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EX-32.1 - SECTION 350 CERTIFICATIONS - CITIZENS FINANCIAL SERVICES INCcertification.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - CITIZENS FINANCIAL SERVICES INCcfocert.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - CITIZENS FINANCIAL SERVICES INCceocert.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020
Or

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

For the transition period from_____________________ to ___________________

Commission file number 0‑13222

CITIZENS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

            PENNSYLVANIA                               23‑2265045
   (State or other jurisdiction of incorporation or organization)  (I.R.S. Employer Identification No.)

15 South Main Street
Mansfield, Pennsylvania 16933
(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (570) 662‑2121

N/A
(Former Name, former address and former fiscal year, if changed since last report)

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

 
 
 
 
 
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes __X__ No_____

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

Large accelerated filer                                                                                    ____                                                      Accelerated filer  _X__


Non-accelerated filer                                                                      ____                                                      Smaller reporting company                                                                                    _X__

Emerging growth company                                                                                    ____

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

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

The number of outstanding shares of the Registrant’s Common Stock, as of April 30, 2020, was 3,879,378.



                               
Citizens Financial Services, Inc.
Form 10-Q

INDEX

   
PAGE
Part I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited):
 
 
Consolidated Balance Sheet as of March 31, 2020 and December 31, 2019
1
 
Consolidated Statement of Income for the Three months Ended March 31, 2020 and 2019
2
 
Consolidated Statement of Comprehensive Income for the Three months ended March 31, 2020 and 2019
3
 
Consolidated Statement of Changes in Stockholders’ Equity for the Three months ended March 31, 2020 and 2019
4
 
Consolidated Statement of Cash Flows for the Three months ended March 31, 2020 and 2019
5
 
Notes to Consolidated Financial Statements
6-28
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29-48
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
Item 4.
Controls and Procedures
48
     
Part II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
48
Item 1A.
Risk Factors
49-50
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
51
Item 3.
Defaults Upon Senior Securities
51
Item 4.
Mine Safety Disclosures
51
Item 5.
Other Information
51
Item 6.
Exhibits
51-52
 
Signatures
53



CITIZENS FINANCIAL SERVICES, INC.
           
CONSOLIDATED BALANCE SHEET
           
(UNAUDITED)
           
 
           
 
 
March 31,
   
December 31,
 
(in thousands except share data)
 
2020
   
2019
 
ASSETS:
           
Cash and due from banks:
           
  Noninterest-bearing
 
$
20,663
   
$
17,727
 
  Interest-bearing
   
858
     
793
 
Total cash and cash equivalents
   
21,521
     
18,520
 
Interest bearing time deposits with other banks
   
14,506
     
14,256
 
Equity securities
   
649
     
701
 
Available-for-sale securities
   
257,788
     
240,706
 
Loans held for sale
   
2,006
     
815
 
                 
Loans (net of allowance for loan losses:
               
  2020, $14,247 and 2019, $13,845)
   
1,079,473
     
1,101,724
 
                 
Premises and equipment
   
16,222
     
15,933
 
Accrued interest receivable
   
4,587
     
4,555
 
Goodwill
   
23,296
     
23,296
 
Bank owned life insurance
   
28,284
     
28,128
 
Other intangibles
   
1,294
     
1,346
 
Other assets
   
15,103
     
16,359
 
 
               
TOTAL ASSETS
 
$
1,464,729
   
$
1,466,339
 
 
               
LIABILITIES:
               
Deposits:
               
  Noninterest-bearing
 
$
204,489
   
$
203,793
 
  Interest-bearing
   
1,000,661
     
1,007,325
 
Total deposits
   
1,205,150
     
1,211,118
 
Borrowed funds
   
83,563
     
85,117
 
Accrued interest payable
   
906
     
1,088
 
Other liabilities
   
15,187
     
14,242
 
TOTAL LIABILITIES
   
1,304,806
     
1,311,565
 
STOCKHOLDERS' EQUITY:
               
Preferred Stock
               
  $1.00 par value; authorized 3,000,000 shares at March 31, 2020 and
               
   December 31, 2019; none issued in 2020 or 2019
   
-
     
-
 
Common stock
               
$1.00 par value; authorized 25,000,000 shares at March 31, 2020 and December 31, 2019;
         
       issued 3,938,668 at March 31, 2020 and December 31, 2019
   
3,939
     
3,939
 
Additional paid-in capital
   
55,129
     
55,089
 
Retained earnings
   
113,374
     
110,800
 
Accumulated other comprehensive income (loss)
   
2,918
     
(629
)
Treasury stock, at cost:  432,659 shares at March 31, 2020
               
  and 413,607 shares at December 31, 2019
   
(15,437
)
   
(14,425
)
TOTAL STOCKHOLDERS' EQUITY
   
159,923
     
154,774
 
TOTAL LIABILITIES AND
               
   STOCKHOLDERS' EQUITY
 
$
1,464,729
   
$
1,466,339
 
 
               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
         


1


CITIZENS FINANCIAL SERVICES, INC.
           
CONSOLIDATED STATEMENT OF INCOME
           
(UNAUDITED)
           
 
 
Three Months Ended
 
   
March 31,
 
(in thousands, except share and per share data)
 
2020
   
2019
 
INTEREST INCOME:
           
Interest and fees on loans
 
$
13,638
   
$
13,314
 
Interest-bearing deposits with banks
   
95
     
104
 
Investment securities:
               
    Taxable
   
1,107
     
1,108
 
    Nontaxable
   
389
     
357
 
    Dividends
   
110
     
134
 
TOTAL INTEREST INCOME
   
15,339
     
15,017
 
INTEREST EXPENSE:
               
Deposits
   
1,987
     
2,314
 
Borrowed funds
   
462
     
788
 
TOTAL INTEREST EXPENSE
   
2,449
     
3,102
 
NET INTEREST INCOME
   
12,890
     
11,915
 
Provision for loan losses
   
400
     
400
 
NET INTEREST INCOME AFTER
               
    PROVISION FOR LOAN LOSSES
   
12,490
     
11,515
 
NON-INTEREST INCOME:
               
Service charges
   
1,081
     
1,099
 
Trust
   
198
     
232
 
Brokerage and insurance
   
340
     
293
 
Gains on loans sold
   
167
     
99
 
Equity security (losses) gains, net
   
(254
)
   
11
 
Earnings on bank owned life insurance
   
156
     
151
 
Other
   
163
     
148
 
TOTAL NON-INTEREST INCOME
   
1,851
     
2,033
 
NON-INTEREST EXPENSES:
               
Salaries and employee benefits
   
5,414
     
5,029
 
Occupancy
   
526
     
592
 
Furniture and equipment
   
131
     
155
 
Professional fees
   
325
     
442
 
FDIC insurance
   
71
     
111
 
Pennsylvania shares tax
   
275
     
275
 
Amortization of intangibles
   
50
     
66
 
Merger and acquisition
   
376
     
-
 
Software expenses
   
247
     
227
 
ORE expenses
   
32
     
107
 
Other
   
1,474
     
1,318
 
TOTAL NON-INTEREST EXPENSES
   
8,921
     
8,322
 
Income before provision for income taxes
   
5,420
     
5,226
 
Provision for income taxes
   
889
     
821
 
NET INCOME
 
$
4,531
   
$
4,405
 
                 
PER COMMON SHARE DATA:
               
Net Income – Basic
 
$
1.29
   
$
1.25
 
Net Income – Diluted
 
$
1.29
   
$
1.25
 
 
               
Number of shares used in computation – basic
   
3,515,500
     
3,528,466
 
Number of shares used in computation – diluted
   
3,515,500
     
3,528,466
 
 
               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
         

2


CITIZENS FINANCIAL SERVICES, INC.
                       
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                       
(UNAUDITED)
                       
 
 
Three Months Ended
 
 
 
March 31,
 
(in thousands)
       
2020
         
2019
 
Net income
       
$
4,531
         
$
4,405
 
Other comprehensive income (loss):
                           
      Change in unrealized gains (losses) on available
                           
                for sale securities
   
4,334
             
1,328
         
      Income tax effect
   
(910
)
           
(280
)
       
      Change in unrecognized pension cost
   
156
             
61
         
      Income tax effect
   
(33
)
           
(13
)
       
Other comprehensive income (loss), net of tax
           
3,547
             
1,096
 
Comprehensive income
         
$
8,078
           
$
5,501
 
 
                               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
                 

3


CITIZENS FINANCIAL SERVICES, INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
(UNAUDITED)
                                         
 
                         
Accumulated
             
 
             
Additional
         
Other
             
 
 
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
       
(in thousands, except share data)
 
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Total
 
Balance, December 31, 2019
   
3,938,668
   
$
3,939
   
$
55,089
   
$
110,800
   
$
(629
)
 
$
(14,425
)
 
$
154,774
 
Comprehensive income:
                                                       
    Net income
                           
4,531
                     
4,531
 
    Net other comprehensive income (loss)
                                   
3,547
             
3,547
 
Purchase of treasury stock (23,412 shares)
                                           
(1,279
)
   
(1,279
)
Restricted stock, executive  and Board of Director awards (204 shares)
                   
1
                     
12
     
13
 
Restricted stock vesting
                   
40
                             
40
 
Cash dividend reinvestment paid from treasury stock (4,156 shares)
                   
(1
)
   
-
             
255
     
254
 
Cash dividends, $0.55 per share
                           
(1,957
)
                   
(1,957
)
Balance, March 31, 2020
   
3,938,668
   
$
3,939
   
$
55,129
   
$
113,374
   
$
2,918
   
$
(15,437
)
 
$
159,923
 
 
                                                       
Balance, December 31, 2018
   
3,904,212
   
$
3,904
   
$
53,099
   
$
99,727
   
$
(3,921
)
 
$
(13,580
)
 
$
139,229
 
Comprehensive income:
                                                       
    Net income
                           
4,405
                     
4,405
 
    Net other comprehensive income (loss)
                                   
1,096
             
1,096
 
Purchase of treasury stock (5,762 shares)
                                           
(330
)
   
(330
)
Restricted stock vesting
                   
3
                             
3
 
Cash dividends, $0.441 per share
                           
(1,558
)
                   
(1,558
)
Balance, March 31, 2019
   
3,904,212
   
$
3,904
   
$
53,102
   
$
102,574
   
$
(2,825
)
 
$
(13,910
)
 
$
142,845
 
                                                         
   
The accompanying notes are an integral part of these unaudited consolidated financial statements


4



CITIZENS FINANCIAL SERVICES, INC.
           
CONSOLIDATED STATEMENT OF CASH FLOWS
           
(UNAUDITED)
 
Three Months Ended
 
 
 
March 31,
 
(in thousands)
 
2020
   
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
  Net income
 
$
4,531
   
$
4,405
 
  Adjustments to reconcile net income to net
               
   cash provided by operating activities:
               
    Provision for loan losses
   
400
     
400
 
    Depreciation and amortization
   
150
     
183
 
    Amortization and accretion of investment securities
   
120
     
175
 
    Deferred income taxes
   
(284
)
   
464
 
    Equity securities losses (gains), net
   
254
     
(11
)
    Earnings on bank owned life insurance
   
(156
)
   
(151
)
    Originations of loans held for sale
   
(7,043
)
   
(3,880
)
    Proceeds from sales of loans held for sale
   
5,973
     
4,885
 
    Realized gains on loans sold
   
(167
)
   
(99
)
    Increase in accrued interest receivable
   
(32
)
   
(317
)
    (Decrease) increase  in accrued interest payable
   
(182
)
   
16
 
    Other, net
   
1,169
     
(1,313
)
      Net cash provided by operating activities
   
4,733
     
4,757
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Available-for-sale securities:
               
    Proceeds from maturity and principal repayments
   
29,045
     
10,581
 
    Purchase of securities
   
(41,915
)
   
(12,855
)
  Purchase of equity securities
   
(202
)
   
-
 
  Purchase of interest bearing time deposits with other banks
   
(250
)
   
-
 
  Proceeds from redemption of regulatory stock
   
3,300
     
2,580
 
  Purchase of regulatory stock
   
(2,798
)
   
(2,782
)
  Net decrease (increase) in loans
   
22,003
     
(12,908
)
  Purchase of premises and equipment
   
(507
)
   
(105
)
  Proceeds from sale of premises and equipment
   
-
     
1
 
  Proceeds from sale of foreclosed assets held for sale
   
350
     
89
 
      Net cash provided by (used in) investing activities
   
9,026
     
(15,399
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
  Net increase in deposits
   
(5,968
)
   
(3,502
)
  Proceeds from long-term borrowings
   
5,000
     
5,000
 
  Repayments of long-term borrowings
   
-
     
(2,589
)
  Net (decrease) increase in short-term borrowed funds
   
(6,554
)
   
14,658
 
  Purchase of treasury and restricted stock
   
(1,279
)
   
(330
)
  Dividends paid
   
(1,957
)
   
(1,558
)
      Net cash (used in) provided by financing activities
   
(10,758
)
   
11,679
 
          Net increase in cash and cash equivalents
   
3,001
     
1,037
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
18,520
     
16,797
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
21,521
   
$
17,834
 
 
               
Supplemental Disclosures of Cash Flow Information:
               
    Interest paid
 
$
2,631
   
$
3,086
 
    Income taxes paid
 
$
-
   
$
-
 
    Loans transferred to foreclosed property
 
$
-
   
$
3,805
 
    Right of use asset and liability
 
$
-
   
$
1,454
 
 
               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 

5

CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation

Citizens Financial Services, Inc. (individually and collectively with its direct and indirect subsidiaries, the “Company”) is a Pennsylvania corporation and the holding company of its wholly owned subsidiary, First Citizens Community Bank (the “Bank”), and of the Bank’s wholly owned subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1st Realty of PA LLC (“Realty”). The Bank is the wholly owned subsidiary of CZFS Acquisition Company, LLC, which is a wholly owned subsidiary of the Company. Realty was formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer.

The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with U.S. generally accepted accounting principles.  Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  Certain of the prior year amounts have been reclassified to conform with the current year presentation.  Such reclassifications had no effect on net income or stockholders’ equity.  All material inter‑company balances and transactions have been eliminated in consolidation.

In the opinion of management of the Company, the accompanying interim financial statements at March 31, 2020 and for the periods ended March 31, 2020 and 2019 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and of revenues and expenses for the period covered by the Consolidated Income Statement. The financial performance reported for the Company for the three month period ended March 31, 2020 is not necessarily indicative of the results to be expected for the full year.  This information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Note 2 – Revenue Recognition

In accordance with ASC 606, Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold and earnings on bank owned life insurances are not within the scope of ASC 606. These sources of revenue cumulatively comprise 90.0% and 89.8% of the total revenue of the Company for the three months ended March 31, 2020 and 2019, respectively. The main types of noninterest income within the scope of the standard are as follows:

Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.

Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer’s assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction.

6


Gains and losses on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.

Brokerage and insurance – Fees includes commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company’s performance obligation under the contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer’s portfolio and is not dependent on certain return or performance level of the customer’s portfolio. Fees for these services are billed monthly and are recorded as revenue at the end of the month for which the wealth management service has been performed. Other performance obligations (such as the delivery of account statements to customers) are generally considered immaterial to the overall transaction price.

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the three months ended March 31, 2020 and 2019 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

  
 
Three Months Ended
 
  
 
March 31,
 
Revenue stream
 
2020
   
2019
 
Service charges on deposit accounts
           
Overdraft fees
 
$
359
     
358
 
Statement fees
   
56
     
51
 
Interchange revenue
   
522
     
540
 
ATM income
   
83
     
91
 
Other service charges
   
61
     
59
 
Total Service Charges
   
1,081
     
1,099
 
Trust
   
198
     
232
 
Brokerage and insurance
   
340
     
293
 
Other
   
107
     
111
 
Total
 
$
1,726
   
$
1,735
 

Note 3 - Earnings per Share

The following table sets forth the computation of earnings per share.

7


   
Three Months Ended
 
   
March 31,
 
   
2020
   
2019
 
Net income applicable to common stock
 
$
4,531,000
   
$
4,405,000
 
 
               
Basic earnings per share computation
               
Weighted average common shares outstanding
   
3,515,500
     
3,528,466
 
Earnings per share – basic
 
$
1.29
   
$
1.25
 
 
               
Diluted earnings per share computation
               
Weighted average common shares outstanding for basic earnings per share
   
3,515,500
     
3,528,466
 
Add: Dilutive effects of restricted stock
   
-
     
-
 
Weighted average common shares outstanding for dilutive earnings per share
   
3,515,500
     
3,528,466
 
Earnings per share – diluted
 
$
1.29
   
$
1.25
 

For the three months ended March 31, 2020 and 2019, there were 7,564 and 6,705 shares, respectively, related to the restricted stock plan that were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had per share prices ranging from $52.44-$62.93 for the three month period ended March 31, 2020 and per share prices ranging from $47.81-$62.93 for the three month period ended March 31, 2019.

Note 4 – Investments

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at March 31, 2020 and December 31, 2019 were as follows (in thousands):

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
March 31, 2020
 
Cost
   
Gains
   
Losses
   
Value
 
Available-for-sale securities:
                       
  U.S. agency securities
 
$
74,681
   
$
2,869
   
$
(40
)
 
$
77,510
 
  U.S. treasury securities
   
27,406
     
907
     
-
     
28,313
 
  Obligations of state and
                               
    political subdivisions
   
73,276
     
1,650
     
(148
)
   
74,778
 
  Corporate obligations
   
3,250
     
97
     
-
     
3,347
 
  Mortgage-backed securities in
                               
    government sponsored entities
   
71,942
     
1,919
     
(21
)
   
73,840
 
Total available-for-sale securities
 
$
250,555
   
$
7,442
   
$
(209
)
 
$
257,788
 
                                 
December 31, 2019
                               
Available-for-sale securities:
                               
  U.S. agency securities
 
$
83,410
   
$
1,523
   
$
(70
)
 
$
84,863
 
  U.S. treasury securities
   
27,394
     
267
     
-
     
27,661
 
  Obligations of state and
                               
    political subdivisions
   
60,667
     
865
     
(77
)
   
61,455
 
  Corporate obligations
   
3,250
     
78
     
-
     
3,328
 
  Mortgage-backed securities in
                               
    government sponsored entities
   
63,086
     
468
     
(155
)
   
63,399
 
Total available-for-sale securities
 
$
237,807
   
$
3,201
   
$
(302
)
 
$
240,706
 

The following table shows the Company’s gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, which individual securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019 (in thousands). As of March 31, 2020, the Company owned 29 securities whose fair value was less than their cost basis.

8



   
Less than Twelve Months
   
Twelve Months or Greater
   
Total
 
         
Gross
         
Gross
         
Gross
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 March 31, 2020
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
U.S. agency securities
 
$
3,765
   
$
(40
)
 
$
-
   
$
-
   
$
3,765
   
$
(40
)
Obligations of state and
                                               
    political subdivisions
   
13,631
     
(148
)
   
-
     
-
     
13,631
     
(148
)
Mortgage-backed securities in
                                               
   government sponsored entities
   
3,870
     
(6
)
   
3,886
     
(15
)
   
7,756
     
(21
)
    Total securities
 
$
21,266
   
$
(194
)
 
$
3,886
   
$
(15
)
 
$
25,152
   
$
(209
)
                                                 
                                                 
December 31, 2019 
                                               
U.S. agency securities
 
$
14,587
   
$
(63
)
 
$
13,094
   
$
(7
)
 
$
27,681
   
$
(70
)
Obligations of states and
                                               
     political subdivisions
   
7,508
     
(75
)
   
1,507
     
(2
)
   
9,015
     
(77
)
Mortgage-backed securities in
                                               
   government sponsored entities
   
27,737
     
(97
)
   
9,559
     
(58
)
   
37,296
     
(155
)
    Total securities
 
$
49,832
   
$
(235
)
 
$
24,160
   
$
(67
)
 
$
73,992
   
$
(302
)

As of March 31, 2020 and December 31, 2019, the Company’s investment securities portfolio contained unrealized losses on agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, obligations of states and political subdivisions and mortgage backed securities issued by government sponsored entities. For fixed maturity investments management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or issuer-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

There were no sales of available for sale securities during the three months ended March 31, 2020 and 2019.

The following table presents the net gains on the Company’s equity investments recognized in earnings during the three month periods ended March 31, 2020 and 2019, and the portion of unrealized gains for the period that relates to equity investments held at March 31, 2020 and 2019 (in thousands):

 
 
Three Months Ended
 
 
 
March 31,
 
Equity Securities
 
2020
   
2019
 
Net (losses) gains recognized in equity securities during the period
 
$
(254
)
 
$
11
 
Less: Net gains realized on the sale of equity securities during the period
   
-
     
-
 
Net unrealized  (losses) gains
 
$
(254
)
 
$
11
 


Investment securities with an approximate carrying value of $203.1 million and $209.1 million at March 31, 2020 and December 31, 2019, respectively, were pledged to secure public funds, certain other deposits and borrowing lines.

9

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.   The amortized cost and fair value of debt securities (excludes equity securities) at March 31, 2020, by contractual maturity, are shown below (in thousands):

   
Amortized
       
 
 
Cost
   
Fair Value
 
Available-for-sale debt securities:
           
  Due in one year or less
 
$
17,816
   
$
17,979
 
  Due after one year through five years
   
71,725
     
75,025
 
  Due after five years through ten years
   
49,897
     
51,081
 
  Due after ten years
   
111,117
     
113,703
 
Total
 
$
250,555
   
$
257,788
 

Note 5 – Loans

The Company grants loans primarily to customers throughout north central, central and south central Pennsylvania and the southern tier of New York. The recently completed MidCoast acquisition has expanded our lending market into Wilmington and Dover, Delaware.   Although the Company had a diversified loan portfolio at March 31, 2020 and December 31, 2019, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of March 31, 2020 and December 31, 2019 (in thousands):

March 31, 2020
 
Total Loans
   
Individually evaluated for impairment
   
Loans acquired with deteriorated credit quality (PCI)
   
Collectively evaluated for impairment
 
Real estate loans:
                       
     Residential
 
$
216,179
   
$
1,220
   
$
23
   
$
214,936
 
     Commercial
   
338,490
     
11,480
     
1,195
     
325,815
 
     Agricultural
   
300,606
     
3,893
     
-
     
296,713
 
     Construction
   
17,926
     
-
     
-
     
17,926
 
Consumer
   
9,533
     
3
     
-
     
9,530
 
Other commercial loans
   
71,038
     
1,842
     
30
     
69,166
 
Other agricultural loans
   
46,170
     
1,293
     
-
     
44,877
 
State and political subdivision loans
   
93,778
     
-
     
-
     
93,778
 
Total
   
1,093,720
     
19,731
     
1,248
     
1,072,741
 
Less: allowance for loan losses
   
14,247
     
753
     
-
     
13,494
 
Net loans
 
$
1,079,473
   
$
18,978
   
$
1,248
   
$
1,059,247
 
 
                               
December 31 , 2019
                               
Real estate loans:
                               
     Residential
 
$
217,088
   
$
1,166
   
$
23
   
$
215,899
 
     Commercial
   
342,023
     
11,537
     
1,210
     
329,276
 
     Agricultural
   
311,464
     
3,782
     
-
     
307,682
 
     Construction
   
15,519
     
-
     
-
     
15,519
 
Consumer
   
9,947
     
4
     
-
     
9,943
 
Other commercial loans
   
69,970
     
1,902
     
49
     
68,019
 
Other agricultural loans
   
55,112
     
1,281
     
-
     
53,831
 
State and political subdivision loans
   
94,446
     
-
     
-
     
94,446
 
Total
   
1,115,569
     
19,672
     
1,282
     
1,094,615
 
Less: allowance for loan losses
   
13,845
     
735
     
-
     
13,110
 
Net loans
 
$
1,101,724
   
$
18,937
   
$
1,282
   
$
1,081,505
 

Upon acquisition, the Company evaluates whether an acquired loan is within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI, defined above, loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans’ collateral. The carrying value of PCI loans was $1,248,000 and $1,282,000 at March 31, 2020 and December 31, 2019, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows.

10

Changes in the accretable yield for PCI loans were as follows for the three months ended March 31, 2020 and 2019, respectively (in thousands):

 
 
Three months ended
 
 
 
March 31
 
 
 
2020
   
2019
 
Balance at beginning of period
 
$
89
   
$
104
 
Accretion
   
(1
)
   
(2
)
Balance at end of period
 
$
88
   
$
102
 

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30 (in thousands):

   
March 31, 2020
   
December 31, 2019
 
Outstanding balance
 
$
4,057
   
$
4,072
 
Carrying amount
   
1,248
     
1,282
 

The segments of the Company’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equity loans are consumer purpose installment loans or lines of credit with terms of 15 years or less secured by a mortgage which is often a second lien on residential real estate. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential, commercial or agricultural real estate used during the construction phase of residential, commercial or agricultural projects. Consumer loans are typically unsecured or primarily secured by assets other than real estate and overdraft lines of credit are typically secured by customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non-real estate collateral. State and political subdivision loans are loans to state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Management considers other commercial loans, other agricultural loans, state and political subdivision loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer’s results of operations and cash flows or if the loan is modified in a troubled debt restructuring. In addition, certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired. Impaired loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allocation of the allowance for loan losses or a charge-off to the allowance for loan losses.

The following table includes the recorded investment and unpaid principal balances for impaired loan receivables by class, excluding PCI loans, with the associated allowance amount, if applicable (in thousands):

11


 
       
Recorded
   
Recorded
             
 
 
Unpaid
   
Investment
   
Investment
   
Total
       
 
 
Principal
   
With No
   
With
   
Recorded
   
Related
 
March 31, 2020
 
Balance
   
Allowance
   
Allowance
   
Investment
   
Allowance
 
Real estate loans:
                             
     Mortgages
 
$
1,282
   
$
776
   
$
300
   
$
1,076
   
$
20
 
     Home Equity
   
166
     
80
     
64
     
144
     
11
 
     Commercial
   
12,000
     
10,668
     
812
     
11,480
     
335
 
     Agricultural
   
4,046
     
1,549
     
2,344
     
3,893
     
86
 
Consumer
   
3
     
3
     
-
     
3
     
-
 
Other commercial loans
   
2,459
     
1,499
     
343
     
1,842
     
148
 
Other agricultural loans
   
1,381
     
129
     
1,164
     
1,293
     
153
 
Total
 
$
21,337
   
$
14,704
   
$
5,027
   
$
19,731
   
$
753
 

 
       
Recorded
   
Recorded
             
 
 
Unpaid
   
Investment
   
Investment
   
Total
       
 
 
Principal
   
With No
   
With
   
Recorded
   
Related
 
December 31, 2019
 
Balance
   
Allowance
   
Allowance
   
Investment
   
Allowance
 
Real estate loans:
                             
     Mortgages
 
$
1,212
   
$
794
   
$
223
   
$
1,017
   
$
20
 
     Home Equity
   
170
     
83
     
66
     
149
     
12
 
     Commercial
   
12,070
     
10,723
     
814
     
11,537
     
251
 
     Agricultural
   
3,900
     
1,580
     
2,202
     
3,782
     
151
 
Consumer
   
4
     
4
     
-
     
4
     
-
 
Other commercial loans
   
2,517
     
1,555
     
347
     
1,902
     
147
 
Other agricultural loans
   
1,347
     
126
     
1,155
     
1,281
     
154
 
Total
 
$
21,220
   
$
14,865
   
$
4,807
   
$
19,672
   
$
735
 

The following tables includes the average balance of impaired loan receivables by class and the income recognized on these receivables for the three month periods ended March 31, 2020 and 2019(in thousands):
 
 
For the Three Months Ended
 
 
 
March 31, 2020
   
March 31, 2019
 
 
             
Interest
               
Interest
 
 
 
Average
   
Interest
   
Income
   
Average
   
Interest
   
Income
 
 
 
Recorded
   
Income
   
Recognized
   
Recorded
   
Income
   
Recognized
 
 
 
Investment
   
Recognized
   
Cash Basis
   
Investment
   
Recognized
   
Cash Basis
 
Real estate loans:
                                   
     Mortgages
 
$
1,031
   
$
5
   
$
-
   
$
1,103
   
$
4
   
$
-
 
     Home Equity
   
146
     
2
     
-
     
85
     
1
     
-
 
     Commercial
   
11,486
     
104
     
2
     
12,548
     
119
     
6
 
     Agricultural
   
3,777
     
21
     
-
     
5,575
     
32
     
-
 
Consumer
   
3
     
-
     
-
     
-
     
-
     
-
 
Other commercial loans
   
1,839
     
1
     
-
     
2,137
     
1
     
-
 
Other agricultural loans
   
1,276
     
2
     
-
     
1,431
     
2
     
-
 
Total
 
$
19,558
   
$
135
   
$
2
   
$
22,879
   
$
159
   
$
6
 

Credit Quality Information

For commercial real estate, agricultural real estate, construction, other commercial, other agricultural and state and political subdivision loans, management uses a nine grade internal risk rating system to monitor and assess credit quality. The first five categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:
12

Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.
Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.
Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.
Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management.  All commercial, agricultural and state and political relationships over $500,000 are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to: 1) review a minimum of 50% of the dollar volume of the commercial, agricultural and municipal loan portfolios on an annual basis, 2) review a sample of new loans originated for over $1.0 million in the last year, 3) review a sample of borrowers with commitments greater than or equal to $1.0 million,  4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of March 31, 2020 and December 31, 2019 (in thousands):

March 31, 2020
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Ending Balance
 
Real estate loans:
                                   
     Commercial
 
$
326,415
   
$
4,256
   
$
7,780
   
$
39
   
$
-
   
$
338,490
 
     Agricultural
   
276,091
     
14,648
     
9,867
     
-
     
-
     
300,606
 
     Construction
   
17,926
     
-
     
-
     
-
     
-
     
17,926
 
Other commercial loans
   
68,042
     
986
     
1,948
     
62
     
-
     
71,038
 
Other agricultural loans
   
42,917
     
1,030
     
2,223
     
-
     
-
     
46,170
 
State and political
                                               
   subdivision loans
   
93,369
     
-
     
409
     
-
     
-
     
93,778
 
Total
 
$
824,760
   
$
20,920
   
$
22,227
   
$
101
   
$
-
   
$
868,008
 

December 31, 2019
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Ending Balance
 
Real estate loans:
                                   
     Commercial
 
$
329,831
   
$
4,305
   
$
7,848
   
$
39
   
$
-
   
$
342,023
 
     Agricultural
   
287,044
     
14,261
     
10,159
     
-
     
-
     
311,464
 
     Construction
   
15,519
     
-
     
-
     
-
     
-
     
15,519
 
Other commercial loans
   
66,880
     
984
     
2,042
     
64
     
-
     
69,970
 
Other agricultural loans
   
51,711
     
1,077
     
2,324
     
-
     
-
     
55,112
 
State and political
                                               
   subdivision loans
   
93,993
     
-
     
453
     
-
     
-
     
94,446
 
Total
 
$
844,978
   
$
20,627
   
$
22,826
   
$
103
   
$
-
   
$
888,534
 

For residential real estate mortgages, home equity and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days and still accruing. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 2020 and December 31, 2019 (in thousands):

13

March 31, 2020
 
Performing
   
Non-performing
   
PCI
   
Total
 
Real estate loans:
                       
     Mortgages
 
$
156,630
   
$
915