Company Quick10K Filing
Quick10K
Citizens & Northern
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$28.65 14 $392
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-12 Regulation FD, Exhibits
8-K 2019-04-18 Shareholder Vote
8-K 2019-04-18 Earnings, Other Events, Exhibits
8-K 2019-04-18 Regulation FD, Exhibits
8-K 2019-01-17 Earnings, Other Events, Exhibits
8-K 2018-12-20 Officers, Exhibits
8-K 2018-10-18 Earnings, Other Events, Exhibits
8-K 2018-09-27 Enter Agreement, Regulation FD, Exhibits
8-K 2018-08-24 Officers, Exhibits
8-K 2018-08-08 Regulation FD, Exhibits
8-K 2018-07-19 Earnings, Other Events, Exhibits
8-K 2018-06-11 Regulation FD, Exhibits
8-K 2018-04-19 Shareholder Vote
8-K 2018-01-18 Earnings, Other Events, Exhibits
PRU Prudential Financial 40,940
RPAI Retail Properties of America 2,670
RUBY Rubius Therapeutics 1,190
GRC Gorman Rupp 860
HCFT Hunt Companies Finance Trust 82
EDUC Educational Development 68
IDXG Interpace Diagnostics Group 28
CHCR Advanzeon 0
ALLM Alliance Bioenergy Plus 0
NLST Netlist 0
CZNC 2019-03-31
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6. Exhibits
EX-31.1 tv520752_ex31-1.htm
EX-31.2 tv520752_ex31-2.htm
EX-32 tv520752_ex32.htm

Citizens & Northern Earnings 2019-03-31

CZNC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv520752_10q.htm FORM 10-Q

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended March 31, 2019

 

or

 

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

 

For the transition period from _______________ to _________________________.

 

Commission file number: 000-16084

 

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

 

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

 

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

 

570-724-3411

(Registrant's telephone number including area code)

  

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

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

 

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

 

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

 

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

  

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

 

Common Stock ($1.00 par value) 13,674,399 Shares Outstanding on May 2, 2019

 

 

 

 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CITIZENS & NORTHERN CORPORATION  
Index  
   
Part I.  Financial Information  
   
Item 1.  Financial Statements  
   
Consolidated Balance Sheets (Unaudited) – March 31, 2019 and December 31, 2018 Page 3
   
Consolidated Statements of Income (Unaudited) – Three-month Periods Ended March 31, 2019 and 2018 Page 4
   
 Consolidated Statements of Comprehensive Income (Unaudited) - Three-month Periods Ended March 31, 2019 and 2018 Page 5
   
Consolidated Statements of Cash Flows (Unaudited) – Three-month Periods Ended March 31, 2019 and 2018 Page 6
   
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month Periods Ended March 31, 2019 and 2018 Page 7
   
Notes to Unaudited Consolidated Financial Statements Pages 8 – 32
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 33 – 53
   
Item 4.  Controls and Procedures Page 53
   
Part II.  Other Information Pages 54 – 55
   
Signatures Page 56
   
Exhibit 31.1.  Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer Page 57
   
Exhibit 31.2.  Rule 13a-14(a)/15d-14(a) Certification -Chief Financial Officer Page 58
   
Exhibit 32.  Section 1350 Certifications Page 59

 

  2 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

 

  March 31,   December 31, 
(In Thousands, Except Share and Per Share Data) (Unaudited)  2019   2018 
ASSETS        
Cash and due from banks:          
Noninterest-bearing  $20,667   $20,970 
Interest-bearing   23,335    16,517 
Total cash and due from banks   44,002    37,487 
Available-for-sale debt securities, at fair value   357,646    363,273 
Marketable equity security   962    950 
Loans held for sale   0    213 
           
Loans receivable   825,392    827,563 
Allowance for loan losses   (8,256)   (9,309)
Loans, net   817,136    818,254 
           
Bank-owned life insurance   18,331    19,035 
Accrued interest receivable   4,270    3,968 
Bank premises and equipment, net   14,663    14,592 
Foreclosed assets held for sale   1,875    1,703 
Deferred tax asset, net   2,696    4,110 
Intangible assets - Goodwill and core deposit intangibles   11,949    11,951 
Other assets   16,470    15,357 
TOTAL ASSETS  $1,290,000   $1,290,893 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $274,759   $272,520 
Interest-bearing   765,152    761,252 
Total deposits   1,039,911    1,033,772 
Short-term borrowings   5,132    12,853 
Long-term borrowings   32,844    35,915 
Accrued interest and other liabilities   9,986    10,985 
TOTAL LIABILITIES   1,087,873    1,093,525 
           
STOCKHOLDERS' EQUITY          
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued   0    0 
Common stock, par value $1.00 per share; authorized 20,000,000 shares; issued 12,655,171; outstanding 12,393,044 at March 31, 2019 and 12,319,330 December 31, 2018   12,655    12,655 
Paid-in capital   71,963    72,602 
Retained earnings   123,155    122,643 
Treasury stock, at cost; 262,127 shares at March 31, 2019 and 335,841 shares at December 31, 2018   (5,005)   (6,362)
Accumulated other comprehensive loss   (641)   (4,170)
TOTAL STOCKHOLDERS' EQUITY   202,127    197,368 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY  $1,290,000   $1,290,893 

 

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

 

  3 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

 

   3 Months Ended 
  March 31,   March 31, 
(In Thousands Except Per Share Data) (Unaudited)  2019   2018 
INTEREST INCOME          
Interest and fees on loans:          
Taxable  $9,948   $9,201 
Tax-exempt   564    556 
Interest on mortgages held for sale   3    2 
Interest on balances with depository institutions   116    50 
Income from available-for-sale debt securities:          
Taxable   1,834    1,363 
Tax-exempt   594    713 
Dividends on marketable equity security   6    5 
Total interest and dividend income   13,065    11,890 
INTEREST EXPENSE          
Interest on deposits   1,053    729 
Interest on short-term borrowings   79    199 
Interest on long-term borrowings   218    65 
Total interest expense   1,350    993 
Net interest income   11,715    10,897 
(Credit) provision for loan losses   (957)   292 
Net interest income after (credit) provision for loan losses   12,672    10,605 
NONINTEREST INCOME          
Trust and financial management revenue   1,360    1,422 
Brokerage revenue   307    212 
Insurance commissions, fees and premiums   30    44 
Service charges on deposit accounts   1,250    1,204 
Service charges and fees   79    86 
Interchange revenue from debit card transactions   643    579 
Net gains from sale of loans   87    184 
Loan servicing fees, net   28    128 
Increase in cash surrender value of life insurance   92    97 
Other noninterest income   530    450 
Total noninterest income   4,406    4,406 
NONINTEREST EXPENSE          
Salaries and wages   4,493    4,124 
Pensions and other employee benefits   1,618    1,610 
Occupancy expense, net   657    637 
Furniture and equipment expense   301    271 
Data processing expenses   803    641 
Automated teller machine and interchange expense   189    322 
Pennsylvania shares tax   347    336 
Professional fees   424    276 
Telecommunications   164    233 
Directors' fees   183    184 
Other noninterest expense   1,828    1,261 
Total noninterest expense   11,007    9,895 
Income before income tax provision   6,071    5,116 
Income tax provision   981    741 
NET INCOME  $5,090   $4,375 
EARNINGS PER COMMON SHARE - BASIC  $0.41   $0.36 
EARNINGS PER COMMON SHARE - DILUTED  $0.41   $0.36 

 

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

 

  4 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income

 

   Three Months Ended 
  March 31,   March 31, 
(In Thousands) (Unaudited)  2019   2018 
Net income  $5,090   $4,375 
           
Unrealized holding gains (losses) on available-for-sale debt securities   4,261    (4,839)
           
Unfunded pension and postretirement obligations:          
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain   214    93 
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost   (8)   (5)
Other comprehensive gain on unfunded retirement obligations   206    88 
           
Other comprehensive income (loss) before income tax   4,467    (4,751)
Income tax related to other comprehensive (income) loss   (938)   997 
           
Net other comprehensive income (loss)   3,529    (3,754)
           
Comprehensive income  $8,619   $621 

 

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

 

  5 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   3 Months Ended 
  March 31,   March 31, 
(In Thousands) (Unaudited)  2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $5,090   $4,375 
Adjustments to reconcile net income to net cash provided by operating activities:          
(Credit) provision for loan losses   (957)   292 
Unrealized (gain) loss on marketable equity security   (12)   15 
Depreciation and amortization expense   425    412 
Accretion and amortization on securities, net   209    268 
Increase in cash surrender value of life insurance   (92)   (97)
Stock-based compensation and other expense   229    183 
Deferred income taxes   476    166 
Decrease (increase) in fair value of servicing rights   77    (20)
Gains on sales of loans, net   (87)   (184)
Origination of loans held for sale   (2,259)   (5,327)
Proceeds from sales of loans held for sale   2,539    6,001 
(Increase) decrease in accrued interest receivable and other assets   (649)   757 
Decrease in accrued interest payable and other liabilities   (2,217)   (482)
Other   48    (29)
Net Cash Provided by Operating Activities   2,820    6,330 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from maturities of certificates of deposit   100    820 
Purchase of certificates of deposit   0    (100)
Proceeds from calls and maturities of available-for-sale securities   18,613    10,516 
Purchase of available-for-sale securities   (8,934)   (312)
Redemption of Federal Home Loan Bank of Pittsburgh stock   2,308    2,990 
Purchase of Federal Home Loan Bank of Pittsburgh stock   (1,753)   (1,706)
Net decrease (increase) in loans   1,681    (1,805)
Proceeds from bank owned life insurance   796    0 
Purchase of premises and equipment   (496)   (467)
Proceeds from sale of foreclosed assets   176    603 
Other   46    51 
Net Cash Provided by Investing Activities   12,537    10,590 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net increase in deposits   6,139    9,632 
Net decrease in short-term borrowings   (7,721)   (35,284)
Proceeds from long-term borrowings   5,000    9,000 
Repayments of long-term borrowings   (8,071)   (67)
Sale of treasury stock   162    63 
Repurchase of restricted stock for tax withholding   (189)   0 
Common dividends paid   (4,062)   (2,928)
Net Cash Used in Financing Activities   (8,742)   (19,584)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   6,615    (2,664)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR   32,827    37,004 
CASH AND CASH EQUIVALENTS, END OF YEAR  $39,442   $34,340 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Assets acquired through foreclosure of real estate loans  $399   $72 
Accrued purchase of available-for-sale debt security  $0   $507 
Interest paid  $1,377   $978 
Income taxes paid  $50   $125 

 

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

 

  6 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Consolidated Statements of Changes in Stockholders' Equity

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

 

                       Accumulated         
                       Other         
   Common   Treasury   Common   Paid-in   Retained   Comprehensive   Treasury     
   Shares   Shares   Stock   Capital   Earnings   Loss   Stock   Total 
                                 
Three Months Ended March 31, 2019                                        
Balance, December 31, 2018   12,655,171    335,841   $12,655   $72,602   $122,643   $(4,170)  $(6,362)  $197,368 
Net income                       5,090              5,090 
Other comprehensive income, net                            3,529         3,529 
Cash dividends declared on common stock, $.37 per share                       (4,578)             (4,578)
Shares issued for dividend reinvestment plan        (20,487)        125              391    516 
Shares issued from treasury and redeemed related to exercise of stock options        (12,638)        (78)             240    162 
Restricted stock granted        (48,137)        (918)             918    0 
Forfeiture of restricted stock        156         3              (3)   0 
Stock-based compensation expense                  229                   229 
Repurchase of restricted stock for tax withholding        7,392                        (189)   (189)
Balance, March 31, 2019   12,655,171    262,127   $12,655   $71,963   $123,155   $(641)  $(5,005)  $202,127 
                                         
Three Months Ended March 31, 2018                                        
Balance, December 31, 2017   12,655,171    440,646   $12,655   $72,035   $113,608   $(1,507)  $(8,348)  $188,443 
Impact of change in enacted income tax rate (a)                       325    (325)        0 
Impact of change in method of premium amortization of callable debt securities (b)                       (26)   26         0 
Impact of change in method of accounting for marketable equity security (c)                       (22)   22         0 
Net income                       4,375              4,375 
Other comprehensive loss, net                            (3,754)        (3,754)
Cash dividends declared on common stock, $.27 per share                       (3,307)             (3,307)
Shares issued for dividend reinvestment Plan        (16,371)        69              310    379 
Shares issued from treasury and redeemed related to exercise of stock options        (4,198)        (16)             79    63 
Restricted stock granted        (34,552)        (655)             655    0 
Forfeiture of restricted stock        5,362         100              (100)   0 
Stock-based compensation expense                  183                   183 
Balance, March 31, 2018   12,655,171    390,887   $12,655   $71,716   $114,953   $(5,538)  $(7,404)  $186,382 

 

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

 

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

 

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

 

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

 

  7 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Notes to Unaudited Consolidated Financial Statements

 

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

 

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

 

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

 

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

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

Recent Accounting Pronouncements - Adopted

 

Effective January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842), as modified by subsequent ASUs, which changed GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. Topic 842, as modified, does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from prior U.S. GAAP. For leases with a term of 12 months or less, the Corporation made an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. The Corporation elected to adopt this pronouncement using an optional transition method resulting in recognition of right-of-use assets and lease liabilities for operating leases of $1,132,000 on its consolidated balance sheets at January 1, 2019, with no adjustment to stockholders’ equity and no material impact to its consolidated statements of income. At March 31, 2019, right-of-use assets of $1,424,000 were included in other assets, and the related liabilities totaling the same amount were included in accrued interest and other liabilities, in the unaudited consolidated balance sheets.

 

Effective January 1, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The Corporation applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Corporation’s interest income and certain noninterest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Corporation’s largest sources of noninterest revenue which are subject to the guidance include Trust and financial management revenue, service charges on deposit accounts and interchange revenue from debit card transactions. Adoption of ASU 2014-09 did not change the timing and pattern of the Corporation’s revenue recognition related to scoped-in noninterest income. Disclosures required by the ASU have been included in Note 11.

 

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

 

  8 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

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

 

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

 

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

 

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

 

·Adoption of ASU 2016-01 also resulted in the use of an exit price to determine the fair value of financial instruments not measured at fair value in the consolidated balance sheets. Further information regarding valuation of financial instruments is provided in Note 5.

 

Recently Issued But Not Yet Effective Accounting Pronouncements

 

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 will be effective for the Corporation beginning in the first quarter 2020. Earlier adoption was permitted beginning in the first quarter 2019; however, the Corporation did not early adopt the ASU. The Corporation has formed a cross functional management team and is working with an outside vendor assessing alternative loss estimation methodologies, the Corporation’s data and system needs and the impact of loans acquired in the merger with Monument Bancorp, Inc. (described in more detail in Note 12) to evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations. The Corporation will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of January 1, 2020.

 

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

 

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

 

  9 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

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

 

2. PER SHARE DATA

 

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

 

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

 

  10 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

   3 Months Ended 
   March 31,   March 31, 
(In Thousands, Except Share and Per Share Data)  2019   2018 
Basic          
Net income  $5,090   $4,375 
Less: Dividends and undistributed earnings allocated to participating securities   (27)   (23)
Net income attributable to common shares  $5,063   $4,352 
Basic weighted-average common shares outstanding   12,308,862    12,189,471 
Basic earnings per common share (a)  $0.41   $0.36 
           
Diluted          
Net income attributable to common shares  $5,063   $4,352 
Basic weighted-average common shares outstanding   12,308,862    12,189,471 
Dilutive effect of potential common stock arising from stock options   25,445    32,785 
Diluted weighted-average common shares outstanding   12,334,307    12,222,256 
Diluted earnings per common share (a)  $0.41   $0.36 
Weighted-average nonvested restricted shares outstanding   65,639    62,922 

 

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

 

Anti-dilutive stock options are excluded from net income per share calculations. There were no anti-dilutive instruments in the first quarter of 2019 or 2018.

 

3. COMPREHENSIVE INCOME

 

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

 

  Before-Tax   Income Tax   Net-of-Tax 
(In Thousands)  Amount   Effect   Amount 
Three Months Ended March 31, 2019               
Other comprehensive income on available-for-sale debt securities, Unrealized holding gains on available-for-sale debt securities  $4,261   $(895)  $3,366 
                
Unfunded pension and postretirement obligations:               
Changes from plan amendments and actuarial gains and losses included in other comprehensive income   214    (45)   169 
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost   (8)   2    (6)
Other comprehensive income on unfunded retirement obligations   206    (43)   163 
                
Total other comprehensive income  $4,467   $(938)  $3,529 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

  Before-Tax   Income Tax   Net-of-Tax 
(In Thousands)  Amount   Effect   Amount 
Three Months Ended March 31, 2018               
Other comprehensive loss on available-for-sale debt securities, Unrealized holding losses on available-for-sale debt securities  $(4,839)  $1,015   $(3,824)
                
Unfunded pension and postretirement obligations:               
Changes from plan amendments and actuarial gains and losses included in other comprehensive income   93    (19)   74 
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost   (5)   1    (4)
Other comprehensive income on unfunded retirement obligations   88    (18)   70 
                
Total other comprehensive loss  $(4,751)  $997   $(3,754)

 

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

 

          Accumulated 
   Unrealized   Unfunded   Other 
   Losses   Retirement   Comprehensive 
(In Thousands)  on Securities   Obligations   Loss 
Three Months Ended March 31, 2019               
Balance, beginning of period  $(4,307)  $137   $(4,170)
Other comprehensive income during three   months ended March 31, 2019   3,366    163    3,529 
Balance, end of period  $(941)  $300   $(641)
                
Three Months Ended March 31, 2018               
Balance, beginning of period  $(1,566)  $59   $(1,507)
Impact of change in enacted income tax rate   (337)   12    (325)
Impact of change in the method of premium   amortization of callable debt securities   26    0    26 
Impact of change in the method of accounting for   marketable equity security   22    0    22 
Other comprehensive (loss) income during three   months ended March 31, 2018   (3,824)   70    (3,754)
Balance, end of period  $(5,679)  $141   $(5,538)

 

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

 

For the Three Months Ended March 31, 2019       
(In Thousands)       
        
   Reclassified from    
Details about Accumulated Other  Accumulated Other   Affected Line Item in the Consolidated
Comprehensive Loss Components  Comprehensive Loss   Statements of Income
Amortization of defined benefit pension and postretirement items:        
Prior service cost  $(8)  Other noninterest expense
    2   Income tax provision
Total reclassifications for the period  $(6)   

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

For the Three Months Ended March 31, 2018       
(In Thousands)       
        
   Reclassified from    
Details about Accumulated Other  Accumulated Other   Affected Line Item in the Consolidated
Comprehensive Loss Components  Comprehensive Loss   Statements of Income
Amortization of defined benefit pension and postretirement items:        
Prior service cost  $(8)  Other noninterest expense
Actuarial loss   3   Other noninterest expense
    (5)  Total before tax
    1   Income tax provision
Total reclassifications for the period  $(4)   

 

4. CASH AND DUE FROM BANKS

 

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

 

  March 31,   Dec. 31, 
(In thousands)  2019   2018 
Cash and cash equivalents  $39,442   $32,827 
Certificates of deposit   4,560    4,660 
Total cash and due from banks  $44,002   $37,487 

 

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

 

The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $17,545,000 at March 31, 2019 and $18,141,000 at December 31, 2018.

 

5. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

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

 

  13 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

At March 31, 2019 and December 31, 2018, assets measured at fair value and the valuation methods used are as

follows:

 

       March 31, 2019     
   Quoted Prices   Other         
   in Active   Observable   Unobservable   Total 
   Markets   Inputs   Inputs   Fair 
(In Thousands)  (Level 1)   (Level 2)   (Level 3)   Value 
Recurring fair value measurements                    
AVAILABLE-FOR-SALE DEBT SECURITIES:                    
Obligations of U.S. Government agencies  $0   $12,265   $0   $12,265 
Obligations of states and political subdivisions:                    
Tax-exempt   0    76,902    0    76,902 
Taxable   0    30,435    0    30,435 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
Residential pass-through securities   0    57,049    0    57,049 
Residential collateralized mortgage obligations   0    140,722    0    140,722 
Commercial mortgage-backed securities   0    40,273    0    40,273 
Total available-for-sale debt securities   0    357,646    0    357,646 
Marketable equity security   962    0    0    962 
Servicing rights   0    0    1,347    1,347 
Total recurring fair value measurements  $962   $357,646   $1,347   $359,955 
                     
Nonrecurring fair value measurements                    
Impaired loans with a valuation allowance  $0   $0   $2,769   $2,769 
Valuation allowance   0    0    (498)   (498)
Impaired loans, net   0    0    2,271    2,271 
Foreclosed assets held for sale   0    0    1,875    1,875 
Total nonrecurring fair value measurements  $0   $0   $4,146   $4,146 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

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

 

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

 

   Fair Value at              
   3/31/19   Valuation  Unobservable  Method or Value As of
Asset  (In Thousands)   Technique  Input(s)  3/31/19
Servicing rights  $1,347   Discounted cash flow  Discount rate   12.50%  Rate used through modeling period
           Loan prepayment speeds   129.00%  Weighted-average PSA
           Servicing fees   0.25%  of loan balances
               4.00%  of payments are late
               5.00%  late fees assessed
              $1.94   Miscellaneous fees per account per month
           Servicing costs  $6.00   Monthly servicing cost per account
              $24.00   Additional monthly servicing cost per loan on loans more than 30 days delinquent
               1.50%  of loans more than 30 days delinquent
               3.00%  annual increase in servicing costs

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

   Fair Value at              
   12/31/18   Valuation  Unobservable  Method or Value As of
Asset  (In Thousands)   Technique  Input(s)  12/31/18
Servicing rights  $1,404   Discounted cash flow  Discount rate   12.50%  Rate used through modeling period
           Loan prepayment speeds   114.00%  Weighted-average PSA
           Servicing fees   0.25%  of loan balances
               4.00%  of payments are late
               5.00%  late fees assessed
              $1.94   Miscellaneous fees per account per month
           Servicing costs  $6.00   Monthly servicing cost per account
              $24.00   Additional monthly servicing cost per loan on loans more than 30 days delinquent
               1.50%  of loans more than 30 days delinquent
               3.00%  annual increase in servicing costs

 

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans. Unrealized gains (losses) in fair value of servicing rights are included in Loan servicing fees, net, in the unaudited consolidated statements of income.

 

Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:

 

  3 Months Ended March 31, 
(In Thousands)  2019   2018 
Servicing rights balance, beginning of period  $1,404   $1,299 
Issuances of servicing rights   20    50 
Unrealized (losses) gains included in earnings   (77)   20 
Servicing rights balance, end of period  $1,347   $1,369 

 

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial and agricultural loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

At March 31, 2019 and December 31, 2018, quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (Level 3 methodologies) are as follows:

 

(In Thousands, Except                    Weighted- 
Percentages)                    Average 
   Balance at   Valuation
Allowance at
   Fair
Value at
   Valuation  Unobservable  Discount
at
 
Asset  3/31/19   3/31/19   3/31/19   Technique  Inputs  3/31/19 
                       
Impaired loans:                          
Residential mortgage loans - first and junior liens  $509   $114   $395   Sales comparison  Discount to appraised value   26%
Commercial:                          
Commercial loans secured by real estate   991    160    831   Sales comparison  Discount to appraised value   39%
Commercial and industrial   75    75    0   Sales comparison  Discount to appraised value   100%
Commercial and industrial   40    40    0   Sales comparison  Discount to appraised value   100%
Commercial and industrial   669    60    609   Liquidation of accounts receivable  Discount to borrower's financial statement value   15%
Loans secured by farmland   485    49    436   Sales comparison  Discount to appraised value   46%
Total impaired loans  $2,769   $498   $2,271            
Foreclosed assets held for sale - real estate:                          
Residential (1-4 family)  $109   $0   $109   Sales comparison  Discount to appraised value   51%
Land   110    0    110   Sales comparison  Discount to appraised value   61%
Commercial real estate   1,656    0    1,656   Sales comparison  Discount to appraised value   32%
Total foreclosed assets held for sale  $1,875   $0   $1,875            

 

(In Thousands, Except                    Weighted- 
Percentages)                    Average 
   Balance at   Valuation
Allowance at
   Fair
Value at
   Valuation  Unobservable  Discount
at
 
Asset  12/31/18   12/31/18   12/31/18   Technique  Inputs  12/31/18 
                       
Impaired loans:                          
Residential mortgage loans - first and junior liens  $509   $116   $393   Sales comparison  Discount to appraised value   26%
Commercial:                          
Commercial loans secured by real estate   2,515    781    1,734   Sales comparison  Discount to appraised value   16%
Commercial and industrial   75    75    0   Sales comparison  Discount to appraised value   100%
Commercial and industrial   1,265    584    681   Sales comparison  Discount to borrower's financial statement value   36%
Loans secured by farmland   487    49    438   Sales comparison  Discount to appraised value   56%
Total impaired loans  $4,851   $1,605   $3,246            
Foreclosed assets held for sale -                          
real estate:                          
Residential (1-4 family)  $64   $0   $64   Sales comparison  Discount to appraised value   68%
Land   110    0    110   Sales comparison  Discount to appraised value   61%
Commercial real estate   1,529    0    1,529   Sales comparison  Discount to appraised value   20%
Total foreclosed assets held for sale  $1,703   $0   $1,703            

 

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:

 

  Fair Value   March 31, 2019   December 31, 2018 
   Hierarchy   Carrying   Fair   Carrying   Fair 
(In Thousands)  Level   Amount   Value   Amount   Value 
Financial assets:                         
Cash and cash equivalents   Level 1   $39,442   $39,442   $32,827   $32,827 
Certificates of deposit   Level 2    4,560    4,611    4,660    4,634 
Restricted equity securities (included in Other Assets)   Level 2    5,157    5,157    5,712    5,712 
Loans, net   Level 3    817,136    824,036    818,254    825,809 
Accrued interest receivable   Level 2    4,270    4,270    3,968    3,968 
                          
Financial liabilities:                         
Deposits with no stated maturity   Level 2    810,409    810,409    804,207    804,207 
Time deposits   Level 2    229,502    229,730    229,565    229,751 
Short-term borrowings   Level 2    5,132    4,941    12,853    12,617 
Long-term borrowings   Level 2    32,844    32,877    35,915    35,902 
Accrued interest payable   Level 2    115    115    142    142 

 

The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

 

6. SECURITIES

 

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

 

       March 31, 2019     
       Gross   Gross     
       Unrealized   Unrealized     
   Amortized   Holding   Holding   Fair 
(In Thousands)  Cost   Gains   Losses   Value 
Obligations of U.S. Government agencies  $11,916   $349   $0   $12,265 
Obligations of states and political subdivisions:                    
Tax-exempt   75,910    1,290    (298)   76,902 
Taxable   30,059    443    (67)   30,435 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
Residential pass-through securities   57,727    155    (833)   57,049 
Residential collateralized mortgage obligations   142,642    204    (2,124)   140,722 
Commercial mortgage-backed securities   40,583    361    (671)   40,273 
Total available-for-sale debt securities  $358,837   $2,802   ($3,993)  $357,646 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

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

 

March 31, 2019

  Less Than 12 Months   12 Months or More   Total 
(In Thousands)  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
Obligations of states and political subdivisions:                              
Tax-exempt  $0   $0   $21,103   $(298)  $21,103   $(298)
Taxable   0    0    8,315    (67)   8,315    (67)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                              
Residential pass-through securities   5,054    (77)   41,750    (756)   46,804    (833)
Residential collateralized mortgage obligations   0    0    98,164    (2,124)   98,164    (2,124)
Commercial mortgage-backed securities   0    0    28,590    (671)   28,590    (671)
Total temporarily impaired available-for-sale debt securities  $5,054   $(77)  $197,922   $(3,916)  $202,976   $(3,993)

 

December 31, 2018

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

There were no realized gains or losses from available-for-sale securities in the first quarter 2019 or 2018.

 

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of March 31, 2019. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

   Amortized   Fair 
  Cost   Value 
(In Thousands)        
Due in one year or less  $14,204   $14,299 
Due from one year through five years   34,281    34,637 
Due from five years through ten years   40,819    41,190 
Due after ten years   28,581    29,476 
Sub-total   117,885    119,602 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:          
Residential pass-through securities   57,727    57,049 
Residential collateralized mortgage obligations   142,642    140,722 
Commercial mortgage-backed securities   40,583    40,273 
Total  $358,837   $357,646 

 

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

 

Investment securities carried at $219,532,000 at March 31, 2019 and $229,418,000 at December 31, 2018 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 8 for information concerning securities pledged to secure borrowing arrangements.

 

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

 

A summary of information management considered in evaluating debt and equity securities for other-than-temporary impairment (“OTTI”) at March 31, 2019 is provided below.

 

Debt Securities

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Equity Securities

 

The Corporation’s marketable equity security, with a carrying value of $962,000 at March 31, 2019 and $950,000 at December 31, 2018, consisted exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $38,000 at March 31, 2019 and $50,000 at December 31, 2018. The decrease in the unrealized loss of $12,000 in the first quarter 2019 and increase in the unrealized loss of $15,000 in the first quarter 2018 are included in other noninterest income in the consolidated statements of income.

 

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheet, was $5,027,000 at March 31, 2019 and $5,582,000 at December 31, 2018. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at March 31, 2019 and December 31, 2018. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

 

7. LOANS

 

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

 

Summary of Loans by Type        
         
  March 31,   Dec. 31, 
(In Thousands)  2019   2018 
Residential mortgage:          
Residential mortgage loans - first liens  $374,764   $372,339 
Residential mortgage loans - junior liens   25,538    25,450 
Home equity lines of credit   32,847    34,319 
1-4 Family residential construction   24,437    24,698 
Total residential mortgage   457,586    456,806 
Commercial:          
Commercial loans secured by real estate   160,177    162,611 
Commercial and industrial   92,842    91,856 
Political subdivisions   52,142    53,263 
Commercial construction and land   12,701    11,962 
Loans secured by farmland   6,938    7,146 
Multi-family (5 or more) residential   7,031    7,180 
Agricultural loans   5,471    5,659 
Other commercial loans   13,467    13,950 
Total commercial   350,769    353,627 
Consumer   17,037    17,130 
Total   825,392    827,563 
Less: allowance for loan losses   (8,256)   (9,309)
Loans, net  $817,136   $818,254 

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month periods ended March 31, 2019 and 2018 were as follows:

 

Three Months Ended March 31, 2019

 

 

  Dec. 31,               March 31, 
(In Thousands)  2018
Balance
   Charge-offs   Recoveries   Provision
(Credit)
   2019
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $3,156   $(50)  $1   $71   $3,178 
Residential mortgage loans - junior liens   325    (24)   0    28    329 
Home equity lines of credit   302    0    3    (19)   286 
1-4 Family residential construction   203    0    0    (5)   198 
Total residential mortgage   3,986    (74)   4    75    3,991 
Commercial:                         
Commercial loans secured by real estate   2,538    0    0    (651)   1,887 
Commercial and industrial   1,553    0    2    (486)   1,069 
Commercial construction and land   110    0    0    4    114 
Loans secured by farmland   102    0    0    (4)   98 
Multi-family (5 or more) residential   114    0    0    (2)   112 
Agricultural loans   46    0    0    (3)   43 
Other commercial loans   128    0    0    (7)   121 
Total commercial   4,591    0    2    (1,149)   3,444 
Consumer   233    (37)   9    31    236 
Unallocated   499    0    0    86    585 
Total Allowance for Loan Losses  $9,309   $(111)  $15   $(957)  $8,256 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Three Months Ended March 31, 2018

 

  Dec. 31,               March 31, 
(In Thousands)  2017
Balance
   Charge-offs   Recoveries   Provision
(Credit)
   2018
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $3,200   $(53)  $1   ($81)  $3,067 
Residential mortgage loans - junior liens   224    0    1    126    351 
Home equity lines of credit   296    0    0    (10)   286 
1-4 Family residential construction   243    0    0    (4)   239 
Total residential mortgage   3,963    (53)   2    31    3,943 
Commercial:                         
Commercial loans secured by real estate   2,584    (21)   0    72    2,635 
Commercial and industrial   1,065    0    2    (31)   1,036 
Commercial construction and land   150    0    0    (13)   137 
Loans secured by farmland   105    0    0    (3)   102 
Multi-family (5 or more) residential   172    0    0    (3)   169 
Agricultural loans   57    0    0    148    205 
Other commercial loans   102    0    0    47    149 
Total commercial   4,235    (21)   2    217    4,433 
Consumer   159    (41)   12    44    174 
Unallocated   499    0    0    0    499 
Total Allowance for Loan Losses  $8,856   $(115)  $16   $292   $9,049 

 

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

 

The credit for loan losses (reduction in expense) was $957,000 in the first quarter 2019 as compared to a provision of $292,000 in the first quarter 2018. Specific allowances totaling $1,365,000 at December 31, 2018 on two commercial loans were eliminated in the first quarter 2019. These two loans were no longer considered impaired at March 31, 2019 and were returned to full accrual status in the first quarter 2019. A specific allowance of $781,000 at December 31, 2018 on a real estate secured commercial loan was eliminated in the first quarter 2019 due to the borrower’s improved financial performance and receipt of an updated, higher appraised value of the underlying collateral. Also, a specific allowance of $584,000 on a commercial loan was eliminated, consistent with improvements in both the borrower’s financial position and the Corporation’s security position on the credit. In total, the first quarter 2019 credit for loan losses included a credit of $1,011,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, partially offset by a net increase of $54,000 in the collectively determined and unallocated portions of the allowance for loan losses.

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

March 31, 2019                    
      Special             
(In Thousands)  Pass   Mention   Substandard   Doubtful   Total 
Residential Mortgage:                         
Residential mortgage loans - first liens  $365,301   $609   $8,854   $0   $374,764 
Residential mortgage loans - junior liens   24,934    98    506    0    25,538 
Home equity lines of credit   32,182    59    606    0    32,847 
1-4 Family residential construction   24,256    0    181    0    24,437 
Total residential mortgage   446,673    766    10,147    0    457,586 
Commercial:                         
Commercial loans secured by real estate   153,387    3,660    3,130    0    160,177 
Commercial and Industrial   84,736    6,532    1,574    0    92,842 
Political subdivisions   52,142    0    0    0    52,142 
Commercial construction and land   12,627    0    74    0    12,701 
Loans secured by farmland   4,681    422    1,835    0    6,938 
Multi-family (5 or more) residential   7,031    0    0    0    7,031 
Agricultural loans   4,679    53    739    0    5,471 
Other commercial loans   13,381    15    71    0    13,467 
Total commercial   332,664    10,682    7,423    0    350,769 
Consumer   17,007    0    30    0    17,037 
Totals  $796,344   $11,448   $17,600   $0   $825,392 

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

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

 

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. Further, the residential mortgage segment is significantly affected by the values of residential real estate that provide collateral for the loans. The majority of the Corporation’s commercial segment loans (approximately 53% at March 31, 2019) is secured by real estate, and accordingly, the Corporation’s risk for the commercial segment is significantly affected by commercial real estate values. The consumer segment includes a wide mix of loans for different purposes, primarily secured loans, including loans secured by motor vehicles, manufactured housing and other types of collateral.

 

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

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of March 31, 2019 and December 31, 2018:

 

March 31, 2019

  Loans:   Allowance for Loan Losses: 
                        
   Individually   Collectively       Individually   Collectively     
(In Thousands)  Evaluated   Evaluated   Totals   Evaluated   Evaluated   Totals 
Residential mortgage:                              
Residential mortgage loans - first liens  $970   $373,794   $374,764   $0   $3,178   $3,178 
Residential mortgage loans - junior liens   289    25,249    25,538    114    215    329 
Home equity lines of credit   0    32,847    32,847    0    286    286 
1-4 Family residential construction   0    24,437    24,437    0    198    198 
Total residential mortgage   1,259    456,327    457,586    114    3,877    3,991 
Commercial:                              
Commercial loans secured by real estate   1,756    158,421    160,177    160    1,727    1,887 
Commercial and industrial   1,292    91,550    92,842    175    894    1,069 
Political subdivisions   0    52,142    52,142    0    0    0 
Commercial construction and land   0    12,701    12,701    0    114    114 
Loans secured by farmland   1,534    5,404    6,938    49    49    98 
Multi-family (5 or more) residential   0    7,031    7,031    0    112    112 
Agricultural loans   656    4,815    5,471    0    43    43 
Other commercial loans   0    13,467    13,467    0    121    121 
Total commercial   5,238    345,531    350,769    384    3,060    3,444 
Consumer   0    17,037    17,037    0    236    236 
Unallocated                            585 
Total  $6,497   $818,895   $825,392   $498   $7,173   $8,256 

  

December 31, 2018

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Summary information related to impaired loans at March 31, 2019 and December 31, 2018 is as follows:

 

  March 31, 2019   December 31, 2018 
   Unpaid           Unpaid         
   Principal   Recorded   Related   Principal   Recorded   Related 
(In Thousands)  Balance   Investment   Allowance   Balance   Investment   Allowance 
With no related allowance recorded:                              
Residential mortgage loans - first liens  $729   $701   $0   $750   $721   $0 
Residential mortgage loans - junior liens   50    50    0    54    54    0 
Commercial loans secured by real estate   765    765    0    1,787    1,787    0 
Commercial and industrial   507    507    0    817    817    0 
Loans secured by farmland   1,049    1,049    0    862    862    0 
Agricultural loans   656    656    0    665    665    0 
Consumer   0    0    0    17    17    0 
Total with no related allowance recorded   3,756    3,728    0    4,952    4,923    0 
                               
With a related allowance recorded:                              
Residential mortgage loans - first liens   270    270    0    270    270    0 
Residential mortgage loans - junior liens   239    239    114    239    239    116 
Commercial loans secured by real estate   991    991    160    2,515    2,515    781 
Commercial and industrial   784    784    175    1,340    1,340    659 
Loans secured by farmland   485    485    49    487    487    49 
Total with a related allowance recorded   2,769    2,769    498    4,851    4,851    1,605 
Total  $6,525   $6,497   $498   $9,803   $9,774   $1,605 

 

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

 

The average balance of impaired loans and interest income recognized on impaired loans is as follows:

 

       Interest Income Recognized on 
   Average Investment in Impaired Loans   Impaired Loans on a Cash Basis 
  3 Months Ended   3 Months Ended 
   March 31,   March 31, 
(In Thousands)  2019   2018   2019   2018 
Residential mortgage:                    
Residential mortgage loans - first lien  $981   $1,046   $10   $19 
Residential mortgage loans - junior lien   291    301    2    3 
Total residential mortgage   1,272    1,347    12    22 
Commercial:                    
Commercial loans secured by real estate   3,040    5,882    10    35 
Commercial and industrial   1,713    508    26    6 
Loans secured by farmland   1,442    1,364    1    6 
Multi-family (5 or more) residential   0    392    0    0 
Agricultural loans   660    346    12    11 
Total commercial   6,855    8,492    49    58 
Consumer   8    19    0    0 
Total  $8,135   $9,858   $61   $80 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

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

 

  March 31, 2019   December 31, 2018 
   Past Due       Past Due     
   90+ Days and       90+ Days and     
(In Thousands)  Accruing   Nonaccrual   Accruing   Nonaccrual 
Residential mortgage:                    
Residential mortgage loans - first liens  $1,327   $4,315   $1,633   $4,750 
Residential mortgage loans - junior liens   111    239    151    239 
Home equity lines of credit   78    9    219    27 
Total residential mortgage   1,516    4,563    2,003    5,016 
Commercial:                    
Commercial loans secured by real estate   286    1,458    394    3,958 
Commercial and industrial   61    1,226    18    2,111 
Commercial construction and land   0    52    0    52 
Loans secured by farmland   0    1,486    459    1,297 
Agricultural loans   0    656    0    665 
Total commercial   347    4,878    871    8,083 
Consumer   39    0    32    14 
Totals  $1,902   $9,441   $2,906   $13,113 

 

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

 

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

 

   As of March 31, 2019   As of December 31, 2018 
   Current &               Current &             
  Past Due   Past Due   Past Due       Past Due   Past Due   Past Due     
   Less than   30-89   90+       Less than   30-89   90+     
(In Thousands)   30 Days   Days   Days   Total   30 Days   Days   Days   Total 
Residential mortgage:                                        
Residential mortgage loans - first liens  $364,905   $6,148   $3,711   $374,764   $361,362   $6,414   $4,563   $372,339 
Residential mortgage loans - junior liens   25,134    54    350    25,538    24,876    184    390    25,450 
Home equity lines of credit   32,478    282    87    32,847    33,611    480    228    34,319 
1-4 Family residential construction   24,119    318    0    24,437    24,531    167    0    24,698 
Total residential mortgage   446,636    6,802    4,148    457,586    444,380    7,245    5,181    456,806 
                                         
Commercial:                                        
Commercial loans secured by real estate   158,276    294    1,607    160,177    160,668    226    1,717    162,611 
Commercial and industrial   92,535    100    207    92,842    90,915    152    789    91,856 
Political subdivisions   52,142    0    0    52,142    53,263    0    0    53,263 
Commercial construction and land   12,387    262    52    12,701    11,910    0    52    11,962 
Loans secured by farmland   5,258    689    991    6,938    5,390    487    1,269    7,146 
Multi-family (5 or more) residential   7,031    0    0    7,031    7,104    76    0    7,180 
Agricultural loans   5,380    85    6    5,471    5,624    29    6    5,659 
Other commercial loans   13,467    0    0    13,467    13,950    0    0    13,950 
Total commercial   346,476    1,430    2,863    350,769    348,824    970    3,833    353,627 
Consumer   16,919    79    39    17,037    16,991    93    46    17,130 
Totals  $810,031   $8,311   $7,050   $825,392   $810,195   $8,308   $9,060   $827,563 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

   Current &             
  Past Due   Past Due   Past Due     
   Less than   30-89   90+     
(In Thousands)  30 Days   Days   Days   Total 
March 31, 2019 Nonaccrual Totals  $3,105   $1,188   $5,148   $9,441 
December 31, 2018 Nonaccrual Totals  $5,793   $1,166   $6,154   $13,113 

 

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

 

   Current &                 
  Past Due   Past Due   Past Due         
   Less than   30-89   90+         
(In Thousands)  30 Days   Days   Days   Nonaccrual   Total 
March 31, 2019 Totals  $775   $1   $74   $700   $1,550 
December 31, 2018 Totals  $612   $43   $0   $2,884   $3,539 

 

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

 

TDRs that occurred during the three-month periods ended March 31, 2019 and 2018 are as follows:

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

All of the loans for which TDRs were granted in the table above in the three-month period ended March 31, 2019 are associated with one relationship.

 

In the three-month periods ended March 31, 2019 and 2018, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months.

 

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

 

  March 31,   Dec. 31, 
(In Thousands)  2019   2018 
Foreclosed residential real estate  $109   $64 

 

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

 

  March 31,   Dec. 31, 
(In Thousands)  2019   2018 
Residential real estate in process of foreclosure  $1,291   $1,097 

 

8. BORROWED FUNDS

 

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

 

  March 31,   Dec. 31, 
(In Thousands)  2019   2018 
FHLB-Pittsburgh borrowings  $0   $7,000 
Customer repurchase agreements   5,132    5,853 
Total short-term borrowings  $5,132   $12,853 

 

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average interest rate paid by the Corporation on customer repurchase agreements was 0.10% at March 31, 2019 and December 31, 2018. The carrying value of the underlying securities was $5,190,000 at March 31, 2019 and $5,890,000 at December 31, 2018.

 

The FHLB-Pittsburgh loan facilities are collateralized by qualifying loans secured by real estate with a book value totaling $494,459,000 at March 31, 2019 and $495,143,000 at December 31, 2018. Also, the FHLB-Pittsburgh loan facilities require the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were $5,027,000 at March 31, 2019 and $5,582,000 at December 31, 2018.

 

The overnight borrowing from FHLB-Pittsburgh at December 31, 2018 had an interest rate of 2.62%.

 

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

 

  March 31,   Dec. 31, 
(In Thousands)  2019   2018 
Loan matured in January 2019 with a rate of 1.83%  $0   $2,000 
Loan matured in February 2019 with a rate of 1.95%   0    3,000 
Loan matured in March 2019 with a rate of 2.15%   0    3,000 
Loan maturing in April 2019 with a rate of 2.24%   3,000    3,000 
Loan maturing in May 2019 with a rate of 2.30%   3,000    3,000 
Loan maturing in June 2019 with a rate of 2.42%   3,000    3,000 
Loan maturing in July 2019 with a rate of 2.41%   3,000    3,000 
Loan maturing in August 2019 with a rate of 2.48%   3,000    3,000 
Loan maturing in September 2019 with a rate of 2.53%   3,000    3,000 
Loan maturing in November 2019 with a rate of 2.75%   3,000    3,000 
Loan maturing in December 2019 with a rate of 2.77%   3,000    3,000 
Loan maturing in January 2020 with a rate of 2.73%   3,000    3,000 
Loan maturing in February 2020 with a rate of 2.66%   2,000    0 
Loan maturing in April 2020 with a rate of 4.79%   221    271 
Loan maturing in March 2022 with a rate of 2.46%   3,000    0 
Loan maturing in June 2025 with a rate of 4.91%   623    644 
Total long-term FHLB-Pittsburgh borrowings  $32,844   $35,915 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

9. STOCK-BASED COMPENSATION PLANS

 

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

 

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

 

Total annual stock-based compensation for the year ending December 31, 2019 is estimated to total $880,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $229,000 in the first quarter 2019 and $183,000 in the first quarter 2018.

 

10. CONTINGENCIES

 

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

 

11. REVENUE RECOGNITION

 

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

 

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

 

Trust and financial management revenue – C&N Bank’s trust division provides a wide range of financial services, including wealth management services for individuals, businesses and retirement funds, administration of 401(k) and other retirement plans, retirement planning, estate planning and estate settlement services. Trust clients are located primarily within the Corporation’s geographic markets. Assets held in a fiduciary capacity by C&N Bank are not the Corporation’s assets and are therefore not included in the consolidated balance sheets. The fair value of trust assets under management was approximately $924,080,000 at March 31, 2019 and $862,517,000 at December 31, 2018. Trust and financial management revenue is included within noninterest income in the consolidated statements of income.

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

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

 

12. SUBSEQUENT EVENT – MERGER – MONUMENT BANCORP, INC.

 

In September 2018, the Corporation, along with Monument Bancorp, Inc. (“Monument”) announced the signing of an Agreement and Plan of Merger. In April 2019, the Corporation and Monument announced the completion of the merger as of April 1, 2019. Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one loan production office in Bucks County, Pennsylvania. Under the terms of the Agreement and Plan of Merger, Monument merged into the Corporation, and Monument Bank merged into C&N Bank. In the transaction, Monument shareholders elected to receive either 1.0144 shares of Corporation common stock or $28.10 in cash for each share of Monument common stock owned, subject to proration to ensure that, overall, 20% of the Monument shares are converted into cash and 80% of the Monument shares are converted into Corporation stock. The election and proration process commenced in late March 2019 and was completed on April 24, 2019. Holders of Monument common stock prior to the consummation of the merger own approximately 9.4% of the Corporation’s common stock outstanding following the merger.

 

The estimated total purchase consideration is valued at approximately $42.7 million based on the average of the high and low trading price of the Corporation’s common stock on April 1, 2019. As of March 31, 2019, Monument reported total assets of $376 million, including gross loans of $263 million, total deposits of $224 million and total stockholders’ equity of $27 million. As of the date the Corporation’s first quarter financial statements are issued, some of the information required to be disclosed under U.S. GAAP was not available since, given the short period between April 1, 2019 merger date and the financial statement issuance, the calculation of the fair value of all material Monument assets acquired and liabilities assumed had not yet been completed.

 

First quarter 2019 expenses included $311,000 of non-payroll expenses related to the acquisition, including $202,000 included in professional fees related to conversion of Monument’s information technology systems and $109,000 included in other noninterest expense in the unaudited consolidated statements of income. Management estimates the Corporation will incur merger-related expenses in the second quarter 2019 ranging between $2,900,000 and $3,500,000, including costs associated with termination of data processing contracts, conversion of Monument’s customer accounting data into the Corporation’s core system, severance and similar expenses, investment banking fees based on successful closing of the transaction and various other costs.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

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

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

EARNINGS OVERVIEW

 

Earnings per basic and diluted common share were $0.41 in the first quarter 2019, as compared to $0.46 per share in the fourth quarter 2018 and up 13.9% from $0.36 per share in the first quarter 2018. The annualized return on average assets for the first quarter 2019 was 1.59%, and the annualized return on average equity was 10.33%. Highlights related to the Corporation’s earnings results for the first quarters of 2019 and 2018 are presented below.

 

Net income of $5,090,000 in the first quarter 2019 was up $715,000 (16.3%) from the first quarter 2018 amount. Significant variances were as follows:

 

·Net interest income increased $818,000 (7.5%) in the first quarter 2019 over the first quarter 2018 amount. Total interest and dividend income increased $1,175,000, while interest expense increased $357,000. The net interest margin was 4.04% for the first quarter 2019, up 0.20% from the first quarter 2018 level. The average fully taxable equivalent yield on earning assets increased to 4.49% in the first quarter 2019 from 4.18% in the first quarter 2018, reflecting the effect of increases in interest rates that took place over most of 2018. Average total earning assets increased $21,895,000, including increases in the average balances of available-for-sale debt securities of $8,912,000, total loans of $6,849,000 (0.8%) and interest-bearing balances with other banks of $6,175,000. The growth in assets was funded mainly by an increase in average total deposits of $23,558,000 (2.4%), including an increase in average noninterest-bearing demand deposits of $25,359,000. The average rate paid on interest-bearing liabilities was 0.68% for the first quarter 2019, up from 0.49% in the first quarter 2018.

 

·The credit for loan losses (reduction in expense) was $957,000 in the first quarter 2019 as compared to a provision of $292,000 in the first quarter 2018. Specific allowances totaling $1,365,000 at December 31, 2018 on two commercial loans were eliminated in the first quarter 2019. These two loans were no longer considered impaired at March 31, 2019 and were returned to full accrual status in the first quarter 2019. A specific allowance of $781,000 at December 31, 2018 on a real estate secured commercial loan was eliminated in the first quarter 2019 due to the borrower’s improved financial performance and receipt of an updated, higher appraised value of the underlying collateral. Also, a specific allowance of $584,000 on a commercial loan was eliminated, consistent with improvements in both the borrower’s financial position and C&N’s security position on the credit. In total, the first quarter 2019 credit for loan losses included a credit of $1,011,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, partially offset by a net increase of $54,000 in the collectively determined and unallocated portions of the allowance for loan losses.

 

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·Total noninterest income of $4,406,000 in the first quarter 2019 was equal to the first quarter 2018 amount. Brokerage revenue increased $95,000, mainly due to an increase in volume. Other noninterest income increased $80,000, including increases in dividends on Federal Home Loan Bank of Pittsburgh stock and interchange fees from credit card transactions. Interchange revenue from debit card transactions increased $64,000 (11.1%), reflecting an increase in transaction volume. Loan servicing fees, net, decreased $100,000, as the fair value of mortgage servicing rights decreased $77,000 in the first quarter 2019 as compared to an increase in fair value of $20,000 in the first quarter 2018. Net gains from sales of mortgage loans decreased $97,000 in the first quarter 2019 from the first quarter 2018 amount, mainly due to a lower volume of transactions. Trust and financial management revenue decreased $62,000 (4.4%), including a reduction in fees from estate settlements.

 

·Total noninterest expense increased $1,112,000 (11.2%) in the first quarter 2019 over the first quarter 2018 amount. Expenses and net losses from other real estate increased $261,000, and loan collection expense increased $109,000, in the first quarter 2019 over the first quarter 2018 amounts. First quarter 2019 expenses included $311,000 of non-payroll expenses related to the acquisition of Monument Bancorp, Inc. (Monument), which was completed April 1, 2019. The most significant category of merger-related expenses was $202,000 of professional fees related to conversion of Monument’s information technology systems (conversion planned to be completed in late June 2019). Additional information regarding the Monument merger is provided in Note 12 to the unaudited consolidated financial statements and in the Monument Acquisition section of Management’s Discussion and Analysis. First quarter 2019 expenses also included $188,000 related to the start-up of a limited purpose office (for lending) which opened in York, PA in April 2019. Additional discussion of significant variances related to individual categories of expenses is detailed below following Table VI.

 

·The income tax provision was $981,000 for the first quarter 2019, up from $741,000 for the first quarter 2018. The higher income tax provision in 2019 resulted mainly from higher pre-tax income. The effective tax rate of 16.2% for the first quarter 2019 was higher than the effective tax rate of 14.5% for the first quarter 2018 due to a reduction in tax-exempt interest income as a percentage of pre-tax income and because a portion of the merger-related expenses incurred in the first quarter 2019 are estimated to be nondeductible.

 

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

 

TABLE I - QUARTERLY CONDENSED, CONSOLIDATED INCOME STATEMENT INFORMATION

 

(Dollars In Thousands, Except Per Share Data)  For the Three Months Ended: 
(Unaudited)  March 31,   Dec. 31,   Sept. 30,   June 30,   March 31, 
   2019   2018   2018   2018   2018 
Interest income  $13,065   $13,304   $12,800   $12,334   $11,890 
Interest expense   1,350    1,312    1,241    1,079    993 
Net interest income   11,715    11,992    11,559    11,255    10,897 
(Credit) provision for loan losses   (957)   252    60    (20)   292 
Net interest income after (credit) provision for loan losses   12,672    11,740    11,499    11,275    10,605 
Noninterest income   4,406    5,040    4,462    4,689    4,406 
Net (losses) gains on securities   0    (4)   569    1,468    0 
Noninterest expense   11,007    10,074    9,833    9,684    9,895 
Income before income tax provision   6,071    6,702    6,697    7,748    5,116 
Income tax provision   981    1,021    1,111    1,377    741 
Net income  $5,090   $5,681   $5,586   $6,371   $4,375 
Net income attributable to common shares  $5,063   $5,653   $5,558   $6,339   $4,352 
Basic earnings per common share  $0.41   $0.46   $0.45   $0.52   $0.36 
Diluted earnings per common share  $0.41   $0.46   $0.45   $0.52   $0.36 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CRITICAL ACCOUNTING POLICIES

 

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

 

A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes the allowance for loan losses is adequate and reasonable. Analytical information related to the Corporation’s aggregate loans and the related allowance for loan losses is summarized by loan segment and classes of loans in Note 7 to the unaudited consolidated financial statements. Additional discussion of the Corporation’s allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

 

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

 

As described in Note 6 to the unaudited consolidated financial statements, management evaluates securities for other-than-temporary impairment (OTTI). In making that evaluation, consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery. Management’s assessments of the likelihood and potential for recovery in value of securities are subjective and based on sensitive assumptions.

 

NET INTEREST INCOME

 

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month periods ended March 31, 2019 and 2018. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

 

For the three-month periods, fully taxable equivalent net interest income was $12,016,000 in 2019, which was $790,000 (7.0%) higher than in 2018. Interest income was $1,147,000 higher in 2019 as compared to 2018, while interest expense was higher by $357,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 4.04% in 2019 as compared to 3.84% in 2018, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.81% in 2019 from 3.69% in 2018.

 

Interest income totaled $13,366,000 in 2019, an increase of $1,147,000 (9.4%) from 2018. Interest and fees from loans receivable increased $757,000, or 7.6%, in 2019 as compared to 2018. Table IV shows the increase in interest on loans includes $660,000 attributable to an increase in average rate and $97,000 related to an increase in volume. The average balance of loans receivable increased $6,849,000 (0.8%) to $823,746,000 in 2019 from $816,897,000 in 2018. The increase in average balance reflects growth in the average balance of residential mortgage and consumer loans, partially offset by a reduction in the average balance of commercial loans. The average yield on loans in the first quarter of 2019 was 5.25% compared to 4.92% in the first quarter 2018 as current rates on variable rate loans and rates on recent new loan originations have increased due to increases in market interest rates that occurred over the first several months of 2018.

 

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Interest income from available-for-sale debt securities increased $322,000 (14.2%) in 2019 over 2018. Total average available-for-sale debt securities (at amortized cost) in 2019 increased to $361,929,000 from $353,017,000 in 2018. The average rate of return on available-for-sale debt securities was 2.89% for 2019, up from 2.60% in 2018. The increase in average rate of return on available-for-sale debt securities is mainly the result of lower yielding securities maturing with the proceeds reinvested in higher yielding securities as rates increased throughout most of 2018.

 

For the three-month periods, interest expense increased $357,000, or 36.0%, to $1,350,000 in 2019 from $993,000 in 2018. Interest expense on deposits increased $324,000, as the average rate paid on interest-bearing deposits increased to 0.56% in 2019 from 0.39% in 2018. The increase in average rates on deposits includes increases of 0.41% on certificates of deposit, 0.20% on money market accounts, 0.12% on interest checking accounts and 0.09% on Individual Retirement Accounts. Total average deposits (interest-bearing and noninterest-bearing) amounted to $1,021,073,000 in 2019, an increase of $23,558,000 (2.4%) from 2018. The increase in total average deposits included an increase in noninterest-bearing demand deposits of $25,359,000.

 

Interest expense on total borrowed funds increased $33,000 in 2019 as compared to 2018. The average balance of total borrowed funds decreased to $50,623,000 in the first quarter 2019 from $65,359,000 in the first quarter 2018, while the average rate on borrowed funds increased to 2.38% in the first quarter 2019 from 1.64% in the first quarter 2018.

 

Interest expense on short-term borrowings decreased $120,000 to $79,000 in 2019 from $199,000 in 2018. The average balance of short-term borrowings decreased to $15,935,000 in 2019 from $52,305,000 in 2018. The total average short-term borrowings balance for the first quarter 2018 included average short-term advances from FHLB-Pittsburgh of $25,733,000, with no corresponding balance in the first quarter 2019, as short-term advances were paid off with proceeds from longer-term FHLB advances (mainly with 13-month terms) over the course of 2018. Also, the average total balance of overnight borrowings and customer repurchase agreements decreased $10,637,000 in 2019 as compared to 2018. The average rate on short-term borrowings increased to 2.01% in 2019 from 1.54% in 2018, reflecting increases in short-term rates consistent with the four quarterly increases in the Federal Reserve’s target rate in 2018.

 

Interest expense on long-term borrowings increased $153,000 to $218,000 in 2019 from $65,000 in 2018. The average balance of long-term borrowings was $34,688,000 in 2019, up from an average balance of $13,054,000 in 2018. Borrowings are classified as long-term within the Tables based on their term at origination. The average balance of long-term borrowings in 2019 and 2018 consisted mainly of FHLB advances with 13-month terms at origination. The average rate on long-term borrowings was 2.55% in 2019 compared to 2.02% in the first quarter of 2018, reflecting increases in market rates that occurred over the first several months of 2018.

 

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TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE

 

   Three Months Ended     
   March 31,   Increase/ 
(In Thousands)  2019   2018   (Decrease) 
             
INTEREST INCOME               
Available-for-sale debt securities:               
Taxable  $1,834   $1,363   $471 
Tax-exempt   749    898    (149)
Total available-for-sale debt securities   2,583    2,261    322 
Dividends on marketable equity security   6    5    1 
Interest-bearing due from banks   116    50    66 
Loans held for sale   3    2    1 
Loans receivable:               
Taxable   9,948    9,201    747 
Tax-exempt   710    700    10 
Total loans receivable   10,658    9,901    757 
Total Interest Income   13,366    12,219    1,147 
                
INTEREST EXPENSE               
Interest-bearing deposits:               
Interest checking   227    181    46 
Money market   178    93    85 
Savings   39    37    2 
Certificates of deposit   486    305    181 
Individual Retirement Accounts   123    113    10 
Total interest-bearing deposits   1,053    729    324 
Borrowed funds:               
Short-term   79    199    (120)
Long-term   218    65    153 
Total borrowed funds   297    264    33 
Total Interest Expense   1,350    993    357 
                
Net Interest Income  $12,016   $11,226   $790 

 

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s federal income tax rate of 21%.

 

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TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES

(Dollars in Thousands)

 

   3 Months       3 Months     
   Ended   Rate of   Ended   Rate of 
   3/31/2019   Return/   3/31/2018   Return/ 
   Average   Cost of   Average   Cost of 
   Balance   Funds %   Balance   Funds % 
EARNING ASSETS                    
Available-for-sale debt securities, at amortized cost:                    
Taxable  $281,805    2.64%  $249,840    2.21%
Tax-exempt   80,124    3.79%   103,177    3.53%
Total available-for-sale debt securities   361,929    2.89%   353,017    2.60%
Marketable equity security   952    2.56%   962    2.11%
Interest-bearing due from banks   20,306    2.32%   14,131    1.43%
Loans held for sale   137    8.88%   168    4.83%
Loans receivable:                    
Taxable   751,172    5.37%   740,655    5.04%
Tax-exempt   72,574    3.97%   76,242    3.72%
Total loans receivable   823,746    5.25%   816,897    4.92%
Total Earning Assets   1,207,070    4.49%   1,185,175    4.18%
Cash   16,914         16,874      
Unrealized gain/loss on securities   (4,628)        (5,529)     
Allowance for loan losses   (9,339)        (9,002)     
Bank premises and equipment   14,511         15,451      
Intangible Assets   11,950         11,954      
Other assets   43,172         42,781      
Total Assets  $1,279,650        $1,257,704      
                     
INTEREST-BEARING LIABILITIES                    
Interest-bearing deposits:                    
Interest checking  $198,903    0.46%  $212,981    0.34%
Money market   176,869    0.41%   179,923    0.21%
Savings   156,691    0.10%   149,618    0.10%
Certificates of deposit   140,142    1.41%   123,974    1.00%
Individual Retirement Accounts   86,411    0.58%   94,311    0.49%
Other time deposits   762    0.00%   772    0.00%
Total interest-bearing deposits   759,778    0.56%   761,579    0.39%
Borrowed funds:                    
Short-term   15,935    2.01%   52,305    1.54%
Long-term   34,688    2.55%   13,054    2.02%
Total borrowed funds   50,623    2.38%   65,359    1.64%
Total Interest-bearing Liabilities   810,401    0.68%   826,938    0.49%
Demand deposits   261,295         235,936      
Other liabilities   10,941         8,870      
Total Liabilities   1,082,637         1,071,744      
Stockholders' equity, excluding other comprehensive income/loss   200,422         190,129      
Accumulated other comprehensive income/loss   (3,409)        (4,169)     
Total Stockholders' Equity   197,013         185,960      
Total Liabilities and Stockholders' Equity  $1,279,650        $1,257,704      
Interest Rate Spread        3.81%        3.69%
Net Interest Income/Earning Assets        4.04%        3.84%
                     
Total Deposits (Interest-bearing and Demand)  $1,021,073        $997,515      

 

(1) Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s federal income tax rate of 21%.

(2) Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

(3) Rates of return on earning assets and costs of funds are presented on an annualized basis.

 

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TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES

 

(In Thousands)   3 Months Ended 3/31/19 vs. 3/31/18 
  Change in   Change in   Total 
  Volume   Rate   Change 
EARNING ASSETS               
Available-for-sale debt securities:               
Taxable  $188   $283   $471 
Tax-exempt   (212)   63    (149)
Total available-for-sale debt securities   (24)   346    322 
Marketable equity security   0    1    1 
Interest-bearing due from banks   27    39    66 
Loans held for sale   0    1    1 
Loans receivable:               
Taxable   132    615    747 
Tax-exempt   (35)   45    10 
Total loans receivable   97    660    757 
Total Interest Income   100    1,047    1,147 
                
INTEREST-BEARING LIABILITIES               
Interest-bearing deposits:               
Interest checking   (13)   59    46 
Money market   (2)   87    85 
Savings   2    0    2 
Certificates of deposit   44    137    181 
Individual Retirement Accounts   (10)   20    10 
Total interest-bearing deposits   21    303    324 
Borrowed funds:               
Short-term   (167)   47    (120)
Long-term   132    21    153 
Total borrowed funds   (35)   68    33 
Total Interest Expense   (14)   371    357 
                
Net Interest Income  $114   $676   $790 

 

(1) Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s federal income tax rate of 21%.

 

(2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.

 

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NONINTEREST INCOME

 

TABLE V - COMPARISON OF NONINTEREST INCOME

(Dollars in Thousands)

 

   3 Months Ended         
   March 31,   $   % 
   2019   2018   Change   Change 
Trust and financial management revenue  $1,360   $1,422   $(62)   -4.4%
Brokerage revenue   307    212    95    44.8%
Insurance commissions, fees and premiums   30    44    (14)   -31.8%
Service charges on deposit accounts   1,250    1,204    46    3.8%
Service charges and fees   79    86    (7)   -8.1%
Interchange revenue from debit card transactions   643    579    64    11.1%
Net gains from sales of loans   87    184    (97)   -52.7%
Loan servicing fees, net   28    128    (100)   -78.1%
Increase in cash surrender value of life insurance   92    97    (5)   -5.2%
Other noninterest income   530    450    80    17.8%
Total noninterest income  $4,406   $4,406   $0    0.0%

 

Total noninterest income shown in Table V in the first three months of 2019 was equal to the first quarter 2018 amount. Within the totals, the most significant variances include the following:

 

·Brokerage revenue was up $95,000 due to an increase in volume of transactions compared to 2018.

 

·Other Income increased $80,000, including a $31,000 increase in dividend income on FHLB stock ($100,000 in 2019 as compared to $69,000 in 2018) and an increase of $26,000 in credit card-related interchange and other fees ($47,000 in 2019 as compared to $21,000 in 2018). The unrealized gain on a marketable equity security was $12,000 in 2019 compared to an unrealized loss of $15,000 on the security in 2018.

 

·Interchange revenue from debit card transactions was up $64,000 reflecting an increase in volume.

 

·Loan servicing fees, net, decreased $100,000, as the fair value of mortgage servicing rights decreased by $77,000 in the first three months of 2019 as compared to an increase of $20,000 in the first three months of 2018.

 

·Net gains from sales of loans decreased $97,000 (52.7%), as the dollar volume of residential mortgage loans sold decreased by approximately $3.4 million (58%). Gains on sales of loans totaled 3.5% of the origination cost of loans sold in 2019 as compared to 3.2% in 2018.

 

·Trust and financial management revenue was $62,000 lower in the first three months of 2019 than in the same period in 2018, mainly due to timing issues associated with the collection of fees. Trust revenue is recorded on a cash basis, which is not materially different from the accrual basis.

 

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NONINTEREST EXPENSE

 

TABLE VI - COMPARISON OF NONINTEREST EXPENSE

(Dollars in Thousands)

 

   3 Months Ended         
   March 31,   $   % 
   2019   2018   Change   Change