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CITIZENS & NORTHERN CORP - Quarter Report: 2020 March (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended March 31, 2020

or

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

 

For the transition period from _______________ to _________________________.

 

Commission file number: 000-16084

 

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

 

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

 

90-92 MAIN STREET, WELLSBORO, PA 16901 
 (Address of principal executive offices) (Zip code) 
   
 570-724-3411 
 (Registrant's telephone number including area code) 

 

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

 

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

 

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

 

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

Yes x No ¨

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

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

 

Common Stock ($1.00 par value)13,786,402 Shares Outstanding on May 4, 2020

 

 

 

 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CITIZENS & NORTHERN CORPORATION

Index

 

Part I.  Financial Information  
   
Item 1.  Financial Statements  
   
Consolidated Balance Sheets (Unaudited) – March 31, 2020 and December 31, 2019 Page 3
   
Consolidated Statements of Income (Unaudited) – Three-month Periods Ended March 31, 2020 and 2019 Page 4
   
Consolidated Statements of Comprehensive Income (Unaudited) - Three-month Periods Ended March 31, 2020 and 2019 Page 5
   
Consolidated Statements of Cash Flows (Unaudited) – Three-month Periods Ended March 31, 2020 and 2019 Page 6
   
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month Periods Ended March 31, 2020 and 2019 Page 7
   
Notes to Unaudited Consolidated Financial Statements Pages 8 – 36
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 37 – 59
   
Item 4.  Controls and Procedures Page 59
   
Part II.  Other Information Pages 59 – 61
   
Signatures Page 62
   
Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer Page 63
   
Exhibit 31.2.  Rule 13a-14(a)/15d-14(a) Certification - Chief Financial Officer Page 64
   
Exhibit 32.  Section 1350 Certifications Page 65

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

ITEM 1. FINANCIAL STATEMENTS        
CONSOLIDATED BALANCE SHEETS        
(In Thousands, Except Share and Per Share Data) (Unaudited)  March 31,   December 31, 
   2020   2019 
ASSETS        
Cash and due from banks:          
Noninterest-bearing  $17,044   $17,667 
Interest-bearing   15,634    17,535 
Total cash and due from banks   32,678    35,202 
Available-for-sale debt securities, at fair value   342,416    346,723 
Marketable equity security   994    979 
Loans held for sale   579    767 
           
Loans receivable   1,167,473    1,182,222 
Allowance for loan losses   (11,330)   (9,836)
Loans, net   1,156,143    1,172,386 
           
Bank-owned life insurance   18,745    18,641 
Accrued interest receivable   5,192    5,001 
Bank premises and equipment, net   18,023    17,170 
Foreclosed assets held for sale   1,685    2,886 
Deferred tax asset, net   684    2,618 
Goodwill   28,388    28,388 
Core deposit intangibles   1,185    1,247 
Other assets   22,733    22,137 
TOTAL ASSETS  $1,629,445   $1,654,145 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $288,316   $285,904 
Interest-bearing   961,596    966,756 
Total deposits   1,249,912    1,252,660 
Short-term borrowings   37,607    86,220 
Long-term borrowings   72,944    52,127 
Subordinated debt   6,500    6,500 
Accrued interest and other liabilities   11,254    12,186 
TOTAL LIABILITIES   1,378,217    1,409,693 
           
STOCKHOLDERS' EQUITY          
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation          
preference per share; no shares issued   0    0 
Common stock, par value $1.00 per share; authorized 20,000,000 shares;          
issued 13,934,996 and outstanding 13,787,160 at March 31, 2020;          
issued 13,934,996 and outstanding 13,716,445 at December 31, 2019;   13,935    13,935 
Paid-in capital   103,731    104,519 
Retained earnings   126,944    126,480 
Treasury stock, at cost; 147,836 shares at March 31, 2020 and 218,551          
shares at December 31, 2019   (2,856)   (4,173)
Accumulated other comprehensive income   9,474    3,691 
TOTAL STOCKHOLDERS' EQUITY   251,228    244,452 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY  $1,629,445   $1,654,145 

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Consolidated Statements of Income  3 Months Ended 
(In Thousands Except Per Share Data) (Unaudited)  March 31,   March 31, 
   2020   2019 
INTEREST INCOME          
Interest and fees on loans:          
Taxable  $14,461   $9,948 
Tax-exempt   459    564 
Interest on mortgages held for sale   6    3 
Interest on balances with depository institutions   81    116 
Income from available-for-sale debt securities:          
Taxable   1,588    1,834 
Tax-exempt   437    594 
Dividends on marketable equity security   5    6 
Total interest and dividend income   17,037    13,065 
INTEREST EXPENSE          
Interest on deposits   2,155    1,053 
Interest on short-term borrowings   198    79 
Interest on long-term borrowings   295    218 
Interest on subordinated debt   107    0 
Total interest expense   2,755    1,350 
Net interest income   14,282    11,715 
Provision (credit) for loan losses   1,528    (957)
Net interest income after provision (credit) for loan losses   12,754    12,672 
NONINTEREST INCOME          
Trust and financial management revenue   1,479    1,360 
Brokerage revenue   333    307 
Insurance commissions, fees and premiums   33    30 
Service charges on deposit accounts   1,250    1,250 
Service charges and fees   63    79 
Interchange revenue from debit card transactions   731    643 
Net gains from sale of loans   315    87 
Loan servicing fees, net   (14)   28 
Increase in cash surrender value of life insurance   104    92 
Other noninterest income   987    530 
Total noninterest income   5,281    4,406 
NONINTEREST EXPENSE          
Salaries and wages   5,340    4,493 
Pensions and other employee benefits   2,038    1,618 
Occupancy expense, net   745    657 
Furniture and equipment expense   358    301 
Data processing expenses   1,018    803 
Automated teller machine and interchange expense   297    189 
Pennsylvania shares tax   422    347 
Professional fees   379    222 
Telecommunications   206    164 
Directors' fees   170    183 
Merger-related expenses   141    311 
Other noninterest expense   1,939    1,719 
Total noninterest expense   13,053    11,007 
Income before income tax provision   4,982    6,071 
Income tax provision   816    981 
NET INCOME  $4,166   $5,090 
EARNINGS PER COMMON SHARE - BASIC  $0.30   $0.41 
EARNINGS PER COMMON SHARE - DILUTED  $0.30   $0.41 

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Consolidated Statements of Comprehensive Income  Three Months Ended 
(In Thousands)  March 31,   March 31, 
   2020   2019 
Net income  $4,166   $5,090 
           
Unrealized holding gains on available-for-sale debt securities   7,240    4,261 
           
Unfunded pension and postretirement obligations:          
Changes from plan amendments and actuarial gains and losses   88    214 
Amortization of prior service cost and net actuarial loss included in          
net periodic benefit cost   (8)   (8)
Other comprehensive gain on unfunded retirement obligations   80    206 
           
Other comprehensive income before income tax   7,320    4,467 
Income tax related to other comprehensive income   (1,537)   (938)
           
Net other comprehensive income   5,783    3,529 
           
Comprehensive income  $9,949   $8,619 

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CONSOLIDATED STATEMENTS OF CASH FLOWS  3 Months Ended 
(In Thousands)  March 31,   March 31, 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $4,166   $5,090 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision (credit) for loan losses   1,528    (957)
Accretion and amortization on securities, net   367    209 
Increase in cash surrender value of life insurance   (104)   (92)
Depreciation and amortization of bank premises and equipment   447    425 
Other accretion and amortization, net   (355)   (3)
Stock-based compensation   194    229 
Deferred income taxes   397    476 
Decrease in fair value of servicing rights   126    77 
Gains on sales of loans, net   (315)   (87)
Origination of loans held for sale   (10,414)   (2,259)
Proceeds from sales of loans held for sale   10,842    2,539 
Increase in accrued interest receivable and other assets   (1,886)   (649)
Decrease in accrued interest payable and other liabilities   (799)   (2,217)
Other   (67)   39 
Net Cash Provided by Operating Activities   4,127    2,820 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from maturities of certificates of deposit   0    100 
Proceeds from sales of available-for-sale debt securities   6,722    0 
Proceeds from calls and maturities of available-for-sale debt securities   17,451    18,613 
Purchase of available-for-sale debt securities   (12,993)   (8,934)
Redemption of Federal Home Loan Bank of Pittsburgh stock   3,660    2,308 
Purchase of Federal Home Loan Bank of Pittsburgh stock   (2,735)   (1,753)
Net decrease in loans   15,179    1,681 
Proceeds from bank owned life insurance   0    796 
Purchase of premises and equipment   (1,300)   (496)
Proceeds from sale of foreclosed assets   1,253    176 
Other   70    46 
Net Cash Provided by Investing Activities   27,307    12,537 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net (decrease) increase in deposits   (2,789)   6,139 
Net decrease in short-term borrowings   (48,619)   (7,721)
Proceeds from long-term borrowings   25,891    5,000 
Repayments of long-term borrowings   (5,074)   (8,071)
Sale of treasury stock   124    162 
Purchase of vested restricted stock   (163)   (189)
Common dividends paid   (3,328)   (4,062)
Net Cash Used in Financing Activities   (33,958)   (8,742)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (2,524)   6,615 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   31,122    32,827 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $28,598   $39,442 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Right-of-use assets recognized at adoption of ASU 2016-02  $0   $1,132 
Leased assets obtained in exchange for new operating lease liabilities  $0   $346 
Assets acquired through foreclosure of real estate loans  $0   $399 
Interest paid  $2,650   $1,377 
Income taxes paid  $42   $50 

 

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

 

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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     
Three Months Ended March 31, 2020  Shares   Shares   Stock   Capital   Earnings   Income (Loss)   Stock   Total 
Balance, December 31, 2019   13,934,996    218,551   $13,935   $104,519   $126,480   $3,691   $(4,173)  $244,452 
Net income                       4,166              4,166 
Other comprehensive income, net                            5,783         5,783 
Cash dividends declared on common                                        
stock, $.27 per share                       (3,702)             (3,702)
Shares issued for dividend reinvestment                                        
plan        (13,945)        104              270    374 
Share issued from treasury and redeemed                                        
related to exercise of stock options        (9,652)        (62)             186    124 
Restricted stock granted        (55,864)        (1,079)             1,079    0 
Forfeiture of restricted stock        2,884         55              (55)   0 
Stock-based compensation expense                  194                   194 
Purchase of restricted stock for                                        
tax withholding        5,862                        (163)   (163)
Balance, March 31, 2020   13,934,996    147,836   $13,935   $103,731   $126,944   $9,474   $(2,856)  $251,228 
                                         
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 
Purchase 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 

 

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

 

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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, 2019, 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 2019 information has been reclassified for consistency with the 2020 presentation.

 

Operating results reported for the three-month period ended March 31, 2020 might not be indicative of the results for the year ending December 31, 2020. 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 U.S. 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 December 31, 2019, right-of-use assets of $1,637,000 were included in other assets, and the related liabilities totaling the same amount were included in accrued interest and other liabilities, in the consolidated balance sheets.

 

Effective December 31, 2019, the Corporation elected early adoption of ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplified accounting for goodwill impairment by removing 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 is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Adoption of this ASU did not have a material impact on the Corporation’s 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.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Recently Issued But Not Yet Effective Accounting Pronouncements

 

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

 

ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:

 

·Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate.
·Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue.

 

The amendments in this Update are effective as of March 12, 2020 through December 31, 2022. The Corporation expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of this Update.

 

2. BUSINESS COMBINATION AND PENDING ACQUISITION

 

Business Combination – Acquisition of Monument Bancorp, Inc.

 

On April 1, 2019, the Corporation completed its acquisition of 100% of the common stock of Monument Bancorp, Inc.(“Monument.”) Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Pursuant to the merger, Monument was merged into Citizens & Northern Corporation and Monument Bank was merged into C&N Bank.

 

Total purchase consideration was $42.7 million, including cash paid to former Monument shareholders totaling $9.6 million and 1,279,825 shares of Corporation common stock issued with a value of $33.1 million, net of costs directly related to stock issuance of $181,000.

 

In connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with no realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately no realized gain or loss. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets or liabilities in the first quarter 2020.

 

Merger-related expenses, including legal and professional expenses and conversion of Monument’s customer accounting data into C&N’s core system, were $311,000 in the first quarter 2019.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Pending Acquisition of Covenant Financial, Inc.

 

In December 2019, the Corporation announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”). Covenant is the holding company for Covenant Bank, which operates banking offices in Bucks and Chester Counties of PA. At March 31, 2020, Covenant reported total assets of $522 million, liabilities of $479 million and stockholders’ equity of $43 million. Under the terms of the definitive agreement, the Corporation will pay cash for 25% of the Covenant shares and will convert 75% of Covenant shares to the Corporation’s common stock. The transaction was valued on December 18, 2019 at approximately $77 million. Based on the average closing price of the Corporation’s common stock in the final 10 trading days of March 2020 of $18.87 per share, the value of the transaction would be $60 million. The value used to record the stock-based portion of the merger consideration will be based on the average of the high and low trading price of the Corporation’s common stock on the closing date. The merger is subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval of Covenant’s shareholders. The merger is expected to close in the third quarter 2020.

 

In the first quarter 2020, the Corporation incurred merger-related expenses related to the planned acquisition of Covenant totaling $141,000, In the year ending December 31, 2020, management expects the Corporation to incur significant additional merger-related expenses, including severance and similar expenses, costs associated with termination of data processing contracts, conversion of Covenant’s customer accounting data, legal and professional fees and various other costs. Management estimates pre-tax merger-related expenses associated with the Covenant acquisition will total approximately $7.4 million ($6.0 million, net of tax), with most of the expenses expected to be incurred in the third quarter 2020.

 

3. PER SHARE DATA

 

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

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q 

(In Thousands, Except Share and Per Share Data)

 

   3 Months Ended 
   March 31,   March 31, 
   2020   2019 
Basic          
Net income  $4,166   $5,090 
Less: Dividends and undistributed earnings allocated to participating securities   (20)   (27)
Net income attributable to common shares  $4,146   $5,063 
Basic weighted-average common shares outstanding   13,685,257    12,308,862 
Basic earnings per common share (a)  $0.30   $0.41 
Diluted          
Net income attributable to common shares  $4,146   $5,063 
Basic weighted-average common shares outstanding   13,685,257    12,308,862 
Dilutive effect of potential common stock arising from stock options   13,981    25,445 
Diluted weighted-average common shares outstanding   13,699,238    12,334,307 
Diluted earnings per common share (a)  $0.30   $0.41 
Weighted-average nonvested restricted shares outstanding   65,533    65,639 

 

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

 

Anti-dilutive stock options are excluded from net income per share calculations. There were no anti-dilutive instruments in the three-month periods ended March 31, 2020 and 2019.

 

4. COMPREHENSIVE INCOME

 

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

 

(In Thousands)  Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Three Months Ended March 31, 2020               
               
Other comprehensive income from available-for-sale debt securities, Unrealized holding gains on available-for-sale debt securities  $7,240   $(1,521)  $5,719 
                
Unfunded pension and postretirement obligations:               
Changes from plan amendments and actuarial gains and losses   88    (18)   70 
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   80    (16)   64 
                
Total other comprehensive income  $7,320   $(1,537)  $5,783 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

(In Thousands)  Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Three Months Ended March 31, 2019               
               
Other comprehensive income from available-for-sale debt securities, Unrealized holding gains on available-for-sale 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 

 

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

 

(In Thousands)  Unrealized       Accumulated 
   Gains   Unfunded   Other 
   (Losses)   Retirement   Comprehensive 
   on Securities   Obligations   Income (Loss) 
Three Months Ended March 31, 2020               
Balance, beginning of period  $3,511   $180   $3,691 
Other comprehensive income during three months ended March 31, 2020   5,719    64    5,783 
Balance, end of period  $9,230   $244   $9,474 
                
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)

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

For the Three Months Ended March 31, 2020       
(In Thousands)  Reclassified from    
   Accumulated Other    
Details about Accumulated Other  Comprehensive   Affected Line Item in the Consolidated
Comprehensive Income Components  Income   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)   

 

For the Three Months Ended March 31, 2019       
(In Thousands)       
   Reclassified from    
   Accumulated Other    
Details about Accumulated Other  Comprehensive   Affected Line Item in the Consolidated
Comprehensive Income (Loss) Components  Income (Loss)   Statements of Income
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)   

 

5. CASH AND DUE FROM BANKS

 

Cash and due from banks at March 31, 2020 and December 31, 2019 include the following:

 

(In thousands)  March 31   Dec. 31, 
   2020   2019 
Cash and cash equivalents  $28,598   $31,122 
Certificates of deposit   4,080    4,080 
Total cash and due from banks  $32,678   $35,202 

 

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.

 

Historically, C&N Bank has been 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. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had no required reserves at March 31, 2020. Required reserves were $20,148,000 at December 31, 2019.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

6. SECURITIES

 

Amortized cost and fair value of available-for-sale debt securities at March 31, 2020 and December 31, 2019 are summarized as follows:

 

       March 31, 2020     
       Gross   Gross     
       Unrealized   Unrealized     
   Amortized   Holding   Holding   Fair 
(In Thousands)  Cost   Gains   Losses   Value 
                 
Obligations of U.S. Government agencies  $15,704   $704   $0   $16,408 
Obligations of states and political subdivisions:                    
Tax-exempt   78,126    2,982    (36)   81,072 
Taxable   35,764    1,348    (38)   37,074 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
Residential pass-through securities   54,280    1,472    0    55,752 
Residential collateralized mortgage obligations   101,130    2,435    (9)   103,556 
Commercial mortgage-backed securities   45,727    2,846    (19)   48,554 
Total available-for-sale debt securities  $330,731   $11,787   $(102)  $342,416 

 

       December 31, 2019     
       Gross   Gross     
       Unrealized   Unrealized     
   Amortized   Holding   Holding   Fair 
(In Thousands)  Cost   Gains   Losses   Value 
                 
Obligations of U.S. Government agencies  $16,380   $620   $0   $17,000 
Obligations of states and political subdivisions:                    
Tax-exempt   68,787    2,011    (38)   70,760 
Taxable   35,446    927    (70)   36,303 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
Residential pass-through securities   58,875    472    (137)   59,210 
Residential collateralized mortgage obligations   115,025    308    (610)   114,723 
Commercial mortgage-backed securities   47,765    1,069    (107)   48,727 
Total available-for-sale debt securities  $342,278   $5,407   $(962)  $346,723 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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, 2020 and December 31, 2019:

 

March 31, 2020  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  $2,968   $(36)  $0   $0   $2,968   $(36)
Taxable   1,270    (38)   0    0    1,270    (38)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                              
Residential collateralized mortgage obligations   875    (9)   0    0    875    (9)
Commercial mortgage-backed securities   3,613    (19)   0    0    3,613    (19)
Total temporary impaired available-for-sale debt securities  $8,726   $(102)  $0   $0   $8,726   $(102)

 

December 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  $6,429   $(38)  $0   $0   $6,429   $(38)
Taxable   5,624    (68)   161    (2)   5,785    (70)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                              
Residential pass-through securities   9,771    (35)   14,787    (102)   24,558    (137)
Residential collateralized mortgage obligations   31,409    (195)   30,535    (415)   61,944    (610)
Commercial mortgage-backed securities   0    0    8,507    (107)   8,507    (107)
Total temporarily impaired available-for-sale debt securities  $53,233   $(336)  $53,990   ($626)  $107,223   $(962)

 

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

 

(In Thousands)  3 Months Ended 
   March 31,   March 31, 
   2020   2019 
Gross realized gains from sales  $52   $0 
Gross realized losses from sales   (52)   0 
Net realized gains  $0   $0 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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, 2020. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(In Thousands)

 

   March 31, 2020 
   Amortized   Fair 
  Cost   Value 
Due in one year or less  $6,611   $6,644 
Due from one year through five years   33,945    34,945 
Due from five years through ten years   43,596    45,168 
Due after ten years   45,442    47,797 
Sub-total   129,594    134,554 
Mortgage-backed securities issued or guaranteed
  by U.S. Government agencies or sponsored
  agencies:
          
     Residential pass-through securities   54,280    55,752 
     Residential collateralized mortgage obligations   101,130    103,556 
     Commercial mortgage-backed securities   45,727    48,554 
Total  $330,731   $342,416 

 

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 $206,718,000 at March 31, 2020 and $215,270,000 at December 31, 2019 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 9 for information concerning securities pledged to secure borrowing arrangements.

 

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

 

A summary of information management considered in evaluating debt and equity securities for other-than-temporary impairment (“OTTI”) at March 31, 2020 is provided below.

 

Debt Securities

 

At March 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019 to be temporary.

 

Equity Securities

 

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 $9,206,000 at March 31, 2020 and $10,131,000 at December 31, 2019. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at March 31, 2020 and December 31, 2019. 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.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q 

 

The Corporation’s marketable equity security, with a carrying value of $994,000 at March 31, 2020 and $979,000 at December 31, 2019, consisted exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $6,000 at March 31, 2020 and $21,000 at December 31, 2019. There was a decrease in the unrealized loss of $15,000 in the first quarter 2020 and a decrease in the unrealized loss of $12,000 in the first quarter 2019. Changes in the unrealized losses on this security are included in other noninterest income in the consolidated statements of income.

 

7. LOANS

 

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at March 31, 2020 and December 31, 2019 are summarized by segment, and by classes within each segment, as follows:

 

Summary of Loans by Type 

(In Thousands)

 

  March 31,   Dec. 31, 
  2020   2019 
Residential mortgage:          
  Residential mortgage loans - first liens  $508,387   $510,641 
  Residential mortgage loans - junior liens   27,028    27,503 
  Home equity lines of credit   32,090    33,638 
  1-4 Family residential construction   14,121    14,798 
Total residential mortgage   581,626    586,580 
Commercial:          
  Commercial loans secured by real estate   295,860    301,227 
  Commercial and industrial   132,308    126,374 
  Political subdivisions   43,613    53,570 
  Commercial construction and land   33,340    33,555 
  Loans secured by farmland   11,524    12,251 
  Multi-family (5 or more) residential   32,370    31,070 
  Agricultural loans   3,886    4,319 
  Other commercial loans   16,430    16,535 
Total commercial   569,331    578,901 
Consumer   16,516    16,741 
Total   1,167,473    1,182,222 
Less: allowance for loan losses   (11,330)   (9,836)
Loans, net  $1,156,143   $1,172,386 

 

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $2,492,000 at March 31, 2020 and $2,482,000 at December 31, 2019.

 

Effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument. The loans acquired from Monument were recorded at an initial fair value of $259,295,000. The gross amortized cost of loans acquired from Monument on April 1, 2019 was reduced $1,807,000 based on movements in interest rates (market rate adjustment) and was also reduced $1,914,000 based on a credit fair value adjustment on non-impaired loans and by $318,000 based on a credit fair value adjustment on impaired loans. In the last three quarters of 2019, the Corporation recognized accretion of a portion of the market rate adjustment and credit adjustment on non-impaired loans, and a partial recovery of purchased credit impaired (PCI) loans. In the first quarter 2020, adjustments to the initial market rate and credit fair value adjustments were recognized as follows:

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(In Thousands) 

 

      Credit 
   Market   Adjustment on 
   Rate   Non-impaired 
  Adjustment   Loans 
Adjustments to gross amortized          
  cost of loans at December 31, 2019  $(1,415)  $(1,216)
Accretion recognized in interest          
  income   147    205 
Adjustments to gross amortized          
  cost of loans at March 31, 2020  $(1,268)  $(1,011)

 

Loans acquired from Monument that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI) were valued at $441,000 at April 1, 2019, which was $318,000 lower than the total outstanding balance of the loans. The fair values of all of the PCI loans were determined based on the estimated realizable value of underlying real estate collateral, net of estimated selling cost. In the first quarter 2020, the Corporation recorded interest income of $112,000 from the excess of proceeds received on the pay-off of PCI loans over their carrying amounts. A summary of PCI loans held at March 31, 2020 and December 31, 2019 is as follows:

 

(In Thousands)

 

  March 31,   December 31, 
  2020   2019 
Outstanding balance  $408   $759 
Carrying amount   305    441 

 

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in northcentral Pennsylvania, the southern tier of New York State and southeastern Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either March 31, 2020 or December 31, 2019.

 

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, 2020, and December 31, 2019, management determined that no allowance for credit losses related to unfunded loan commitments was required.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month periods ended March 31, 2020 and 2019 were as follows:

 

Three Months Ended March 31, 2020

(In Thousands)

 

  Dec. 31,               March 31, 
  2019
Balance
   Charge-offs   Recoveries   Provision
(Credit)
   2020
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
  Residential mortgage loans - first liens  $3,405   $0   $1   $166   $3,572 
  Residential mortgage loans - junior liens   384    0    1    29    414 
  Home equity lines of credit   276    0    1    1    278 
  1-4 Family residential construction   117    0    0    2    119 
Total residential mortgage   4,182    0    3    198    4,383 
Commercial:                         
  Commercial loans secured by real estate   1,921    0    0    11    1,932 
  Commercial and industrial   1,391    (17)   0    1,271    2,645 
  Commercial construction and land   966    0    0    4    970 
  Loans secured by farmland   158    0    0    (14)   144 
  Multi-family (5 or more) residential   156    0    0    43    199 
  Agricultural loans   41    0    0    (2)   39 
  Other commercial loans   155    0    0    5    160 
Total commercial   4,788    (17)   0    1,318    6,089 
Consumer   281    (31)   11    12    273 
Unallocated   585    0    0    0    585 
Total Allowance for Loan Losses  $9,836   $(48)  $14   $1,528   $11,330 

 

Three Months Ended March 31, 2019

(In Thousands)

 

  Dec. 31,               March 31, 
  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 

 

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

 

 19 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Performing loans acquired from Monument are presented net of a discount for credit losses of $1,011,000 at March 31, 2020 and $1,216,000 at December 31, 2019. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. None of the performing loans purchased were found to be impaired at March 31, 2020, and the purchased performing loans were excluded from the loan pools for which the general component of the allowance for loan losses was calculated.

 

In the first quarter 2020, the provision for loan losses was $1,528,000, up from a credit (reduction in expense) to the provision of $957,000 in the first quarter 2019. In the first quarter 2020, the Corporation recognized a specific allowance of $1,193,000 related to a commercial loan with an outstanding balance of $3.5 million at March 31, 2020. In total, the provision included a charge of $1,210,000 related to specific loans (net increase in specific allowances on loans of $1,176,000 and net charge-offs of $34,000), a charge of $402,000 attributable to increases in qualitative factors and a credit of $67,000 in the net charge-off experience factors used to estimate the allowance, and a net credit of $17,000 from the impact of a reduction in total outstanding loans. In comparison, the Corporation recorded a credit for loan losses (reduction in expense) of $957,000 in the first quarter 2019, as specific allowances totaling $1,365,000 at December 31, 2018 on two commercial loans were eliminated. These two loans were no longer considered impaired at March 31, 2019 and were returned to full accrual status in the first quarter 2019. In total, the first quarter 2019 credit for loan losses included a net credit of $1,011,000 related to changes in specific allowances on loans, 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.

 

 20 

 

 

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, 2020 and December 31, 2019:

 

March 31, 2020

(In Thousands)

 

              Purchased    
     Special        Credit    
  Pass  Mention  Substandard  Doubtful  Impaired  Total 
Residential Mortgage:                         
     Residential Mortgage loans - first liens  $498,803  $305  $9,202  $0  $77  $508,387 
     Residential Mortgage loans - junior liens   26,367   136   525   0   0   27,028 
     Home Equity lines of credit   31,613   59   418   0   0   32,090 
     1-4 Family residential construction   14,121   0   0   0   0   14,121 
Total residential mortgage   570,904   500   10,145   0   77   581,626 
Commercial:                         
     Commercial loans secured by real estate   287,783   6,191   1,658   0   228   295,860 
     Commercial and Industrial   117,424   8,728   6,156   0   0   132,308 
     Political subdivisions   43,613   0   0   0   0   43,613 
     Commercial construction and land   32,016   0   1,324   0   0   33,340 
     Loans secured by farmland   5,569   5,062   893   0   0   11,524 
     Multi-family (5 or more) residential   31,465   0   905   0   0   32,370 
     Agricultural loans   2,956   304   626   0   0   3,886 
     Other commercial loans   16,380   0   50   0   0   16,430 
Total commercial   537,206   20,285   11,612   0   228   569,331 
Consumer   16,433   0   83   0   0   16,516 
Totals  $1,124,543  $20,785  $21,840  $0  $305  $1,167,473 

 

December 31, 2019

(In Thousands) 

 

              Purchased    
     Special        Credit    
  Pass  Mention  Substandard  Doubtful  Impaired  Total 
Residential Mortgage:                         
     Residential Mortgage loans - first liens  $500,963  $193  $9,324  $84  $77  $510,641 
     Residential Mortgage loans - junior liens   26,953   79   471   0   0   27,503 
     Home Equity lines of credit   33,170   59   409   0   0   33,638 
     1-4 Family residential construction   14,798   0   0   0   0   14,798 
Total residential mortgage   575,884   331   10,204   84   77   586,580 
Commercial:                         
     Commercial loans secured by real estate   294,397   4,773   1,693   0   364   301,227 
     Commercial and Industrial   114,293   9,538   2,543   0   0   126,374 
     Political subdivisions   53,570   0   0   0   0   53,570 
     Commercial construction and land   32,224   0   1,331   0   0   33,555 
     Loans secured by farmland   6,528   4,681   1,042   0   0   12,251 
     Multi-family (5 or more) residential   30,160   0   910   0   0   31,070 
     Agricultural loans   3,343   335   641   0   0   4,319 
     Other commercial loans   16,416   0   119   0   0   16,535 
Total commercial   550,931   19,327   8,279   0   364   578,901 
Consumer   16,720   0   21   0   0   16,741 
Totals  $1,143,535  $19,658  $18,504  $84  $441  $1,182,222 

 

 21 

 

 

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, 2020 and December 31, 2019, a five-year average net charge-off rate was used for commercial loans secured by real estate and for multi-family residential loans, while a three-year average net charge-off rate was used for all other loan classes.

 

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

 

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

 

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

 

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, 2020 and December 31, 2019. 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.

 

 22 

 

 

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, 2020 and December 31, 2019.

 

March 31, 2020

(In Thousands)

 

  Loans:  Allowance for Loan Losses: 
         Purchased             
  Individually  Collectively  Performing     Individually  Collectively    
  Evaluated  Evaluated  Loans  Totals  Evaluated  Evaluated  Totals 
Residential mortgage:                             
  Residential mortgage loans - first liens  $556  $405,687  $102,144  $508,387  $0  $3,572  $3,572 
  Residential mortgage loans - junior liens   367   24,755   1,906   27,028   194   220   414 
  Home equity lines of credit   0   30,580   1,510   32,090   0   278   278 
  1-4 Family residential construction   0   13,963   158   14,121   0   119   119 
Total residential mortgage   923   474,985   105,718   581,626   194   4,189   4,383 
Commercial:                             
  Commercial loans secured by real estate   714   193,507   101,639   295,860   0   1,932   1,932 
  Commercial and industrial   4,974   124,917   2,417   132,308   1,325   1,320   2,645 
  Political subdivisions   0   43,613   0   43,613   0   0   0 
  Commercial construction and land   1,255   29,308   2,777   33,340   674   296   970 
  Loans secured by farmland   424   10,845   255   11,524   34   110   144 
  Multi-family (5 or more) residential   0   13,517   18,853   32,370   0   199   199 
  Agricultural loans   0   3,886   0   3,886   0   39   39 
  Other commercial loans   0   15,864   566   16,430   0   160   160 
Total commercial   7,367   435,457   126,507   569,331   2,033   4,056   6,089 
Consumer   0   16,516   0   16,516   0   273   273 
Unallocated                           585 
                              
Total  $8,290  $926,958  $232,225  $1,167,473  $2,227  $8,518  $11,330 

 

 23 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

December 31, 2019

(In Thousands)

 

  Loans:  Allowance for Loan Losses: 
         Purchased             
  Individually  Collectively  Performing     Individually  Collectively    
  Evaluated  Evaluated  Loans  Totals  Evaluated  Evaluated  Totals 
Residential mortgage:                             
  Residential mortgage loans - first liens  $1,023  $405,186  $104,432  $510,641  $0  $3,405  $3,405 
  Residential mortgage loans - junior liens   368   24,730   2,405   27,503   176   208   384 
  Home equity lines of credit   0   32,147   1,491   33,638   0   276   276 
  1-4 Family residential construction   0   14,640   158   14,798   0   117   117 
Total residential mortgage   1,391   476,703   108,486   586,580   176   4,006   4,182 
Commercial:                             
  Commercial loans secured by real estate   684   198,532   102,011   301,227   0   1,921   1,921 
  Commercial and industrial   1,467   122,313   2,594   126,374   149   1,242   1,391 
  Political subdivisions   0   53,570   0   53,570   0   0   0 
  Commercial construction and land   1,261   29,710   2,584   33,555   678   288   966 
  Loans secured by farmland   607   11,386   258   12,251   48   110   158 
  Multi-family (5 or more) residential   0   10,617   20,453   31,070   0   156   156 
  Agricultural loans   76   4,243   0   4,319   0   41   41 
  Other commercial loans   0   15,947   588   16,535   0   155   155 
Total commercial   4,095   446,318   128,488   578,901   875   3,913   4,788 
Consumer   0   16,741   0   16,741   0   281   281 
Unallocated                           585 
                              
Total  $5,486  $939,762  $236,974  $1,182,222  $1,051  $8,200  $9,836 

 

Summary information related to impaired loans at March 31, 2020 and December 31, 2019 is provided in the table immediately below. Purchased credit impaired loans are excluded from the table.

 

(In Thousands)

 

  March 31, 2020  December 31, 2019 
   Unpaid          Unpaid         
   Principal   Recorded   Related  Principal   Recorded   Related 
  Balance   Investment   Allowance  Balance   Investment   Allowance 
With no related allowance recorded:                             
  Residential mortgage loans - first liens  $180   $152   $0  $645   $617   $0 
  Residential mortgage loans - junior liens   41    41    0   42    42    0 
  Commercial loans secured by real estate   714    714    0   684    684    0 
  Commercial and industrial   587    587    0   563    563    0 
  Loans secured by farmland   87    87    0   129    129    0 
  Agricultural loans   0    0    0   76    76    0 
Total with no related allowance recorded   1,609    1,581    0   2,139    2,111    0 
                              
With a related allowance recorded:                             
  Residential mortgage loans - first liens   404    404    0   406    406    0 
  Residential mortgage loans - junior liens   326    326    194   326    326    176 
  Commercial and industrial   4,387    4,387    1,325   904    904    149 
  Construction and other land loans   1,255    1,255    674   1,261    1,261    678 
  Loans secured by farmland   337    337    34   478    478    48 
Total with a related allowance recorded   6,709    6,709    2,227   3,375    3,375    1,051 
Total  $8,318   $8,290   $2,227  $5,514   $5,486   $1,051 

 

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.

 

 24 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

(In Thousands)

 

           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, 
  2020   2019   2020   2019 
Residential mortgage:                    
  Residential mortgage loans - first lien  $1,232   $981   $8   $10 
  Residential mortgage loans - junior lien   382    291    0    2 
  Home equity lines of credit   65    0    1    0 
Total residential mortgage   1,679    1,272    9    12 
Commercial:                    
  Commercial loans secured by real estate   387    3,040    4    10 
  Commercial and industrial   2,872    1,713    1    26 
  Commercial construction and land   1,308    0    12    0 
  Loans secured by farmland   516    1,442    17    1 
  Agricultural loans   76    660    0    12 
  Other commercial loans   50    0    1    0 
Total commercial   5,209    6,855    35    49 
Consumer   0    8    0    0 
Total  $6,888   $8,135   $44   $61 

 

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.

 

 25 

 

 

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

(In Thousands)  March 31,2020   December 31,2019 
   Past Due       Past Due     
   90+ Days and       90+ Days and     
   Accruing   Nonaccrual   Accruing   Nonaccrual 
Residential mortgage:                    
Residential mortgage loans - first liens  $983   $4,818   $878   $4,679 
Residential mortgage loans - junior liens   98    354    53    326 
Home equity lines of credit   107    74    71    73 
1-4 Family residential construction   0    39    0    0 
Total residential mortgage   1,188    5,285    1,002    5,078 
Commercial:                    
Commercial loans secured by real estate   496    744    107    1,148 
Commercial and industrial   59    4,487    15    1,051 
Commercial construction and land   0    1,305    0    1,311 
Loans secured by farmland   229    424    43    565 
Agricultural loans   1    0    0    0 
Other commercial   0    49    0    49 
Total commercial   785    7,009    165    4,124 
Consumer   120    15    40    16 
                     
Totals  $2,093   $12,309   $1,207   $9,218 

 

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, 2020 and December 31, 2019:

 

   As of March 31, 2020   As of December 31, 2019 
   Current &               Current &             
(In Thousands)  Past Due   Past Due   Past Due       Past Due   Past Due   Past Due     
   Less than   30-89   90+       Less than   30-89   90+     
   30 Days   Days   Days   Total   30 Days   Days   Days   Total 
Residential mortgage:                                        
Residential mortgage loans - first liens  $497,246   $7,817   $3,324   $508,387   $499,024   $7,839   $3,778   $510,641 
Residential mortgage loans - junior liens   26,564    40    424    27,028    27,041    83    379    27,503 
Home equity lines of credit   31,509    474    107    32,090    33,115    452    71    33,638 
1-4 Family residential construction   14,121    0    0    14,121    14,758    40    0    14,798 
Total residential mortgage   569,440    8,331    3,855    581,626    573,938    8,414    4,228    586,580 
                                         
Commercial:                                        
Commercial loans secured by real estate   294,408    574    878    295,860    299,640    737    850    301,227 
Commercial and industrial   128,435    3,742    131    132,308    126,221    16    137    126,374 
Political subdivisions   43,613    0    0    43,613    53,570    0    0    53,570 
Commercial construction and land   33,145    145    50    33,340    33,505    0    50    33,555 
Loans secured by farmland   11,208    0    316    11,524    11,455    666    130    12,251 
Multi-family (5 or more) residential   32,370    0    0    32,370    31,070    0    0    31,070 
Agricultural loans   3,809    76    1    3,886    4,318    1    0    4,319 
Other commercial loans   16,430    0    0    16,430    16,535    0    0    16,535 
Total commercial   563,418    4,537    1,376    569,331    576,314    1,420    1,167    578,901 
Consumer   16,196    185    135    16,516    16,496    189    56    16,741 
Totals  $1,149,054   $13,053   $5,366   $1,167,473   $1,166,748   $10,023   $5,451   $1,182,222 

 

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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, 2020 and December 31, 2019 is as follows:

 

   Current &             
(In Thousands)  Past Due   Past Due   Past Due     
   Less than   30-89   90+     
   30 Days   Days   Days   Total 
March 31, 2020 Nonaccrual Totals  $4,355   $4,681   $3,273   $12,309 
December 31, 2019 Nonaccrual Totals  $3,840   $1,134   $4,244   $9,218 

 

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, 2020 and December 31, 2019 is as follows:

 

   Current &                 
(In Thousands)  Past Due   Past Due   Past Due         
   Less than   30-89   90+         
   30 Days   Days   Days   Nonaccrual   Total 
March 31, 2020 Totals  $176   $196   $0   $1,730   $2,102 
December 31, 2019 Totals  $889   $0   $0   $1,737   $2,626 

 

At March 31, 2020 and December 31, 2019, 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, 2020 and 2019 are as follows:

 

(Balances in Thousands)  Three Months Ended  Three Months Ended 
   March 31, 2020  March 31, 2019 
       Post-       Post- 
   Number   Modification   Number   Modification 
   of   Recorded   of   Recorded 
   Loans   Investment   Loans   Investment 
Residential mortgage - first liens,                    
Reduced monthly payments and extended maturity date   0   $0    1   $271 
Residential mortgage - junior liens:                    
Reduced monthly payments and extended maturity date   0    0    1    18 
New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted   1    30    0    0 
Commercial and industrial,                    
Reduced monthly payments and extended maturity date   0    0    8    177 
Agricultural loans,                    
Reduced monthly payments and extended maturity date   0    0    1    84 
Total   1   $30    11   $550 

 

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, 2020 and 2019, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

(In Thousands)  March 31,   Dec. 31, 
   2020   2019 
Foreclosed residential real estate  $130   $292 

 

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

 

(In Thousands)  March 31,   Dec. 31, 
   2020   2019 
Residential real estate in process of foreclosure  $1,779   $1,717 

 

8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Information related to the core deposit intangibles are as follows:

 

(In Thousands)        
   March 31,   December 31, 
   2020   2019 
Gross amount  $3,495   $3,495 
Accumulated amortization   (2,310)   (2,248)
Net  $1,185   $1,247 

 

Amortization expense was $62,000 in the first quarter 2020 and $2,000 in the first quarter 2019.

 

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At March 31, 2020 and December 31, 2019, the carrying value of goodwill is $28,388,000.

 

Goodwill is tested at least annually at December 31 for impairment, or more often if events or circumstances indicate there may be impairment. In the first quarter 2020, the coronavirus (COVID-19) pandemic that has impacted the U.S. and most of the world has led to government-imposed emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. These restrictions have resulted in significant adverse effects on macroeconomic conditions, and stock market valuations have decreased significantly for most companies, including banks. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In light of the adverse circumstances resulting from COVID-19, management determined it necessary to evaluate goodwill for impairment at March 31, 2020.

 

The average closing price (trading price) of the Corporation’s common stock was $19.96 per share for the month of March 2020, down from $25.90 in February 2020 and $27.37 in January 2020. The average closing price for the last 10 trading days of the first quarter 2020 (March 18 through March 31, 2020) was $18.87 per share. In comparison, the book value per share of the Corporation’s common stock at March 31, 2020 was $18.22 per share. In testing goodwill for impairment as of March 31, 2020, the Corporation by-passed performing a qualitative assessment and performed a quantitative assessment based on comparison of the Corporation’s market capitalization to its stockholders’ equity, resulting in the determination that the fair value of its reporting unit, its community banking operation, exceeded its carrying value. Accordingly, there was no goodwill impairment at March 31, 2020.

 

9. BORROWED FUNDS AND SUBORDINATED DEBT

 

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

 

(In Thousands)  March 31,   Dec. 31, 
   2020   2019 
FHLB-Pittsburgh borrowings  $35,200   $84,292 
Customer repurchase agreements   2,407    1,928 
Total short-term borrowings  $37,607   $86,220 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

(In Thousands)  March 31,   Dec. 31, 
   2020   2019 
Overnight borrowing  $17,000   $64,000 
Other short-term advances   18,200    20,292 
Total short-term FHLB-Pittsburgh borrowings  $35,200   $84,292 

 

Overnight borrowings from FHLB-Pittsburgh had an interest rate of 0.36% at March 31, 2020 and 1.81% at December 31, 2019. At March 31, 2020, other short-term advances included eight advances totaling $18,200,000 with a weighted-average interest rate of 1.68%.

 

The Corporation had available credit with other correspondent banks totaling $45,000,000 at March 31, 2020 and December 31, 2019. These lines of credit are primarily unsecured. No amounts were outstanding at March 31, 2020 or December 31, 2019.

 

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At March 31, 2020, the Corporation had available credit in the amount of $14,364,000 on this line with no outstanding advances. At December 31, 2019, the Corporation had available credit in the amount of $14,244,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $14,815,000 at March 31, 2020 and $14,728,000 at December 31, 2019.

 

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 rate paid by the Corporation on customer repurchase agreements was 0.10% at March 31, 2020 and December 31, 2019. The carrying value of the underlying securities was $2,430,000 at March 31, 2020 and $1,951,000 at December 31, 2019.

 

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $783,312,000 at March 31, 2020 and $778,877,000 at December 31, 2019. Also, the FHLB-Pittsburgh loan facility requires 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 $9,206,000 at March 31, 2020 and $10,131,000 at December 31, 2019. The Corporation’s total credit facility with FHLB-Pittsburgh was $567,606,000 at March 31, 2020, including an unused (available) amount of $459,462,000. At December 31, 2019, the Corporation’s total credit facility with FHLB-Pittsburgh was $552,546,000, including an unused (available) amount of $416,127,000.

 

LONG-TERM BORROWINGS

 

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

 

(In Thousands)  March 31,   Dec. 31, 
   2020   2019 
Loans matured in 2020 with a weighted-average rate of 2.70%  $0   $5,000 
Loan maturing in 2020 with a rate of 4.79%   17    69 
Loans maturing in 2021 with a weighted-average rate of 1.63%   20,000    6,000 
Loans maturing in 2022 with a weighted-average rate of 1.90%   22,355    20,000 
Loans maturing in 2023 with a weighted-average rate of 1.63%   22,500    20,500 
Loans maturing in 2024 with a weighted-average rate of 1.27%   7,536    0 
Loan maturing in 2025 with a rate of 4.91%   536    558 
Total long-term FHLB-Pittsburgh borrowings  $72,944   $52,127 

 

At March 31, 2020 and December 31, 2019, the Corporation has outstanding subordinated debt agreements with par values totaling $6,500,000, maturing April 1, 2027, which may be redeemed at par beginning April 1, 2022. The agreements have fixed annual interest rates of 6.50%. At March 31, 2020 and December 31, 2019, the carrying value of the subordinated debt on the consolidated balance sheet is $6,500,000.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

10. STOCK-BASED COMPENSATION PLANS

 

The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. In the first quarter 2020, the Corporation awarded 48,284 shares of restricted stock under the Stock Incentive Plan and 7,580 shares of restricted stock under the Independent Directors Stock Incentive Plan. The 2020 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and include 30,381 time-based awards with a total fair value of $801,000 at the date of grant and 17,903 performance-based awards with a total fair value of $343,000 at date of grant. The 2020 restricted stock issued under the Independent Directors Stock Incentive Plan are time-based awards, vesting over one year, with a total fair value of $200,000 at the date of grant.

 

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. Total annual stock-based compensation for the year ending December 31, 2020 is estimated to total $893,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $194,000 in the first quarter 2020 and $229,000 in the first quarter 2019.

 

11. CONTINGENCIES

 

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

 

12. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

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

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

At March 31, 2020 and December 31, 2019, assets measured at fair value and the valuation methods used are as

follows:

 

   March 31, 2020
   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   $16,408   $0   $16,408 
Obligations of states and political subdivisions:                    
Tax-exempt   0    81,072    0    81,072 
Taxable   0    37,074    0    37,074 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
Residential pass-through securities   0    55,752    0    55,752 
Residential collateralized mortgage obligations   0    103,556    0    103,556 
Commercial mortgage-backed securities   0    48,554    0    48,554 
Total available for sale debt Securities   0    342,416    0    342,416 
Marketable equity security   994    0    0    994 
Servicing rights   0    0    1,226    1,226 
Total recurring fair value measurements  $994   $342,416   $1,226   $344,636 
                     
Nonrecurring fair value measurements                    
Impaired loans with a valuation allowance  $0   $0   $6,709   $6,709 
Valuation allowance   0    0    (2,227)   (2,227)
Impaired loans, net   0    0    4,482    4,482 
Foreclosed assets held for sale   0    0    1,685    1,685 
Total nonrecurring fair value measurements  $0   $0   $6,167   $6,167 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

   December 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   $17,000   $0   $17,000 
Obligations of states and political subdivisions:                    
Tax-exempt   0    70,760    0    70,760 
Taxable   0    36,303    0    36,303 
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                    
Residential pass-through securities   0    59,210    0    59,210 
Residential collateralized mortgage obligations   0    114,723    0    114,723 
Commercial mortgage-backed securities   0    48,727    0    48,727 
Total available-for-sale debt securities   0    346,723    0    346,723 
Marketable equity security   979    0    0    979 
Servicing rights   0    0    1,277    1,277 
Total recurring fair value measurements  $979   $346,723   $1,277   $348,979 
                     

Nonrecurring fair value measurements

                    
Impaired loans with a valuation allowance  $0   $0   $3,375   $3,375 
Valuation allowance   0    0    (1,051)   (1,051)
Impaired loans, net   0    0    2,324    2,324 
Foreclosed assets held for sale   0    0    2,886    2,886 
Total nonrecurring fair value measurements  $0   $0   $5,210   $5,210 

 

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, 2020 and December 31, 2019, quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs Level 3 methodologies are as follows:

 

   Fair Value at              
   3/31/20   Valuation  Unobservable      Method or Value As of
Asset  (In Thousands)   Technique  Input(s)      3/31/20
Servicing rights  $1,226   Discounted cash flow  Discount rate   12.50%  Rate used through modeling period
           Loan prepayment speeds   213.00%  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 Additional monthly servicing cost per loan on loans more than
              $24.00   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              
   12/31/19   Valuation  Unobservable      Method or Value As of
Asset  (In Thousands)   Technique  Input(s)      12/31/19
Servicing rights  $1,277   Discounted cash flow  Discount rate   12.50%  Rate used through modeling period
           Loan prepayment speeds   183.00%  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 Additional monthly servicing cost per loan on loans
              $24.00   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:

 

(In Thousands)  3 Months Ended March 31, 
   2020   2019 
Servicing rights balance, beginning of period  $1,277   $1,404 
Issuances of servicing rights   75    20 
Unrealized losses included in earnings   (126)   (77)
Servicing rights balance, end of period  $1,226   $1,347 

 

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.

 

At March 31, 2020 and December 31, 2019, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

(In Thousands, Except                             Weighted  
Percentages)         Valuation                   Average  
    Balance at     Allowance
at
    Fair Value
at
    Valuation   Unobservable   Discount
at
 
Asset   3/31/20     3/31/20     3/31/20     Technique   Inputs   3/31/20  
                                 
Impaired loans:                                        
Residential mortgage loans -                                        
first and junior liens   $ 730     $ 194     $ 536     Sales comparison   Discount to appraised value     32 %
Commercial:                                        
Commercial and industrial     3,572       1,265       2,307     Liquidation of assets   Discount to appraised value     35 %
Commercial and industrial     815       60       755     Liquidation of accounts receivable   Discount to borrower's financial statement value     16 %
Commercial construction and land     1,255       674       581     Sales comparison   Discount to appraised value     48 %
Loans secured by farmland     337       34       303     Sales comparison   Discount to appraised value     42 %
Total impaired loans   $ 6,709     $ 2,227     $ 4,482                  
Foreclosed assets held for sale -                                        
real estate:                                        
Residential (1-4 family)   $ 130     $ 0     $ 130     Sales comparison   Discount to appraised value     61 %
Land     70       0       70     Sales comparison   Discount to appraised value     53 %
Commercial real estate     1,485       0       1,485     Sales comparison   Discount to appraised value     34 %
Total foreclosed assets held for sale   $ 1,685     $ 0     $ 1,685                  

 

(In Thousands, Except                             Weighted  
Percentages)         Valuation                   Average  
    Balance at     Allowance
at
    Fair Value
at
    Valuation   Unobservable   Discount
at
 
Asset   12/31/19     12/31/19     12/31/19     Technique   Inputs   12/31/19  
                                 
Impaired loans:                                        
Residential mortgage loans -                                        
first and junior liens   $ 732     $ 176     $ 556     Sales comparison   Discount to appraised value     30 %
Commercial:                                        
Commercial and industrial     106       89       17     Sales comparison   Discount to appraised value     69 %
Commercial and industrial     798       60       738     Liquidation of accounts receivable   Discount to borrower's financial statement value     15 %
Commercial construction and land     1,261       678       583     Sales comparison   Discount to appraised value     47 %
Loans secured by farmland     478       48       430     Sales comparison   Discount to appraised value     46 %
Total impaired loans   $ 3,375     $ 1,051     $ 2,324                  
Foreclosed assets held for sale -                                        
real estate:                                        
Residential (1-4 family)   $ 292     $ 0     $ 292     Sales comparison   Discount to appraised value     46 %
Land     70       0       70     Sales comparison   Discount to appraised value     53 %
Commercial real estate     2,524       0       2,524     Sales comparison   Discount to appraised value     39 %
Total foreclosed assets held for sale   $ 2,886     $ 0     $ 2,886                  

 

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:

 

(In Thousands)  Fair Value   March 31, 2020   December 31, 2019 
   Hierarchy   Carrying   Fair   Carrying   Fair 
   Level   Amount   Value   Amount   Value 
Financial assets:                    
Cash and cash equivalents   Level 1   $28,598   $28,598   $31,122   $31,122 
Certificates of deposit   Level 2    4,080    4,249    4,080    4,227 
Restricted equity securities (included in Other Assets)   Level 2    9,396    9,396    10,321    10,321 
Loans, net   Level 3    1,156,143    1,172,452    1,172,386    1,181,000 
Accrued interest receivable   Level 2    5,192    5,192    5,001    5,001 
                          
Financial liabilities:                         
Deposits with no stated maturity   Level 2    893,596    893,596    877,965    877,965 
Time deposits   Level 2    356,316    359,516    374,695    376,738 
Short-term borrowings   Level 2    37,607    37,471    86,220    86,166 
Long-term borrowings   Level 2    72,944    74,297    52,127    52,040 
Accrued interest payable   Level 2    369    369    311    311 

 

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.

 

13. CORONAVIRUS (COVID-19) OUTBREAK/SUBSEQUENT EVENT

 

In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. Since first being reported in China, the coronavirus has spread to additional countries including the United States. In response, many state and local governments, including the Commonwealth of Pennsylvania, have instituted emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. These restrictions have resulted in significant adverse effects for many businesses and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates.

 

The Corporation’s Pandemic Committee has instituted measures to protect the health of employees and clients, including temporarily operating branch locations on a drive-through only basis and transitioning a significant portion of the Corporation’s employees to remote work.

 

The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In the first quarter 2020, the Corporation increased the allowance for loan losses $402,000 based on an increase in qualitative factors related to potential deterioration in economic conditions. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.

 

To work with clients impacted by COVID-19, the Corporation is offering short-term (typically 90-day) loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. These efforts have been designed to assist borrowers as they deal with the current crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. The loans will not be reported as past due or as TDRs during the deferral period. The quantity and balances of modifications under the program through March 31, 2020 and April 30, 2020 are as follows:

 

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   Through March 31, 2020   Through April 30 2020 
   Number       Number     
(Dollars in Thousands)  of   Recorded   of   Recorded 
   Loans   Investment   Loans   Investment 
COVID-19-related loan modifications:                
Residential mortgage   79   $8,999    311   $43,532 
Consumer   18    258    47    599 
Commercial   100    40,825    244    136,047 
Total   197   $50,082    602   $180,178 

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (SBA) and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

 

The maximum term of PPP loans is two years, and the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation will receive fees ranging between 1% and 5% per loan, depending on the size of the loan. Fees on PPP loans, net of origination costs, will be recognized in interest income as a yield adjustment over the term of the loans.

 

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. As of April 30, 2020, the outstanding balance of PPP loans was $84,478,000, and the Corporation had received conditional approval from the SBA for an additional $11,709,000 of PPP loans expected to be funded in May 2020. Fees to be received on PPP loans originated through April 30, 2020 total $3,106,000. Management believes the Corporation has ample availability of funding sources available for PPP loans, including unused borrowing capacity with the FHLB-Pittsburgh. In April 2020, the Federal Reserve instituted the Paycheck Protection Program Liquidity Facility (“PPPLF”), which is intended to facilitate PPP lending. The Corporation is in the process of evaluating whether it will participate in the PPPLF.

 

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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:

 

·the effect of the novel coronavirus (COVID-19) and related events
·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.

 

CORONAVIRUS (COVID-19) OUTBREAK

 

The Corporation’s Pandemic Committee has instituted measures to protect the health of employees and clients, including temporarily operating branch locations on a drive-through only basis and transitioning a significant portion of the Corporation’s employees to remote work. No furloughs or layoffs of employees have been made to date. The Pandemic Committee has been very active since March 2020, providing frequent communication with employees and clients by telephone, video conference, email and digital tools, while substantially limiting business travel.

 

Emergency restrictions on the activities of businesses and individuals have resulted in significant adverse economic effects and a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In the first quarter 2020, the Corporation increased the allowance for loan losses $402,000 based on an increase in qualitative factors related to potential deterioration in economic conditions. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.

 

To work with clients impacted by COVID-19, the Corporation is offering short-term (typically 90-day) loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. These efforts have been designed to assist borrowers as they deal with the current crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. The loans will not be reported as past due or as TDRs during the deferral period. Through April 30, 2020, 602 loans with a total outstanding balance at the time of modification of $180,178,000 have been modified under this program. As shown in Note 13 to the unaudited consolidated financial statements, 244 of the loans modified through April 30, 2020 with a recorded investment of $136,047,000 were commercial loans. A breakdown of these commercial loans by industry is as follows:

 

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   Through April 30 2020 
(Dollars in Thousands)  Number     
   of   Recorded 
Commercial Loans Summary  Loans   Investment 
 Lessors of nonresidential buildings (except miniwarehouses)   41   $44,187 
 Accommodation and food services - hotels   16    33,486 
 Residential property managers   6    7,970 
 Lessors of residential buildings & dwellings   10    6,984 
 Accommodation and food services - other   31    6,863 
 Manufacturing   11    5,844 
 Real estate rental and leasing - other   5    5,258 
 Retail trade   13    4,380 
 Transportation and warehousing   18    3,881 
 Commercial printing (except screen and books)   1    3,460 
 Other services (except public administration)   10    2,019 
 Finance and insurance   2    1,860 
 Construction   22    1,780 
 Mining   8    1,656 
 Educational services   9    1,528 
 Agriculture, forestry, fishing and hunting   22    1,497 
 Healthcare and social assistance   6    1,375 
 Arts, entertainment, and recreation   5    771 
 Information   1    593 
 Wholesale trade   1    516 
 Administrative and support and waste management and remediation services   5    87 
 Public administration   1    52 
    244   $136,047 

 

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. Under the PPP, the Corporation provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

 

The maximum term of PPP loans is two years, and the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation will receive fees ranging between 1% and 5% per loan, depending on the size of the loan. Fees on PPP loans, net of origination costs, will be recognized in interest income as a yield adjustment over the term of the loans.

 

As of April 30, 2020, the outstanding balance of PPP loans was $84,478,000, and the Corporation had received conditional approval from the SBA for an additional $11,709,000 of PPP loans expected to be funded in May 2020. Fees to be received on PPP loans originated through April 30, 2020 total $3,106,000. Management believes the Corporation has ample availability of funding sources available for PPP loans, including unused borrowing capacity with the FHLB-Pittsburgh. In April 2020, the Federal Reserve instituted the Paycheck Protection Program Liquidity Facility (“PPPLF”), which is intended to facilitate PPP lending. The Corporation is in the process of evaluating whether it will participate in the PPPLF.

 

Capital Strength

 

While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, C&N Bank, entered the crisis from a position of strength. This is especially apparent in the capital ratios, which are at levels that demonstrate the capacity to absorb the acquisition of Covenant Financial, Inc. as well as significant losses if they arise while continuing to meet the requirements to be considered well capitalized.

 

C&N Bank’s leverage ratio (Tier 1 capital to average assets) at March 31, 2020 of 12.38% is more than double the well-capitalized threshold of 5%, an excess capital amount of $117.0 million. Similarly, the total capital to risk-weighted assets ratio at March 31, 2020 is 19.18%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $99.5 million.

 

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Additional details regarding the Corporation’s and C&N Bank’s regulatory capital position are provided in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

 

PENDING AND COMPLETED BUSINESS COMBINATIONS

 

Pending Acquisition of Covenant Financial, Inc.

 

In December 2019, the Corporation announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”). Covenant is the holding company for Covenant Bank, which operates banking offices in Bucks and Chester Counties of PA. At March 31, 2020, Covenant reported total assets of $522 million, liabilities of $479 million and stockholders’ equity of $43 million. Under the terms of the definitive agreement, the Corporation will pay cash for 25% of the Covenant shares and will convert 75% of Covenant shares to the Corporation’s common stock. The transaction was valued on December 18, 2019 at approximately $77 million. Based on the average closing price of the Corporation’s common stock in the final 10 trading days of March 2020 of $18.87 per share, the value of the transaction would be $60 million. The value used to record the stock-based portion of the merger consideration will be based on the average of the high and low trading price of the Corporation’s common stock on the closing date. The merger is subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval of Covenant’s shareholders. The merger is expected to close in the third quarter 2020.

 

In the first quarter 2020, the Corporation incurred merger-related expenses related to the planned acquisition of Covenant totaling $141,000, In the year ending December 31, 2020, management expects the Corporation to incur significant additional merger-related expenses, including severance and similar expenses, costs associated with termination of data processing contracts, conversion of Covenant’s customer accounting data, legal and professional fees and various other costs. Management estimates pre-tax merger-related expenses associated with the Covenant acquisition will total approximately $7.4 million ($6.0 million, net of tax), with most of the expenses expected to be incurred in the third quarter 2020.

 

Business Combination – Acquisition of Monument Bancorp, Inc.

 

On April 1, 2019, the Corporation completed its acquisition of 100% of the common stock of Monument Bancorp, Inc.(“Monument.”) Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Pursuant to the merger, Monument was merged into Citizens & Northern Corporation and Monument Bank was merged into C&N Bank.

 

Total purchase consideration was $42.7 million, including cash paid to former Monument shareholders totaling $9.6 million and 1,279,825 shares of Corporation common stock issued with a value of $33.1 million, net of costs directly related to stock issuance of $181,000.

 

In connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with no realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately no realized gain or loss. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets or liabilities in the first quarter 2020.

 

Merger-related expenses, including legal and professional expenses and conversion of Monument’s customer accounting data into C&N’s core system, were $311,000 in the first quarter 2019.

 

EARNINGS OVERVIEW

 

Net income was $0.30 per diluted share in the first quarter 2020, as compared to $0.41 per share in the first quarter 2019. Highlights related to the Corporation’s earnings results for the first quarters of 2020 and 2019 are presented below.

 

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Net income of $4,166,000 in the first quarter 2020 was down $924,000 (18.2%) from the first quarter 2019 amount. Significant variances were as follows:

 

·The provision for loan losses was $1,528,000 in the first quarter 2020, including the effects of recording a specific allowance of $1,193,000 on a commercial loan with a balance of $3.5 million at March 31, 2020 and a charge of $402,000 related to an increase in the qualitative factors used in determining the allowance for loan losses at March 31, 2020. In comparison, the Corporation recorded a credit for loan losses (reduction in expense) of $957,000 in the first quarter 2019, as specific allowances totaling $1,365,000 at December 31, 2018 on two commercial loans were eliminated. These two loans were no longer considered impaired at March 31, 2019 and were returned to full accrual status in the first quarter 2019. In total, the first quarter 2019 credit for loan losses included a net credit of $1,011,000 related to changes in specific allowances on loans, 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.

 

·First quarter 2020 net interest income of $14,282,000 was $2,567,000 (21.9%) higher than the total for the first quarter 2019. Total average earning assets increased $317.3 million, including an increase in average loans outstanding of $344.7 million, reflecting the impact of the Monument acquisition and additional loan growth in the last three quarters of 2019. Total average deposits increased $239.2 million, including deposits assumed from Monument. The net interest margin was 3.83% for the first quarter 2020, down from 4.04% for the first quarter 2019. The average yield on earning assets was 0.06% higher in the first quarter 2020 as compared to the same period in 2019, while the average rate paid on interest-bearing liabilities increased 0.33% between periods. The increase in average rate on interest-bearing liabilities resulted primarily from comparatively higher rates on time deposits assumed from Monument. Accretion and amortization of purchase accounting-related adjustments from marking financial instruments to fair value had a positive effect on net interest income in the first quarter 2020 of $417,000, including an increase in income on loans of $464,000 partially offset by increases in interest expense on time deposits of $41,000 and on short-term borrowings of $6,000. The net positive impact to the first quarter 2020 net interest margin from accretion and amortization of purchase accounting adjustments was 0.11%.

 

·Total noninterest income for the first quarter 2020 was up $875,000 from the first quarter 2019 total. Significant variances included the following:

 

·Other noninterest income increased $457,000 over the first quarter 2019 total. Income from realization of tax credits was $504,000, an increase of $352,000 over the first quarter 2019 amount. Tax credits from donations through the Pennsylvania Educational Improvement Tax Credit program totaled $450,000 in the first quarter 2020 as compared to $135,000 in the first quarter 2019. Also within this category, dividend income from Federal Home Loan Bank of Pittsburgh stock was $171,000 in the first quarter 2020, up from $100,000 in the first quarter 2019, as the average balance of the stock held increased, consistent with a higher average balance of borrowed funds.

 

·Net gains from sales of loans of $315,000 for the first quarter 2020 were up $228,000 from the total for the first quarter 2019. The increase is sales reflects an increase in volume of mortgage loans sold, due in part to increased refinancing activity resulting from falling interest rates.

 

·Total trust and brokerage revenues of $1,812,000 were up $145,000 from the first quarter 2019 amount, reflecting the impact of new business generated in 2019.

 

·Interchange revenue from debit card transactions increased $108,000 in the first quarter 2019 over the first quarter 2019 amount, reflecting increases in transaction volumes.

 

·Noninterest expense, excluding merger-related expenses, increased $2,216,000 in the first quarter 2020 over the first quarter 2019 amount. Significant variances included the following:

 

·Salaries and wages expense increased $847,000. Salaries and wages from the Corporation’s new ventures in Southeastern PA and York County totaled $811,000 in the first quarter 2020, an increase of $658,000 over the first quarter 2019.

 

·Pensions and other employee benefits expense increased $420,000, reflecting an increase in number of personnel resulting mainly from new ventures.

 

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·Other noninterest expense increased $220,000. Within this category, donations expense increased $376,000, including an increase of $350,000 in education-related donations as discussed above. Amortization of core deposit intangibles related to the Monument acquisition increased $60,000. Partially offsetting these expense increases, expenses associated with other real estate properties fell to $106,000 in the first quarter 2020 from $244,000 in the first quarter 2019, net gains from sales of other real estate properties of $52,000 were realized in the first quarter 2020 as compared to net losses of $51,000 in the first quarter 2019, and expense from estimated FDIC premiums fell to $2,000 in 2020 from $86,000 in 2019.

 

·Data processing expenses increased $215,000, including the impact of increases in software licensing costs associated with lending, trust and other functions.

 

·Professional fees expense increased $157,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis as well as increases related to cyber security management and other corporate activities.

 

·Automated teller machine and interchange expense increased $108,000, including increases in volume-related charges as well as other costs.

 

More detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of MD&A.

 

TABLE I - QUARTERLY FINANCIAL DATA

(Dollars In Thousands, Except Per Share Data)

(Unaudited)

 

  For the Three Months Ended:            
  March 31,   Dec. 31,   Sept. 30,   June 30,   March 31, 
  2020   2019   2019   2019   2019 
Interest income  $17,037   $17,290   $17,277   $17,139   $13,065 
Interest expense   2,755    2,999    3,000    2,934    1,350 
Net interest income   14,282    14,291    14,277    14,205    11,715 
Provision (credit) for loan losses   1,528    652    1,158    (4)   (957)
Net interest income after provision (credit) for                         
loan losses   12,754    13,639    13,119    14,209    12,672 
Noninterest income   5,281    5,066    4,963    4,849    4,406 
Net gains on securities   0    3    13    7    0 
Merger-related expenses   141    281    206    3,301    311 
Other noninterest expenses   12,912    11,834    11,486    11,422    10,696 
Income before income tax provision   4,982    6,593    6,403    4,342    6,071 
Income tax provision   816    1,135    1,096    693    981 
Net income  $4,166   $5,458   $5,307   $3,649   $5,090 
Net income attributable to common shares  $4,146   $5,431   $5,281   $3,630   $5,063 
Basic earnings per common share  $0.30   $0.40   $0.39   $0.27   $0.41 
Diluted earnings per common share  $0.30   $0.40   $0.39   $0.27   $0.41 

 

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 MD&A. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

 

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

 

As described in Note 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, 2020 and 2019. 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 $14,506,000 in 2020, which was $2,490,000 (20.7%) higher than in 2019. Interest income was $3,895,000 higher in 2020 as compared to 2019, while interest expense was higher by $1,405,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.83% in 2020 as compared to 4.04% in 2019, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.54% in 2020 from 3.81% in 2019. The average yield on earning assets of 4.55% was 0.06% higher in 2020 as compared to 2019, while the average rate on interest-bearing liabilities increased 0.33% between periods.

 

Accretion and amortization of purchase accounting-related adjustments from marking financial instruments to fair value had a positive effect on net interest income in the first quarter 2020 of $417,000, including an increase in income on loans of $464,000 partially offset by increases in interest expense on time deposits of $41,000 and on short-term borrowings of $6,000. The net positive impact to the first quarter 2020 net interest margin from accretion and amortization of purchase accounting adjustments was 0.11%.

 

INTEREST INCOME AND EARNING ASSETS

 

Interest income totaled $17,261,000 in 2020, an increase of $3,895,000 (29.1%) from 2019. Interest and fees from loans receivable increased $4,378,000, or 41.1%, in 2020 as compared to 2019. Table IV shows the increase in interest on loans includes $4,630,000 attributable to an increase in average volume, partially offset by a decrease of $252,000 related to a decrease in average yield. The average balance of loans receivable increased $344,739,000 (41.9%) to $1,168,485,000 in 2020 from $823,746,000 in 2019, including the effects of loans acquired from Monument as well as additional growth, primarily in commercial loans. The average yield on loans in the first quarter of 2020 was 5.18%, down from 5.25% in the first quarter 2019 as rates on variable rate loans and rates on recent new loan originations have decreased due to decreases in market interest rates that occurred in the latter part of 2019 and first quarter of 2020. Accretion of purchase accounting-related adjustments provided a positive impact of 0.16% to the first quarter 2020 yield on loans.

 

Interest income from available-for-sale debt securities decreased $450,000 (17.4%) in 2020 from 2019. Total average available-for-sale debt securities (at amortized cost) in 2020 decreased to $335,007,000 from $361,929,000 in 2019. The average yield on available-for-sale debt securities was 2.56% for 2020, down from 2.89% in 2019. The decrease in average yield on available-for-sale debt securities is mainly the result of higher-yielding tax-exempt municipal bonds being called or maturing throughout 2019 and increased amortization on mortgage-backed securities due to accelerated prepayments of principal caused by falling interest rates.

 

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

 

For the three-month periods, interest expense increased $1,405,000 to $2,755,000 in 2020 from $1,350,000 in 2019. Interest expense on deposits increased $1,102,000, as the average rate on interest-bearing deposits increased to 0.89% in 2020 from 0.56% in 2019. The increase in average rates on deposits includes increases of 0.58% on time deposits, 0.12% on money market accounts and 0.05% on saving accounts. Total average deposits (interest-bearing and noninterest-bearing) amounted to $1,260,245,000 in 2020, an increase of $239,172,000 (23.4%) from 2019. The increase in total average deposits included deposits assumed from Monument. The increase in average rate on interest-bearing liabilities resulted primarily from comparatively higher rates on deposits assumed from Monument.

 

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Further contributing to the increase in average rate on deposits was an increase in higher-cost deposits as a proportion of total deposits. The average balance of time deposits increased $154,306,000 to 39% of total average interest-bearing deposits in the first quarter 2020 from 30% in the first quarter 2019. The growth in time deposits resulted from changes in mix attributable to deposits assumed from Monument, an increase in time deposits within the Corporation’s legacy markets and use of brokered certificates of deposit (CDs) in 2020. The average balance of brokered CDs, included in time deposits in Table III, was $30,266,000 in the first quarter 2020 with no corresponding amount in the first quarter 2019. The balance of brokered CDs at March 31, 2020 was $15,224,000, up from $14,984,000 at December 31, 2019.

 

Interest expense on total borrowed funds increased $303,000 in 2020 as compared to 2019. The average balance of total borrowed funds increased to $115,447,000 in the first quarter 2020 from $50,623,000 in the first quarter 2019, while the average rate on borrowed funds decreased to 2.09% in the first quarter 2020 from 2.38% in the first quarter 2019.

 

Interest expense on short-term borrowings increased $119,000 to $198,000 in 2020 from $79,000 in 2019. The average balance of short-term borrowings increased to $44,882,000 in 2020 from $15,935,000 in 2019. The average rate on short-term borrowings decreased to 1.77% in 2020 from 2.01% in 2019, reflecting the impact of lower short-term market rates in the first quarter 2020.

 

Interest expense on long-term borrowings increased $77,000 to $295,000 in 2020 from $218,000 in 2019. The average balance of long-term borrowings was $64,065,000 in 2020, up from an average balance of $34,688,000 in 2019. Borrowings are classified as long-term within the Tables based on their term at origination. The average balance of long-term borrowings in 2020 and 2019 consisted mainly of FHLB advances with terms longer than 12 months at origination. The average rate on long-term borrowings was 1.85% in 2020 compared to 2.55% in the first quarter of 2019.

 

Interest expense on subordinated debt assumed from Monument was $107,000 in the first quarter 2020 with no comparative amount in 2019.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE  

(In Thousands)

 

   Three Months Ended     
   March 31,   Increase/ 
  2020   2019   (Decrease) 
INTEREST INCOME               
Interest-bearing due from banks  $81   $116   $(35)
Available-for-sale debt securities:               
Taxable   1,588    1,834    (246)
Tax-exempt   545    749    (204)
Total available-for-sale debt securities   2,133    2,583    (450)
Loans receivable:               
Taxable   14,461    9,948    4,513 
Tax-exempt   575    710    (135)
Total loans receivable   15,036    10,658    4,378 
Other earning assets   11    9    2 
Total Interest Income   17,261    13,366    3,895 
                
INTEREST EXPENSE               
Interest-bearing deposits:               
Interest checking   243    227    16 
Money market   263    178    85 
Savings   64    39    25 
Time deposits   1,585    609    976 
Total interest-bearing deposits   2,155    1,053    1,102 
Borrowed funds:               
Short-term   198    79    119 
Long-term   295    218    77 
Subordinated debt   107    0    107 
Total borrowed funds   600    297    303 
Total Interest Expense   2,755    1,350    1,405 
                
Net Interest Income  $14,506   $12,016   $2,490 

 

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Table III - Analysis of Average Daily Balances and Rates        
(Dollars in Thousands)                
                 
   3 Months       3 Months     
   Ended   Rate of   Ended   Rate of 
   3/31/2020   Return/   3/31/2019   Return/ 
   Average   Cost of   Average   Cost of 
   Balance   Funds %   Balance   Funds % 
EARNING ASSETS                    
Interest-bearing due from banks   19,401    1.68%   20,306    2.32%
Available-for-sale debt securities,                    
at amortized cost:                    
Taxable  $265,157    2.41%  $281,805    2.64%
Tax-exempt   69,850    3.14%   80,124    3.79%
Total available-for-sale debt securities   335,007    2.56%   361,929    2.89%
Loans receivable:                    
Taxable   1,108,118    5.25%   751,172    5.37%
Tax-exempt   60,367    3.83%   72,574    3.97%
Total loans receivable   1,168,485    5.18%   823,746    5.25%
Other earning assets   1,460    3.03%   1,089    3.35%
Total Earning Assets   1,524,353    4.55%   1,207,070    4.49%
Cash   18,042         16,914      
Unrealized gain/loss on securities   8,176         (4,628)     
Allowance for loan losses   (10,015)        (9,339)     
Bank premises and equipment   17,732         14,511      
Intangible Assets   29,607         11,950      
Other assets   49,270         43,172      
Total Assets  $1,637,165        $1,279,650      
                     
INTEREST-BEARING LIABILITIES                    
Interest-bearing deposits:                    
Interest checking  $227,069    0.43%  $198,903    0.46%
Money market   200,691    0.53%   176,869    0.41%
Savings   168,971    0.15%   156,691    0.10%
Time deposits   381,621    1.67%   227,315    1.09%
Total interest-bearing deposits   978,352    0.89%   759,778    0.56%
Borrowed funds:                    
Short-term   44,882    1.77%   15,935    2.01%
Long-term   64,065    1.85%   34,688    2.55%
Subordinated debt   6,500    6.62%   0    0.00%
Total borrowed funds   115,447    2.09%   50,623    2.38%
Total Interest-bearing Liabilities   1,093,799    1.01%   810,401    0.68%
Demand deposits   281,893         261,295      
Other liabilities   14,071         10,941      
Total Liabilities   1,389,763         1,082,637      
Stockholders' equity, excluding                    
other comprehensive income/loss   240,718         200,422      
Accumulated other comprehensive income/loss   6,684         (3,409)     
Total Stockholders' Equity   247,402         197,013      
Total Liabilities and Stockholders' Equity  $1,637,165        $1,279,650      
Interest Rate Spread        3.54%        3.81%
Net Interest Income/Earning Assets        3.83%        4.04%
                     
Total Deposits (Interest-bearing                    
and Demand)  $1,260,245        $1,021,073      

 

(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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES    
(In Thousands)    
     
  3 Months Ended  3/31/20 vs. 3/31/19 
   Change in   Change in   Total 
   Volume   Rate   Change 
EARNING ASSETS               
Interest-bearing due from banks  $(5)  $(30)  $(35)
Available-for-sale debt securities:               
Taxable   (99)   (147)   (246)
Tax-exempt   (87)   (117)   (204)
Total available-for-sale debt securities   (186)   (264)   (450)
Loans receivable:               
Taxable   4,742    (229)   4,513 
Tax-exempt   (112)   (23)   (135)
Total loans receivable   4,630    (252)   4,378 
Other earning assets   3    (1)   2 
Total Interest Income   4,442    (547)   3,895 
                
INTEREST-BEARING LIABILITIES               
Interest-bearing deposits:               
Interest checking   32    (16)   16 
Money market   27    58    85 
Savings   3    22    25 
Time deposits   547    429    976 
Total interest-bearing deposits   609    493    1,102 
Borrowed funds:               
Short-term   129    (10)   119 
Long-term   149    (72)   77 
Subordinated debt   107    0    107 
Total borrowed funds   385    (82)   303 
Total Interest Expense   994    411    1,405 
                
Net Interest Income  $3,448   $(958)  $2,490 

 

(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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

NONINTEREST INCOME

 

TABLE V - COMPARISON OF NONINTEREST INCOME

            
(Dollars in Thousands)                
   3 Months Ended         
   March 31,   $   % 
   2020   2019   Change   Change 
Trust and financial management revenue  $1,479   $1,360   $119    8.8%
Brokerage revenue   333    307    26    8.5%
Insurance commissions, fees and premiums   33    30    3    10.0%
Service charges on deposit accounts   1,250    1,250    0    0.0%
Service charges and fees   63    79    (16)   -20.3%
Interchange revenue from debit card transactions   731    643    88    13.7%
Net gains from sales of loans   315    87    228    262.1%
Loan servicing fees, net   (14)   28    (42)   -150.0%
Increase in cash surrender value of life insurance   104    92    12    13.0%
Other noninterest income   987    530    457    86.2%
Total noninterest income  $5,281   $4,406   $875    19.9%

 

Total noninterest income shown in Table V in the first quarter 2020 was up $875,000 from the first quarter 2019 total. Significant variances included the following:

 

·Other noninterest income increased $457,000 over the first quarter 2019 total. Income from realization of tax credits was $504,000, an increase of $352,000 over the first quarter 2019 amount. Tax credits from donations through the Pennsylvania Educational Improvement Tax Credit program totaled $450,000 in the first quarter 2020 as compared to $135,000 in the first quarter 2019. Also within this category, dividend income from Federal Home Loan Bank of Pittsburgh stock was $171,000 in the first quarter 2020, up from $100,000 in the first quarter 2019, as the average balance of the stock held increased, consistent with a higher average balance of borrowed funds.

 

·Net gains from sales of loans of $315,000 for the first quarter 2020 were up $228,000 from the total for the first quarter 2019. The increase in sales reflects an increase in volume of mortgage loans sold, due in part to increased refinancing activity resulting from falling interest rates. Proceeds from sales of mortgage loans totaled $10,842,000 in the first quarter 2020, up from $2,539,000 in the first quarter 2019.

 

·Total trust and brokerage revenues of $1,812,000 were up $145,000 from the first quarter 2019 amount, reflecting the impact of new trust business generated in 2019.

 

·Interchange revenue from debit card transactions increased $88,000 in the first quarter 2020 over the first quarter 2019 amount, reflecting an increase in transaction volume.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

NONINTEREST EXPENSE

 

TABLE VI - COMPARISON OF NONINTEREST EXPENSE            
(Dollars in Thousands)                
   3 Months Ended         
   March 31,   $   % 
   2020   2019   Change   Change 
Salaries and wages  $5,340   $4,493   $847    18.9%
Pensions and other employee benefits   2,038    1,618    420    26.0%
Occupancy expense, net   745    657    88    13.4%
Furniture and equipment expense   358    301    57    18.9%
Data processing expenses   1,018    803    215    26.8%
Automated teller machine and interchange expense   297    189    108    57.1%
Pennsylvania shares tax   422    347    75    21.6%
Professional fees   379    222    157    70.7%
Telecommunications   206    164    42    25.6%
Directors' fees   170    183    (13)   -7.1%
Other noninterest expense   1,939    1,719    220    12.8%
Total noninterest expense, excluding merger-                    
related expenses   12,912    10,696    2,216    20.7%
Merger-related expenses   141    311    (170)   -54.7%
Total noninterest expense  $13,053   $11,007   $2,046   18.6%

 

As shown in Table VII, total noninterest expense, excluding merger-related expenses, increased $2,216,000 (20.7%) for the three months ended March 31, 2020 over the total for the three months ended March 31, 2019. The most significant variances include the following:

 

·Salaries and wages expense increased $847,000. Salaries and wages from the Corporation’s new ventures in Southeastern PA and York County totaled $811,000 in the first quarter 2020, an increase of $658,000 over the first quarter 2019.

 

·Pensions and other employee benefits expense increased $420,000, reflecting an increase in number of personnel resulting mainly from new ventures.

 

·Other noninterest expense increased $220,000. Within this category, donations expense increased $376,000, including an increase of $350,000 in education-related donations as discussed above. Amortization of core deposit intangibles related to the Monument acquisition increased $60,000. Partially offsetting these expense increases, expenses associated with other real estate properties fell to $106,000 in the first quarter 2020 from $244,000 in the first quarter 2019, net gains from sales of other real estate properties of $52,000 were realized in the first quarter 2020 as compared to net losses of $51,000 in the first quarter 2019, and expense from estimated FDIC premiums fell to $2,000 in 2020 from $86,000 in 2019.

 

·Data processing expenses increased $215,000, including the impact of increases in software licensing costs associated with lending, trust and other functions.

 

·Professional fees expense increased $157,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis as well as increases related to cyber security management and other corporate activities.

 

·Automated teller machine and interchange expense increased $108,000, including increases in volume-related charges as well as other costs.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

INCOME TAXES

 

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first three months of 2020 was $816,000, which was $165,000 lower than the provision for the first three months of 2019 of $981,000. The effective tax rate (tax provision as a percentage of pre-tax income) was 16.4% in the first three months of 2020 compared to 16.2% in the first three months of 2019. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first three months of 2020 and 2019 principally because of the effects of tax-exempt interest income.

 

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at March 31, 2020 and December 31, 2019 represents the following temporary difference components:

 

   March 31,
   December 31, 
(In Thousands)  2020   2019 
Deferred tax assets:          
Allowance for loan losses  $2,418   $2,080 
Purchase accounting adjustments on loans   520    640 
Operating leases liability   333    344 
Other deferred tax assets   1,736    2,173 
Total deferred tax assets   5,007    5,237 
           
Deferred tax liabilities:          
Unrealized holding gains on securities   2,455    934 
Defined benefit plans - ASC 835   65    49 
Bank premises and equipment   926    763 
Core deposit intangibles   258    272 
Right-of-use assets from operating leases   333    344 
Other deferred tax liabilities   286    257 
Total deferred tax liabilities   4,323    2,619 
Deferred tax asset, net  $684   $2,618 

 

At March 31, 2020, the net deferred tax asset was $684,000, down from $2,618,000 at December 31, 2019. The most significant change in temporary difference components was a net increase of $1,521,000 in the deferred tax liability resulting from appreciation in available-for-sale debt securities attributable to lower interest rates.

 

The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income.

 

Management believes the recorded net deferred tax asset at March 31, 2020 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

 

FINANCIAL CONDITION

 

This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in MD&A. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the “Net Interest Income” section of MD&A. Other significant balance sheet items, including the allowance for loan losses and stockholders’ equity, are discussed in separate sections of MD&A. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding standby letters of credit at March 31, 2020. Management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition in 2020.

 

Net loans outstanding (excluding mortgage loans held for sale) were $1,156,143,000 at March 31, 2020, down from $1,172,386,000 at December 31, 2019 but up 41.5% from $817,136,000 at March 31, 2019. As presented in Table X, total outstanding commercial loans were $9.6 million lower at March 31, 2020 from December 31, 2019, including a reduction in loans to political subdivisions of $10.0 million. The reduction in outstanding loans to political subdivisions in the first quarter 2020 included the impact of a pay-off of one loan of approximately $10 million. Residential mortgage loans were $4.3 million lower at March 31, 2020 as compared to December 31, 2019. In 2019, a significant portion of the Corporation’s loan growth was attributable to the Monument acquisition. In comparing outstanding balances at March 31, 2020 and 2019, total commercial loans increased $218.6 million (62.3%) and total residential mortgage loans increased $124.0 million (27.1%) while total consumer loans decreased $521,000 (3.1%).

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

While the Corporation’s lending activities are primarily concentrated in its market area, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $62,414,000 at March 31, 2020, down from $64,633,000 at December 31, 2019 and $68,418,000 at March 31, 2019. At March 31, 2020, the balance of participation loans outstanding includes a total of $44,095,000 to businesses located outside of the Corporation’s market area. Also, included within participation loans outstanding are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans outstanding totaled $10,109,000 at March 31, 2020 and $9,947,000 at December 31, 2019.

 

Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Prior to the April 2019 merger, Monument Bank had participated in the MPF Original program. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation will not retain servicing rights for loans sold under the MPF Direct Program. Through March 31, 2020, the Corporation’s activity under the MPF Direct Program was minimal.

 

For loan sales originated under the MPF Xtra and Original programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At

March 31, 2020, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,757,000, and the corresponding total outstanding balance repurchased at December 31, 2019 was $1,770,000.

 

At March 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $182,410,000, including loans sold through the MPF Xtra program of $106,040,000 and loans sold through the Original program of $76,370,000. In addition, the outstanding balance of loans sold under the MPF Original program by Monument totaled $20,130,000. The loans sold by Monument are not serviced by the Corporation; however, the Corporation has assumed the credit enhancement obligation on these loans (as discussed in the next paragraph). At December 31, 2019, outstanding balances of loans sold and serviced through the two programs totaled $178,446,000, including loans sold through the MPF Xtra program of $104,707,000 and loans sold through the Original program of $73,739,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of March 31, 2020 and December 31, 2019.

 

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At March 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,840,000, and the Corporation has recorded a related allowance for credit losses of $303,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets. At December 31, 2019, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,618,000, and the related allowance for credit losses was $333,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

PROVISION AND ALLOWANCE FOR LOAN LOSSES

 

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction of the investment in loans. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses.

 

While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

 

The allowance for loan losses was $11,330,000 at March 31, 2020, up from $9,836,000 at December 31, 2019. Table VIII shows total specific allowances on impaired loans increased $1,176,000 to $2,227,000 at March 31, 2020 from $1,051,000 at December 31, 2019. This net increase included the impact of a specific allowance of $1,193,000 on a commercial loan with an outstanding balance of $3,500,000 being recorded in the first quarter 2020. This loan was made on a partially unsecured basis. At March 31, 2020, the specific allowance reflected the Corporation’s estimate that the liquidation value of the related collateral, net of selling costs, would be approximately $1.6 million, and that approximately $700,000 would be recovered from the remainder of the borrower’s net assets.

 

Loans acquired from Monument that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $441,000 at April 1, 2019 and $305,000 at March 31, 2020. The remainder of the portfolio was deemed to be the performing component of the portfolio. The calculation of the fair value of performing loans included a discount for credit losses of $1,914,000, reflecting an estimate of the present value of credit losses based on market expectations. Cumulatively through March 31, 2020, the Corporation recognized accretion of the discount totaling $903,000, and the balance of the discount at March 31, 2020 was $1,011,000. None of the performing loans purchased were found to be impaired at March 31, 2020, and the purchased performing loans were excluded from the loan pools for which the general component of the allowance for loan losses was calculated. Accordingly, there was no allowance for loan losses at March 31, 2020 on loans purchased from Monument.

 

The provision (credit) for loan losses by segment in the three-month periods ended March 31, 2020 and 2019 are as follows:

 

(In Thousands)  3 Months Ended 
   March 31,   March 31, 
   2020   2019 
Residential mortgage  $198   $75 
Commercial   1,318    (1,149)
Consumer   12    31 
Unallocated   0    86 
           
Total  $1,528   $(957)

 

The provision (credit) for loan losses is further detailed as follows:

 

Residential mortgage segment  3 Months Ended 
(In thousands)  March 31,   March 31, 
   2020   2019 
Increase in total specific allowance on          
impaired loans, adjusted for the effect of net          
charge-offs  $15   $68 
           
(Decrease) increase in collectively determined          
portion of the allowance attributable to:          
Loan (reduction) growth   (14)   2 
Changes in historical loss experience factors   (40)   5 
Changes in qualitative factors   237    0 
Total provision for loan losses -          
Residential mortgage segment  $198   $75 

 

 51 

 

 

Commercial segment  3 Months Ended 
(In thousands)  March 31,   March 31, 
   2020   2019 
Increase (decrease) in total specific allowance on          
impaired loans, adjusted for the effect of net          
charge-offs  $1,175   $(1,107)
           
Increase (decrease) in collectively determined          
portion of the allowance attributable to:          
Loan growth   7    14 
Changes in historical loss experience factors   (21)   2 
Changes in qualitative factors   157    (58)
Total provision (credit) for loan losses -          
Commercial segment  $1,318   $(1,149)

 

 

Consumer segment

  3 Months Ended 
(In thousands)  March 31,   March 31, 
   2020   2019 
Increase in total specific allowance on          
impaired loans, adjusted for the effect of net          
charge-offs  $20   $28 
           
(Decrease) increase in collectively determined          
portion of the allowance attributable to:          
Loan reduction   (10)   0 
Changes in historical loss experience factors   (6)   10 
Changes in qualitative factors   8    (7)
Total provision for loan losses -          
Consumer segment  $12   $31 

 

Total - All segments  Three Months Ended 
(In thousands)  March 31,   March 31, 
   2020   2019 
Increase (decrease) in total specific allowance on          
impaired loans, adjusted for the effect of net          
charge-offs  $1,210   $(1,011)
           
(Decrease) increase in collectively determined          
portion of the allowance attributable to:          
Loan (reduction) growth   (17)   16 
Changes in historical loss experience factors   (67)   17 
Changes in qualitative factors   402    (65)
Sub-total   1,528    (1,043)
Unallocated   0    86 
Total provision (credit) for loan losses -          
All segments  $1,528   $(957)

 

For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase or decrease in loans outstanding (excluding loans specifically evaluated for impairment) for the period.

 

The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment).

 

Table IX presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 1.23% at March 31, 2020, up from 0.88% at December 31, 2019, and nonperforming assets as a percentage of total assets was 0.99% at March 31, 2020, up from 0.80% at December 31, 2019. At March 31, 2020, these ratios were affected by classification as nonperforming of the commercial loan noted above with an outstanding balance of $3.5 million that had not been classified as such at December 31, 2019.

 

Table IX presents data at March 31, 2020 and at the end of each of the years ended December 31, 2015 through 2019. Table IX shows that total nonperforming loans as a percentage of loans of 1.23% at March 31, 2020, though up from December 31, 2019, was lower than the corresponding year-end ratio from 2015 through 2018. Similarly, the March 31, 2020 ratio of total nonperforming assets as a percentage of assets of 0.99% was lower than the corresponding ratio from 2015 through 2018. These improved credit-related ratios reflect the impact of acquired loans from Monument with minimal nonperforming loans at March 31, 2020.

 

Total impaired loans of $8,290,000 at March 31, 2020 are up $2,804,000 from the corresponding amount at December 31, 2019 of $5,486,000. The increase in impaired loans includes the impact of classification as impaired of the commercial loan referred to above with an outstanding balance of $3.5 million and a specific allowance of $1,193,000 at March 31, 2020.

 

Total nonperforming assets of $16,087,000 at March 31, 2020 are $2,776,000 higher than the corresponding amount at December 31, 2019, summarized as follows:

 

·Total nonaccrual loans at March 31, 2020 of $12,309,000 was $3,091,000 higher than the corresponding December 31, 2019 total of $9,218,000. This increase also includes the impact of classification as impaired of the commercial loan referred to above with an outstanding balance of $3.5 million and a specific allowance of $1,193,000 at March 31, 2020.

 

·Total loans past due 90 days or more and still accruing interest amounted to $2,093,000 at March 31, 2020, an increase of $886,000 from the total at December 31, 2019. The increase includes five real estate secured loans that became more than 90 days past due during the first quarter 2020. Management has evaluated the loans within this category and determined they are well secured and in the process of collection at March 31, 2020.

 

·Foreclosed assets held for sale consisted of real estate, and totaled $1,685,000 at March 31, 2020, a decrease of $1,201,000 from $2,886,000 at December 31, 2019. Of this decrease, $1,134,000 related to the sale of a commercial real estate property in the first quarter of 2020. At March 31, 2020, the Corporation held eight such properties for sale, with total carrying values of $130,000 related to residential real estate, $70,000 of land and $1,485,000 related to commercial real estate. At December 31, 2019, the Corporation held ten such properties for sale, with total carrying values of $292,000 related to residential real estate, $70,000 of land and $2,524,000 related to commercial real estate. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property.

 

Over the period 2015-2019 and the first three months of 2020, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans and may significantly impact the amount of total charge-offs reported in any one period.

 

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of March 31, 2020. Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Tables VII through X present historical data related to loans and the allowance for loan losses.

 

TABLE VII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars In Thousands)

 

   3 Months Ended                     
   March 31,   March 31,   Years Ended December 31, 
   2020   2019   2019   2018   2017   2016   2015 
Balance, beginning of year  $9,836   $9,309   $9,309   $8,856   $8,473   $7,889   $7,336 
Charge-offs:                                   
Residential mortgage   0    (74)   (190)   (158)   (197)   (73)   (217)
Commercial   (17)   0    (6)   (165)   (132)   (597)   (251)
Consumer   (31)   (37)   (183)   (174)   (150)   (87)   (94)
Total charge-offs   (48)   (111)   (379)   (497)   (479)   (757)   (562)
Recoveries:                                   
Residential mortgage   3    4    12    8    19    3    1 
Commercial   0    2    6    317    4    35    214 
Consumer   11    9    39    41    38    82    55 
Total recoveries   14    15    57    366    61    120    270 
Net charge-offs   (34)   (96)   (322)   (131)   (418)   (637)   (292)
Provision (credit) for loan losses   1,528    (957)   849    584    801    1,221    845 
Balance, end of period  $11,330   $8,256   $9,836   $9,309   $8,856   $8,473   $7,889 
Net charge-offs as a % of                                   
average loans   0.00%   0.01%   0.03%   0.02%   0.05%   0.09%   0.04%

 

TABLE VIII - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)

 

   March 31,   As of December 31, 
   2020   2019   2018   2017   2016   2015 
ASC 310 - Impaired loans  $2,227   $1,051   $1,605   $1,279   $674   $820 
ASC 450 - Collective segments:                              
Commercial   4,056    3,913    3,102    3,078    3,373    3,103 
Residential mortgage   4,189    4,006    3,870    3,841    3,890    3,417 
Consumer   273    281    233    159    138    122 
Unallocated   585    585    499    499    398    427 
Total Allowance  $11,330   $9,836   $9,309   $8,856   $8,473   $7,889 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

TABLE IX - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

(Dollars In Thousands)

 

   March 31,   As of December 31, 
   2020   2019   2018   2017   2016   2015 
Impaired loans with a valuation allowance  $6,709   $3,375   $4,851   $4,100   $3,372   $1,933 
Impaired loans without a valuation allowance   1,581    2,111    4,923    5,411    7,488    8,041 
Total impaired loans  $8,290   $5,486   $9,774   $9,511   $10,860   $9,974 
                               
Total loans past due 30-89 days and still accruing  $8,372   $8,889   $7,142   $9,449   $7,735   $7,057 
                               
Nonperforming assets:                              
Total nonaccrual loans  $12,309   $9,218   $13,113   $13,404   $8,736   $11,517 
Total loans past due 90 days or more and still accruing   2,093    1,207    2,906    3,724    6,838    3,229 
Total nonperforming loans   14,402    10,425    16,019    17,128    15,574    14,746 
Foreclosed assets held for sale (real estate)   1,685    2,886    1,703    1,598    2,180    1,260 
Total nonperforming assets  $16,087   $13,311   $17,722   $18,726   $17,754   $16,006 
                               
Loans subject to troubled debt restructurings (TDRs):                              
Performing  $372   $889   $655   $636   $5,803   $1,186 
Nonperforming   1,730    1,737    2,884    3,027    2,874    5,178 
Total TDRs  $2,102   $2,626   $3,539   $3,663   $8,677   $6,364 
                               
Total nonperforming loans as a % of loans   1.23%   0.88%   1.94%   2.10%   2.07%   2.09%
Total nonperforming assets as a % of assets   0.99%   0.80%   1.37%   1.47%   1.43%   1.31%
Allowance for loan losses as a % of total loans   0.97%   0.83%   1.12%   1.09%   1.13%   1.12%
Allowance for loan losses as a % of nonperforming loans   78.67%   94.35%   58.11%   51.70%   54.40%   53.50%

 

TABLE X - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

 

(In Thousands)  March   December 31, 
   2020   2019   2018   2017   2016   2015 
Residential mortgage:                              
Residential mortgage loans - first liens  $508,387   $510,641   $372,339   $359,987   $334,102   $304,783 
Residential mortgage loans - junior liens   27,028    27,503    25,450    25,325    23,706    21,146 
Home equity lines of credit   32,090    33,638    34,319    35,758    38,057    39,040 
1-4 Family residential construction   14,121    14,798    24,698    26,216    24,908    21,121 
Total residential mortgage   581,626    586,580    456,806    447,286    420,773    386,090 
Commercial:                              
Commercial loans secured by real estate   295,860    301,227    162,611    159,266    150,468    154,779 
Commercial and industrial   132,308    126,374    91,856    88,276    83,854    75,196 
Political subdivisions   43,613    53,570    53,263    59,287    38,068    40,007 
Commercial construction and land   33,340    33,555    11,962    14,527    14,287    5,122 
Loans secured by farmland   11,524    12,251    7,146    7,255    7,294    7,019 
Multi-family (5 or more) residential   32,370    31,070    7,180    7,713    7,896    9,188 
Agricultural loans   3,886    4,319    5,659    6,178    3,998    4,671 
Other commercial loans   16,430    16,535    13,950    10,986    11,475    12,152 
Total commercial   569,331    578,901    353,627    353,488    317,340    308,134 
Consumer   16,516    16,741    17,130    14,939    13,722    10,656 
Total   1,167,473    1,182,222    827,563    815,713    751,835    704,880 
Less: allowance for loan losses   (11,330)   (9,836)   (9,309)   (8,856)   (8,473)   (7,889)
Loans, net  $1,156,143   $1,172,386   $818,254   $806,857   $743,362   $696,991 

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

LIQUIDITY

 

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At March 31, 2020, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $11,555,000.

 

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

 

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $14,815,000 at March 31, 2020.

 

The Corporation’s outstanding, available, and total credit facilities at March 31, 2020 and December 31, 2019 are as follows:

 

   Outstanding   Available   Total Credit 
(In Thousands)  March 31,   Dec. 31,   March 31,   Dec. 31,   March 31,   Dec. 31, 
   2020   2019   2020   2019   2020   2019 
Federal Home Loan Bank of Pittsburgh  $108,144   $136,424   $459,462   $416,122   $567,606   $552,546 
Federal Reserve Bank Discount Window   0    0    14,364    14,244    14,364    14,244 
Other correspondent banks   0    0    45,000    45,000    45,000    45,000 
Total credit facilities  $108,144   $136,424   $518,826   $475,366   $626,970   $611,790 

 

At March 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $17,000,000, short-term borrowings of $18,200,000 and long-term borrowings of $72,944,000. At December 31, 2019, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $64,000,000, short-term borrowings of $20,297,000 and long-term borrowings with a total amount of $52,127,000. Additional information regarding borrowed funds is included in Note 9 to the unaudited consolidated financial statements.

 

Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At March 31, 2020, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $182,093,000.

 

Management believes the Corporation is well-positioned to meet its short-term and long-term obligations, including the impact of additional lending opportunities and other potential cash requirements arising from the Monument merger.

 

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

 

Details concerning capital ratios at March 31, 2020 and December 31, 2019 are presented below. As a small bank holding company, the Corporation is not subject to consolidated capital requirements at March 31, 2020; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. Management believes, as of March 31, 2020, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at March 31, 2020 and December 31, 2019 exceed the Corporation’s Board policy threshold levels.

 

In October 2019, the Federal Reserve Board, FDIC and Office of the Comptroller of the Currency finalized a rule that provides qualifying community banking organizations an option to calculate a simple leverage ratio, rather than multiple measures of capital adequacy. In the first quarter 2020, C&N Bank did not elect the community bank leverage ratio (“CBLR”) framework. The decision to continue to measure capital adequacy using previously existing risk-based and leverage capital requirements reflects concerns that reliance on the leverage ratio as a single measurement could, in certain circumstances, limit the ability to grow or encourage taking excessive risk. C&N Bank could elect the CBLR framework in the future.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

(Dollars in Thousands)                          Minimum To Be
Well
         
       Minimum   Minimum To Maintain   Capitalized Under   Minimum To Meet 
           Capital   Capital Conservation   Prompt Corrective   the Corporation's 
   Actual   Requirement   Buffer at Reporting Date   Action Provisions   Policy Thresholds 
   Amount   Ratio   Amount   Ratio   Amount   Ratio   Amount   Ratio   Amount   Ratio 
March 31, 2020:                                        
Total capital to risk-weighted assets:                                                  
Consolidated  $229,506    21.07%   N/A    N/A    N/A    N/A    N/A    N/A   $114,376    ³10.5%
C&N Bank   207,862    19.18%   86,705    ³8%   113,800    ³10.5%   108,381    ³10%   113,800    ³10.5%
Tier 1 capital to risk-weighted assets:                                                  
Consolidated   211,373    19.40%   N/A    N/A    N/A    N/A    N/A    N/A    92,590    ³8.5%
C&N Bank   196,229    18.11%   65,029    ³6%   92,124    ³8.5%   86,705    ³8%   92,124    ³8.5%
Common equity tier 1 capital to risk-weighted assets:                                                  
Consolidated   211,373    19.40%   N/A    N/A    N/A    N/A    N/A    N/A    76,251    ³7%
C&N Bank   196,229    18.11%   48,772    ³4.5%   75,867    ³7.0%   70,448    ³6.5%   75,867    ³7%
Tier 1 capital to average assets:                                                  
Consolidated   211,373    13.21%   N/A    N/A    N/A    N/A    N/A    N/A    128,046    ³8%
C&N Bank   196,229    12.38%   63,414    ³4%   N/A    N/A    79,268    ³5%   126,829    ³8%
                                                   
December 31, 2019:                                                  
Total capital to risk-weighted assets:                                                  
Consolidated  $228,057    20.70%   N/A    N/A    N/A    N/A    N/A    N/A   $115,689    ³10.5%
C&N Bank   205,863    18.75%   87,817    ³8%   115,260    ³10.5%   109,771    ³10%   115,260    ³10.5%
Tier 1 capital to risk-weighted assets:                                                  
Consolidated   211,388    19.19%   N/A    N/A    N/A    N/A    N/A    N/A    93,653    ³8.5%
C&N Bank   195,694    17.83%   65,863    ³6%   93,306    ³8.5%   87,817    ³8%   93,306    ³8.5%
Common equity tier 1 capital to risk-weighted assets:                                                  
Consolidated   211,388    19.19%   N/A    N/A    N/A    N/A    N/A    N/A    77,126    ³7%
C&N Bank   195,694    17.83%   49,397    ³4.5%   76,840    ³7.0%   71,351    ³6.5%   76,840    ³7%
Tier 1 capital to average assets:                                                  
Consolidated   211,388    13.10%   N/A    N/A    N/A    N/A    N/A    N/A    129,126    ³8%
C&N Bank   195,694    12.24%   63,940    ³4%   N/A    N/A    79,925    ³5%   127,879    ³8%

 

While it is difficult to estimate the future impact of COVID-19, the Corporation’s and C&N Bank’s capital ratios at March 31, 2020 are at levels that demonstrate the capacity to absorb the acquisition of Covenant as well as significant losses if they arise while continuing to meet the requirements to be considered well capitalized.

 

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. As described in more detail below, C&N Bank is subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile.

 

To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At March 31, 2020, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Minimum common equity tier 1 capital ratio   4.5%
Minimum common equity tier 1 capital ratio plus
capital conservation buffer
   7.0%
Minimum tier 1 capital ratio   6.0%
Minimum tier 1 capital ratio plus capital
conservation buffer
   8.5%
Minimum total capital ratio   8.0%
Minimum total capital ratio plus capital
conservation buffer
   10.5%

  

A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:

 

Capital Conservation Buffer  Maximum Payout 
(as a % of risk-weighted assets)  (as a % of eligible retained income) 
Greater than 2.5%  No payout limitation applies 
≤2.5% and >1.875%   60%
≤1.875% and >1.25%   40%
≤1.25% and >0.625%   20%
≤0.625%   0%

 

At March 31, 2020, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 11.02%.

 

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income (Loss) within stockholders’ equity. The balance in Accumulated Other Comprehensive Income (Loss) related to unrealized gains (losses) on available-for-sale debt securities, net of deferred income tax, amounted to $9,230,000 at March 31, 2020 and $3,511,000 at December 31, 2019. Changes in accumulated other comprehensive income (loss) are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale securities for other-than-temporary impairment at March 31, 2020.

 

Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income related to defined benefit plans, net of deferred income tax, was $244,000 at March 31, 2020 and $180,000 at December 31, 2019.

 

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. Changes in the components of Accumulated Other Comprehensive Income (Loss) are included in Other Comprehensive Income, and for the Corporation, consist of changes in unrealized gains or losses on available-for-sale debt securities and changes in underfunded or overfunded defined benefit plans. Fluctuations in interest rates significantly affect fair values of available-for-sale debt securities, and accordingly have an effect on Other Comprehensive Income (Loss) in each period.

 

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Comprehensive Income totaled $9,949,000 for the first quarter 2020 as compared to $8,619,000 in the first quarter 2019. For the three months ended March 31, 2020, Comprehensive Income included: (1) Net Income of $4,166,000, which was $924,000 lower than in the first quarter 2019; (2) Other Comprehensive Income from available-for-sale debt securities of $5,719,000 as compared to Other Comprehensive Income of $3,366,000 in the first quarter 2019; and (3) Other Comprehensive Income from defined benefit plans of $64,000 which was lower for the first quarter 2020 as compared to $163,000 for the first quarter 2019.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Corporation’s management, under the supervision of and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensure that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

PART II – OTHER INFORMATION

 

Item 1.        Legal Proceedings

The Corporation and C&N Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material, adverse effect on the Corporation’s financial condition or results of operations.

 

Item 1A.     Risk Factors

Except for the risk factor described immediately below, there have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed February 20, 2020.

 

Coronavirus Outbreak - In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. Since first being reported in China, the coronavirus has spread to additional countries including the United States.

 

In response, many state and local governments, including the Commonwealth of Pennsylvania, have instituted emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. It has been widely reported that these restrictions have resulted in significant adverse effects for many different types of businesses, particularly those in the travel, hospitality and food and beverage industries, among many others, and has resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect interest income and, therefore, earnings. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus outbreak, and there is no guarantee that the Corporation’s efforts to address the adverse impacts of the coronavirus will be effective. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others.

 

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation’s business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation’s financial reporting and internal controls; declines in the demand for loans and other banking services and products; declines in demand resulting from adverse impacts of the disease on businesses deemed to be “non-essential” by governments; and branch or office closures and business interruptions.

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

As described above, the Corporation has entered into an agreement to acquire Covenant. The COVID-19-related risk factors described in the preceding paragraphs also apply to Covenant. These factors, together or in combination with other events or occurrences not yet known or anticipated, could adversely affect the value of the merger consideration or could delay or prevent the consummation of the merger. Further, if the Corporation or Covenant is unable to recover from a business disruption on a timely basis, the merger and the combined company's business and financial condition and results of operations following the completion of the merger would be adversely affected. The merger and efforts to integrate the businesses of the Corporation and Covenant may also be delayed and adversely affected by the coronavirus outbreak and become more costly, which could adversely affect the Corporation’s financial condition and results of operations.

 

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

The following table sets forth a summary of the purchases by the Corporation of its common stock during the first quarter 2020.

 

Period  Total Number
of Shares
Purchased
   Average
Price Paid
per Share
   Total Number of
Shares Purchased
as Part of Publicly Announced Plans
or Programs
   Maximum Number of
Shares that May Yet
be Purchased Under
the Plans or
Programs
 
January 1 - 31, 2020   0   $0    0    600,000 
February 1 - 29, 2020   0   $0    0    600,000 
March 1 - 31, 2020   0   $0    0    600,000 

 

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

 

Item 3.        Defaults Upon Senior Securities

None

 

Item 4.        Mine Safety Disclosures

Not applicable

 

Item 5.        Other Information

None       

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Item 6.        Exhibits

 

2. Plan of acquisition, reorganization, arrangement, liquidation or succession:   
   
2.1 Agreement and Plan of Merger dated September 27, 2018,  between the Corporation and Monument Bancorp, Inc.  Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018
    
2.2 Agreement and Plan of Merger dated December 18, 2019, between the Corporation and Covenant Financial, Inc.  Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed December 18, 2019
 
3. (i) Articles of Incorporation  Incorporated by reference to Exhibit 3.1 of the Corporation's Form 8-K filed September 21, 2009
    
3. (ii) By-laws  Incorporated by reference to Exhibit 3.1(ii) of The Corporation's Form S-4/A filed April 20, 2020
    
4. Instruments defining the rights of Security holders, including Indentures  Not applicable
    
10. Material contracts  Not applicable
    
 15. Letter re: unaudited interim information  Not applicable
    
18. Letter re: change in accounting principles  Not applicable
    
19. Report furnished to security holders  Not applicable
    
22. Published report regarding matters submitted to vote of security holders  Not applicable
    
23. Consents of experts and counsel  Not applicable
    
24. Power of attorney  Not applicable
    
31. Rule 13a-14(a)/15d-14(a) certifications:   
31.1 Certification of Chief Executive Officer  Filed herewith
31.2 Certification of Chief Financial Officer  Filed herewith
    
32. Section 1350 certifications  Filed herewith
    
99. Additional exhibits  Not applicable
    
100. XBRL-related documents  Not applicable
    
101. Interactive data file  Filed herewith
    
104. Cover page interactive data file  Not applicable

 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

    CITIZENS & NORTHERN CORPORATION
   
     
May 7, 2020   By: /s/ J. Bradley Scovill
Date   President and Chief Executive Officer
   
   
     
May 7, 2020   By: /s/ Mark A. Hughes
Date   Treasurer and Chief Financial Officer
   

 

 

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