity date   1    84    0    0 
Total   11   $550    4   $162 

 

All of the loans for which TDRs were granted in the table above in the six-month period ended June 30, 2019 are associated with one relationship.

 

In the six-month periods ended June 30, 2019 and 2018, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months.

 

The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in Foreclosed assets held for sale in the unaudited consolidated balance sheets) is as follows:

 

(In Thousands)  June 30,   Dec. 31, 
   2019   2018 
Foreclosed residential real estate  $368   $64 

 

The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:

 

(In Thousands)  June 30,   Dec. 31, 
   2019   2018 
Residential real estate in process of foreclosure  $1,456   $1,097 

 

8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Information related to the core deposit intangibles are as follows:

 

(In Thousands)

 

   June 30,   December 31, 
   2019   2018 
Gross amount  $3,495   $2,034 
Accumulated amortization   (2,100)   (2,025)
Net  $1,395   $9 

 

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Amortization expense was $73,000 in the second quarter 2019, including $72,000 related to the core deposit intangible recognized in the Monument acquisition as described in Note 2. In comparison, amortization expense was $1,000 in the second quarter 2018. Amortization expense totaled $75,000 in the six-month period ended June 30, 2019 and $2,000 in the six-month period ended June 30, 2018.

 

Changes in the carrying amount of goodwill are summarized in the following table:

(In Thousands)

 

   3 Months   3 Months 
   and 6 Months   and 6 Months 
   Ended   Ended 
   June 30,   June 30, 
   2019   2018 
Balance, beginning of period  $11,942   $11,942 
Goodwill arising in business combination   16,676    0 
Balance, end of period  $28,618   $11,942 

 

9. BORROWED FUNDS AND SUBORDINATED DEBT

 

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

 

(In Thousands)  June 30,   Dec. 31, 
   2019   2018 
FHLB-Pittsburgh borrowings – overnight  $3,000   $7,000 
Other short-term advances from FHLB-Pittsburgh   21,301    0 
Customer repurchase agreements   3,192    5,853 
Total short-term borrowings  $27,493   $12,853 

 

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average interest rate paid by the Corporation on customer repurchase agreements was 0.10% at June 30, 2019 and December 31, 2018. The carrying value of the underlying securities was $3,240,000 at June 30, 2019 and $5,890,000 at December 31, 2018.

 

The FHLB-Pittsburgh loan facilities are collateralized by qualifying loans secured by real estate with a book value totaling $741,242,000 at June 30, 2019 and $495,143,000 at December 31, 2018. Also, the FHLB-Pittsburgh loan facilities require the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were $7,485,000 at June 30, 2019 and $5,582,000 at December 31, 2018.

 

Overnight borrowings from FHLB-Pittsburgh had interest rates of 2.46% at June 30, 2019 and 2.62% at December 31, 2018. At June 30,2019, other short-term advances from FHLB-Pittsburgh included four advances totaling $21,379,000 which are presented in the table net of the unamortized purchase accounting-related adjustment, with a weighted-average effective interest rate of 2.66%.

 

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

 

(In Thousands)  June 30,   Dec. 31, 
   2019   2018 
Loans matured in 2019 with a weighted-average rate of 2.17%  $0   $17,000 
Loans maturing in 2019 with a weighted-average rate of 2.59%   15,000    15,000 
Loans maturing in 2020 with a weighted-average rate of 2.77%   5,171    3,271 
Loans maturing in 2022 with a weighted-average rate of 2.16%   14,000    0 
Loans maturing in 2023 with a weighted-average rate of 2.31%   3,500    0 
Loan maturing in 2025 with a rate of 4.91%   602    644 
Total long-term FHLB-Pittsburgh borrowings  $38,273   $35,915 

 

In connection with the Monument acquisition, the Corporation assumed subordinated debt agreements with par values totaling $7,000,000, maturing April 1, 2027, which may be redeemed at par beginning April 1, 2022. The agreements have fixed annual interest rates of 6.50%. The subordinated debt was recorded at fair value, which was deemed to be equal to par value, and thus is carried on the unaudited consolidated balance sheet at $7,000,000 at June 30, 2019.

 

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10. STOCK-BASED COMPENSATION PLANS

 

The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. In the first quarter 2019, the Corporation awarded 40,517 shares of restricted stock under the Stock Incentive Plan and 7,620 shares of restricted stock under the Independent Directors Stock Incentive Plan. The 2019 restricted stock awards under the Stock Incentive Plan vest ratably over three years and vesting for one-half of the 27,380 restricted shares awarded to Executive Officers depends on the Corporation meeting a return on average equity (“ROAE”) target each year. The 2019 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year.

 

Compensation cost related to restricted stock is recognized based on the fair value of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. Management has estimated restricted stock expense in the second quarter and first six months of 2019 based on an assumption that the ROAE target for awards to Executive Officers in 2017, 2018 and 2019 will be met.

 

Total annual stock-based compensation for the year ending December 31, 2019 is estimated to total $880,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $202,000 in the second quarter 2019 and $155,000 in the second quarter 2018. Total stock-based compensation expense attributable to restricted stock awards amounted to $431,000 in the six-month period ended June 30, 2019 and $338,000 in the six-month period ended June 30, 2018.

 

11. CONTINGENCIES

 

In the normal course of business, the Corporation may be subject to pending and threatened lawsuits in which claims for monetary damages could be asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of such pending legal proceedings.

 

12.   REVENUE RECOGNITION

 

As disclosed in Note 1, as of January 1, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as well as subsequent ASUs that modified ASC 606. The Company has elected to apply the ASU and all related ASUs using the modified retrospective implementation method. The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

 

Additional disclosures related to the Corporation’s largest sources of noninterest income within the consolidated statements of income that are subject to ASC 606 are as follows:

 

Trust and financial management revenue – C&N Bank’s trust division provides a wide range of financial services, including wealth management services for individuals, businesses and retirement funds, administration of 401(k) and other retirement plans, retirement planning, estate planning and estate settlement services. Trust clients are located primarily within the Corporation’s geographic markets. Assets held in a fiduciary capacity by C&N Bank are not the Corporation’s assets and are therefore not included in the consolidated balance sheets. The fair value of trust assets under management was approximately $948,998,000 at June 30, 2019 and $862,517,000 at December 31, 2018. Trust and financial management revenue is included within noninterest income in the consolidated statements of income.

 

Trust revenue is recorded on a cash basis, which is not materially different from the accrual basis. The majority (approximately 81%, based on annual 2018 results) of trust revenue is earned and collected monthly, with the amount determined based on a percentage of the fair value of the trust assets under management. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The services provided under such a contract represent a single performance obligation under the ASU because it embodies a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. None of the contracts with trust customers provide for incentive-based fees. In addition to wealth management fees, trust revenue includes fees for provision of services, including employee benefit plan administration, tax return preparation and estate planning and settlement. Fees for such services are billed based on contractual arrangements or established fee schedules and are typically billed upon completion of providing such services. The costs of acquiring trust customers are incremental and recognized within noninterest expense in the consolidated statements of income.

 

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Service charges on deposit accounts - Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts. All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within noninterest expense in the consolidated statements of income.

 

Interchange revenue from debit card transactions – The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements of income.

 

13. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

 

The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB Accounting Standards Codification (ASC) topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

 

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

 

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.

 

Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

 

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

 

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At June 30, 2019 and December 31, 2018, assets measured at fair value and the valuation methods used are as follows:

 

       June 30, 2019     
   Quoted Prices   Other         
   in Active   Observable   Unobservable   Total 
   Markets   Inputs   Inputs   Fair 
(In Thousands)  (Level 1)   (Level 2)   (Level 3)   Value 
Recurring fair value measurements                    
AVAILABLE-FOR-SALE DEBT SECURITIES:                    
Obligations of U.S. Government agencies  $0   $17,570   $0   $17,570 
Obligations of states and political subdivisions:                    
     Tax-exempt   0    75,499    0    75,499 
     Taxable   0    31,509    0    31,509 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
    Residential pass-through securities   0    55,141    0    55,141 
    Residential collateralized mortgage obligations   0    139,484    0    139,484 
    Commercial mortgage-backed securities   0    44,262    0    44,262 
Total available-for-sale debt securities   0    363,465    0    363,465 
Marketable equity security   976    0    0    976 
Servicing rights   0    0    1,322    1,322 
Total recurring fair value measurements  $976   $363,465   $1,322   $365,763 
                     
Nonrecurring fair value measurements                    
Impaired loans with a valuation allowance  $0   $0   $1,785   $1,785 
Valuation allowance   0    0    (297)   (297)
Impaired loans, net   0    0    1,488    1,488 
Foreclosed assets held for sale   0    0    3,305    3,305 
Total nonrecurring fair value measurements  $0   $0   $4,793   $4,793 

 

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       December 31, 2018     
   Quoted Prices   Other         
   in Active   Observable   Unobservable   Total 
   Markets   Inputs   Inputs   Fair 
(In Thousands)  (Level 1)   (Level 2)   (Level 3)   Value 
Recurring fair value measurements                    
AVAILABLE-FOR-SALE DEBT SECURITIES:                    
Obligations of U.S. Government agencies  $0   $12,500   $0   $15,500 
Obligations of states and political subdivisions:                    
     Tax-exempt   0    83,952    0    83,952 
     Taxable   0    27,699    0    27,699 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
    Residential pass-through securities   0    53,445    0    53,445 
    Residential collateralized mortgage obligations   0    145,912    0    145,912 
    Commercial mortgage-backed securities   0    39,765    0    39,765 
Total available-for-sale debt securities   0    363,273    0    363,273 
Marketable equity security   950    0    0    950 
Servicing rights   0    0    1,404    1,404 
Total recurring fair value measurements  $950   $363,273   $1,404   $365,627 
                     
Nonrecurring fair value measurements                    
Impaired loans with a valuation allowance  $0   $0   $4,851   $4,851 
Valuation allowance   0    0    (1,605)   (1,605)
Impaired loans, net   0    0    3,246    3,246 
Foreclosed assets held for sale   0    0    1,703    1,703 
Total nonrecurring fair value measurements  $0   $0   $4,949   $4,949 

 

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.

 

At June 30, 2019 and December 31, 2018, quantitative information regarding significant techniques and inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:

 

   Fair Value at              
   6/30/19   Valuation  Unobservable      Method or Value As of
Asset  (In Thousands)   Technique  Input(s)      6/30/19
Servicing rights  $1,322   Discounted cash flow  Discount rate   12.50%  Rate used through modeling period
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