NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The Company also owns a controlling interest in United Insurance Solutions, LLC. All significant inter-company balances and transactions have been eliminated in the consolidation.
The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.
Note 2. Accumulated Other Comprehensive Gain (loss)
The changes in accumulated other comprehensive gain (loss) by component shown net of tax and parenthesis indicating debits, as of March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
(In Thousands)
|
|
Net Unrealized Gain (Loss) on Available for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
|
Net Unrealized Gain (Loss) on Available
for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
Beginning balance
|
|
$
|
2,455
|
|
|
$
|
(5,232
|
)
|
|
$
|
(2,777
|
)
|
|
$
|
(1,360
|
)
|
|
$
|
(5,276
|
)
|
|
$
|
(6,636
|
)
|
Other comprehensive gain before reclassifications
|
|
548
|
|
|
—
|
|
|
548
|
|
|
1,567
|
|
|
—
|
|
|
1,567
|
|
Amounts reclassified from accumulated other comprehensive (loss) gain
|
|
(17
|
)
|
|
33
|
|
|
16
|
|
|
(10
|
)
|
|
37
|
|
|
27
|
|
Net current-period other comprehensive income
|
|
531
|
|
|
33
|
|
|
564
|
|
|
1,557
|
|
|
37
|
|
|
1,594
|
|
Ending balance
|
|
$
|
2,986
|
|
|
$
|
(5,199
|
)
|
|
$
|
(2,213
|
)
|
|
$
|
197
|
|
|
$
|
(5,239
|
)
|
|
$
|
(5,042
|
)
|
The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss
|
|
Affected Line Item
in the Consolidated
Statement of Income
|
|
Three months ended March 31, 2020
|
|
Three months ended March 31, 2019
|
|
Net unrealized gain on available for sale securities
|
|
$
|
21
|
|
|
$
|
13
|
|
|
Net debt securities gains, available for sale
|
Income tax effect
|
|
(4
|
)
|
|
(3
|
)
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
17
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
Net unrecognized pension costs
|
|
$
|
(41
|
)
|
|
$
|
(47
|
)
|
|
Salaries and employee benefits
|
Income tax effect
|
|
8
|
|
|
10
|
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
(33
|
)
|
|
$
|
(37
|
)
|
|
|
Note 3. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments - Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles - Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns 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). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles - Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815). The amendments in this Update permit use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted Update 2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in Update 2017-12. For public business entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted Update 2017-12. This Update is not expected to have a significant impact on the Company’s financial statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments - Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021.On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments - Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017- 12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments - Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In November 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944), which defers the effective date of the amendments in Update 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. For public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies, as defined by the SEC, the amendments in Update 2018-12 are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early application of the amendments in Update 2018-12 is permitted. For all other entities, the amendments in Update 2018-12 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early application of the amendments in Update 2018-12 is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.
In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from
the goodwill impairment test under ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. This Update is not expected to have a significant impact on the Company’s financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-1, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option, in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-2, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Company’s financial statements.
In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13.
Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
Note 4. Per Share Data
There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 864,300 stock options, with an average exercise price of $28.20, outstanding on March 31, 2020. A portion of these options were included, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $29.57 exceeding the exercise price of the options issued for all years except for 2017. There were a total of 635,550 stock options outstanding for the same period end in 2019 that had an average exercise price of $29.29 and were excluded, on a weighted average basis, in the computation of diluted earnings per share because the quarterly average closing market price of common shares was $26.91 for the period.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Weighted average common shares issued
|
|
7,520,965
|
|
|
7,517,853
|
|
Weighted average treasury stock shares
|
|
(480,225
|
)
|
|
(480,225
|
)
|
Weighted average common shares outstanding - basic
|
|
7,040,740
|
|
|
7,037,628
|
|
Dilutive effect of outstanding stock options
|
|
62,250
|
|
|
—
|
|
Weighted average common shares outstanding - basic and diluted
|
|
7,102,990
|
|
|
7,037,628
|
|
Note 5. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at March 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
4,874
|
|
|
$
|
125
|
|
|
$
|
—
|
|
|
$
|
4,999
|
|
State and political securities
|
|
87,545
|
|
|
4,574
|
|
|
(79
|
)
|
|
92,040
|
|
Other debt securities
|
|
59,323
|
|
|
543
|
|
|
(1,383
|
)
|
|
58,483
|
|
Total debt securities
|
|
$
|
151,742
|
|
|
$
|
5,242
|
|
|
$
|
(1,462
|
)
|
|
$
|
155,522
|
|
|
|
|
|
|
|
|
|
|
Investment equity securities:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
1,300
|
|
|
$
|
7
|
|
|
$
|
(26
|
)
|
|
$
|
1,281
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
4,956
|
|
|
$
|
56
|
|
|
$
|
(46
|
)
|
|
$
|
4,966
|
|
State and political securities
|
|
79,064
|
|
|
3,299
|
|
|
(77
|
)
|
|
82,286
|
|
Other debt securities
|
|
61,492
|
|
|
401
|
|
|
(526
|
)
|
|
61,367
|
|
Total debt securities
|
|
$
|
145,512
|
|
|
$
|
3,756
|
|
|
$
|
(649
|
)
|
|
$
|
148,619
|
|
|
|
|
|
|
|
|
|
|
Investment equity securities:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
1,300
|
|
|
$
|
—
|
|
|
$
|
(39
|
)
|
|
$
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
50
|
|
|
$
|
3
|
|
|
$
|
(2
|
)
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
(In Thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
Available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State and political securities
|
|
5,887
|
|
|
(61
|
)
|
|
242
|
|
|
(18
|
)
|
|
6,129
|
|
|
(79
|
)
|
Other debt securities
|
|
21,691
|
|
|
(1,068
|
)
|
|
11,185
|
|
|
(315
|
)
|
|
32,876
|
|
|
(1,383
|
)
|
Total debt securities
|
|
$
|
27,578
|
|
|
$
|
(1,129
|
)
|
|
$
|
11,427
|
|
|
$
|
(333
|
)
|
|
$
|
39,005
|
|
|
$
|
(1,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
(In Thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
Available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,115
|
|
|
$
|
(46
|
)
|
|
$
|
2,115
|
|
|
$
|
(46
|
)
|
State and political securities
|
|
7,958
|
|
|
(40
|
)
|
|
224
|
|
|
(37
|
)
|
|
8,182
|
|
|
(77
|
)
|
Other debt securities
|
|
13,373
|
|
|
(216
|
)
|
|
14,258
|
|
|
(310
|
)
|
|
27,631
|
|
|
(526
|
)
|
Total debt securities
|
|
$
|
21,331
|
|
|
$
|
(256
|
)
|
|
$
|
16,597
|
|
|
$
|
(393
|
)
|
|
$
|
37,928
|
|
|
$
|
(649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2020, there were a total of 24 securities in a continuous unrealized loss position for less than twelve months and 9 individual securities that were in a continuous unrealized loss position for twelve months or greater.
The Company reviews its position quarterly and has determined that, at March 31, 2020, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at March 31, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
5,642
|
|
|
$
|
5,657
|
|
Due after one year to five years
|
|
55,063
|
|
|
55,073
|
|
Due after five years to ten years
|
|
67,078
|
|
|
70,403
|
|
Due after ten years
|
|
23,959
|
|
|
24,389
|
|
Total
|
|
$
|
151,742
|
|
|
$
|
155,522
|
|
Total gross proceeds from sales of debt securities available for sale for the three months ended March 31, 2020 was $2,774,000, a decrease from the 2019 total $6,986,000.
The following table represents gross realized gains and losses from the sales of debt securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Available for sale (AFS):
|
|
|
|
|
Gross realized gains:
|
|
|
|
|
|
|
State and political securities
|
|
$
|
1
|
|
|
$
|
15
|
|
Other debt securities
|
|
20
|
|
|
4
|
|
Total gross realized gains
|
|
$
|
21
|
|
|
$
|
19
|
|
|
|
|
|
|
Gross realized losses:
|
|
|
|
|
|
|
State and political securities
|
|
$
|
—
|
|
|
$
|
2
|
|
Other debt securities
|
|
—
|
|
|
4
|
|
Total gross realized losses
|
|
$
|
—
|
|
|
$
|
6
|
|
|
|
|
|
|
There were no impairment charges included in gross realized losses for the three months ended March 31, 2020 and 2019, respectively.
Investment securities with a carrying value of approximately $87,695,000 and $74,163,000 at March 31, 2020 and December 31, 2019, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
At March 31, 2020 and December 31, 2019, we had $1,281,000 and $1,261,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Net (losses) gains recognized in equity securities during the period
|
|
$
|
20
|
|
|
$
|
43
|
|
Less: Net gains realized on the sale of equity securities during the period
|
|
—
|
|
|
—
|
|
Unrealized (losses) gains recognized in equity securities held at reporting date
|
|
$
|
20
|
|
|
$
|
43
|
|
|
|
|
|
|
Net gains and losses on trading account securities are as follows for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Net gains on sale transactions
|
|
$
|
—
|
|
|
$
|
5
|
|
Net mark-to-market (losses) gains
|
|
(14
|
)
|
|
5
|
|
Net (loss) gain on trading account securities
|
|
$
|
(14
|
)
|
|
$
|
10
|
|
|
|
|
|
|
Note 6. Loans
Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial, financial, and agricultural, real estate, and installment loans. Real estate loans are further segmented into three categories: residential, commercial, and construction, while installment loans are classified as either consumer automobile loans or other installment loans.
The following table presents the related aging categories of loans, by segment, as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
Past Due
|
|
Past Due 90
|
|
|
|
|
|
|
|
|
30 To 89
|
|
Days Or More
|
|
Non-
|
|
|
(In Thousands)
|
|
Current
|
|
Days
|
|
& Still Accruing
|
|
Accrual
|
|
Total
|
Commercial, financial, and agricultural
|
|
$
|
155,692
|
|
|
$
|
489
|
|
|
$
|
31
|
|
|
$
|
1,938
|
|
|
$
|
158,150
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
607,445
|
|
|
6,321
|
|
|
1,383
|
|
|
1,005
|
|
|
616,154
|
|
Commercial
|
|
351,202
|
|
|
2,795
|
|
|
—
|
|
|
6,740
|
|
|
360,737
|
|
Construction
|
|
39,003
|
|
|
230
|
|
|
—
|
|
|
64
|
|
|
39,297
|
|
Consumer automobile loans
|
|
150,891
|
|
|
700
|
|
|
74
|
|
|
50
|
|
|
151,715
|
|
Other consumer installment loans
|
|
21,451
|
|
|
522
|
|
|
15
|
|
|
—
|
|
|
21,988
|
|
|
|
1,325,684
|
|
|
$
|
11,057
|
|
|
$
|
1,503
|
|
|
$
|
9,797
|
|
|
1,348,041
|
|
Net deferred loan fees and discounts
|
|
1,359
|
|
|
|
|
|
|
|
|
|
|
|
1,359
|
|
Allowance for loan losses
|
|
(12,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,500
|
)
|
Loans, net
|
|
$
|
1,314,543
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,336,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Past Due
|
|
Past Due 90
|
|
|
|
|
|
|
|
|
30 To 89
|
|
Days Or More
|
|
Non-
|
|
|
(In Thousands)
|
|
Current
|
|
Days
|
|
& Still Accruing
|
|
Accrual
|
|
Total
|
Commercial, financial, and agricultural
|
|
$
|
153,737
|
|
|
$
|
249
|
|
|
$
|
30
|
|
|
$
|
2,197
|
|
|
$
|
156,213
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
615,580
|
|
|
4,881
|
|
|
1,529
|
|
|
1,266
|
|
|
623,256
|
|
Commercial
|
|
355,597
|
|
|
775
|
|
|
164
|
|
|
6,725
|
|
|
363,261
|
|
Construction
|
|
37,871
|
|
|
131
|
|
|
—
|
|
|
65
|
|
|
38,067
|
|
Consumer automobile loans
|
|
149,703
|
|
|
709
|
|
|
—
|
|
|
105
|
|
|
150,517
|
|
Other consumer installment loans
|
|
22,124
|
|
|
579
|
|
|
324
|
|
|
16
|
|
|
23,043
|
|
|
|
1,334,612
|
|
|
$
|
7,324
|
|
|
$
|
2,047
|
|
|
$
|
10,374
|
|
|
1,354,357
|
|
Net deferred loan fees and discounts
|
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
1,187
|
|
Allowance for loan losses
|
|
(11,894
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,894
|
)
|
Loans, net
|
|
$
|
1,323,905
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,343,650
|
|
The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
(In Thousands)
|
|
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
|
|
Interest
Income
Recorded on
a Cash Basis
|
|
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
|
|
Interest
Income
Recorded on
a Cash Basis
|
Commercial, financial, and agricultural
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
39
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
9
|
|
|
—
|
|
|
33
|
|
|
23
|
|
Commercial
|
|
42
|
|
|
—
|
|
|
89
|
|
|
40
|
|
Construction
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Consumer automobile loans
|
|
2
|
|
|
—
|
|
|
2
|
|
|
1
|
|
Other consumer installment loans
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
104
|
|
Impaired Loans
Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks individually evaluate such loans for impairment and do not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard or worse. Management may also elect to measure an individual loan for impairment if less than $100,000 on a case-by-case basis.
Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively with the exception of loans identified as troubled debt restructurings. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management
determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Interest income for impaired loans is recorded consistent to the Banks' policy.
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Recorded
|
|
Unpaid Principal
|
|
Related
|
(In Thousands)
|
|
Investment
|
|
Balance
|
|
Allowance
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
1,921
|
|
|
$
|
4,708
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
4,656
|
|
|
4,656
|
|
|
—
|
|
Commercial
|
|
5,089
|
|
|
5,089
|
|
|
—
|
|
Construction
|
|
65
|
|
|
65
|
|
|
—
|
|
Consumer automobile loans
|
|
—
|
|
|
—
|
|
|
—
|
|
Installment loans to individuals
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
11,731
|
|
|
14,518
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
104
|
|
|
104
|
|
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,074
|
|
|
1,074
|
|
|
177
|
|
Commercial
|
|
3,472
|
|
|
3,522
|
|
|
1,062
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer automobile loans
|
|
21
|
|
|
21
|
|
|
5
|
|
Installment loans to individuals
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
4,671
|
|
|
4,721
|
|
|
1,244
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
2,025
|
|
|
4,812
|
|
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
5,730
|
|
|
5,730
|
|
|
177
|
|
Commercial
|
|
8,561
|
|
|
8,611
|
|
|
1,062
|
|
Construction
|
|
65
|
|
|
65
|
|
|
—
|
|
Consumer automobile loans
|
|
21
|
|
|
21
|
|
|
5
|
|
Installment loans to individuals
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
16,402
|
|
|
$
|
19,239
|
|
|
$
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Recorded
|
|
Unpaid Principal
|
|
Related
|
(In Thousands)
|
|
Investment
|
|
Balance
|
|
Allowance
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
2,285
|
|
|
$
|
5,072
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
5,008
|
|
|
5,008
|
|
|
—
|
|
Commercial
|
|
5,035
|
|
|
5,035
|
|
|
—
|
|
Construction
|
|
65
|
|
|
65
|
|
|
—
|
|
Consumer automobile loans
|
|
—
|
|
|
—
|
|
|
—
|
|
Installment loans to individuals
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
12,393
|
|
|
15,180
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
—
|
|
|
—
|
|
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,168
|
|
|
1,200
|
|
|
211
|
|
Commercial
|
|
3,540
|
|
|
3,590
|
|
|
1,104
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer automobile loans
|
|
130
|
|
|
130
|
|
|
62
|
|
Installment loans to individuals
|
|
16
|
|
|
16
|
|
|
16
|
|
|
|
4,854
|
|
|
4,936
|
|
|
1,393
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
2,285
|
|
|
5,072
|
|
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
6,176
|
|
|
6,208
|
|
|
211
|
|
Commercial
|
|
8,575
|
|
|
8,625
|
|
|
1,104
|
|
Construction
|
|
65
|
|
|
65
|
|
|
—
|
|
Consumer automobile loans
|
|
130
|
|
|
130
|
|
|
62
|
|
Installment loans to individuals
|
|
16
|
|
|
16
|
|
|
16
|
|
|
|
$
|
17,247
|
|
|
$
|
20,116
|
|
|
$
|
1,393
|
|
The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
(In Thousands)
|
|
Average
Investment in
Impaired Loans
|
|
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
|
|
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
|
|
Average
Investment in
Impaired Loans
|
|
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
|
|
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
|
Commercial, financial, and agricultural
|
|
$
|
2,155
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
5,302
|
|
|
$
|
1
|
|
|
$
|
38
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
5,953
|
|
|
57
|
|
|
—
|
|
|
4,163
|
|
|
28
|
|
|
17
|
|
Commercial
|
|
8,568
|
|
|
26
|
|
|
—
|
|
|
11,069
|
|
|
31
|
|
|
36
|
|
Construction
|
|
65
|
|
|
—
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
1
|
|
Consumer automobile
|
|
76
|
|
|
—
|
|
|
—
|
|
|
52
|
|
|
—
|
|
|
1
|
|
Other consumer installment loans
|
|
8
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
|
$
|
16,825
|
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
20,677
|
|
|
$
|
60
|
|
|
$
|
93
|
|
Currently, there is $4,000 committed to be advanced in connection with impaired loans.
Troubled Debt Restructurings
The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.
There were no loan modifications considered to be TDRs completed during the three months ended March 31, 2020 and 2019.
There were three loan modifications considered to be TDRs made during the twelve months previous to March 31, 2020 that defaulted during the three months ended March 31, 2020. The defaulted loan types and recorded investments at March 31, 2020 are as follows: one commercial real estate loan with a recorded investment of $1,040,000, and two commercial and agricultural loans with a recorded investment of $1,112,000. There were no loan modifications considered to be TDR's made during the twelve months previous to March 31, 2019 that defaulted during the three months ended March 31, 2019.
Troubled debt restructurings amounted to $12,885,000 and $13,282,000 as of March 31, 2020 and December 31, 2019, respectively.
The amount of foreclosed residential real estate held at March 31, 2020 and December 31, 2019, totaled $393,000 and $493,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2020 and December 31, 2019, totaled $421,000 and $32,000, respectively.
The Company began offering short-term loan modifications to provide relief to borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made in a good faith basis in response to COVID-19 who were current at the time the modification program is implemented do not need to be accounted for as TDRs. Loan modifications and payment deferrals have been at historical high levels as the impact of the pandemic continues. As of March 31, 2020, rate modifications have been granted on 23 loans with an aggregate balance of $2,476,000. In addition, payment deferrals of up to 90 days have been granted on 36 loans with an aggregate balance of $4,044,000. These loan modifications met applicable requirements to not be considered troubled debt restructurings. The number of customers seeking loan modifications or payment deferrals may increase as the effects of the pandemic continue.
Internal Risk Ratings
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated for substandard classification. Loans in the doubtful category exhibit the same weaknesses found in the substandard loans, however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Loans classified loss are considered uncollectible and charge-off is imminent.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. An external semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. During 2019, the threshold for the annual loan review was commercial relationships of $1,750,000 or greater for JSSB and $1,500,000 or greater for Luzerne with the 2020 review beginning in the second quarter. Confirmation of the appropriate risk category is included in the review. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.
The following table presents the credit quality categories identified above as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer automobile
|
|
Other consumer installment loans
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Totals
|
Pass
|
|
$
|
151,756
|
|
|
$
|
611,584
|
|
|
$
|
346,727
|
|
|
$
|
39,163
|
|
|
$
|
151,715
|
|
|
$
|
21,985
|
|
|
$
|
1,322,930
|
|
Special Mention
|
|
3,154
|
|
|
2,416
|
|
|
5,018
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,588
|
|
Substandard
|
|
3,240
|
|
|
2,154
|
|
|
8,992
|
|
|
134
|
|
|
—
|
|
|
3
|
|
|
14,523
|
|
|
|
$
|
158,150
|
|
|
$
|
616,154
|
|
|
$
|
360,737
|
|
|
$
|
39,297
|
|
|
$
|
151,715
|
|
|
$
|
21,988
|
|
|
$
|
1,348,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer automobile
|
|
Other consumer installment loans
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Totals
|
Pass
|
|
$
|
149,349
|
|
|
$
|
618,350
|
|
|
$
|
348,864
|
|
|
$
|
37,931
|
|
|
$
|
150,517
|
|
|
$
|
23,039
|
|
|
$
|
1,328,050
|
|
Special Mention
|
|
3,174
|
|
|
2,436
|
|
|
5,080
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,690
|
|
Substandard
|
|
3,690
|
|
|
2,470
|
|
|
9,317
|
|
|
136
|
|
|
—
|
|
|
4
|
|
|
15,617
|
|
|
|
$
|
156,213
|
|
|
$
|
623,256
|
|
|
$
|
363,261
|
|
|
$
|
38,067
|
|
|
$
|
150,517
|
|
|
$
|
23,043
|
|
|
$
|
1,354,357
|
|
Allowance for Loan Losses
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.
The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Banks' ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that are collectively evaluated for impairment are grouped into two classes for evaluation. A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.
For the general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing a twelve quarter moving average. However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the economic cycle. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.
Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors. Management also monitors industry loss factors by loan segment for applicable adjustments to actual loss experience.
Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
Activity in the allowance is presented for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
t
|
|
Three Months Ended March 31, 2020
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer automobile
|
|
Other consumer installment
|
|
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
1,779
|
|
|
$
|
4,306
|
|
|
$
|
3,210
|
|
|
$
|
118
|
|
|
$
|
1,780
|
|
|
$
|
278
|
|
|
$
|
423
|
|
|
$
|
11,894
|
|
Charge-offs
|
|
(14
|
)
|
|
(41
|
)
|
|
—
|
|
|
—
|
|
|
(75
|
)
|
|
(100
|
)
|
|
—
|
|
|
(230
|
)
|
Recoveries
|
|
21
|
|
|
21
|
|
|
—
|
|
|
2
|
|
|
1
|
|
|
41
|
|
|
—
|
|
|
86
|
|
Provision
|
|
111
|
|
|
251
|
|
|
204
|
|
|
40
|
|
|
149
|
|
|
48
|
|
|
(53
|
)
|
|
750
|
|
Ending Balance
|
|
$
|
1,897
|
|
|
$
|
4,537
|
|
|
$
|
3,414
|
|
|
$
|
160
|
|
|
$
|
1,855
|
|
|
$
|
267
|
|
|
$
|
370
|
|
|
$
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer automobile
|
|
Other consumer installment
|
|
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
1,680
|
|
|
$
|
5,616
|
|
|
$
|
4,047
|
|
|
$
|
143
|
|
|
$
|
1,328
|
|
|
$
|
259
|
|
|
$
|
764
|
|
|
$
|
13,837
|
|
Charge-offs
|
|
(50
|
)
|
|
(73
|
)
|
|
(139
|
)
|
|
—
|
|
|
(100
|
)
|
|
(96
|
)
|
|
—
|
|
|
(458
|
)
|
Recoveries
|
|
6
|
|
|
1
|
|
|
—
|
|
|
5
|
|
|
26
|
|
|
15
|
|
|
—
|
|
|
53
|
|
Provision
|
|
96
|
|
|
186
|
|
|
(106
|
)
|
|
(18
|
)
|
|
148
|
|
|
100
|
|
|
(46
|
)
|
|
360
|
|
Ending Balance
|
|
$
|
1,732
|
|
|
$
|
5,730
|
|
|
$
|
3,802
|
|
|
$
|
130
|
|
|
$
|
1,402
|
|
|
$
|
278
|
|
|
$
|
718
|
|
|
$
|
13,792
|
|
The shift in allocation of the loan provision is primarily due to changes in the credit metrics within the loan portfolio and the economic uncertainty caused by the COVID-19 pandemic .
The Company grants commercial, industrial, residential, and installment loans to customers primarily throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.
The Company has a concentration of the following to gross loans at March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
Owners of residential rental properties
|
|
16.04
|
%
|
|
14.82
|
%
|
Owners of commercial rental properties
|
|
12.53
|
%
|
|
12.07
|
%
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer Automobile
|
|
Other consumer installment
|
|
Unallocated
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
|
Totals
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
177
|
|
|
$
|
1,062
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,244
|
|
Collectively evaluated for impairment
|
|
1,897
|
|
|
4,360
|
|
|
2,352
|
|
|
160
|
|
|
1,850
|
|
|
267
|
|
|
370
|
|
|
11,256
|
|
Total ending allowance balance
|
|
$
|
1,897
|
|
|
$
|
4,537
|
|
|
$
|
3,414
|
|
|
$
|
160
|
|
|
$
|
1,855
|
|
|
$
|
267
|
|
|
$
|
370
|
|
|
$
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,025
|
|
|
$
|
5,730
|
|
|
$
|
8,561
|
|
|
$
|
65
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
|
|
|
$
|
16,402
|
|
Collectively evaluated for impairment
|
|
156,125
|
|
|
610,424
|
|
|
352,176
|
|
|
39,232
|
|
|
151,694
|
|
|
21,988
|
|
|
|
|
|
1,331,639
|
|
Total ending loans balance
|
|
$
|
158,150
|
|
|
$
|
616,154
|
|
|
$
|
360,737
|
|
|
$
|
39,297
|
|
|
$
|
151,715
|
|
|
$
|
21,988
|
|
|
|
|
|
$
|
1,348,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer Automobile
|
|
Other consumer installment
|
|
Unallocated
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
|
Totals
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
—
|
|
|
$
|
211
|
|
|
$
|
1,104
|
|
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
1,393
|
|
Collectively evaluated for impairment
|
|
1,779
|
|
|
4,095
|
|
|
2,106
|
|
|
118
|
|
|
1,718
|
|
|
262
|
|
|
423
|
|
|
10,501
|
|
Total ending allowance balance
|
|
$
|
1,779
|
|
|
$
|
4,306
|
|
|
$
|
3,210
|
|
|
$
|
118
|
|
|
$
|
1,780
|
|
|
$
|
278
|
|
|
$
|
423
|
|
|
$
|
11,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,285
|
|
|
$
|
6,176
|
|
|
$
|
8,575
|
|
|
$
|
65
|
|
|
$
|
130
|
|
|
$
|
16
|
|
|
|
|
|
$
|
17,247
|
|
Collectively evaluated for impairment
|
|
153,928
|
|
|
617,080
|
|
|
354,686
|
|
|
38,002
|
|
|
150,387
|
|
|
23,027
|
|
|
|
|
|
1,337,110
|
|
Total ending loans balance
|
|
$
|
156,213
|
|
|
$
|
623,256
|
|
|
$
|
363,261
|
|
|
$
|
38,067
|
|
|
$
|
150,517
|
|
|
$
|
23,043
|
|
|
|
|
|
$
|
1,354,357
|
|
Note 7. Net Periodic Benefit Cost-Defined Benefit Plans
For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.
The following sets forth the components of the net periodic benefit/cost of the domestic non-contributory defined benefit plan for the three months ended March 31, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
Interest cost
|
|
$
|
160
|
|
|
$
|
191
|
|
Expected return on plan assets
|
|
(318
|
)
|
|
(249
|
)
|
Amortization of net loss
|
|
41
|
|
|
47
|
|
Net periodic benefit
|
|
$
|
(117
|
)
|
|
$
|
(11
|
)
|
Employer Contributions
The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2019, that it expected to contribute a minimum of $500,000 to its defined benefit plan in 2020. As of March 31, 2020, there were contributions of $1,000,000 made to the plan with additional contributions of at least $250,000 anticipated during the remainder of 2020.
Note 8. Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to 1,000,000 shares to be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. During the three months ended March 31, 2020 and 2019, there were 751 and 863 shares issued under the plan, respectively.
Note 9. Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily comprised of commitments to extend credit, standby letters of credit, and credit exposure from the sale of assets with recourse. These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
March 31, 2020
|
|
December 31, 2019
|
Commitments to extend credit
|
|
$
|
191,676
|
|
|
$
|
187,778
|
|
Standby letters of credit
|
|
9,976
|
|
|
9,638
|
|
Credit exposure from the sale of assets with recourse
|
|
7,091
|
|
|
6,826
|
|
|
|
$
|
208,743
|
|
|
$
|
204,242
|
|
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, on an extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
Note 10. Fair Value Measurements
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.
|
|
|
|
Level I:
|
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
|
|
Level II:
|
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
|
|
|
|
Level III:
|
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of March 31, 2020 and December 31, 2019, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
4,999
|
|
|
$
|
—
|
|
|
$
|
4,999
|
|
State and political securities
|
|
—
|
|
|
92,040
|
|
|
—
|
|
|
92,040
|
|
Other debt securities
|
|
—
|
|
|
58,483
|
|
|
—
|
|
|
58,483
|
|
Investment equity securities:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
1,281
|
|
|
—
|
|
|
—
|
|
|
1,281
|
|
Investment securities, trading:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
37
|
|
|
—
|
|
|
—
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
4,966
|
|
|
$
|
—
|
|
|
$
|
4,966
|
|
State and political securities
|
|
—
|
|
|
82,286
|
|
|
—
|
|
|
82,286
|
|
Other debt securities
|
|
—
|
|
|
61,367
|
|
|
—
|
|
|
61,367
|
|
Investment equity securities:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
1,261
|
|
|
—
|
|
|
—
|
|
|
1,261
|
|
Investment securities, trading:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
51
|
|
|
—
|
|
|
—
|
|
|
51
|
|
The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of March 31, 2020 and December 31, 2019, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,158
|
|
|
$
|
15,158
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
308
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,854
|
|
|
$
|
15,854
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
413
|
|
|
413
|
|
The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Quantitative Information About Level III Fair Value Measurements
|
(In Thousands)
|
|
Fair Value
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range
|
|
Weighted Average
|
Impaired loans
|
|
$
|
6,891
|
|
|
Discounted cash flow
|
|
Temporary reduction in payment amount
|
|
17% to (59)%
|
|
(24)%
|
|
|
8,267
|
|
|
Appraisal of collateral (1)
|
|
Appraisal adjustments (1)
|
|
0 to (80)%
|
|
(10)%
|
Other real estate owned
|
|
$
|
308
|
|
|
Appraisal of collateral (1)
|
|
Appraisal adjustments (1)
|
|
(20)%
|
|
(20)%
|
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Quantitative Information About Level III Fair Value Measurements
|
(In Thousands)
|
|
Fair Value
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range
|
|
Weighted Average
|
Impaired loans
|
|
$
|
6,950
|
|
|
Discounted cash flow
|
|
Temporary reduction in payment amount
|
|
17 to (59)%
|
|
(24)%
|
|
|
8,904
|
|
|
Appraisal of collateral (1)
|
|
Appraisal adjustments (1)
|
|
0 to (30)%
|
|
(9)%
|
Other real estate owned
|
|
$
|
413
|
|
|
Appraisal of collateral (1)
|
|
Appraisal adjustments (1)
|
|
(20)%
|
|
(20)%
|
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
The discounted cash flow valuation technique is utilized to determine the fair value of performing impaired loans, while non-performing impaired loans utilize the appraisal of collateral method.
The significant unobservable inputs used in the fair value measurement of the Company’s impaired loans using the discounted cash flow valuation technique include temporary changes in payment amounts and the probability of default. Significant increases (decreases) in payment amounts would result in significantly higher (lower) fair value measurements. The probability of default is 0% for impaired loans using the discounted cash flow valuation technique because all defaulted impaired loans are valued using the appraisal of collateral valuation technique.
The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses. The significant unobservable input used in the fair value measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of collateral valuation technique.
Note 11. Fair Value of Financial Instruments
The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair values.
Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments. The Company’s fair values, methods, and assumptions are set forth below for the Company’s other financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, this fair value of financial instruments would not represent the full market value of the Company.
The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair
|
|
Fair Value Measurements at March 31, 2020
|
(In Thousands)
|
|
Value
|
|
Value
|
|
Level I
|
|
Level II
|
|
Level III
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1)
|
|
$
|
77,761
|
|
|
$
|
77,761
|
|
|
$
|
77,761
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted investment in bank stock (1)
|
|
14,611
|
|
|
14,611
|
|
|
14,611
|
|
|
—
|
|
|
—
|
|
Loans held for sale (1)
|
|
4,294
|
|
|
4,294
|
|
|
4,294
|
|
|
—
|
|
|
—
|
|
Loans, net
|
|
1,336,900
|
|
|
1,325,148
|
|
|
—
|
|
|
—
|
|
|
1,325,148
|
|
Bank-owned life insurance (1)
|
|
29,228
|
|
|
29,228
|
|
|
29,228
|
|
|
—
|
|
|
—
|
|
Accrued interest receivable (1)
|
|
5,307
|
|
|
5,307
|
|
|
5,307
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
993,975
|
|
|
$
|
999,579
|
|
|
$
|
618,680
|
|
|
$
|
—
|
|
|
$
|
380,899
|
|
Noninterest-bearing deposits (1)
|
|
332,759
|
|
|
332,759
|
|
|
332,759
|
|
|
—
|
|
|
—
|
|
Short-term borrowings (1)
|
|
17,741
|
|
|
17,741
|
|
|
17,741
|
|
|
—
|
|
|
—
|
|
Long-term borrowings
|
|
171,903
|
|
|
176,801
|
|
|
—
|
|
|
—
|
|
|
176,801
|
|
Accrued interest payable (1)
|
|
1,635
|
|
|
1,635
|
|
|
1,635
|
|
|
—
|
|
|
—
|
|
(1) The financial instrument is carried at cost at March 31, 2020, which approximate the fair value of the instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair
|
|
Fair Value Measurements at December 31, 2019
|
(In Thousands)
|
|
Value
|
|
Value
|
|
Level I
|
|
Level II
|
|
Level III
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1)
|
|
$
|
48,589
|
|
|
$
|
48,589
|
|
|
$
|
48,589
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted investment in bank stock (1)
|
|
13,528
|
|
|
13,528
|
|
|
13,528
|
|
|
—
|
|
|
—
|
|
Loans held for sale (1)
|
|
4,232
|
|
|
4,232
|
|
|
4,232
|
|
|
—
|
|
|
—
|
|
Loans, net
|
|
1,343,650
|
|
|
1,346,395
|
|
|
—
|
|
|
—
|
|
|
1,346,395
|
|
Bank-owned life insurance (1)
|
|
29,253
|
|
|
29,253
|
|
|
29,253
|
|
|
—
|
|
|
—
|
|
Accrued interest receivable (1)
|
|
5,246
|
|
|
5,246
|
|
|
5,246
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
989,259
|
|
|
$
|
990,747
|
|
|
$
|
611,374
|
|
|
$
|
—
|
|
|
$
|
379,373
|
|
Noninterest-bearing deposits (1)
|
|
334,746
|
|
|
334,746
|
|
|
334,746
|
|
|
—
|
|
|
—
|
|
Short-term borrowings (1)
|
|
4,920
|
|
|
4,920
|
|
|
4,920
|
|
|
—
|
|
|
—
|
|
Long-term borrowings
|
|
161,920
|
|
|
163,931
|
|
|
—
|
|
|
—
|
|
|
163,931
|
|
Accrued interest payable (1)
|
|
1,671
|
|
|
1,671
|
|
|
1,671
|
|
|
—
|
|
|
—
|
|
(1) The financial instrument is carried at cost at December 31, 2019, which approximate the fair value of the instruments
The methods and assumptions used by the Company in estimating fair values of financial instruments at March 31, 2020 is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables.
Loans:
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial, and agricultural, commercial real estate, residential real estate, construction real estate, and installment loans to individuals. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower information.
Deposits:
The fair value of deposits with no stated maturity, such as savings, NOW, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows.
Long Term Borrowings:
The fair value of long term borrowings is based on the discounted value of contractual cash flows.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:
There is no material difference between the notional amount and the estimated fair value of off-balance sheet items. The contractual amounts of unfunded commitments and letters of credit are presented in Note 9 (Off-Balance Sheet Risk).
Note 12. Stock Options
In 2014, the Company adopted the 2014 Equity Incentive Plan designed to help the Company attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, and restricted stock may be granted as part of the plan.
As of January 1, 2020, the Company had a total of 625,800 stock options outstanding. During the period ended March 31, 2020, the Company issued 238,500 stock options with a strike price of $25.34 to a group of employees. The options granted in 2020 all expire ten years from the grant date. Of the 238,500 grants awarded in 2020, 119,300 of the options vest in 3 years while the 119,200 remaining options vest in five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Granted
|
Date
|
|
Shares
|
|
Forfeited
|
|
Outstanding
|
|
Strike Price
|
|
Vesting Period
|
|
Expiration
|
March 11, 2020
|
|
119,300
|
|
|
—
|
|
|
119,300
|
|
|
$
|
25.34
|
|
|
3 years
|
|
10 years
|
March 11, 2020
|
|
119,200
|
|
|
—
|
|
|
119,200
|
|
|
25.34
|
|
|
5 years
|
|
10 years
|
March 15, 2019
|
|
120,900
|
|
|
(1,950
|
)
|
|
118,950
|
|
|
28.01
|
|
|
3 years
|
|
10 years
|
March 15, 2019
|
|
119,100
|
|
|
(1,800
|
)
|
|
117,300
|
|
|
28.01
|
|
|
5 years
|
|
10 years
|
August 24, 2018
|
|
75,300
|
|
|
(1,950
|
)
|
|
73,350
|
|
|
30.67
|
|
|
3 years
|
|
10 years
|
August 24, 2018
|
|
149,250
|
|
|
(4,050
|
)
|
|
145,200
|
|
|
30.67
|
|
|
5 years
|
|
10 years
|
January 5, 2018
|
|
18,750
|
|
|
—
|
|
|
18,750
|
|
|
30.07
|
|
|
3 years
|
|
10 years
|
January 5, 2018
|
|
18,750
|
|
|
—
|
|
|
18,750
|
|
|
30.07
|
|
|
5 years
|
|
10 years
|
March 24, 2017
|
|
69,375
|
|
|
(6,750
|
)
|
|
62,625
|
|
|
29.47
|
|
|
3 years
|
|
10 years
|
March 24, 2017
|
|
35,625
|
|
|
—
|
|
|
35,625
|
|
|
29.47
|
|
|
5 years
|
|
10 years
|
August 27, 2015
|
|
58,125
|
|
|
(22,875
|
)
|
|
35,250
|
|
|
28.02
|
|
|
5 years
|
|
10 years
|
A summary of stock option activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Shares
|
|
Weighted Average Exercise Price
|
Outstanding, beginning of year
|
|
625,800
|
|
|
$
|
29.29
|
|
|
395,550
|
|
|
$
|
30.08
|
|
Granted
|
|
238,500
|
|
|
25.34
|
|
|
240,000
|
|
|
28.01
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding, end of period
|
|
864,300
|
|
|
$
|
28.20
|
|
|
635,550
|
|
|
$
|
29.29
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
62,625
|
|
|
$
|
29.47
|
|
|
—
|
|
|
$
|
—
|
|
The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straightline basis over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the value of the vested portion of the award at that date. The Company determines the fair value of options granted using the Black-Scholes option-pricing model. The risk-free interest rate is based on the United States Treasury bond with a similar term to the expected life of the options at the grant date. Expected volatility was estimated based on the adjusted historic volatility of the Company’s shares. The expected life was estimated to equal the contractual life of the options. The dividend yield rate was based upon recent historical dividends paid on shares.
Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense related to stock options was $198,000 for the three months ended March 31, 2020 compared to $136,000 for the same period of 2019. As of March 31, 2020, a total of 62,625 stock options were exercisable and the weighted average years to expiration was 8.67 years. The fair value of options granted during the three months ended March 31, 2020 was $1,343,000 or $5.63 per award. Total unrecognized compensation cost for non-vested options was $2,642,000 and will be recognized over their weighted average remaining vesting period of 1.66 years.
Note 13. Leases
The following table shows finance lease right of use assets and finance lease liabilities as of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Statement of Financial Condition classification
|
|
March 31, 2020
|
|
December 31, 2019
|
Finance lease right of use assets
|
|
Premises and equipment, net
|
|
$
|
5,406
|
|
|
$
|
5,456
|
|
Finance lease liabilities
|
|
Long-term borrowings
|
|
5,570
|
|
|
5,587
|
|
The following table shows the components of finance and operating lease expense for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2020
|
|
2019
|
|
|
|
|
|
Finance Lease Cost:
|
|
|
|
|
Amortization of right-of-use asset
|
|
$
|
50
|
|
|
$
|
65
|
|
Interest expense
|
|
53
|
|
|
56
|
|
Operating lease cost
|
|
91
|
|
|
88
|
|
Variable lease cost
|
|
—
|
|
|
1
|
|
Total Lease Cost
|
|
$
|
194
|
|
|
$
|
210
|
|
A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Operating
|
|
Finance
|
2020
|
|
$
|
215
|
|
|
$
|
211
|
|
2021
|
|
291
|
|
|
282
|
|
2022
|
|
298
|
|
|
283
|
|
2023
|
|
273
|
|
|
284
|
|
2024
|
|
263
|
|
|
290
|
|
2025 and thereafter
|
|
3,176
|
|
|
8,004
|
|
Total undiscounted cash flows
|
|
4,516
|
|
|
9,354
|
|
Discount on cash flows
|
|
(1,217
|
)
|
|
(3,784
|
)
|
Total lease liability
|
|
$
|
3,299
|
|
|
$
|
5,570
|
|
The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of March 31, 2020.
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Finance
|
Weighted-average term (years)
|
|
18.8
|
|
|
27.9
|
|
Weighted-average discount rate
|
|
3.51
|
%
|
|
3.77
|
%
|
Note 14. Reclassification of Comparative Amounts
Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.
NOTE 15. Subsequent Events
All events subsequent to the date of the consolidated financial statements through May 8, 2020, and for which U.S. GAAP requires adjustment or disclosure, have been adjusted or disclosed, including that the 2019 novel coronavirus (or COVID-19) has adversely affected, and may continue to adversely affect, economic activity globally, nationally, and locally. In response to COVID-19, among other things, the Company has incurred loan rate modifications and payment deferrals of up to 90 days. For further discussion, see COVID-19 Impact section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the effects of health emergencies, including the spread of infectious diseases, or (vi) the effect of changes in the business cycle and downturns in the local, regional or national economies; and (vi) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 and in other filings made by the Company under the Securities Exchange Act of 1934.
You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.