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Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FORM 10-Q

(Mark One)

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

For the quarterly period endedMarch 31,June 30, 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

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

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. Yesx 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).

YesxNo¨

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 filerx Non-accelerated filer¨ Smaller reporting companyxEmerging 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¨Nox

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

Common Stock ($1.00 par value)

13,786,402

15,871,073 Shares Outstanding on May 4,August 3, 2020

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) – March 31,June 30, 2020 and December 31, 2019

Page 3

Consolidated Statements of Income (Unaudited) – Three-month and Six-month Periods Ended March 31,June 30, 2020 and 2019

Page 4

Consolidated Statements of Comprehensive Income (Unaudited) - Three-month and Six-month Periods Ended March 31,June 30, 2020 and 2019

Page 5

Consolidated Statements of Cash Flows (Unaudited) – Three-monthSix-month Periods Ended March 31,June 30, 2020 and 2019

Page 6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Six-month Periods Ended March 31,June 30, 2020 and 2019

Page 7 - 8 

Notes to Unaudited Consolidated Financial Statements

Pages 89 – 3646

Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

Pages 3746 – 5979

Item 4. Controls and Procedures

Page 5979

Part II. Other Information

Pages 5979 – 6183

Signatures

Page 62

Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification - Chief Executive OfficerPage 63
Exhibit 31.2.  Rule 13a-14(a)/15d-14(a) Certification - Chief Financial OfficerPage 64
Exhibit 32.  Section 1350 CertificationsPage 6584

2

2

Table of Contents

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 

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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

    

June 30, 

    

December 31, 

2020

2019

ASSETS

 

  

 

  

Cash and due from banks:

 

  

 

  

Noninterest-bearing

$

24,075

$

17,667

Interest-bearing

 

53,567

 

17,535

Total cash and due from banks

 

77,642

 

35,202

Available-for-sale debt securities, at fair value

 

332,188

 

346,723

Marketable equity security

 

1,003

 

979

Loans held for sale

 

1,258

 

767

Loans receivable

 

1,241,413

 

1,182,222

Allowance for loan losses

 

(11,026)

 

(9,836)

Loans, net

 

1,230,387

 

1,172,386

Bank-owned life insurance

 

18,843

 

18,641

Accrued interest receivable

 

6,326

 

5,001

Bank premises and equipment, net

 

18,332

 

17,170

Foreclosed assets held for sale

 

1,593

 

2,886

Deferred tax asset, net

 

93

 

2,618

Goodwill

 

28,388

 

28,388

Core deposit intangibles, net

 

1,123

 

1,247

Other assets

 

28,290

 

22,137

TOTAL ASSETS

$

1,745,466

$

1,654,145

LIABILITIES

 

 

Deposits:

 

 

Noninterest-bearing

$

353,707

$

285,904

Interest-bearing

 

1,027,471

 

966,756

Total deposits

 

1,381,178

 

1,252,660

Short-term borrowings

 

14,404

 

86,220

Long-term borrowings

 

72,904

 

52,127

Subordinated debt

 

6,500

 

6,500

Accrued interest and other liabilities

 

14,689

 

12,186

TOTAL LIABILITIES

 

1,489,675

 

1,409,693

STOCKHOLDERS' EQUITY

 

 

Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation

 

 

preference per share; 0 shares issued

 

0

 

0

Common stock, par value $1.00 per share; authorized 20,000,000 shares;

 

 

issued 13,934,996 and outstanding 13,807,157 at June 30, 2020;

 

 

issued 13,934,996 and outstanding 13,716,445 at December 31, 2019

 

13,935

 

13,935

Paid-in capital

 

103,954

 

104,519

Retained earnings

 

128,661

 

126,480

Treasury stock, at cost; 127,839 shares at June 30, 2020 and 218,551

 

 

shares at December 31, 2019

 

(2,470)

 

(4,173)

Accumulated other comprehensive income

 

11,711

 

3,691

TOTAL STOCKHOLDERS' EQUITY

 

255,791

 

244,452

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

$

1,745,466

$

1,654,145

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

3

3

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

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 

(In Thousands Except Per Share Data) (Unaudited)

    

3 Months Ended

6 Months Ended

June 30, 

June 30, 

June 30, 

June 30, 

2020

2019

2020

2019

INTEREST INCOME

 

  

 

  

  

 

  

Interest and fees on loans:

 

  

 

  

  

 

  

Taxable

$

14,126

$

14,098

$

28,587

$

24,046

Tax-exempt

 

439

 

524

 

898

 

1,088

Interest on mortgages held for sale

 

15

 

6

 

21

 

9

Interest on balances with depository institutions

 

41

 

149

 

122

 

265

Income from available-for-sale debt securities:

 

 

 

 

Taxable

 

1,380

 

1,826

 

2,968

 

3,660

Tax-exempt

 

507

 

531

 

944

 

1,125

Dividends on marketable equity security

 

5

 

5

 

10

 

11

Total interest and dividend income

 

16,513

 

17,139

 

33,550

 

30,204

INTEREST EXPENSE

 

  

 

 

  

 

Interest on deposits

 

1,784

 

2,363

 

3,939

 

3,416

Interest on short-term borrowings

 

64

 

228

 

262

 

307

Interest on long-term borrowings

 

313

 

228

 

608

 

446

Interest on subordinated debt

 

106

 

115

 

213

 

115

Total interest expense

 

2,267

 

2,934

 

5,022

 

4,284

Net interest income

 

14,246

 

14,205

 

28,528

 

25,920

(Credit) provision for loan losses

 

(176)

 

(4)

 

1,352

 

(961)

Net interest income after (credit) provision for loan losses

 

14,422

 

14,209

 

27,176

 

26,881

NONINTEREST INCOME

 

  

 

  

 

  

 

  

Trust and financial management revenue

 

1,565

 

1,583

 

3,044

 

2,943

Brokerage revenue

 

343

 

361

 

676

 

668

Insurance commissions, fees and premiums

 

52

 

48

 

85

 

78

Service charges on deposit accounts

 

831

 

1,277

 

2,081

 

2,527

Service charges and fees

 

84

 

89

 

147

 

168

Interchange revenue from debit card transactions

 

718

 

699

 

1,449

 

1,342

Net gains from sale of loans

 

1,564

 

221

 

1,879

 

308

Loan servicing fees, net

 

(158)

 

35

 

(172)

 

63

Increase in cash surrender value of life insurance

 

98

 

99

 

202

 

191

Other noninterest income

 

431

 

437

 

1,418

 

967

Sub-total

5,528

4,849

10,809

9,255

Realized gains on available-for-sale debt securities, net

0

7

0

7

Total noninterest income

 

5,528

 

4,856

 

10,809

 

9,262

NONINTEREST EXPENSE

 

 

 

  

 

  

Salaries and wages

 

5,364

 

5,276

 

10,704

 

9,769

Pensions and other employee benefits

 

1,619

 

1,225

 

3,657

 

2,843

Occupancy expense, net

 

664

 

665

 

1,409

 

1,322

Furniture and equipment expense

 

311

 

333

 

669

 

634

Data processing expenses

 

1,040

 

962

 

2,058

 

1,765

Automated teller machine and interchange expense

 

275

 

277

 

572

 

466

Pennsylvania shares tax

 

423

 

347

 

845

 

694

Professional fees

 

464

 

331

 

843

 

553

Telecommunications

 

213

 

176

 

419

 

340

Directors' fees

 

178

 

141

 

348

 

324

Merger-related expenses

 

983

 

3,301

 

1,124

 

3,612

Other noninterest expense

 

1,723

 

1,689

 

3,662

 

3,408

Total noninterest expense

 

13,257

 

14,723

 

26,310

 

25,730

Income before income tax provision

 

6,693

 

4,342

 

11,675

 

10,413

Income tax provision

 

1,255

 

693

 

2,071

 

1,674

NET INCOME

$

5,438

$

3,649

$

9,604

$

8,739

EARNINGS PER COMMON SHARE - BASIC

$

0.39

$

0.27

$

0.70

$

0.67

EARNINGS PER COMMON SHARE - DILUTED

$

0.39

$

0.27

$

0.70

$

0.67

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

4

4

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 

Consolidated Statements of Comprehensive Income

(In Thousands) (Unaudited)

    

Three Months Ended

Six Months Ended

June 30, 

June 30, 

 

2020

    

2019

2020

    

2019

Net income

$

5,438

$

3,649

$

9,604

$

8,739

Unrealized holding gains on available-for-sale debt securities

 

2,835

 

5,163

 

10,075

 

9,424

Unfunded pension and postretirement obligations:

 

 

 

 

Changes from plan amendments and actuarial gains and losses

 

0

 

0

 

88

 

214

Amortization of prior service cost and net actuarial loss included in

 

 

 

 

net periodic benefit cost

 

(6)

 

(7)

 

(14)

 

(15)

Other comprehensive (loss) gain on unfunded retirement obligations

 

(6)

 

(7)

 

74

 

199

Other comprehensive income before income tax

 

2,829

 

5,156

 

10,149

 

9,623

Income tax related to other comprehensive income

 

(592)

 

(1,083)

 

(2,129)

 

(2,021)

Net other comprehensive income

 

2,237

 

4,073

 

8,020

 

7,602

Comprehensive income

$

7,675

$

7,722

$

17,624

$

16,341

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

5

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

    

6 Months Ended

June 30, 

June 30, 

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

9,604

$

8,739

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Provision (credit) for loan losses

 

1,352

 

(961)

Realized gains on available-for-sale debt securities, net

 

0

 

(7)

Accretion and amortization on securities, net

802

505

Increase in cash surrender value of life insurance

 

(202)

 

(191)

Depreciation and amortization of bank premises and equipment

 

897

 

843

Other accretion and amortization, net

 

(578)

 

(138)

Stock-based compensation

 

424

 

431

Deferred income taxes

 

396

 

583

Decrease in fair value of servicing rights

 

396

 

148

Gains on sales of loans, net

 

(1,879)

 

(308)

Origination of loans held for sale

 

(60,830)

 

(9,783)

Proceeds from sales of loans held for sale

 

61,815

 

9,107

Increase in accrued interest receivable and other assets

 

(9,085)

 

(254)

Increase (decrease) in accrued interest payable and other liabilities

 

2,630

 

(1,188)

Other

 

15

 

58

Net Cash Provided by Operating Activities

 

5,757

 

7,584

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

Net cash and cash equivalents used in business combination

0

(1,778)

Proceeds from maturities of certificates of deposit

 

250

 

100

Proceeds from sales of available-for-sale debt securities

 

6,722

 

95,139

Proceeds from calls and maturities of available-for-sale debt securities

 

43,718

 

34,825

Purchase of available-for-sale debt securities

 

(26,632)

 

(26,662)

Redemption of Federal Home Loan Bank of Pittsburgh stock

 

5,076

 

6,723

Purchase of Federal Home Loan Bank of Pittsburgh stock

 

(3,616)

 

(3,148)

Net increase in loans

 

(58,591)

 

(30,385)

Proceeds from bank owned life insurance

 

0

 

796

Purchase of premises and equipment

 

(2,085)

 

(925)

Proceeds from sale of foreclosed assets

 

1,265

 

227

Other

 

116

 

75

Net Cash (Used in) Provided by Investing Activities

 

(33,777)

 

74,987

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

Net increase in deposits

 

128,464

 

26,931

Net decrease in short-term borrowings

 

(71,822)

 

(96,990)

Proceeds from long-term borrowings

 

25,891

 

22,500

Repayments of long-term borrowings and subordinated debt

 

(5,114)

 

(25,517)

Sale of treasury stock

 

124

 

198

Purchase of vested restricted stock

 

(163)

 

(189)

Common dividends paid

 

(6,670)

 

(7,386)

Net Cash Provided by (Used in) Financing Activities

 

70,710

 

(80,453)

INCREASE IN CASH AND CASH EQUIVALENTS

 

42,690

 

2,118

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

31,122

 

32,827

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

73,812

$

34,945

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

$

745

Assets acquired through foreclosure of real estate loans

$

0

$

824

Interest paid

$

4,961

$

3,846

Income taxes paid

$

42

$

950

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

5

6

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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

 

Accumulated

 

Other

 

Common

 

Treasury

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

Three Months Ended June 30, 2020

 

Shares

 

Shares

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Total

Balance, March 31, 2020

 

13,934,996

 

147,836

$

13,935

$

103,731

$

126,944

$

9,474

$

(2,856)

$

251,228

Net income

 

 

 

 

 

5,438

 

 

 

5,438

Other comprehensive income, net

 

 

 

 

 

 

2,237

 

 

2,237

Cash dividends declared on common stock, $.27 per share

 

 

 

 

 

(3,721)

 

 

 

(3,721)

Shares issued for dividend reinvestment plan

 

 

(20,755)

 

 

(22)

 

 

 

401

 

379

Forfeiture of restricted stock

 

 

758

 

 

15

 

 

 

(15)

 

0

Stock-based compensation expense

 

 

 

 

230

 

 

 

 

230

Balance, June 30, 2020

 

13,934,996

 

127,839

$

13,935

$

103,954

$

128,661

$

11,711

$

(2,470)

$

255,791

Three Months Ended June 30, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, March 31, 2019

 

12,655,171

 

262,127

$

12,655

$

71,963

$

123,155

$

(641)

$

(5,005)

$

202,127

Net income

 

 

 

 

 

3,649

 

 

 

3,649

Other comprehensive income, net

 

 

 

 

 

 

4,073

 

 

4,073

Cash dividends declared on common stock, $.27 per share

 

 

 

 

 

(3,692)

 

 

 

(3,692)

Shares issued for dividend reinvestment plan

 

 

(12,685)

 

 

126

 

 

 

242

 

368

Shares issued from treasury and redeemed related to exercise of stock options

 

 

(5,433)

 

 

(68)

 

 

 

104

 

36

Forfeiture of restricted stock

 

 

2,988

 

 

57

 

 

 

(57)

 

0

Stock-based compensation expense

 

 

 

 

202

 

 

 

 

202

Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs

1,279,825

1,280

31,673

32,953

Balance, June 30, 2019

 

13,934,996

 

246,997

$

13,935

$

103,953

$

123,112

$

3,432

$

(4,716)

$

239,716

7

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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 

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

(Continued)

    

    

    

    

    

    

Accumulated

    

    

Other

Common

Treasury

Common

Paid-in

Retained

Comprehensive

Treasury

Shares

Shares

Stock

Capital

Earnings

Income (Loss)

Stock

Total

Six Months Ended June 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2019

 

13,934,996

 

218,551

$

13,935

$

104,519

$

126,480

$

3,691

$

(4,173)

$

244,452

Net income

 

 

 

  

 

  

 

9,604

 

  

 

  

 

9,604

Other comprehensive income, net

 

 

 

  

 

  

 

  

 

8,020

 

  

 

8,020

Cash dividends declared on common stock, $.54 per share

 

 

 

  

 

  

 

(7,423)

 

  

 

  

 

(7,423)

Shares issued for dividend reinvestment plan

 

 

(34,700)

 

 

82

 

 

 

671

 

753

Shares 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

 

 

3,642

 

 

70

 

  

 

  

 

(70)

 

0

Stock-based compensation expense

 

 

 

  

 

424

 

  

 

  

 

  

 

424

Purchase of restricted stock for tax withholding

 

 

5,862

 

 

  

 

  

 

  

 

(163)

 

(163)

Balance, June 30, 2020

 

13,934,996

 

127,839

$

13,935

$

103,954

$

128,661

$

11,711

$

(2,470)

$

255,791

Six Months Ended June 30, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2018

 

12,655,171

 

335,841

$

12,655

$

72,602

$

122,643

$

(4,170)

$

(6,362)

$

197,368

Net income

 

 

 

  

 

  

 

8,739

 

  

 

  

 

8,739

Other comprehensive income, net

 

 

 

  

 

  

 

  

 

7,602

 

  

 

7,602

Cash dividends declared on common stock, $.64 per share

 

 

 

  

 

  

 

(8,270)

 

  

 

  

 

(8,270)

Shares issued for dividend reinvestment plan

 

 

(33,172)

 

 

251

 

  

 

  

 

633

 

884

Shares issued from treasury and redeemed related to exercise of stock options

 

 

(18,071)

 

 

(146)

 

  

 

  

 

344

 

198

Restricted stock granted

 

 

(48,137)

 

 

(918)

 

  

 

  

 

918

 

0

Forfeiture of restricted stock

 

 

3,144

 

 

60

 

  

 

  

 

(60)

 

0

Stock-based compensation expense

 

 

 

  

 

431

 

  

 

  

 

  

 

431

Purchase of restricted stock for tax withholding

 

 

7,392

 

 

  

 

  

 

  

 

(189)

 

(189)

Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs

 

1,279,825

 

 

1,280

 

31,673

 

 

  

 

  

 

32,953

Balance, June 30, 2019

 

13,934,996

 

246,997

 

13,935

$

103,953

$

123,112

$

3,432

$

(4,716)

$

239,716

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

6

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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.

7

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Unaudited Consolidated Financial Statements

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

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

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 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-monthsix-month period ended March 31,June 30, 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 arebecame 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 adoptionNote 12 provides disclosure regarding fair value measurements of the Corporation’s financial instruments. Adoption of this ASU todid not have a material impact on itsthe Corporation’s consolidated financial position or results of operations.

8

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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 UpdateASU 2020-04 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.ASU 2020-04.

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”) 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 no0 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 no0 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’sthe Corporation’s core system, were $311,000$3,301,000 in the firstsecond quarter 2019 and $3,612,000 in the six-month period ended June 30, 2019.

9

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”). In July 2020, the Corporation and Covenant isannounced the completion of the merger as of July 1, 2020. Covenant was the holding company for Covenant Bank, which operatesoperated 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,Agreement and Plan of Merger, Covenant merged into the Corporation, will payand Covenant Bank merged into C&N Bank. In the transaction, Covenant shareholders elected to receive either 0.6212 shares of Corporation common stock or $16.50 in cash for each share of Covenant common stock owned, subject to proration to ensure that, overall, 25% of the Covenant shares were converted into cash and will convert 75% of the Covenant shares were converted into Corporation stock. The election and proration process commenced in June 2020 and was completed in early July 2020. Holders of Covenant common stock prior to the Corporation’s common stock. The transaction was valued on December 18, 2019 atconsummation of the merger own approximately $77 million. Based on the average closing price12.9% of the Corporation’s common stock inoutstanding following 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 basedmerger.

Based on the average of the high and low trading price of the Corporation’s common stock of $20.32 per share 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 quarterJuly 1, 2020, the Corporation incurred merger-relatedtotal purchase consideration is valued at approximately $63.3 million. As of June 30, 2020, Covenant reported total assets of $608 million, including gross loans of $472 million, total deposits of $480 million and total stockholders’ equity of $44 million. As of the date the Corporation’s June 30, 2020 financial statements are issued, some of the information required to be disclosed under U.S. GAAP was not available since, given the short period between the July 1, 2020 merger date and the financial statement issuance, the calculation of the fair value of all material Covenant assets acquired and liabilities assumed had not yet been completed.

Merger-related expenses related to the planned acquisition of Covenant totaling $141,000, Intotaled $983,000 in the year ending December 31,second quarter 2020 management expectsand $1,124,000 in the Corporation to incur significant additional merger-relatedsix-month period ended June 30, 2020. Merger-related expenses includinginclude severance and similar expenses costs associated with termination of data processing contracts,as well as initial expenses related to conversion of Covenant’s core customer accounting data into the Corporation’s core system and legal and other professional fees and various other costs.expenses. Management estimates total pre-tax merger-related expenses associated with the Covenant acquisitiontransaction will totalbe approximately $7.4$8.0 million, ($6.0 million, netincluding remaining expenses of tax), with mostapproximately $6.6 million. Most of the expenses are 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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'sCorporation’s common stock during the period.

(In Thousands, Except Share and Per Share Data)

3 Months Ended

    

6 Months Ended

June 30,

June 30,

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Basic

  

 

  

 

  

 

  

Net income

$

5,438

$

3,649

$

9,604

$

8,739

Less: Dividends and undistributed earnings allocated to participating securities

 

(33)

 

(19)

 

(54)

 

(46)

Net income attributable to common shares

$

5,405

$

3,630

$

9,550

$

8,693

Basic weighted-average common shares outstanding

 

13,710,118

 

13,597,848

 

13,697,617

 

12,956,916

Basic earnings per common share (a)

$

0.39

$

0.27

$

0.70

$

0.67

Diluted

 

  

 

  

 

  

 

  

Net income attributable to common shares

$

5,405

$

3,630

$

9,550

$

8,693

Basic weighted-average common shares outstanding

 

13,710,118

 

13,597,848

 

13,697,617

 

12,956,916

Dilutive effect of potential common stock arising from stock options

 

2,269

 

25,106

 

8,116

 

25,445

Diluted weighted-average common shares outstanding

 

13,712,387

 

13,622,954

 

13,705,733

 

12,982,361

Diluted earnings per common share (a)

$

0.39

$

0.27

$

0.70

$

0.67

Weighted-average nonvested restricted shares outstanding

 

88,514

 

70,366

 

77,093

 

68,016

(a)10Basic 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).

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. Weighted-average common shares available from anti-dilutive instruments totaled 39,012 shares in the three-month period ended June 30, 2020 and 19,506 shares in the six-month period ended June 30, 2020. There were no0 anti-dilutive instruments in the three-month and six-month periods ended March 31, 2020 andJune 30, 2019.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 

    

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 
            

Amount

Effect

Amount

Six Months Ended June 30, 2020

 

  

 

  

 

  

Unrealized gains on available-for-sale debt securities,

Unrealized holding gains on available-for-sale debt securities

$

10,075

$

(2,114)

$

7,961

Unfunded pension and postretirement obligations:            

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses  88   (18)  70 

 

88

 

(18)

 

70

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost  (8)  2   (6)

 

(14)

 

3

 

(11)

Other comprehensive income on unfunded retirement obligations  80   (16)  64 

 

74

 

(15)

 

59

            

Total other comprehensive income $7,320  $(1,537) $5,783 

$

10,149

$

(2,129)

$

8,020

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Six Months Ended June 30, 2019

 

  

 

  

 

  

Unrealized gains on available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

$

9,431

$

(1,980)

$

7,451

Reclassification adjustment for (gains) realized in income

(7)

1

(6)

Other comprehensive income on available-for-sale debt securities

9,424

(1,979)

7,445

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses included in other comprehensive income

 

214

 

(45)

 

169

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

 

(15)

 

3

 

(12)

Other comprehensive income on unfunded retirement obligations

 

199

 

(42)

 

157

Total other comprehensive income

$

9,623

$

(2,021)

$

7,602

11

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended June 30, 2020

 

  

 

  

 

  

Unrealized gains on available-for-sale debt securities,

 

  

 

  

 

  

Unrealized holding gains on available-for-sale debt securities

$

2,835

$

(593)

$

2,242

Unfunded pension and postretirement obligations,

 

  

 

  

 

  

Amortization of prior service cost and net actuarial loss

 

  

 

  

 

  

included in net periodic benefit cost

 

(6)

 

1

 

(5)

Total other comprehensive income

$

2,829

$

(592)

$

2,237

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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 June 30, 2019

 

  

 

  

 

  

Unrealized gains on available-for-sale debt securities:

 

  

 

  

 

  

Unrealized holding gains on available-for-sale debt securities

$

5,170

$

(1,085)

$

4,085

Reclassification adjustment for (gains) realized in income

 

(7)

 

1

 

(6)

Other comprehensive income on available-for-sale debt securities

 

5,163

 

(1,084)

 

4,079

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Amortization of prior service cost and net actuarial loss

 

  

 

  

 

  

included in net periodic benefit cost

 

(7)

 

1

 

(6)

Other comprehensive loss on unfunded retirement obligations

 

(7)

 

1

 

(6)

Total other comprehensive income

$

5,156

$

(1,083)

$

4,073

(In Thousands) Before-Tax  Income Tax  Net-of-Tax 
  Amount  Effect  Amount 
Three Months Ended 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 

The amounts shown in the table immediately above are included in the following line items in the consolidated statements of income:

Affected Line Item in the

Description

Consolidated Statements of Income

Amortization of prior service cost and

Other noninterest expense

net actuarial loss included in net

periodic benefit cost (Before-Tax)

Reclassification adjustment for (gains)

Realized gains on available-for-sale

realized in income (Before-Tax)

debt securities, net

Income Tax effect

Income tax provision

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

(In Thousands) Unrealized     Accumulated 

    

Unrealized

    

Accumulated

    

  

 Gains Unfunded Other 
 (Losses) Retirement Comprehensive 
 on Securities Obligations Income (Loss) 
Three Months Ended March 31, 2020            

Gains

Unfunded

Other

 

(Losses)

 

Retirement

 

Comprehensive

 

on Securities

 

Obligations

 

Income (Loss)

Six Months Ended June 30, 2020

 

  

 

  

 

  

Balance, beginning of period $3,511  $180  $3,691 

$

3,511

$

180

$

3,691

Other comprehensive income during three months ended March 31, 2020  5,719   64   5,783 

Other comprehensive income during six months ended June 30, 2020

 

7,961

 

59

 

8,020

Balance, end of period $9,230  $244  $9,474 

$

11,472

$

239

$

11,711

            
Three Months Ended March 31, 2019            

Six Months Ended June 30, 2019

 

  

 

  

 

  

Balance, beginning of period $(4,307) $137  $(4,170)

$

(4,307)

$

137

$

(4,170)

Other comprehensive income during three months ended March 31, 2019  3,366   163   3,529 

Other comprehensive income during six months ended June 30, 2019

 

7,445

 

157

 

7,602

Balance, end of period $(941) $300  $(641)

$

3,138

$

294

$

3,432

12

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(In Thousands)

    

Unrealized

    

    

    

Accumulated

Gains

Unfunded

Other

(Losses)

Retirement

Comprehensive

on Securities

Obligations

Income (Loss)

Three Months Ended June 30, 2020

 

  

 

  

 

  

Balance, beginning of period

$

9,230

$

244

$

9,474

Other comprehensive income (loss) during three months ended June 30, 2020

 

2,242

 

(5)

 

2,237

Balance, end of period

$

11,472

$

239

$

11,711

Three Months Ended June 30, 2019

 

  

 

  

 

  

Balance, beginning of period

$

(941)

$

300

$

(641)

Other comprehensive income (loss) during three months ended June 30, 2019

 

4,079

 

(6)

 

4,073

Balance, end of period

$

3,138

$

294

$

3,432

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,June 30, 2020 and December 31, 2019 include the following:

(In thousands) March 31 Dec. 31, 

    

June 30,

    

Dec. 31,

 2020 2019 

2020

2019

Cash and cash equivalents $28,598  $31,122 

$

73,812

$

31,122

Certificates of deposit  4,080   4,080 

 

3,830

 

4,080

Total cash and due from banks $32,678  $35,202 

$

77,642

$

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 no0 required reserves at March 31,June 30, 2020. Required reserves were $20,148,000 at December 31, 2019.

13

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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,June 30, 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 

    

June 30, 2020

         

Gross

Gross

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies $15,704  $704  $0  $16,408 

$

10,706

$

967

$

0

$

11,673

Obligations of states and political subdivisions:                

 

  

 

  

 

  

 

  

Tax-exempt  78,126   2,982   (36)  81,072 

 

86,897

 

4,786

 

(40)

 

91,643

Taxable  35,764   1,348   (38)  37,074 

 

38,022

 

1,810

 

(48)

 

39,784

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 

 

49,852

 

1,668

 

0

 

51,520

Residential collateralized mortgage obligations  101,130   2,435   (9)  103,556 

 

87,527

 

1,951

 

(43)

 

89,435

Commercial mortgage-backed securities  45,727   2,846   (19)  48,554 

 

44,664

 

3,469

 

0

 

48,133

Total available-for-sale debt securities $330,731  $11,787  $(102) $342,416 

$

317,668

$

14,651

$

(131)

$

332,188

    December 31, 2019    
    Gross Gross    
    Unrealized Unrealized    
 Amortized Holding Holding Fair 

(In Thousands) Cost Gains Losses Value 

    

December 31, 2019

         

Gross

Gross

 

 

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of U.S. Government agencies $16,380  $620  $0  $17,000 

$

16,380

$

620

$

0

$

17,000

Obligations of states and political subdivisions:                

 

  

 

  

 

  

 

  

Tax-exempt  68,787   2,011   (38)  70,760 

 

68,787

 

2,011

 

(38)

 

70,760

Taxable  35,446   927   (70)  36,303 

 

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 

 

58,875

 

472

 

(137)

 

59,210

Residential collateralized mortgage obligations  115,025   308   (610)  114,723 

 

115,025

 

308

 

(610)

 

114,723

Commercial mortgage-backed securities  47,765   1,069   (107)  48,727 

 

47,765

 

1,069

 

(107)

 

48,727

Total available-for-sale debt securities $342,278  $5,407  $(962) $346,723 

$

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,June 30, 2020 and December 31, 2019:

March 31, 2020 Less Than 12 Months 12 Months or More Total 

June 30, 2020

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands) Fair Unrealized Fair Unrealized Fair Unrealized 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 Value Losses Value Losses Value Losses 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of states and political subdivisions:                        

 

  

 

  

 

  

 

  

 

  

 

  

Tax-exempt $2,968  $(36) $0  $0  $2,968  $(36)

$

3,743

$

(40)

$

0

$

0

$

3,743

$

(40)

Taxable  1,270   (38)  0   0   1,270   (38)

 

1,476

 

(48)

 

0

 

0

 

1,476

 

(48)

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                        

 

  

 

  

 

  

 

  

 

  

 

  

Residential collateralized mortgage obligations  875   (9)  0   0   875   (9)

 

8,809

 

(43)

 

0

 

0

 

8,809

 

(43)

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)

Total temporary impaired available for sale debt securities

$

14,028

$

(131)

$

0

$

0

$

14,028

$

(131)

16

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)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 debt securities were as follows:

(In Thousands) 3 Months Ended 

3 Months Ended

6 Months Ended

 March 31, March 31, 
 2020 2019 

June 30,

June 30,

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Gross realized gains from sales $52  $0 

$

0

$

7

$

52

$

7

Gross realized losses from sales  (52)  0 

 

0

 

0

 

(52)

 

0

Net realized gains $0  $0 

$

0

$

7

$

0

$

7

15

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,June 30, 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)

June 30, 2020

Amortized

Fair

    

Cost

    

Value

Due in one year or less

$

7,369

$

7,414

Due from one year through five years

 

33,740

 

35,119

Due from five years through ten years

 

38,294

 

40,729

Due after ten years

 

56,222

 

59,838

Sub-total

 

135,625

 

143,100

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

Residential pass-through securities

 

49,852

 

51,520

Residential collateralized mortgage obligations

 

87,527

 

89,435

Commercial mortgage-backed securities

 

44,664

 

48,133

Total

$

317,668

$

332,188

(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$196,620,000 at March 31,June 30, 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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,June 30, 2020 is provided below.

Debt Securities

At March 31,June 30, 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,June 30, 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,sheets, was $9,206,000$8,671,000 at March 31,June 30, 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,June 30, 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.

16

CITIZENS & NORTHERN CORPORATION – FORM 10-Q 

The Corporation’s marketable equity security, with a carrying value of $994,000$1,003,000 at March 31,June 30, 2020 and $979,000 at December 31, 2019, consisted exclusively of one mutual fund. There was an unrealized lossgain on the mutual fund of $6,000$3,000 at March 31,June 30, 2020 and an unrealized loss of $21,000 at December 31, 2019. There was a decreaseChanges 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 unrealizedgains or losses on this security are included in other noninterest income in the consolidated statements of income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

7. LOANS

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at March 31,June 30, 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 

    

June 30,

    

Dec. 31,

2020

2019

Residential mortgage:        

 

  

 

  

Residential mortgage loans - first liens $508,387  $510,641 

$

493,214

$

510,641

Residential mortgage loans - junior liens  27,028   27,503 

 

25,632

 

27,503

Home equity lines of credit  32,090   33,638 

 

31,826

 

33,638

1-4 Family residential construction  14,121   14,798 

 

15,621

 

14,798

Total residential mortgage  581,626   586,580 

 

566,293

 

586,580

Commercial:        

 

  

 

  

Commercial loans secured by real estate  295,860   301,227 

 

293,304

 

301,227

Commercial and industrial  132,308   126,374 

 

120,202

 

126,374

Small Business Administration - Paycheck Protection Program

97,103

0

Political subdivisions  43,613   53,570 

 

43,134

 

53,570

Commercial construction and land  33,340   33,555 

 

40,348

 

33,555

Loans secured by farmland  11,524   12,251 

 

11,433

 

12,251

Multi-family (5 or more) residential  32,370   31,070 

 

32,699

 

31,070

Agricultural loans  3,886   4,319 

 

3,874

 

4,319

Other commercial loans  16,430   16,535 

 

16,579

 

16,535

Total commercial  569,331   578,901 

 

658,676

 

578,901

Consumer  16,516   16,741 

 

16,444

 

16,741

Total  1,167,473   1,182,222 

 

1,241,413

 

1,182,222

Less: allowance for loan losses  (11,330)  (9,836)

 

(11,026)

 

(9,836)

Loans, net $1,156,143  $1,172,386 

$

1,230,387

$

1,172,386

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $2,492,000$5,519,000 at March 31,June 30, 2020 and $2,482,000 at December 31, 2019.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 and first six months of 2020, 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. InFor the first quarterthree-month and six-month periods ended June 30, 2020 and 2019, adjustments to the initial market rate and credit fair value adjustments were recognized as follows:

(In Thousands)

    

    

    

    

3 Months Ended

6 Months Ended

June 30,

June 30,

June 30,

June 30,

2020

2019

2020

2019

Market Rate Adjustment

 

  

 

  

 

  

 

  

Adjustments to gross amortized cost of loans at beginning of period

$

(1,268)

$

0

$

(1,415)

$

0

Market rate adjustment recorded in acquisition

0

(1,807)

0

(1,807)

Accretion recognized in interest income

165

149

312

149

Adjustments to gross amortized cost of loans at end of period

$

(1,103)

$

(1,658)

$

(1,103)

$

(1,658)

Credit Adjustment on Non-impaired Loans

Adjustments to gross amortized cost of loans at beginning of period

$

(1,011)

$

0

$

(1,216)

$

0

Credit adjustment recorded in acquisition

0

(1,914)

0

(1,914)

Accretion recognized in interest income

 

133

 

261

 

338

 

261

Adjustments to gross amortized cost of loans at end of period

$

(878)

$

(1,653)

$

(878)

$

(1,653)

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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)

LoansPCI 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 quartersix months of 2020, the Corporation recorded interest income of $112,000$113,000 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,June 30, 2020 and December 31, 2019 is as follows:

(In Thousands)

June 30,

December 31,

    

2020

    

2019

Outstanding balance

$

407

$

759

Carrying amount

 

305

 

441

(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,June 30, 2020 or December 31, 2019.

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The maximum term of PPP loans is five years, though most of the Corporation’s PPP loans have two-year terms, 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 has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Consistent with current SBA guidance, if a borrower uses an agent in the loan process, the Corporation would pay a percentage of the SBA fees to the agent. 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 June 30, 2020, the recorded investment in PPP loans was $97,103,000, including contractual principal balances of $100,120,000, reduced by net deferred origination fees of $3,017,000. Net deferred origination fees on PPP loans are recognized in interest income as a yield adjustment (accretion over the term of the loans). Accretion of $337,000 from fees received on PPP loans was included in interest and fees on (taxable) loans in the consolidated statements of income in the three-month and six-month periods ended June 30, 2020.

Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.

In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

To work with clients impacted by COVID-19, the Corporation is offering short-term 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. Consistent with Section 4013 of the CARES ACT and guidance from the joint interagency statement described in the preceding paragraphs, the modified loans have not been reported as past due, nonaccrual or as TDRs at June 30, 2020. Most of the modifications under the program became effective In March or April 2020 and provided a deferral of interest or principal and interest for 90 days. Accordingly, most of the loans for which deferrals were granted returned to full payment status in June or July 2020. There have been 706 loans for which deferrals have been granted through June 30, 2020 with an aggregate recorded investment of approximately $202 million at the time of deferral. The quantity and

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

balances of modifications outstanding under the program at June 30, 2020 and July 31, 2020 (excluding loans acquired pursuant to the Covenant acquisition on July 1, 2020) are as follows:

Deferrals Remaining

Deferrals Remaining

As of June 30, 2020

As of July 31, 2020

(Dollars in Thousands)

Number

Number

of

Recorded

of

Recorded

    

Loans

    

Investment

    

Loans

    

Investment

COVID-19-related loan modifications:

 

  

    

  

    

  

    

  

Residential mortgage

 

307

$

40,930

54

$

7,130

Consumer

 

36

 

364

Commercial

 

198

 

117,424

24

22,488

Total

 

541

$

158,718

78

$

29,618

The ultimate effect of COVID-19 on the local or broader economy is not known. In the first six months of 2020, the Corporation increased the allowance for loan losses $646,000, including $244,000 in the second quarter, based on an increase in qualitative factors related to potential deterioration in economic conditions. Further, in June 2020, the Corporation’s credit administration and commercial lending staffs performed a review of commercial credits with “Pass” ratings in an effort to reduce the risk of failing to identify loans that should be evaluated for risk rating downgrade or a specific allowance. Updated risk ratings and specific allowances based on that review have been included in the June 30, 2020 information presented below. 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.

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,June 30, 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 and six-month periods ended March 31,June 30, 2020 and 2019 were as follows:

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Three Months Ended March 31, 2020CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Three Months Ended June 30, 2020

 March 31, 

    

    

    

    

    

    

    

 June 30, 

(In Thousands)

    

 2020 Balance 

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

 2020 Balance 

Allowance for Loan Losses:

 

  

  

  

  

  

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

$

3,572

$

0

$

1

$

(42)

$

3,531

Residential mortgage loans - junior liens

 

414

 

0

 

0

 

(49)

 

365

Home equity lines of credit

 

278

 

0

 

1

 

8

 

287

1-4 Family residential construction

 

119

 

0

 

0

 

18

 

137

Total residential mortgage

 

4,383

 

0

 

2

 

(65)

 

4,320

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

 

1,932

 

0

 

0

 

494

 

2,426

Commercial and industrial

 

2,645

 

0

 

0

 

(149)

 

2,496

Commercial construction and land

 

970

 

(107)

 

0

 

(443)

 

420

Loans secured by farmland

 

144

 

0

 

0

 

2

 

146

Multi-family (5 or more) residential

 

199

 

0

 

0

 

(36)

 

163

Agricultural loans

 

39

 

0

 

0

 

1

 

40

Other commercial loans

 

160

 

0

 

0

 

7

 

167

Total commercial

 

6,089

 

(107)

 

0

 

(124)

 

5,858

Consumer

 

273

 

(39)

 

16

 

13

 

263

Unallocated

 

585

 

0

 

0

 

0

 

585

Total Allowance for Loan Losses

$

11,330

$

(146)

$

18

$

(176)

$

11,026

Three Months Ended June 30, 2019

 March 31, 

    

    

    

    

    

    

    

 June 30, 

(In Thousands)

    

 2019 Balance 

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

 2019 Balance 

Allowance for Loan Losses:

 

  

  

  

  

  

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

$

3,178

$

(33)

$

1

$

(16)

$

3,130

Residential mortgage loans - junior liens

 

329

 

0

 

0

 

4

 

333

Home equity lines of credit

 

286

 

0

 

1

 

(7)

 

280

1-4 Family residential construction

 

198

 

0

 

0

 

22

 

220

Total residential mortgage

 

3,991

 

(33)

 

2

 

3

 

3,963

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

 

1,887

 

0

 

0

 

(310)

 

1,577

Commercial and industrial

 

1,069

 

(6)

 

1

 

182

 

1,246

Commercial construction and land

 

114

 

0

 

0

 

38

 

152

Loans secured by farmland

 

98

 

0

 

0

 

4

 

102

Multi-family (5 or more) residential

 

112

 

0

 

0

 

38

 

150

Agricultural loans

 

43

 

0

 

0

 

(1)

 

42

Other commercial loans

 

121

 

0

 

0

 

(2)

 

119

Total commercial

 

3,444

 

(6)

 

1

 

(51)

 

3,388

Consumer

 

236

 

(29)

 

13

 

44

 

264

Unallocated

 

585

 

0

 

0

 

0

 

585

Total Allowance for Loan Losses

$

8,256

$

(68)

$

16

$

(4)

$

8,200

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(In Thousands)CITIZENS & NORTHERN CORPORATION – FORM 10-Q

    

Dec. 31,

    

    

    

    

June 30,

Six Months Ended June 30, 2020

2019

Provision

2020

(In Thousands)

Balance

Charge-offs

Recoveries

(Credit)

Balance

Allowance for Loan Losses:

  

  

  

  

  

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

$

3,405

$

0

$

2

$

124

$

3,531

Residential mortgage loans - junior liens

 

384

 

0

 

1

 

(20)

 

365

Home equity lines of credit

 

276

 

0

 

2

 

9

 

287

1-4 Family residential construction

 

117

 

0

 

0

 

20

 

137

Total residential mortgage

 

4,182

 

0

 

5

 

133

 

4,320

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

 

1,921

 

0

 

0

 

505

 

2,426

Commercial and industrial

 

1,391

 

(17)

 

0

 

1,122

 

2,496

Commercial construction and land

 

966

 

(107)

 

0

 

(439)

 

420

Loans secured by farmland

 

158

 

0

 

0

 

(12)

 

146

Multi-family (5 or more) residential

 

156

 

0

 

0

 

7

 

163

Agricultural loans

 

41

 

0

 

0

 

(1)

 

40

Other commercial loans

 

155

 

0

 

0

 

12

 

167

Total commercial

 

4,788

 

(124)

 

0

 

1,194

 

5,858

Consumer

 

281

 

(70)

 

27

 

25

 

263

Unallocated

 

585

 

0

 

0

 

0

 

585

Total Allowance for Loan Losses

$

9,836

$

(194)

$

32

$

1,352

$

11,026

    

Dec. 31,

    

    

    

    

June 30,

Six Months Ended June 30, 2019

2018

Provision

2019

(In Thousands)

Balance

Charge-offs

Recoveries

(Credit)

Balance

Allowance for Loan Losses:

  

  

  

  

  

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

$

3,156

$

(83)

$

2

$

55

$

3,130

Residential mortgage loans - junior liens

 

325

 

(24)

 

0

 

32

 

333

Home equity lines of credit

 

302

 

0

 

4

 

(26)

 

280

1-4 Family residential construction

 

203

 

0

 

0

 

17

 

220

Total residential mortgage

 

3,986

 

(107)

 

6

 

78

 

3,963

Commercial:

 

 

 

 

 

Commercial loans secured by real estate

 

2,538

 

0

 

0

 

(961)

 

1,577

Commercial and industrial

 

1,553

 

(6)

 

3

 

(304)

 

1,246

Commercial construction and land

 

110

 

0

 

0

 

42

 

152

Loans secured by farmland

 

102

 

0

 

0

 

0

 

102

Multi-family (5 or more) residential

 

114

 

0

 

0

 

36

 

150

Agricultural loans

 

46

 

0

 

0

 

(4)

 

42

Other commercial loans

 

128

 

0

 

0

 

(9)

 

119

Total commercial

 

4,591

 

(6)

 

3

 

(1,200)

 

3,388

Consumer

 

233

 

(66)

 

22

 

75

 

264

Unallocated

 

499

 

0

 

0

 

86

 

585

Total Allowance for Loan Losses

$

9,309

$

(179)

$

31

$

(961)

$

8,200

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Performing loans acquired from Monument are presented net of a discount for credit losses of $1,011,000$878,000 at March 31,June 30, 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 performingAt June 30, 2020, it was determined that 5 purchased loans purchasedto 2 borrowers with recorded investments totaling $6,075,000 were found to be impairedimpaired. Specific allowances totaling $350,000 were recorded on these loans at March 31,June 30, 2020, andbased on the purchasedexcess of the recorded investments in the loans over the estimated value of the related real estate collateral, net of selling costs. Purchased performing loans were excluded from the loan pools for which the general component of the allowance for loan losses was calculated.

The credit for loan losses of $176,000 in the second quarter 2020 included the benefit of repayment of a commercial construction loan for less than the full principal balance, resulting in a charge-off of $107,000 as compared to a specific allowance on the loan of $674,000 at March 31, 2020.

InFor the first quartersix months of 2020, the provision for loan losses was $1,528,000, up from a credit (reduction$1,352,000, an increase in expense)expense of $2,313,000 as compared to the provisioncredit for loan losses of $957,000$961,000 recorded in the first quartersix months of 2019. In the first quarter 2020, the Corporation recognizedprovision includes the effects of recording a specific allowance of $1,193,000 related toon a commercial loan with an outstanding balancein the first quarter, partially offset by the benefit from the previously described repayment of $3.5 million at March 31, 2020.the commercial construction loan in the second quarter. In total, the provision for the first six months of 2020 included a net charge of $1,210,000$1,067,000 related to specific loans (net increase in specific allowances on loans of $1,176,000$905,000 and net charge-offs of $34,000),$162,000); a charge of $402,000$646,000 attributable to increases in qualitative factorsfactors; a credit of $272,000 from the impact of a reduction in outstanding loans, excluding PPP loans; and a credit of $67,000$89,000 in the net charge-off experience factors used to estimate the allowance, and a net credit of $17,000 fromallowance. NaN provision for loan losses was recognized on PPP loans because the impact of a reduction in total outstanding loans. In comparison,SBA guarantees the Corporation recorded aloans, subject to compliance with program requirements. The credit for loan losses (reduction in expense) of $957,000 in the first quartersix months of 2019 asincluded a benefit from eliminating specific allowances totaling $1,365,000 at December 31, 2018 on two commercial loans were eliminated. These two loansthat 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.impaired.

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of March 31,June 30, 2020 and December 31, 2019:

March 31,June 30, 2020

(In Thousands)

         Purchased   
   Special     Credit   
 Pass Mention Substandard Doubtful Impaired Total 

    

    

    

    

    

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 

$

480,338

$

2,977

$

9,822

$

0

$

77

$

493,214

Residential Mortgage loans - junior liens  26,367 136 525 0 0 27,028 

 

24,990

 

130

 

512

 

0

 

0

 

25,632

Home Equity lines of credit  31,613 59 418 0 0 32,090 

 

31,115

 

59

 

652

 

0

 

0

 

31,826

1-4 Family residential construction  14,121  0  0  0  0  14,121 

 

15,621

 

0

 

0

 

0

 

0

 

15,621

Total residential mortgage  570,904  500  10,145  0  77  581,626 

 

552,064

 

3,166

 

10,986

 

0

 

77

 

566,293

Commercial:              

 

 

 

 

 

 

Commercial loans secured by real estate  287,783 6,191 1,658 0 228 295,860 

 

276,776

 

6,536

 

9,764

 

0

 

228

 

293,304

Commercial and Industrial  117,424 8,728 6,156 0 0 132,308 

 

107,788

 

6,225

 

2,689

 

3,500

 

0

 

120,202

Small Business Administration - Paycheck

Protection Program

97,103

0

0

0

0

97,103

Political subdivisions  43,613 0 0 0 0 43,613 

 

43,134

 

0

 

0

 

0

 

0

 

43,134

Commercial construction and land  32,016 0 1,324 0 0 33,340 

 

40,082

 

198

 

68

 

0

 

0

 

40,348

Loans secured by farmland  5,569 5,062 893 0 0 11,524 

 

9,819

 

728

 

886

 

0

 

0

 

11,433

Multi-family (5 or more) residential  31,465 0 905 0 0 32,370 

 

29,364

 

2,434

 

901

 

0

 

0

 

32,699

Agricultural loans  2,956 304 626 0 0 3,886 

 

3,261

 

0

 

613

 

0

 

0

 

3,874

Other commercial loans  16,380  0  50  0  0  16,430 

 

16,579

 

0

 

0

 

0

 

0

��

16,579

Total commercial  537,206  20,285  11,612  0  228  569,331 

 

623,906

 

16,121

 

14,921

 

3,500

 

228

 

658,676

Consumer  16,433  0  83  0  0  16,516 

 

16,345

 

0

 

99

 

0

 

0

 

16,444

Totals $1,124,543 $20,785 $21,840 $0 $305 $1,167,473 

$

1,192,315

$

19,287

$

26,006

$

3,500

$

305

$

1,241,413

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 

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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,June 30, 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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,June 30, 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of March 31,June 30, 2020 and December 31, 2019.

March 31,June 30, 2020

(In Thousands)

 Loans: Allowance for Loan Losses: 
     Purchased         
 Individually Collectively Performing   Individually Collectively   
 Evaluated Evaluated Loans Totals Evaluated Evaluated Totals 

    

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 

$

1,358

$

391,116

$

100,740

$

493,214

$

10

$

3,521

$

3,531

Residential mortgage loans - junior liens  367 24,755 1,906 27,028 194 220 414 

 

355

 

23,422

 

1,855

 

25,632

 

154

 

211

 

365

Home equity lines of credit  0 30,580 1,510 32,090 0 278 278 

 

0

 

30,540

 

1,286

 

31,826

 

0

 

287

 

287

1-4 Family residential construction  0  13,963  158  14,121  0  119  119 

 

0

 

15,621

 

0

 

15,621

 

0

 

137

 

137

Total residential mortgage  923  474,985  105,718  581,626  194  4,189  4,383 

 

1,713

 

460,699

 

103,881

 

566,293

 

164

 

4,156

 

4,320

Commercial:                

 

 

 

 

 

 

 

Commercial loans secured by real estate  714 193,507 101,639 295,860 0 1,932 1,932 

 

7,501

 

186,066

 

99,737

 

293,304

 

494

 

1,932

 

2,426

Commercial and industrial  4,974 124,917 2,417 132,308 1,325 1,320 2,645 

 

4,645

 

112,891

 

2,666

 

120,202

 

1,264

 

1,232

 

2,496

Small Business Administration - Paycheck

Protection Program

 

0

 

97,103

 

0

 

97,103

 

0

 

0

 

0

Political subdivisions  0 43,613 0 43,613 0 0 0 

 

0

 

43,134

 

0

 

43,134

 

0

 

0

 

0

Commercial construction and land  1,255 29,308 2,777 33,340 674 296 970 

 

0

 

40,348

 

0

 

40,348

 

0

 

420

 

420

Loans secured by farmland  424 10,845 255 11,524 34 110 144 

 

421

 

10,758

 

254

 

11,433

 

34

 

112

 

146

Multi-family (5 or more) residential  0 13,517 18,853 32,370 0 199 199 

 

0

 

11,195

 

21,504

 

32,699

 

0

 

163

 

163

Agricultural loans  0 3,886 0 3,886 0 39 39 

 

0

 

3,874

 

0

 

3,874

 

0

 

40

 

40

Other commercial loans  0  15,864  566  16,430  0  160  160 

 

0

 

16,031

 

548

 

16,579

 

0

 

167

 

167

Total commercial  7,367  435,457  126,507  569,331  2,033  4,056  6,089 

 

12,567

 

521,400

 

124,709

 

658,676

 

1,792

 

4,066

 

5,858

Consumer  0 16,516 0 16,516 0 273 273 

 

0

 

16,444

 

0

 

16,444

 

0

 

263

 

263

Unallocated                    585 

 

 

 

 

 

 

 

585

                

Total $8,290 $926,958 $232,225 $1,167,473 $2,227 $8,518 $11,330 

$

14,280

$

998,543

$

228,590

$

1,241,413

$

1,956

$

8,485

$

11,026

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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 

    

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 

$

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 

 

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 

 

0

 

32,147

 

1,491

 

33,638

 

0

 

276

 

276

1-4 Family residential construction  0  14,640  158  14,798  0  117  117 

 

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 

 

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 

 

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 

 

1,467

 

122,313

 

2,594

 

126,374

 

149

 

1,242

 

1,391

Political subdivisions  0 53,570 0 53,570 0 0 0 

 

0

 

53,570

 

0

 

53,570

 

0

 

0

 

0

Commercial construction and land  1,261 29,710 2,584 33,555 678 288 966 

 

1,261

 

29,710

 

2,584

 

33,555

 

678

 

288

 

966

Loans secured by farmland  607 11,386 258 12,251 48 110 158 

 

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 

 

0

 

10,617

 

20,453

 

31,070

 

0

 

156

 

156

Agricultural loans  76 4,243 0 4,319 0 41 41 

 

76

 

4,243

 

0

 

4,319

 

0

 

41

 

41

Other commercial loans  0  15,947  588  16,535  0  155  155 

 

0

 

15,947

 

588

 

16,535

 

0

 

155

 

155

Total commercial  4,095  446,318  128,488  578,901  875  3,913  4,788 

 

4,095

 

446,318

 

128,488

 

578,901

 

875

 

3,913

 

4,788

Consumer  0 16,741 0 16,741 0 281 281 

 

0

 

16,741

 

0

 

16,741

 

0

 

281

 

281

Unallocated                    585 

 

585

 

 

 

 

 

 

                

Total $5,486 $939,762 $236,974 $1,182,222 $1,051 $8,200 $9,836 

$

5,486

$

939,762

$

236,974

$

1,182,222

$

1,051

$

8,200

$

9,836

30

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Summary information related to impaired loans at March 31,June 30, 2020 and December 31, 2019 is provided in the table immediately below. Purchased credit impaired loans of $305,000 at June 30, 2020 and $441,000 at December 31, 2019 are excluded from the table.

(In Thousands)

June 30, 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

$

179

$

152

$

0

$

645

$

617

$

0

Residential mortgage loans - junior liens

 

41

 

41

 

0

 

42

 

42

 

0

Commercial loans secured by real estate

 

747

 

747

 

0

 

684

 

684

 

0

Commercial and industrial

 

1,065

 

1,065

 

0

 

563

 

563

 

0

Loans secured by farmland

 

86

 

86

 

0

 

129

 

129

 

0

Agricultural loans

 

0

 

0

 

0

 

76

 

76

 

0

Total with no related allowance recorded

 

2,118

 

2,091

 

0

 

2,139

 

2,111

 

0

With a related allowance recorded:

 

 

 

 

  

 

  

 

  

Residential mortgage loans - first liens

 

1,206

 

1,206

 

10

 

406

 

406

 

0

Residential mortgage loans - junior liens

 

314

 

314

 

154

 

326

 

326

 

176

Commercial loans secured by real estate

6,754

6,754

494

0

0

0

Commercial and industrial

 

3,580

 

3,580

 

1,264

 

904

 

904

 

149

Construction and other land loans

 

0

 

0

 

0

 

1,261

 

1,261

 

678

Loans secured by farmland

 

335

 

335

 

34

 

478

 

478

 

48

Total with a related allowance recorded

 

12,189

 

12,189

 

1,956

 

3,375

 

3,375

 

1,051

Total

$

14,307

$

14,280

$

1,956

$

5,514

$

5,486

$

1,051

(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 borrowertwo borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. TheseEach of these loans areis collateralized by one property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property. The total allowance related to these two borrowers was $154,000 at June 30, 2020 and $176,000 at December 31, 2019.

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31

Table of Contents

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

6 Months Ended

3 Months Ended

6 Months Ended

June 30,

June 30,

June 30,

June 30,

    

2020

2019

2020

    

2019

2020

2019

    

2020

    

2019

Residential mortgage:

 

  

 

  

 

  

 

  

Residential mortgage loans - first lien

$

1,398

$

970

$

1,315

$

977

$

35

$

8

$

43

$

18

Residential mortgage loans - junior lien

391

289

 

387

 

290

13

0

 

13

 

2

Home equity lines of credit

65

0

 

65

 

0

1

0

 

2

 

0

Total residential mortgage

1,854

1,259

 

1,767

 

1,267

49

8

 

58

 

20

Commercial:

 

 

 

 

Commercial loans secured by real estate

3,771

1,722

 

2,079

 

2,582

12

7

 

16

 

17

Commercial and industrial

4,460

1,241

 

3,666

 

1,546

19

8

 

20

 

34

Commercial construction and land

678

0

 

993

 

0

1

0

 

13

 

0

Loans secured by farmland

422

1,533

 

469

 

1,471

7

18

 

24

 

19

Agricultural loans

76

626

 

76

 

639

2

12

 

2

 

24

Other commercial loans

25

0

 

37

 

0

0

0

 

1

 

0

Total commercial

9,432

5,122

 

7,320

 

6,238

41

45

 

76

 

94

Consumer

0

0

 

0

 

6

0

0

 

0

 

0

Total

$

11,286

$

6,381

$

9,087

$

7,511

$

90

$

53

$

134

$

114

(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

32

Table of Contents

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 

June 30,2020

December 31,2019

 Past Due     Past Due    
 90+ Days and     90+ Days and    
 Accruing Nonaccrual Accruing Nonaccrual 

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 

$

1,545

$

5,888

$

878

$

4,679

Residential mortgage loans - junior liens  98   354   53   326 

 

59

 

344

 

53

 

326

Home equity lines of credit  107   74   71   73 

 

243

 

273

 

71

 

73

1-4 Family residential construction  0   39   0   0 

 

0

 

39

 

0

 

0

Total residential mortgage  1,188   5,285   1,002   5,078 

 

1,847

 

6,544

 

1,002

 

5,078

Commercial:                

 

 

 

  

 

  

Commercial loans secured by real estate  496   744   107   1,148 

 

558

 

7,482

 

107

 

1,148

Commercial and industrial  59   4,487   15   1,051 

 

135

 

4,227

 

15

 

1,051

Commercial construction and land  0   1,305   0   1,311 

 

0

 

50

 

0

 

1,311

Loans secured by farmland  229   424   43   565 

 

188

 

421

 

43

 

565

Agricultural loans  1   0   0   0 
Other commercial  0   49   0   49 

 

0

 

0

 

0

 

49

Total commercial  785   7,009   165   4,124 

 

881

 

12,180

 

165

 

4,124

Consumer  120   15   40   16 

 

84

 

39

 

40

 

16

                

Totals $2,093  $12,309  $1,207  $9,218 

$

2,812

$

18,763

$

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.

33

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The table below presents a summary of the contractual aging of loans as of March 31,June 30, 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    

As of June 30, 2020

As of December 31, 2019

 Less than 30-89 90+     Less than 30-89 90+    
 30 Days Days Days Total 30 Days Days Days Total 

    

Current &

    

    

    

    

Current &

    

    

    

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 

$

484,129

$

5,111

$

3,974

$

493,214

$

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 

 

25,482

 

4

 

146

 

25,632

 

27,041

 

83

 

379

 

27,503

Home equity lines of credit  31,509   474   107   32,090   33,115   452   71   33,638 

 

31,246

 

337

 

243

 

31,826

 

33,115

 

452

 

71

 

33,638

1-4 Family residential construction  14,121   0   0   14,121   14,758   40   0   14,798 

 

15,621

 

0

 

0

 

15,621

 

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 

 

556,478

 

5,452

 

4,363

 

566,293

 

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 

 

291,728

 

245

 

1,331

 

293,304

 

299,640

 

737

 

850

 

301,227

Commercial and industrial  128,435   3,742   131   132,308   126,221   16   137   126,374 

 

116,429

 

67

 

3,706

 

120,202

 

126,221

 

16

 

137

 

126,374

Small Business Administration -

Paycheck Protection Program

97,103

0

0

97,103

0

0

0

0

Political subdivisions  43,613   0   0   43,613   53,570   0   0   53,570 

 

43,134

 

0

 

0

 

43,134

 

53,570

 

0

 

0

 

53,570

Commercial construction and land  33,145   145   50   33,340   33,505   0   50   33,555 

 

39,947

 

351

 

50

 

40,348

 

33,505

 

0

 

50

 

33,555

Loans secured by farmland  11,208   0   316   11,524   11,455   666   130   12,251 

 

11,159

 

52

 

222

 

11,433

 

11,455

 

666

 

130

 

12,251

Multi-family (5 or more) residential  32,370   0   0   32,370   31,070   0   0   31,070 

 

32,699

 

0

 

0

 

32,699

 

31,070

 

0

 

0

 

31,070

Agricultural loans  3,809   76   1   3,886   4,318   1   0   4,319 

 

3,800

 

74

 

0

 

3,874

 

4,318

 

1

 

0

 

4,319

Other commercial loans  16,430   0   0   16,430   16,535   0   0   16,535 

 

16,553

 

26

 

0

 

16,579

 

16,535

 

0

 

0

 

16,535

Total commercial  563,418   4,537   1,376   569,331   576,314   1,420   1,167   578,901 

 

652,552

 

815

 

5,309

 

658,676

 

576,314

 

1,420

 

1,167

 

578,901

Consumer  16,196   185   135   16,516   16,496   189   56   16,741 

 

16,205

 

124

 

115

 

16,444

 

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 

$

1,225,235

$

6,391

$

9,787

$

1,241,413

$

1,166,748

$

10,023

$

5,451

$

1,182,222

26

34

Table of Contents

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,June 30, 2020 and December 31, 2019 is as follows:

 Current &        

(In Thousands) Past Due Past Due Past Due    

Current &

 

 Less than 30-89 90+    
 30 Days Days Days Total 
March 31, 2020 Nonaccrual Totals $4,355  $4,681  $3,273  $12,309 

Past Due

Past Due

Past Due

 

Less than

30-89

90+

 

    

30 Days

    

Days

    

Days

    

Total

June 30, 2020 Nonaccrual Totals

$

10,521

$

1,267

$

6,975

$

18,763

December 31, 2019 Nonaccrual Totals $3,840  $1,134  $4,244  $9,218 

$

3,840

$

1,134

$

4,244

$

9,218

Loans whose terms are modified are classified as Troubled Debt Restructurings (TDRs)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,June 30, 2020 and December 31, 2019 is as follows:

 Current &          

(In Thousands) Past Due Past Due Past Due      

Current &

 

 

 Less than 30-89 90+      
 30 Days Days Days Nonaccrual Total 
March 31, 2020 Totals $176  $196  $0  $1,730  $2,102 

Past Due

Past Due

Past Due

 

 

Less than

30-89

90+

 

 

    

30 Days

    

Days

    

Days

    

Nonaccrual

    

Total

June 30, 2020 Totals

$

172

$

93

$

338

$

452

$

1,055

December 31, 2019 Totals $889  $0  $0  $1,737  $2,626 

$

889

$

0

$

0

$

1,737

$

2,626

At March 31,June 30, 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 and six-month periods ended March 31,June 30, 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 

Three Months Ended

Three Months Ended

June 30, 2020

June 30, 2019

Post-

Post-

Number

Modification

Number

Modification

of

Recorded

of

Recorded

(Balances in Thousands)

Loans

Investment

Loans

Investment

Commercial and industrial,

Interest only payments for a nine-month period

    

1

    

$

240

    

0

    

$

0

(Balances in Thousands)

Six Months Ended

Six Months Ended

June 30, 2020

June 30, 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

Interest only payments for a nine-month period

1

240

0

0

Agricultural loans,

 

  

 

  

 

  

 

  

Reduced monthly payments and extended maturity date

 

0

 

0

 

1

 

84

Total

 

2

$

270

 

11

$

550

35

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

All of the loans for which TDRs were granted in the table above in the three-monthsix-month period ended March 31,June 30, 2019 are associated with one relationship.

In the three-month and six-month periods ended March 31,June 30, 2020 and 2019, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months.

27

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 Foreclosedforeclosed assets held for sale in the unaudited consolidated balance sheets) is as follows:

(In Thousands) March 31, Dec. 31, 

    

June 30,

    

Dec. 31,

 2020 2019 

2020

2019

Foreclosed residential real estate $130  $292 

$

118

$

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, 

    

June 30,

    

Dec. 31,

 2020 2019 

2020

2019

Residential real estate in process of foreclosure $1,779  $1,717 

$

1,502

$

1,717

8. GOODWILL AND OTHER INTANGIBLE ASSETS NET

Information related to the core deposit intangibles, net are as follows:

(In Thousands)     

    

June 30,

    

December 31,

 March 31, December 31, 
 2020 2019 

2020

2019

Gross amount $3,495  $3,495 

$

3,495

$

3,495

Accumulated amortization  (2,310)  (2,248)

 

(2,372)

 

(2,248)

Net $1,185  $1,247 

$

1,123

$

1,247

Amortization expense was $62,000related to core deposit intangibles is included in other noninterest expense in the first quarter 2020 and $2,000 in the first quarter 2019.consolidated statements of income, as follows:

(In Thousands)

3 Months Ended

6 Months Ended

June 30,

June 30,

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Amortization expense

$

62

    

$

73

    

$

124

    

$

75

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At March 31,June 30, 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)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 inhad significant adverse effects on macroeconomic conditions,conditions. After a period when the virus appeared to have subsided in Pennsylvania and throughout many parts of the US, the number of cases and mortality levels have increased in recent weeks. Broader US stock market valuations have decreased significantly for most companies, including banks.in the latter part of the first quarter and early second quarter 2020 but more recently have bounced back to levels consistent with pre-COVID-19 conditions. Bank stock valuations have lagged, reflecting market concerns about potential credit losses and the effects of a substantial drop in interest rates. 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,June 30, 2020.

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The average closing price (trading price) of the Corporation’s common stock was $19.96$20.24 per share for the month of MarchJune 2020, down from $25.90an average closing price of $26.05 in February 2020 and $27.37 in January 2020.the fourth quarter 2019. The average closing price for the last 10 trading days of the firstsecond quarter 2020 (March 18(June 17 through March 31,June 30, 2020) was $18.87$20.14 per share. In comparison, the book value per share of the Corporation’s common stock at March 31,June 30, 2020 was $18.22$18.53 per share. In testing goodwill for impairment as of March 31,June 30, 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 no0 goodwill impairment at March 31,June 30, 2020.

9. BORROWED FUNDS AND SUBORDINATED DEBT

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

(In Thousands) March 31, Dec. 31, 

    

June 30,

    

Dec. 31,

 2020 2019 

2020

2019

FHLB-Pittsburgh borrowings $35,200  $84,292 

$

12,200

$

84,292

Customer repurchase agreements  2,407   1,928 

 

2,204

 

1,928

Total short-term borrowings $37,607  $86,220 

$

14,404

$

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, 

    

June 30,

    

Dec. 31,

 2020 2019 

2020

2019

Overnight borrowing $17,000  $64,000 

$

0

$

64,000

Other short-term advances  18,200   20,292 

 

12,200

 

20,292

Total short-term FHLB-Pittsburgh borrowings $35,200  $84,292 

$

12,200

$

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,June 30, 2020, other short-term advances included eight5 advances totaling $18,200,000$12,200,000 with a weighted-average interest rate of 1.68%1.59%.

The Corporation had available credit with other correspondent banks totaling $45,000,000 at March 31,June 30, 2020 and December 31, 2019. These lines of credit are primarily unsecured. NoNaN amounts were outstanding at March 31,June 30, 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,June 30, 2020, the Corporation had available credit in the amount of $14,364,000$14,605,000 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 no0 outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $14,815,000$15,092,000 at March 31,June 30, 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,June 30, 2020 and December 31, 2019. The carrying value of the underlying securities was $2,430,000$2,240,000 at March 31,June 30, 2020 and $1,951,000 at December 31, 2019.

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The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $783,312,000$759,623,000 at March 31,June 30, 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$8,671,000 at March 31,June 30, 2020 and $10,131,000 at December 31, 2019. In addition to the short-term and long-term borrowings shown in these tables, there was a $400,000 letter of credit from FHLB-Pittsburgh outstanding at June 30, 2020. The Corporation’s total credit facility with FHLB-Pittsburgh was $567,606,000$571,597,000 at March 31,June 30, 2020, including an unused (available) amount of $459,462,000.$486,093,000. 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, 

    

June 30,

    

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 

2020

2019

Loans matured in 2020 with a weighted-average rate of 2.71%

$

0

$

5,069

Loans maturing in 2021 with a weighted-average rate of 1.63%  20,000   6,000 

20,000

6,000

Loans maturing in 2022 with a weighted-average rate of 1.90%  22,355   20,000 

22,355

20,000

Loans maturing in 2023 with a weighted-average rate of 1.63%  22,500   20,500 

22,500

20,500

Loans maturing in 2024 with a weighted-average rate of 1.27%  7,536   0 

7,536

0

Loan maturing in 2025 with a rate of 4.91%  536   558 

 

513

 

558

Total long-term FHLB-Pittsburgh borrowings $72,944  $52,127 

$

72,904

$

52,127

At March 31,June 30, 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,June 30, 2020 and December 31, 2019, the carrying value of the subordinated debt on the consolidated balance sheetsheets 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$230,000 in the firstsecond quarter 2020 and $229,000$202,000 in the firstsecond quarter 2019. Total stock-based compensation expense attributable to restricted stock awards amounted to $424,000 in the six-month period ended June 30, 2020 and $431,000 in the six-month period ended June 30, 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.

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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,June 30, 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 

June 30, 2020

    

Quoted

    

    

    

Prices

Other

in Active

Observable

Unobservable

Total

Markets

Inputs

Inputs

Fair

(In Thousands) (Level 1) (Level 2) (Level 3) Value 

(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 

$

0

$

11,673

$

0

$

11,673

Obligations of states and political subdivisions:                

 

  

 

  

 

  

 

Tax-exempt  0   81,072   0   81,072 

 

0

 

91,643

 

0

 

91,643

Taxable  0   37,074   0   37,074 

 

0

 

39,784

 

0

 

39,784

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:                

 

  

 

  

 

  

 

  

Residential pass-through securities  0   55,752   0   55,752 

 

0

 

51,520

 

0

 

51,520

Residential collateralized mortgage obligations  0   103,556   0   103,556 

 

0

 

89,435

 

0

 

89,435

Commercial mortgage-backed securities  0   48,554   0   48,554 

 

0

 

48,133

 

0

 

48,133

Total available for sale debt Securities  0   342,416   0   342,416 

 

0

 

332,188

 

0

 

332,188

Marketable equity security  994   0   0   994 

 

1,003

 

0

 

0

 

1,003

Servicing rights  0   0   1,226   1,226 

 

0

 

0

 

1,284

 

1,284

Total recurring fair value measurements $994  $342,416  $1,226  $344,636 

$

1,003

$

332,188

$

1,284

$

334,475

                

Nonrecurring fair value measurements                

 

  

 

  

 

  

 

  

Impaired loans with a valuation allowance $0  $0  $6,709  $6,709 

$

0

$

0

$

12,189

$

12,189

Valuation allowance  0   0   (2,227)  (2,227)

 

0

 

0

 

(1,956)

 

(1,956)

Impaired loans, net  0   0   4,482   4,482 

 

0

 

0

 

10,233

 

10,233

Foreclosed assets held for sale  0   0   1,685   1,685 

 

0

 

0

 

1,593

 

1,593

Total nonrecurring fair value measurements $0  $0  $6,167  $6,167 

$

0

$

0

$

11,826

$

11,826

31

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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

  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.

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At March 31,June 30, 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(Level 3 methodologiesmethodologies) are as follows:

 Fair Value at         
 3/31/20 Valuation Unobservable    Method or Value As of

    

Fair Value at

    

  

    

  

    

  

    

  

6/30/20

Valuation

Unobservable

Method or Value As of

Asset (In Thousands) Technique Input(s)    3/31/20

(In Thousands)

Technique

Input(s)

6/30/20

Servicing rights $1,226  Discounted cash flow Discount rate  12.50% Rate used through modeling period

$

1,284

 

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

 

 

Loan prepayment speeds

285.00

%  

Weighted-average PSA

 

 

Servicing fees

0.25

%  

of loan balances

 

4.00

%  

of payments are late

 

5.00

%  

late fees assessed

$

1.94

Miscellaneous fees per account per month

 

 

Servicing costs

$

6.00

Monthly servicing cost per account

$

24.00

Additional monthly servicing cost per loan on loans more than 30 days delinquent

 

1.50

%  

of loans more than 30 days delinquent

 

 

3.00

%  

annual increase in servicing costs

    

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

$

24.00

Additional monthly servicing cost per loan on loans more than 30 days delinquent

1.50

%  

of loans more than 30 days delinquent

 

 

3.00

%  

annual increase in servicing costs

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

  Fair Value at          
  12/31/19  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, 

Three Months Ended

Six Months Ended

 2020 2019 

    

June 30, 2020

    

June 30, 2019

    

June 30, 2020

    

June 30, 2019

Servicing rights balance, beginning of period $1,277  $1,404 

$

1,226

$

1,347

$

1,277

$

1,404

Issuances of servicing rights  75   20 

Originations of servicing rights

 

328

 

46

 

403

 

66

Unrealized losses included in earnings  (126)  (77)

 

(270)

 

(71)

 

(396)

 

(148)

Servicing rights balance, end of period $1,226  $1,347 

$

1,284

$

1,322

$

1,284

$

1,322

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

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values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial and agricultural loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

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At March 31,June 30, 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:

(In Thousands, Except

    

    

  

    

  

    

  

    

  

    

Weighted

 

Percentages)

Valuation

  

  

  

Average

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

6/30/20

6/30/20

6/30/20

Technique

Inputs

6/30/20

Impaired loans:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans -

 

  

 

  

 

  

 

  

 

  

 

  

first and junior liens

$

1,520

$

164

$

1,355

 

Sales comparison

 

Discount to appraised value

 

31

%

Commercial:

 

  

 

 

 

  

 

  

 

Commercial loans secured by real estate

 

6,754

 

494

 

6,261

 

Sales comparison

 

Discount to appraised value

 

38

%

Commercial and industrial

 

3,580

 

1,264

 

2,316

 

Liquidation of assets

 

Discount to appraised value

 

35

%

Loans secured by farmland

 

335

 

34

 

302

 

Sales comparison

 

Discount to appraised value

 

42

%

Total impaired loans

$

12,189

$

1,956

$

10,234

 

  

 

  

 

  

Foreclosed assets held for sale -

 

  

 

  

 

  

 

  

 

  

 

  

real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential (1-4 family)

$

118

$

0

$

118

 

Sales comparison

 

Discount to appraised value

 

55

%

Land

 

70

 

0

 

70

 

Sales comparison

 

Discount to appraised value

 

53

%

Commercial real estate

 

1,405

 

0

 

1,405

 

Sales comparison

 

Discount to appraised value

 

38

%

Total foreclosed assets held for sale

$

1,593

$

0

$

1,593

 

  

 

  

 

  

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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

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

 

  

 

  

 

  

(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 

Fair Value

June 30, 2020

December 31, 2019

 Hierarchy Carrying Fair Carrying Fair 
 Level Amount Value Amount Value 

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 

 

Level 1

$

73,812

$

73,812

$

31,122

$

31,122

Certificates of deposit  Level 2   4,080   4,249   4,080   4,227 

 

Level 2

 

3,830

 

4,078

 

4,080

 

4,227

Restricted equity securities (included in Other Assets)  Level 2   9,396   9,396   10,321   10,321 

 

Level 2

 

8,861

 

8,861

 

10,321

 

10,321

Loans, net  Level 3   1,156,143   1,172,452   1,172,386   1,181,000 

 

Level 3

 

1,230,387

 

1,236,040

 

1,172,386

 

1,181,000

Accrued interest receivable  Level 2   5,192   5,192   5,001   5,001 

 

Level 2

 

6,326

 

6,326

 

5,001

 

5,001

                    

Financial liabilities:                    

 

  

 

  

 

  

 

  

 

  

Deposits with no stated maturity  Level 2   893,596   893,596   877,965   877,965 

 

Level 2

 

1,039,401

 

1,039,401

 

877,965

 

877,965

Time deposits  Level 2   356,316   359,516   374,695   376,738 

 

Level 2

 

341,777

 

344,959

 

374,695

 

376,738

Short-term borrowings  Level 2   37,607   37,471   86,220   86,166 

 

Level 2

 

14,404

 

14,271

 

86,220

 

86,166

Long-term borrowings  Level 2   72,944   74,297   52,127   52,040 

 

Level 2

 

72,904

 

74,545

 

52,127

 

52,040

Accrued interest payable  Level 2   369   369   311   311 

 

Level 2

 

312

 

312

 

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

  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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

·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 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. Since the pandemic began, the Committee 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. Currently all branches are open for walk-in traffic though some branches are running on reduced hours. Many employees who were working from home have returned to the offices where social distancing allows. 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 quartersix months of 2020, the Corporation increased the allowance for loan losses $402,000$646,000 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.

In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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. TheConsistent with Section 4013 of the CARES ACT and guidance from the joint interagency statement described in the preceding paragraphs, the modified loans willhave not bebeen reported as past due, nonaccrual or as TDRs duringat June 30, 2020. Most of the modifications under the program became effective In March or April 2020 and provided a deferral period.of interest or principal and interest for 90 days. Most of the modifications under the program became effective In March or April 2020 and provided a deferral of interest or principal and interest for 90 days. Accordingly, most of the loans for which deferrals were granted returned to full payment status in June or July 2020. Through AprilJune 30, 2020, 602706 loans with a total outstanding balance at the time of modification of $180,178,000$202,062,000 have been modified under this program.program with 541 loans with outstanding balances of $158,718,000 remaining on deferral at June 30, 2020. As shown in Note 137 to the unaudited consolidated financial statements, 244198 of the loans modified through Aprilremaining on deferral at June 30, 2020 with a recorded investment of $136,047,000outstanding balances $117,424,000 were commercial loans. By July 31, 2020, the number of loans on deferral (excluding loans acquired pursuant to the Covenant acquisition on July 1, 2020) had dropped to 78 with total outstanding balances of $29,618,000, including commercial loans of $22,488,000. A breakdown of these commercial loans by industry is as follows:

Deferrals Remaining

Deferrals Remaining

As of June 30,2020

As of July 31,2020

(Dollars in Thousands)

Number

Number

of

Recorded

of

Recorded

Commercial Loans Modified - Summary

Loans

Investment

Loans

Investment

Lessors of nonresidential buildings (except miniwarehouses)

    

36

    

$

34,649

    

4

    

$

2,352

Accommodation and food services - hotels

 

14

 

29,496

 

4

 

11,342

Residential property managers

 

7

 

8,108

 

1

 

100

Lessors of residential buildings & dwellings

 

14

 

8,021

 

3

 

3,227

Real estate rental and leasing - other

 

3

 

4,644

 

0

 

0

Accommodation and food services - other

 

18

 

4,500

 

1

 

104

Commercial printing (except screen and books)

 

1

 

3,460

 

0

 

0

Transportation and warehousing

 

10

 

3,371

 

0

 

0

Manufacturing

 

4

 

3,199

 

0

 

0

Retail trade

 

6

 

3,027

 

2

 

2,689

Powder metallurgy part manufacturing

 

7

 

2,788

 

0

 

0

Arts, entertainment, and recreation

 

6

 

2,491

 

0

 

0

Other services (except public administration)

 

11

 

2,048

 

2

 

1,037

Finance and insurance

 

2

 

1,859

 

1

 

1,197

Health care and social assistance

 

7

 

1,472

 

1

 

17

Agriculture, forestry, fishing and hunting

 

24

 

1,457

 

2

 

57

Construction

 

14

 

1,329

 

1

 

214

Educational services

 

5

 

623

 

1

 

105

Information

 

1

 

593

 

0

 

0

Mining

 

4

 

146

 

0

 

0

Administrative and support and waste management and remediation services

 

3

 

91

 

1

 

47

Public administration

 

1

 

52

 

0

 

0

 

198

$

117,424

 

24

$

22,488

37

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

  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 PPPPaycheck Protection Program (“PPP”) through the Small Business Administration (SBA) and Treasury Department 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’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 twofive years, though most of the Corporation’s PPP loans have two-year terms, 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 receivehas received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Consistent with current SBA guidance, if a borrower uses an agent in the loan process, the Corporation would pay a percentage of the SBA fees to the agent. 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 AprilJune 30, 2020, the outstanding balance ofrecorded investment in PPP loans was $84,478,000, and the Corporation had received conditional approval from the SBA for an additional $11,709,000$97,103,000, including contractual principal balances of $100,120,000, reduced by net deferred origination fees of $3,017,000. Net deferred origination fees on PPP loans expected to be fundedare recognized in May 2020. Fees to beinterest income as a yield adjustment (accretion over the term of the loans). Accretion of $337,000 from fees 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 PPPwas included in interest and fees on (taxable) 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 processconsolidated statements of evaluating whether it will participateincome in the PPPLF.

three-month and six-month periods ended June 30, 2020.

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,June 30, 2020 of 12.38%10.63% is more than double the well-capitalized threshold of 5%, an excess capital amount of $117.0$93.4 million. Similarly, the total capital to risk-weighted assets ratio at March 31,June 30, 2020 is 19.18%17.20%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $99.5$78.6 million.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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”). In July 2020, the Corporation and Covenant isannounced the completion of the merger as of July 1, 2020. Covenant was the holding company for Covenant Bank, which operatesoperated 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,Agreement and Plan of Merger, Covenant merged into the Corporation, will payand Covenant Bank merged into C&N Bank. In the transaction, Covenant shareholders elected to receive either 0.6212 shares of Corporation common stock or $16.50 in cash for each share of Covenant common stock owned, subject to proration to ensure that, overall, 25% of the Covenant shares were converted into cash and will convert 75% of the Covenant shares were converted into Corporation stock. The election and proration process commenced in June 2020 and was completed in early July 2020. Holders of Covenant common stock prior to the Corporation’s common stock. The transaction was valued on December 18, 2019 atconsummation of the merger own approximately $77 million. Based on the average closing price12.9% of the Corporation’s common stock inoutstanding following the final 10 trading daysmerger.

49

Based on the average of the high and low trading price of the Corporation’s common stock of $20.32 per share 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 quarterJuly 1, 2020, the Corporation incurred merger-relatedtotal purchase consideration is valued at approximately $63.3 million. As of June 30, 2020, Covenant reported total assets of $608 million, including gross loans of $472 million, total deposits of $480 million and total stockholders’ equity of $44 million. As of the date the Corporation’s June 30, 2020 financial statements are issued, some of the information required to be disclosed under U.S. GAAP was not available since, given the short period between the July 1, 2020 merger date and the financial statement issuance, the calculation of the fair value of all material Covenant assets acquired and liabilities assumed had not yet been completed.

Merger-related expenses related to the planned acquisition of Covenant totaling $141,000, Intotaled $983,000 in the year ending December 31,second quarter 2020 management expectsand $1,124,000 in the Corporation to incur significant additional merger-relatedsix-month period ended June 30, 2020. Merger-related expenses includinginclude severance and similar expenses costs associated with termination of data processing contracts,as well as initial expenses related to conversion of Covenant’s core customer accounting data into the Corporation’s core system and legal and other professional fees and various other costs.expenses. Management estimates total pre-tax merger-related expenses associated with the Covenant acquisitiontransaction will totalbe approximately $7.4$8.0 million, ($6.0 million, netincluding remaining expenses of tax), with mostapproximately $6.6 million. Most of the expenses are 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 & Northernthe 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’sthe Corporation’s core system, were $311,000$3,301,000 in the firstsecond quarter 2019 and $3,612,000 in the six-month period ended June 30, 2019.

EARNINGS OVERVIEW

Net income was $0.39 per diluted share in the second quarter 2020, as compared to $0.30 per diluted share in the first quarter 2020 and $0.27 in the second quarter 2019. For the six months ended June 30, 2020, net income per diluted share was $0.70 as compared to $0.41$0.67 per share infor the first six months of 2019. Earnings for the second quarter 2019. Highlights2020 and June 30, 2020 year-to-date and the comparative periods in 2019 were impacted by nonrecurring merger-related expenses related to the Corporation’s earnings results forMonument transaction in 2019 and the first quartersCovenant transaction in 2020 described earlier.

50

Table of 2020 and 2019 are presented below.

39

Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table provides a reconciliation of the Corporation’s second quarter and June 30, 2020 year-to-date unaudited earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses and realized gains and losses on securities. Management believes disclosure of unaudited second quarter and six-months ended June 30, 2020 and 2019 earnings results, adjusted to exclude the impact of these items, provides useful information for comparative purposes.

RECONCILIATION OF NET INCOME AND DILUTED EARNINGS PER SHARE TO NON-U.S. GAAP MEASURE

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

2nd Quarter 2020

2nd Quarter 2019

Income

Diluted

Income

Diluted

(Dollars In Thousands, Except Per Share Data)

Before

Income

Earnings

Before

Income

Earnings

(Unaudited)

Income

Tax

per

Income

Tax

per

Tax

Provision

Net

Common

Tax

Provision

Net

Common

Provision

(1)

Income

Share

Provision

(1)

Income

Share

Results as Presented Under U.S. GAAP

$

6,693

$

1,255

$

5,438

$

0.39

$

4,342

$

693

$

3,649

$

0.27

Add: Merger-Related Expenses

 

983

 

200

 

783

 

3,301

 

673

 

2,628

 

  

 

  

Net Gains on Available-for-Sale Debt

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Securities

 

0

 

0

 

0

 

 

(7)

 

(1)

 

(6)

 

  

Adjusted Earnings, Excluding Effect of Merger-

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Related Expenses and Net Gains on Available-

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

for Sale Debt Securities (Non-U.S. GAAP)

$

7,676

$

1,455

$

6,221

$

0.45

$

7,636

$

1,365

$

6,271

$

0.46

    

6 Months Ended June 30, 2020

    

6 Months Ended June 30, 2019    

Income

Diluted

Income

Diluted

Before

Income

Earnings

Before

Income

Earnings

Income

Tax

per

Income

Tax

per

Tax

Provision

Net

Common

Tax

Provision

Net

Common

Provision

(1)

Income

Share

Provision

(1)

Income

Share

Results as Presented Under U.S. GAAP

$

11,675

$

2,071

$

9,604

$

0.70

$

10,413

$

1,674

$

8,739

$

0.67

Add: Merger-Related Expenses

 

1,124

 

229

 

895

 

3,612

 

739

 

2,873

 

  

 

  

Net Gains on Available-for-Sale Debt

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Securities

 

0

 

0

 

0

 

 

(7)

 

(1)

 

(6)

 

  

Adjusted Earnings, Excluding Effect of Merger-

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Related Expenses and Net Gains on Available-

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

for Sale Debt Securities (Non-U.S. GAAP)

$

12,799

$

2,300

$

10,499

$

0.76

$

14,018

$

2,412

$

11,606

$

0.89

(1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision of merger-related expenses is adjusted for the estimated nondeductible portion of the expenses.

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Table of Contents

Net income of $4,166,000 inCITIZENS & NORTHERN CORPORATION – FORM 10-Q

Additional highlights related to the Corporation’s second quarter and June 30, 2020 year-to-date unaudited earnings results as compared to the first quarter 2020 and comparative periods of 2019 are presented below.

Second Quarter 2020 as Compared to Second Quarter 2019

Second quarter 2020 net income was down $924,000 (18.2%) from$5,438,000, and excluding the firstimpact of merger-related expenses, adjusted (non-U.S. GAAP) earnings were $6,221,000. In comparison, second quarter 2019 amount. Significantnet income was $3,649,000, and excluding merger-related expenses and net securities gains, adjusted (non-U.S. GAAP) earnings were $6,271,000. Other 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 $957,000was $176,000 in the firstsecond quarter 2019,2020 as specific allowances totaling $1,365,000 at December 31, 2018compared to a credit of $4,000 in the second quarter 2019. The credit for loan losses in the second quarter 2020 included the benefit of repayment of a loan for less than the full principal balance, resulting in a charge-off of $107,000 on twoa commercial loans were eliminated. These two loans were no longer considered impairedloan for which an allowance for loan losses had been recorded at March 31, 2019 and were returned to full accrual status in the first quarter 2019.2020. In total, the first quarter 2019 credit for loan losses in the second quarter 2020 included a net credit of $1,011,000$255,000 from the impact of a reduction in outstanding loans, excluding PPP loans; a net credit of $143,000 related to changesspecific loans (net decrease in specific allowances on loans adjusted for net charge-offs during the period,of $271,000 partially offset by net charge-offs of $128,000); a net increasecredit of $54,000$22,000 in the collectively determinednet charge-off factors used to estimate the allowance; and unallocated portionsa charge of $244,000 attributable to increases in qualitative factors. In comparison, the allowancenet credit for loan losses.losses in the second quarter 2019 included a reduction from changes in historical loss factors of $322,000 and a reduction of $149,000 related to specific allowances on loans, partially offset by an increases attributable to loan growth of $382,000 and an increase from qualitative factors of $85,000.

·FirstSecond quarter 2020 net interest income of $14,282,000$14,246,000 was $2,567,000 (21.9%)slightly higher than the second quarter 2019 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.$14,205,000. The net interest margin was 3.83% forof 3.65% in the firstsecond quarter 2020 was down from 4.04% for3.89% in the firstsecond quarter 2019. The average yield on earning assets was 0.06% higherof 4.22% in the firstsecond quarter 2020 as compared towas down 0.46% from the same period insecond quarter 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 primarilyof 0.83% was lower by 0.29% 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 incomethe second quarter 2019 level. Average outstanding loans in the firstsecond quarter 2020 of $417,000, including an increase$1.231 billion were up $126.2 million (11.4%) from the corresponding second quarter 2019 amount. The average balance of PPP loans was $77.8 million in income onthe second quarter 2020, as C&N participated in the PPP from its inception in early April 2020. Excluding PPP loans, of $464,000 partially offset by increasesaverage outstanding loans were 4.4% higher in interest expense on timethe second quarter 2020 as compared to the second quarter 2019. Average total deposits of $41,000 and on short-term borrowings of $6,000. The net positive impact to$1.349 billion in the firstsecond quarter 2020 net interest marginwere up $79.9 million from accretion and amortizationthe second quarter 2019, with much of purchase accounting adjustments was 0.11%.the growth attributable to PPP activity.

·Total noninterest income for the firstsecond quarter 2020 was up $875,000$679,000 from the firstsecond quarter 2019 total. Significant variances included the following:

·oOther 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$1,564,000 for the firstsecond quarter 2020 were up $228,000$1,343,000 from the total for the firstsecond quarter 2019. The increase is sales reflects an increase in volume of mortgage loans sold, due in partmainly to increased refinancing activity resulting from falling interest rates.

·oTotal trust and brokerage revenuesService charges on deposit accounts of $1,812,000$831,000 in the second quarter 2020 were up $145,000down $446,000 from the firstsecond quarter 2019 amount, reflectingas the impactvolume of newconsumer and business generated in 2019.overdraft activity fell.

·oInterchangeNet revenue from debit card transactions increased $108,000loan servicing fees decreased $193,000, as net fees were negative $158,000 (a decrease in revenue) in the firstsecond quarter 2020 as compared to net revenue of $35,000 in the second quarter 2019. The fair value of mortgage servicing rights decreased $270,000 in the second quarter 2020, as compared to a decrease of $71,000 in the second quarter 2019, over the first quarter 2019 amount, reflecting increases in transaction volumes.market assumptions that prepayments will increase due to lower interest rates.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

·Noninterest expense, excluding merger-related expenses, increased $2,216,000$852,000 in the firstsecond quarter 2020 over the firstsecond quarter 2019 amount. Significant variances included the following:

·oSalaries 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$394,000, mainly due to increased health care expenses from new ventures.C&N’s partially self-insured plan.

40

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

·oOther 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,$133,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basisbasis.
oSalaries and wages expense increased $88,000 (1.7%), reflecting the net impact of several factors, including: an increase in number of personnel to 337 full-time equivalent (FTEs) from 332 at June 30, 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; and a slight reduction in incentive compensation expense.
oData processing expenses increased $78,000(8.1%), including the impact of increases in software licensing costs associated with lending, trust and other functions.
oPennsylvania shares tax expense increased $76,000 (21.9%), reflecting the impact of an increase in C&N Bank’s stockholder’s equity.

Six Months Ended June 30, 2020 as Compared to Six Months Ended June 30, 2019

Net income for the six-month period ended June 30, 2020 was $9,604,000, or $0.70 per diluted share, while net income for the first six months of 2019 was $8,739,000, or $0.67 per share. Excluding the impact of merger-related expenses and net securities gains, adjusted (non-U.S. GAAP) earnings for the first six months of 2020 would be $10,499,000 or $0.76 per share as compared to similarly adjusted earnings of $11,606,000 or $0.89 per share for the first six months of 2019. Other significant variances were as follows:

For the first six months of 2020, the provision for loan losses was $1,352,000, an increase in expense of $2,313,000 as compared to the credit for loan losses of $961,000 recorded in the first six months of 2019. In 2020, the provision includes the effects of recording a specific allowance of $1,193,000 on a commercial loan in the first quarter, partially offset by the benefit from recording a charge-off of $107,000 in the second quarter 2020 on a commercial loan for which the previously-established allowance had been $674,000. In total, the provision for the first six months of 2020 included a net charge of $1,067,000 related to specific loans (net increase in specific allowances on loans of $905,000 and net charge-offs of $162,000); a charge of $646,000 attributable to increases in qualitative factors; a credit of $272,000 from the impact of a reduction in outstanding loans, excluding PPP loans; and a credit of $89,000 in the net charge-off experience factors used to estimate the allowance. The credit for loan losses in the first six months of 2019 included a benefit from eliminating specific allowances on commercial loans that were no longer considered impaired.
Net interest income was up $2,608,000 (10.1%) for the first six months of 2020 over the same period in 2019, reflecting the benefits of growth related to the Monument acquisition. The net interest margin was 3.73% for the first six months of 2020, down from 3.96% in 2019. The average yield on earning assets was 0.21% lower in 2020 as compared to 2019, while the average rate paid on interest-bearing liabilities was 0.01% lower in comparing the same periods. Average outstanding loans of $1.2 billion for the first six months of 2020 were up $234.7 million (24.3%) from the corresponding total for the first six months of 2019, reflecting the impact of the Monument acquisition which closed April 1, 2019 as well as significant loan growth in the last three quarters of 2019. Average total deposits of $1.304 billion for the first six months of 2020 were up $158.8 million from the 2019 total, reflecting the impact of the Monument acquisition, PPP-related activity and other factors.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Total noninterest income, excluding realized securities gains, for the first six months of 2020 was up $1,554,000 from the total for the first six months of 2019. Significant variances included the following:
oNet gains from sales of loans totaled $1,879,000 in the first six months of 2020, an increase of $1,571,000 over the total for the first six months of 2019. As noted above, the increase reflects an increase in volume of mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates.
oOther noninterest income totaled $1,418,000, an increase of $451,000 over 2019. Income from realization of tax credits was $351,000 higher in the first six months of 2020 as compared to 2019. Also, dividend income from Federal Home Loan Bank stock was up $99,000, reflecting a higher average balance of stock held due to increased borrowings.
oInterchange revenue from debit card transactions totaled $1,449,000 for the first six months of 2020, an increase of $107,000 (8.0%), reflecting an increase in transaction volumes.
oTrust and financial management revenue of $3,044,000 was $101,000 (3.4%) higher in the first six months of 2020 as compared to 2019, reflecting the impact of fees from new business growth in 2019.
oService charges on deposit accounts of $2,081,000 in the first six months of 2020 were down $446,000 (17.6%) from the total for the first six months of 2019, as the volume of consumer and business overdraft activity fell significantly in the second quarter 2020.
oNet revenue from loan servicing fees decreased $235,000, as net fees were negative $172,000 (a decrease in revenue) in the first six months of 2020 as compared to net revenue of $63,000 in the first six months of 2019. The fair value of mortgage servicing rights decreased $396,000 in the first six months of 2020, as compared to a decrease of $148,000 in the first six months of 2019.
Noninterest expense, excluding merger-related expenses, increased $3,068,000 for the six months ended June 30, 2020 over the total for the first six months of 2019. Significant variances included the following:
oTotal salaries and wages and benefits expenses increased $1,749,000, reflecting: inclusion of the former Monument operations for six months in 2020 as compared to three months in 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; a slight reduction in incentive compensation expense; and an increase in health care expense due to higher claims on C&N’s partially self-insured plan.
oData processing expenses increased $293,000, including the impact of increases in software licensing costs associated with lending, trust and other functions.
oProfessional fees expense increased $290,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis.
oOther noninterest expense increased $254,000. Within this category, significant variances included the following:
Donations expense increased $427,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program.
Other operational losses increased $337,000, including an estimated accrual of $300,000 for penalties related to cyber security management and other corporate activities.certain information returns.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

·Automated teller machineExpenses related to other real estate properties decreased $244,000 and interchangecollection expenses decreased $215,000. The reduction in both of these expense increased $108,000, including increasescategories resulted from the completion in volume-related charges as well as other costs.the first quarter 2020 of a complex commercial workout situation for which a significant amount of expenses were incurred in 2019.

FDIC assessments expense decreased $81,000, as a significant portion of the assessed amounts for the first two quarters of 2020 were offset by credits based on the funding level of the insurance fund.

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)

For the Three Months Ended:

(Dollars In Thousands, Except Per Share Data)

June 30,

March 31,

Dec. 31,

Sept. 30,

June 30,

March 31,

(Unaudited)

    

2020

    

2020

    

2019

    

2019

    

2019

    

2019

Interest income

$

16,513

$

17,037

$

17,290

$

17,277

$

17,139

$

13,065

Interest expense

 

2,267

 

2,755

 

2,999

 

3,000

 

2,934

 

1,350

Net interest income

 

14,246

 

14,282

 

14,291

 

14,277

 

14,205

 

11,715

(Credit) provision for loan losses

 

(176)

 

1,528

 

652

 

1,158

 

(4)

 

(957)

Net interest income after (credit) provision for

 

 

 

 

 

 

loan losses

 

14,422

 

12,754

 

13,639

 

13,119

 

14,209

 

12,672

Noninterest income

 

5,528

 

5,281

 

5,066

 

4,963

 

4,849

 

4,406

Net gains on securities

 

0

 

0

 

3

 

13

 

7

 

0

Merger-related expenses

 

983

 

141

 

281

 

206

 

3,301

 

311

Other noninterest expenses

 

12,274

 

12,912

 

11,834

 

11,486

 

11,422

 

10,696

Income before income tax provision

 

6,693

 

4,982

 

6,593

 

6,403

 

4,342

 

6,071

Income tax provision

 

1,255

 

816

 

1,135

 

1,096

 

693

 

981

Net income

$

5,438

$

4,166

$

5,458

$

5,307

$

3,649

$

5,090

Net income attributable to common shares

$

5,405

$

4,146

$

5,431

$

5,281

$

3,630

$

5,063

Basic earnings per common share

$

0.39

$

0.30

$

0.40

$

0.39

$

0.27

$

0.41

Diluted earnings per common share

$

0.39

$

0.30

$

0.40

$

0.39

$

0.27

$

0.41

(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 and six-month periods ended March 31,June 30, 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.

Three-Month Periods Ended June 30, 2020 and 2019

For the three-month periods, fully taxable equivalent net interest income was $14,506,000$14,483,000 in 2020, which was $2,490,000 (20.7%$14,000 (0.1%) higher than in 2019. Interest income was $3,895,000 higher$653,000 lower in 2020 as compared to 2019, while interest expense was higherlower by $1,405,000$667,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.83%3.65% in 2020 as compared to 4.04%3.89% 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%3.39% in 2020 from 3.81%3.56% in 2019. The average yield on earning assets of 4.55%4.22% was 0.06% higher0.46% lower in 2020 as compared to 2019, while the average rate on interest-bearing liabilities increased 0.33%decreased 0.29% 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 firstsecond quarter 2020 of $417,000,$285,000, including an increase in income on loans of $464,000$299,000 partially offset by increases in interest expense on time deposits of $41,000 and on short-term borrowings of $6,000.$14,000. The net positive impact to the firstsecond quarter 2020 net interest margin from accretion and amortization of purchase accounting adjustments was 0.11%0.08%. In comparison, the net positive impact to the second quarter 2019 net interest margin from purchase accounting adjustments was 0.06%.

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INTEREST INCOME AND EARNING ASSETS

Interest income totaled $17,261,000$16,750,000 in 2020, an increasea decrease of $3,895,000 (29.1%$653,000 (3.8%) from 2019. Interest and fees from loans receivable increased $4,378,000,decreased $76,000, or 41.1%0.5%, in 2020 as compared to 2019. Table IV shows the increasedecrease in interest on loans includes $4,630,000$1,163,000 attributable to a decrease in average rate, offset by an increase of $1,087,000 related to an increase in average volume, partially offset by a decrease of $252,000 related to a decrease in average yield.volume. The average balance of loans receivable increased $344,739,000 (41.9%$126,198,000 (11.4%) to $1,168,485,000$1,231,441,000 in 2020 from $823,746,000$1,105,243,000 in 2019. The average balance of PPP loans originated in the second quarter of 2020 was $77,832,000. Excluding PPP loans, average loans in the second quarter 2020 exceeded the second quarter 2019 includingby $48,366,000, or 4.4%, reflecting the effects of loans acquired from Monument as well as additionalsignificant loan growth primarily in commercial loans.the third and fourth quarters of 2019. The average yield on loans in the firstsecond quarter of 2020 was 5.18%4.79%, down from 5.25%5.35% in the firstsecond 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% toThe average yield on loans in the firstsecond quarter 2020 was also affected by the comparatively low average yield on loans.

PPP loans of 2.79%.

Interest income from available-for-sale debt securities decreased $450,000 (17.4%$478,000 (19.2%) in 2020 from 2019. Total average available-for-sale debt securities (at amortized cost) in 2020 decreased to $335,007,000$326,069,000 from $361,929,000$362,969,000 in 2019. The average yield on available-for-sale debt securities was 2.56%2.48% for 2020, down from 2.89%2.75% 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 of premiums on mortgage-backed securities due to accelerated prepayments of principal caused by falling interest rates.rates and recently purchased securities with lower market yields.

For the three-month period, income from interest-bearing due from banks totaled $41,000 in 2020, a decrease of $108,000 (72.5%) from $149,000 in 2019. Although the average balance increased $15,401,000, the average yield on interest-bearing due from banks dropped to 0.44% in 2020 from 2.67% in 2019, consistent with the decrease in market rates.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the three-month periods, interest expense increased $1,405,000decreased $667,000 to $2,755,000$2,267,000 in 2020 from $1,350,000$2,934,000 in 2019. Interest expense on deposits increased $1,102,000,decreased $579,000, as the average rate on interest-bearing deposits increaseddecreased to 0.89%0.72% in 2020 from 0.56%0.97% in 2019. The increasedecrease in average rates on deposits includes increasesdecreases of 0.58%0.28% on time deposits, 0.12%0.27% on interest checking accounts, 0.08% on money market accounts and 0.05% on saving accounts.

Total average deposits (interest-bearing and noninterest-bearing) amounted to $1,260,245,000$1,349,093,000 in 2020, an increase of $239,172,000 (23.4%$79,875,000 (6.3%) from 2019. The increase in total average deposits included increases in noninterest-bearing demand deposits assumed from Monument. The increaseof $52,173,000, interest checking of $41,446,000, money market of $16,349,000 and savings of $10,011,000. Increases in average rate on interest-bearing liabilities resulted primarily from comparatively higher rates on deposits assumed from Monument.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 timedemand and other nonmaturity deposits resulted from changesfunding provided for PPP loans, stimulus deposits from the federal government and customers’ seeking “safe havens” in mix attributable tothe form of FDIC-insured deposits assumed from Monument, an increaseduring the COVID-19 pandemic. These volume increases were partially offset by a decrease in average time deposits withinof $40,104,000, as the Corporation’s legacy markets and useCorporation has experienced some run-off of brokered certificates of deposit (CDs) in 2020. The average balance of brokered CDs, included inhigher-cost 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.

deposits.

Interest expense on total borrowed funds increased $303,000decreased $88,000 in 2020 as compared to 2019. The average balance of total borrowed funds increased to $115,447,000$99,261,000 in the firstsecond quarter 2020 from $50,623,000$79,446,000 in the firstsecond quarter 2019, while the average rate on borrowed funds decreased to 2.09%1.96% in the firstsecond quarter 2020 from 2.38%2.88% in the firstsecond quarter 2019.

Interest expense on short-term borrowings increased $119,000decreased $164,000 to $198,000$64,000 in 2020 from $79,000$228,000 in 2019. The average balance of short-term borrowings increaseddecreased to $44,882,000$19,884,000 in 2020 from $15,935,000$37,279,000 in 2019. The average rate on short-term borrowings decreased to 1.77%1.30% in 2020 from 2.01%2.45% in 2019, reflecting the impact of lower short-term market rates in the first quarter 2020.

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Interest expense on long-term borrowings increased $77,000$85,000 to $295,000$313,000 in 2020 from $218,000$228,000 in 2019. The average balance of long-term borrowings was $64,065,000$72,917,000 in 2020, up from an average balance of $34,688,000$35,167,000 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%1.73% in 2020 compared to 2.55%2.60% in the firstsecond quarter of 2019.

Six-Month Periods Ended June 30, 2020 and 2019

For the six-month periods, fully taxable equivalent net interest income was $28,989,000 in 2020, $2,504,000 (9.5%) higher than in 2019. Interest income was $3,242,000 higher in 2020 as compared to 2019, while interest expense was higher by $738,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.73% in 2020 as compared to 3.96% 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) was 3.46% in 2020, down from 3.66% in 2019. The overall growth in net interest income, despite margin compression, resulted mainly from the infusion of loans, deposits and borrowings from Monument.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $34,011,000 in 2020, an increase of $3,242,000 (10.5%) from 2019. Interest and fees on loans receivable increased $4,302,000, or 16.9%, to $29,714,000 in 2020 from $25,412,000 in 2019. Table IV shows the increase in interest on loans includes an increase of $5,717,000 attributable to volume and a decrease of $1,415,000 related to average rate. The average balance of loans receivable increased $234,691,000 (24.3%) to $1,199,963,000 in 2020 from $965,272,000 in 2019. The increase in average balance reflects the Corporation’s purchase of Monument on April 1, 2019 and the effects of significant loan growth over the last three quarters of 2019. The fully taxable equivalent yield on loans in 2020 was 4.98% compared to 5.31% in 2019 as current rates on variable rate loans and rates on recent new loan originations have decreased, consistent with decreases in market interest rates over the past six months. The reduction in fully taxable equivalent yield on loans was also affected by PPP loans with an average balance of $38,916,000 at an average rate of 2.79% in 2020, with no comparative amounts in 2019.

Interest income on available-for-sale debt securities totaled $4,144,000 in 2020, a decrease of $928,000 from the total for 2019. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $330,538,000 in 2020, a decrease of $31,914,000 (8.8%) from 2019. The average yield on available-for-sale debt securities decreased to 2.52% in 2020 from 2.82% in 2019.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense increased $738,000 to $5,022,000 in 2020 from $4,284,000 in 2019. Table III shows that the overall cost of funds on interest-bearing liabilities decreased slightly to 0.92% in 2020 from 0.93% in 2019.

Interest expense on deposits increased $523,000 in 2020 over 2019. Total average deposit balances (interest-bearing and noninterest-bearing) increased 13.9%, to $1,304,669,000 in 2020 from $1,145,831,000 in 2019. The increase in average balance on deposits was across all categories, reflecting the impact of the Monument acquisition on April 1, 2019 as well as the effects in 2020 of PPP-related funding, stimulus funding and customers seeking FDIC-insured funding during the COVID-19 pandemic. The average rate on interest-bearing deposits increased slightly to 0.80% in 2020 from 0.79% in 2019.

Interest expense on subordinated debt assumedborrowed funds increased $215,000 in 2020 as compared to 2019. Total average borrowed funds increased $42,239,000 to $107,354,000 in 2020 from Monument was $107,000$65,115,000 in 2019. The increase in average borrowed funds includes the impact of borrowings originated to fund loan growth in the first quarterlast three quarters of 2019. The average rate on total borrowed funds was 2.03% in 2020 with no comparative amountcompared to 2.69% in 2019. The decrease in the average rate on borrowed funds in 2020 reflects the impact of decreases in market rates over the course of 2020.

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TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE

(In Thousands)

Three Months Ended

Six Months Ended

June 30,

Increase/

June 30,

Increase/

(In Thousands)

    

2020

    

2019

    

(Decrease)

    

2020

    

2019

    

(Decrease)

INTEREST INCOME

Interest-bearing due from banks

$

41

$

149

$

(108)

$

122

$

265

$

(143)

Available-for-sale debt securities:

 

 

 

 

 

 

Taxable

 

1,380

 

1,826

 

(446)

 

2,968

 

3,660

 

(692)

Tax-exempt

 

631

 

663

��

(32)

 

1,176

 

1,412

 

(236)

Total available-for-sale debt securities

 

2,011

 

2,489

 

(478)

 

4,144

 

5,072

 

(928)

Loans receivable:

 

 

 

 

 

 

Taxable

 

13,586

 

14,098

 

(512)

 

28,047

 

24,046

 

4,001

Paycheck Protection Program (Taxable)

540

0

540

540

0

540

Tax-exempt

 

552

 

656

 

(104)

 

1,127

 

1,366

 

(239)

Total loans receivable

 

14,678

 

14,754

 

(76)

 

29,714

 

25,412

 

4,302

Other earning assets

 

20

 

11

 

9

 

31

 

20

 

11

Total Interest Income

 

16,750

 

17,403

 

(653)

 

34,011

 

30,769

 

3,242

INTEREST EXPENSE

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

Interest checking

 

202

 

319

 

(117)

 

445

 

546

 

(101)

Money market

 

232

 

252

 

(20)

 

495

 

430

 

65

Savings

 

54

 

74

 

(20)

 

118

 

113

 

5

Time deposits

 

1,296

 

1,718

 

(422)

 

2,881

 

2,327

 

554

Total interest-bearing deposits

 

1,784

 

2,363

 

(579)

 

3,939

 

3,416

 

523

Borrowed funds:

 

 

 

 

 

 

Short-term

 

64

 

228

 

(164)

 

262

 

307

 

(45)

Long-term

 

313

 

228

 

85

 

608

 

446

 

162

Subordinated debt

 

106

 

115

 

(9)

 

213

 

115

 

98

Total borrowed funds

 

483

 

571

 

(88)

 

1,083

 

868

 

215

Total Interest Expense

 

2,267

 

2,934

 

(667)

 

5,022

 

4,284

 

738

Net Interest Income

$

14,483

$

14,469

$

14

$

28,989

$

26,485

$

2,504

  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 marginal federal income tax rate of 21%.

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Table III - Analysis of Average Daily Balances and Rates      
(Dollars in Thousands)            
             
  3 Months     3 Months    
  Ended  Rate of  Ended  Rate of 
  3/31/2020  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     

Table III - Analysis of Average Daily Balances and Rates

(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.

(Dollars in Thousands)

3 Months

3 Months

 

6 Months

6 Months

 

Ended

Rate of

Ended

Rate of

 

Ended

Rate of

Ended

Rate of

 

6/30/2020

Return/

6/30/2019

Return/

 

6/30/2020

Return/

6/30/2019

Return/

 

Average

Cost of

Average

Cost of

 

Average

Cost of

Average

Cost of

 

    

Balance

    

Funds %

    

Balance

    

Funds %

 

    

Balance

    

Funds %

    

Balance

    

Funds %

 

EARNING ASSETS

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing due from banks

 

37,799

 

0.44

%  

22,398

 

2.67

%

 

28,600

 

0.86

%  

21,358

 

2.50

%

Available-for-sale debt securities,

 

 

 

 

 

 

 

 

  

at amortized cost:

 

 

 

 

 

 

 

 

  

Taxable

$

244,019

 

2.27

%  

$

289,041

 

2.53

%

$

254,588

 

2.34

%  

$

285,443

 

2.59

%

Tax-exempt

 

82,050

 

3.09

%  

 

73,928

 

3.60

%

 

75,950

 

3.11

%  

 

77,009

 

3.70

%

Total available-for-sale debt securities

 

326,069

 

2.48

%  

 

362,969

 

2.75

%

 

330,538

 

2.52

%  

 

362,452

 

2.82

%

Loans receivable:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Taxable

 

1,094,432

 

4.99

%  

 

1,035,672

 

5.46

%

 

1,101,275

 

5.12

%  

 

894,208

 

5.42

%

Paycheck Protection Program (Taxable)

77,832

2.79

%  

0

0.00

%  

38,916

2.79

%  

0

0.00

%  

Tax-exempt

 

59,177

 

3.75

%  

 

69,571

 

3.78

%

 

59,772

 

3.79

%  

 

71,064

 

3.88

%

Total loans receivable

 

1,231,441

 

4.79

%  

 

1,105,243

 

5.35

%

 

1,199,963

 

4.98

%  

 

965,272

 

5.31

%

Other earning assets

 

2,206

 

3.65

%  

 

1,423

 

3.10

%

 

1,833

 

3.40

%  

 

1,257

 

3.21

%

Total Earning Assets

 

1,597,515

 

4.22

%  

 

1,492,033

 

4.68

%

 

1,560,934

 

4.38

%  

 

1,350,339

 

4.59

%

Cash

 

18,960

 

  

 

20,325

 

  

 

18,501

 

  

 

18,629

 

  

Unrealized gain/loss on securities

 

12,574

 

  

 

(101)

 

  

 

10,375

 

  

 

(2,352)

 

  

Allowance for loan losses

 

(11,471)

 

  

 

(8,378)

 

  

 

(10,743)

 

  

 

(8,856)

 

  

Bank premises and equipment

 

18,230

 

  

 

16,214

 

  

 

17,981

 

  

 

15,367

 

  

Intangible Assets

 

29,543

 

  

 

30,040

 

  

 

29,575

 

  

 

21,045

 

  

Other assets

 

49,502

 

  

 

49,935

 

  

 

49,386

 

  

 

46,573

 

  

Total Assets

$

1,714,853

 

  

$

1,600,068

 

  

$

1,676,009

 

  

$

1,440,745

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

$

260,177

 

0.31

%  

$

218,731

 

0.58

%

$

243,623

 

0.37

%  

$

208,872

 

0.53

%

Money market

 

215,441

 

0.43

%  

 

199,092

 

0.51

%

 

208,066

 

0.48

%  

 

188,042

 

0.46

%

Savings

 

183,933

 

0.12

%  

 

173,922

 

0.17

%

 

176,452

 

0.13

%  

 

165,354

 

0.14

%

Time deposits

 

343,257

 

1.52

%  

 

383,361

 

1.80

%

 

362,439

 

1.60

%  

 

305,769

 

1.53

%

Total interest-bearing deposits

 

1,002,808

 

0.72

%  

 

975,106

 

0.97

%

 

990,580

 

0.80

%  

 

868,037

 

0.79

%

Borrowed funds:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Short-term

 

19,844

 

1.30

%  

 

37,279

 

2.45

%

 

32,363

 

1.63

%  

 

26,666

 

2.32

%

Long-term

 

72,917

 

1.73

%  

 

35,167

 

2.60

%

 

68,491

 

1.79

%  

 

34,929

 

2.57

%

Subordinated debt

 

6,500

 

6.56

%  

 

7,000

 

6.59

%

 

6,500

 

6.59

%  

 

3,520

 

6.59

%

Total borrowed funds

 

99,261

 

1.96

%  

 

79,446

 

2.88

%

 

107,354

 

2.03

%  

 

65,115

 

2.69

%

Total Interest-bearing Liabilities

 

1,102,069

 

0.83

%  

 

1,054,552

 

1.12

%

 

1,097,934

 

0.92

%  

 

933,152

 

0.93

%

Demand deposits

 

346,285

 

  

 

294,112

 

  

 

314,089

 

  

 

277,794

 

  

Other liabilities

 

15,891

 

  

 

15,454

 

  

 

14,981

 

  

 

13,210

 

  

Total Liabilities

 

1,464,245

 

  

 

1,364,118

 

  

 

1,427,004

 

  

 

1,224,156

 

  

Stockholders' equity, excluding

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

other comprehensive income/loss

 

240,434

 

  

 

235,733

 

  

 

240,576

 

  

 

218,175

 

  

Accumulated other comprehensive income/loss

 

10,174

 

  

 

217

 

  

 

8,429

 

  

 

(1,586)

 

  

Total Stockholders' Equity

 

250,608

 

  

 

235,950

 

  

 

249,005

 

  

 

216,589

 

  

Total Liabilities and Stockholders' Equity

$

1,714,853

 

  

$

1,600,068

 

  

$

1,676,009

 

  

$

1,440,745

 

  

Interest Rate Spread

 

  

 

3.39

%  

 

  

 

3.56

%

 

  

 

3.46

%  

 

  

 

3.66

%

Net Interest Income/Earning Assets

 

  

 

3.65

%  

 

  

 

3.89

%

 

  

 

3.73

%  

 

  

 

3.96

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total Deposits (Interest-bearing

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

and Demand)

$

1,349,093

 

  

$

1,269,218

 

  

$

1,304,669

 

  

$

1,145,831

 

  

(1)45Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal 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 

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES

(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.

(In Thousands)

3 Months Ended  6/30/20 vs. 6/30/19

 

6 Months Ended  6/30/20 vs. 6/30/19

Change in

Change in

Total

 

Change in

Change in

Total

    

Volume

    

Rate

    

Change

 

Volume

    

Rate

    

Change

EARNING ASSETS

 

  

 

  

 

  

  

 

  

 

  

Interest-bearing due from banks

$

75

$

(183)

$

(108)

$

70

$

(213)

$

(143)

Available-for-sale debt securities:

 

 

 

 

 

 

Taxable

 

(273)

 

(173)

 

(446)

 

(372)

 

(320)

 

(692)

Tax-exempt

 

69

 

(101)

 

(32)

 

(18)

 

(218)

 

(236)

Total available-for-sale debt securities

 

(204)

 

(274)

 

(478)

 

(390)

 

(538)

 

(928)

Loans receivable:

 

  

 

  

 

 

 

 

Taxable

 

645

 

(1,157)

 

(512)

 

5,387

 

(1,386)

 

4,001

Paycheck Protection Program (Taxable)

540

0

540

540

0

540

Tax-exempt

 

(98)

 

(6)

 

(104)

 

(210)

 

(29)

 

(239)

Total loans receivable

 

1,087

 

(1,163)

 

(76)

 

5,717

 

(1,415)

 

4,302

Other earning assets

 

7

 

2

 

9

 

10

 

1

 

11

Total Interest Income

 

965

 

(1,618)

 

(653)

 

5,407

 

(2,165)

 

3,242

 

  

 

  

 

  

 

  

 

  

 

  

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

 

50

 

(167)

 

(117)

 

82

 

(183)

 

(101)

Money market

 

21

 

(41)

 

(20)

 

48

 

17

 

65

Savings

 

5

 

(25)

 

(20)

 

8

 

(3)

 

5

Time deposits

 

(95)

 

(327)

 

(422)

 

452

 

102

 

554

Total interest-bearing deposits

 

(19)

 

(560)

 

(579)

 

590

 

(67)

 

523

Borrowed funds:

 

 

 

 

 

 

Short-term

 

(71)

 

(93)

 

(164)

 

58

 

(103)

 

(45)

Long-term

 

182

 

(97)

 

85

 

331

 

(169)

 

162

Subordinated debt

 

(9)

 

0

 

(9)

 

98

 

0

 

98

Total borrowed funds

 

102

 

(190)

 

(88)

 

487

 

(272)

 

215

Total Interest Expense

 

83

 

(750)

 

(667)

 

1,077

 

(339)

 

738

 

 

 

 

 

 

Net Interest Income

$

882

$

(868)

$

14

$

4,330

$

(1,826)

$

2,504

(1)46Changes 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

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%

(Dollars in Thousands)

3 Months Ended

 

June 30,

$

%

 

    

2020

2019

    

Change

Change

 

Trust and financial management revenue

$

1,565

$

1,583

$

(18)

 -1.1

%

Brokerage revenue

 

343

361

(18)

 -5.0

%

Insurance commissions, fees and premiums

 

52

48

4

8.3

%

Service charges on deposit accounts

 

831

1,277

(446)

 -34.9

%

Service charges and fees

 

84

89

(5)

 -5.6

%

Interchange revenue from debit card transactions

 

718

699

19

2.7

%

Net gains from sales of loans

 

1,564

221

1,343

607.7

%

Loan servicing fees, net

 

(158)

35

(193)

 -551.4

%

Increase in cash surrender value of life insurance

 

98

99

(1)

 -1.0

%

Other noninterest income

 

431

437

(6)

 -1.4

%

Total noninterest income, excluding realized gains on securities, net

$

5,528

$

4,849

$

679

14.0

%

Total noninterest income shown in Table V in the firstsecond quarter 2020 was up $875,000$679,000 from the firstsecond 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$1,564,000 for the firstsecond quarter 2020 were up $228,000$1,343,000 from the total for the firstsecond quarter 2019. The increase in sales reflects an increase in volume of residential mortgage loans sold, due in partmainly to increased refinancing activity resulting from falling interest rates. Proceeds from sales of residential mortgage loans totaled $10,842,000$51.0 million in the firstsecond quarter 2020 up from $2,539,000as compared to $6.6 million in the firstsecond quarter 2019.

·Total trust and brokerage revenuesService charges on deposit accounts of $1,812,000$831,000 in the second quarter 2020 were up $145,000down $446,000 from the firstsecond quarter 2019 amount, reflectingas the impactvolume of new trustconsumer and business generated in 2019.overdraft activity fell.

·InterchangeNet revenue from debit card transactions increased $88,000loan servicing fees decreased $193,000. The fair value of mortgage servicing rights decreased $270,000 in the firstsecond quarter 2020, overas compared to a decrease of $71,000 in the firstsecond quarter 2019, amount, reflecting anmarket assumptions that prepayments will increase in transaction volume.due to lower interest rates.

TABLE VI – COMPARISON OF NONINTEREST INCOME

47

(Dollars in Thousands)

6 Months Ended

 

June 30,

$

%

 

    

2020

    

2019

    

Change

Change

 

Trust and financial management revenue

$

3,044

$

2,943

$

101

3.4

%

Brokerage revenue

 

676

 

668

8

1.2

%

Insurance commissions, fees and premiums

 

85

 

78

7

9.0

%

Service charges on deposit accounts

 

2,081

 

2,527

(446)

 -17.6

%

Service charges and fees

 

147

 

168

(21)

 -12.5

%

Interchange revenue from debit card transactions

 

1,449

 

1,342

107

8.0

%

Net gains from sales of loans

 

1,879

 

308

1,571

510.1

%

Loan servicing fees, net

 

(172)

 

63

(235)

 -373.0

%

Increase in cash surrender value of life insurance

 

202

 

191

11

 5.8

%

Other noninterest income

 

1,418

 

967

451

46.6

%

Total noninterest income, excluding realized gains on securities, net

$

10,809

$

9,255

$

1,554

16.8

%

62

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Total noninterest income, excluding realized gains on securities, net, shown in Table VI increased $1,554,000 for the first six months of 2020 compared to 2019. Significant variances included the following:

Net gains from sales of loans totaled $1,879,000 in the first six months of 2020, an increase of $1,571,000 over the total for the first six months of 2019. As noted above, the increase reflects an increase in volume of residential mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates. Proceeds from sales of residential mortgage loans of $61.8 million in the first six months of 2020 were 6.8 times the comparative 2019 amount of $9.1 million.
Other noninterest income totaled $1,418,000, an increase of $451,000 over 2019. Income from realization of tax credits was $351,000 higher in the first six months of 2020 as compared to 2019. Also, dividend income from Federal Home Loan Bank stock was up $99,000, reflecting a higher average balance of stock held due to increased borrowings.
Interchange revenue from debit card transactions totaled $1,449,000 for the first six months of 2020, an increase of $107,000 (8.0%), reflecting an increase in transaction volumes.
Trust and financial management revenue of $3,044,000 was $101,000 (3.4%) higher in the first six months of 2020 as compared to 2019, reflecting the impact of fees from new business growth in 2019.
Service charges on deposit accounts of $2,081,000 in the first six months of 2020 were down $446,000 (17.6%) from the total for the first six months of 2019, as the volume of consumer and business overdraft activity fell significantly in the second quarter 2020.
Net revenue from loan servicing fees decreased $235,000. The fair value of mortgage servicing rights decreased $396,000 in the first six months of 2020, as compared to a decrease of $148,000 in the first six months of 2019.

NONINTEREST EXPENSE

TABLE VII - COMPARISON OF 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%

(Dollars in Thousands)

 3 Months Ended 

 

 June 30, 

 $ 

 % 

 

 

2020

 

2019

 

 Change 

 

 Change 

Salaries and wages

    

$

5,364

    

$

5,276

    

$

88

    

1.7

%

Pensions and other employee benefits

 

1,619

 

1,225

 

394

 

32.2

%

Occupancy expense, net

 

664

 

665

 

(1)

 

 -0.2

%

Furniture and equipment expense

 

311

 

333

 

(22)

 

 -6.6

%

Data processing expenses

 

1,040

 

962

 

78

 

8.1

%

Automated teller machine and interchange expense

 

275

 

277

 

(2)

 

 -0.7

%

Pennsylvania shares tax

 

423

 

347

 

76

 

21.9

%

Professional fees

 

464

 

331

 

133

 

40.2

%

Telecommunications

 

213

 

176

 

37

 

21.0

%

Directors' fees

178

141

37

26.2

%

Other noninterest expense

1,723

1,689

34

2.0

%

Total noninterest expense, excluding merger-related expenses

12,274

11,422

852

7.5

%

Merger-related expenses

983

3,301

(2,318)

 -70.2

%

Total noninterest expense

$

13,257

$

14,723

$

(1,466)

 

 -10.0

%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

As shown in Table VII, total noninterest expense, excluding merger-related expenses, increased $2,216,000 (20.7%$852,000 (7.5%) for the three months ended March 31,June 30, 2020 over the total for the three months ended March 31,June 30, 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$394,000, mainly due to increased health care expenses from new ventures.the Corporation’s partially self-insured plan.

·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,$133,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis as well asbasis.
Salaries and wages expense increased $88,000 (1.7%), reflecting the net impact of several factors, including: an increase in number of personnel to 337 full-time equivalent (FTEs) from 332 at June 30, 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; and a slight reduction in incentive compensation expense.
Data processing expenses increased $78,000 (8.1%), including the impact of increases related to cyber security managementin software licensing costs associated with lending, trust and other corporate activities.functions.
Pennsylvania shares tax expense increased $76,000 (21.9%), reflecting the impact of an increase in C&N Bank’s stockholder’s equity.

TABLE VIII - COMPARISON OF NONINTEREST EXPENSE

(Dollars in Thousands)

 6 Months Ended 

 

 June 30, 

 $ 

 % 

 

2020

2019

 Change 

 Change 

 

Salaries and wages

    

$

10,704

    

$

9,769

    

$

935

    

9.6

%

Pensions and other employee benefits

 

3,657

 

2,843

 

814

 

28.6

%

Occupancy expense, net

 

1,409

 

1,322

 

87

 

6.6

%

Furniture and equipment expense

 

669

 

634

 

35

 

5.5

%

Data processing expenses

 

2,058

 

1,765

 

293

 

16.6

%

Automated teller machine and interchange expense

 

572

 

466

 

106

 

22.7

%

Pennsylvania shares tax

 

845

 

694

 

151

 

21.8

%

Professional fees

 

843

 

553

 

290

 

52.4

%

Telecommunications

 

419

 

340

 

79

 

23.2

%

Directors' fees

 

348

 

324

 

24

 

7.4

%

Other noninterest expense

 

3,662

 

3,408

 

254

 

7.5

%

Total noninterest expense, excluding merger-

 

  

 

  

 

  

 

  

related expenses

 

25,186

 

22,118

 

3,068

 

13.9

%

Merger-related expenses

 

1,124

 

3,612

 

(2,488)

 

 -68.9

%

Total noninterest expense

$

26,310

$

25,730

$

580

 

2.3

%

As shown in Table VIII, total noninterest expense, excluding merger-related expenses, increased $3,068,000 (13.9%) for the six months ended June 30, 2020 over the total for the first six months of 2019. The most significant variances include the following:

·Automated teller machineTotal salaries and interchangewages and benefits expenses increased $1,749,000, reflecting: inclusion of the former Monument operations for six months in 2020 as compared to three months in 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense increased $108,000, including increasesdue to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; a slight reduction in volume-related charges as well as other costs.

48incentive compensation expense; and an increase in health care expense due to higher claims on C&N’s partially self-insured plan.

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Data processing expenses increased $293,000, including the impact of increases in software licensing costs associated with lending, trust and other functions.
Professional fees expense increased $290,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis.
Other noninterest expense increased $254,000. Within this category, significant variances included the following:

o

Donations expense increased $427,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program.

o

Other operational losses increased $337,000, including an estimated accrual of $300,000 for penalties related to certain information returns.

o

Expenses related to other real estate properties decreased $244,000 and collection expenses decreased $215,000. The reduction in both of these expense categories resulted from the completion in the first quarter 2020 of a complex commercial workout situation for which a significant amount of expenses were incurred in 2019.

o

FDIC assessments expense decreased $81,000, as a significant portion of the assessed amounts for the first two quarters of 2020 were offset by credits based on the funding level of the insurance fund.

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 threesix months of 2020 was $816,000,$2,071,000, which was $165,000 lower$397,000 higher than the provision for the first threesix months of 2019 of $981,000.$1,674,000. The effective tax rate (tax provision as a percentage of pre-tax income) was 16.4%17.7% in the first threesix months of 2020 compared to 16.2%16.1% in the first threesix months of 2019. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first threesix months of 2020 and 2019 principally because of the effects of tax-exempt interest income. The higher effective tax rate in the first six months of 2020 as compared to 2019 resulted mainly from a reduction in tax-exempt interest income and nondeductible penalties.

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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,June 30, 2020 and December 31, 2019 represents the following temporary difference components:

 March 31,
 December 31, 

    

June 30,

    

December 31,

(In Thousands) 2020 2019 

2020

2019

Deferred tax assets:        

 

  

 

  

Allowance for loan losses $2,418  $2,080 

$

2,353

$

2,080

Purchase accounting adjustments on loans  520   640 

 

497

 

640

Operating leases liability  333   344 

 

333

 

344

Other deferred tax assets  1,736   2,173 

 

1,816

 

2,173

Total deferred tax assets  5,007   5,237 

 

4,999

 

5,237

        

 

  

 

  

Deferred tax liabilities:        

 

  

 

  

Unrealized holding gains on securities  2,455   934 

 

3,048

 

934

Defined benefit plans - ASC 835  65   49 

 

64

 

49

Bank premises and equipment  926   763 

 

977

 

763

Core deposit intangibles  258   272 

 

245

 

272

Right-of-use assets from operating leases  333   344 

 

333

 

344

Other deferred tax liabilities  286   257 

 

239

 

257

Total deferred tax liabilities  4,323   2,619 

 

4,906

 

2,619

Deferred tax asset, net $684  $2,618 

$

93

$

2,618

At March 31,June 30, 2020, the net deferred tax asset was $684,000,$93,000, 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$2,114,000 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,June 30, 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,June 30, 2020. Management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition in 2020.

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Net loans outstanding (excluding mortgage loans held for sale) were $1,156,143,000$1,230,387,000 at March 31,June 30, 2020, downup 4.9% from $1,172,386,000 at December 31, 2019 butand up 41.5%$121.9 million or 11.0% from $817,136,000$1,108,483,000 at March 31,June 30, 2019. As presented in Table X,XII, total outstanding commercial loans were $9.6$79.8 million lowerhigher at March 31,June 30, 2020 from December 31, 2019, including a reductionan increase in PPP 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$97.1 million. Residential mortgage loans were $4.3$20.3 million lower at March 31,June 30, 2020 as compared to December 31, 2019. In 2019, a significant portionreflecting large amounts of the Corporation’s loan growth was attributablerefinancing activity occurring due to the Monument acquisition. In comparing outstanding balances at March 31, 2020 and 2019, total commercial loans increased $218.6 million (62.3%) and totallower interest rates. While residential mortgage loans outstanding (on-balance sheet) decreased in the first six months of 2020, the volume of residential mortgage loans originated and sold increased $124.0dramatically, resulting in an increase of $1.6 million (27.1%) while total consumer loans decreased $521,000 (3.1%).in revenue from sales of residential mortgage loans.

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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$63,057,000 at March 31,June 30, 2020, down from $64,633,000 at December 31, 2019 and $68,418,000$66,289,000 at March 31,June 30, 2019. At March 31,June 30, 2020, the balance of participation loans outstanding includes a total of $44,095,000$46,346,000 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$10,184,000 at March 31,June 30, 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 willdoes not retain servicing rights for loans sold under the MPF Direct Program. Through March 31,June 30, 2020, the Corporation’s activity under the MPF Direct Program was minimal.

For loan sales originated and sold under the MPF Xtra and Originalthese 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,June 30, 2020, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,757,000,$1,744,000, and the corresponding total outstanding balance repurchased at December 31, 2019 was $1,770,000.

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At March 31,June 30, 2020, outstanding balances of loans sold and serviced through the twothese programs totaled $182,410,000,$210,778,000, including loans sold through the MPF Xtra program of $106,040,000$119,393,000 and loans sold through the Original program of $76,370,000.$91,385,000. In addition, the outstanding balance of loans sold under the MPF Original program by Monument totaled $20,130,000.$17,568,000. 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 twothese 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,June 30, 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,June 30, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,840,000,$5,266,000, and the Corporation has recorded a related allowance for credit losses of $303,000$283,000 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$11,026,000 at March 31,June 30, 2020, up from $9,836,000 at December 31, 2019. Table VIIIX shows total specific allowances on impaired loans increased $1,176,000$905,000 to $2,227,000$1,956,000 at March 31,June 30, 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,June 30, 2020, the specific allowance reflectedremained at $1,193,000. The increase in specific allowances on impaired loans at June 30, 2020 also included allowances totaling $504,000 related to three commercial loan relationships with an aggregate recorded investment of $7,576,000 that management identified as impaired in the Corporation’s estimatesecond quarter 2020. The impact of these increases was partially offset by elimination of an allowance of $674,000 at December 31, 2019 on a commercial loan that was repaid for less than the liquidation valuefull principal balance, resulting in a $107,000 charge-off in the second quarter 2020. In addition, there was a commercial loan with an outstanding balance of $798,000 and a specific allowance of $60,000 at December 31, 2019 that was no longer considered impaired at June 30, 2020 due to improved circumstances with the related collateral, netunderlying business.

68

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,June 30, 2020. The remainder of the portfolio was deemed to be the performing component of the portfolio. The calculationPerforming loans acquired from Monument are presented net of the fair value of performing loans included a discount for credit losses of $1,914,000, reflecting$878,000 at June 30, 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. Cumulatively through March 31,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. At June 30, 2020, it was determined that five purchased loans to two borrowers with recorded investments totaling $6,075,000 (included in the Corporation recognized accretiontotal of $7,576,000 of loans identified as impaired in the discount totaling $903,000, and the balance of the discount at March 31,second quarter 2020 was $1,011,000. None of the performing loans purchasednoted above) were found to be impairedimpaired. Specific allowances totaling $350,000 were recorded on these loans at March 31,June 30, 2020, andbased on the purchasedexcess of the recorded investments in the loans over the estimated value of the related real estate collateral, net of selling costs. Purchased performing loans with an aggregate recorded investment of $228,590,000 at June 30, 2020 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 (credit) provision (credit) for loan losses by segment in the three-month and six-month periods ended March 31,June 30, 2020 and 2019 are as follows:

(In Thousands) 3 Months Ended 

3 Months Ended

6 Months Ended

 March 31, March 31, 
 2020 2019 

June 30,

June 30,

June 30,

June 30,

    

2020

    

2019

    

2020

    

2019

Residential mortgage $198  $75 

$

(65)

$

3

$

133

$

78

Commercial  1,318   (1,149)

 

(124)

 

(51)

 

1,194

 

(1,200)

Consumer  12   31 

 

13

 

44

 

25

 

75

Unallocated  0   86 

 

0

 

0

 

0

 

86

        

 

  

 

  

 

  

 

  

Total $1,528  $(957)

$

(176)

$

(4)

$

1,352

$

(961)

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

3 Months 

3 Months 

6 Months 

6 Months 

Residential mortgage segment 3 Months Ended 

Ended

Ended

Ended

Ended

(In thousands) March 31, March 31, 

June 30,

June 30,

June 30,

June 30,

 2020 2019 
Increase in total specific allowance on        

    

2020

2019

2020

    

2019

(Decrease) increase in total specific allowance on

 

  

 

  

impaired loans, adjusted for the effect of net        

 

  

 

  

charge-offs $15  $68 

$

(32)

$

31

$

(17)

$

99

        

 

  

 

  

(Decrease) increase in collectively determined        

 

  

 

  

portion of the allowance attributable to:        

 

  

 

  

Loan (reduction) growth  (14)  2 

(126)

54

 

(140)

 

56

Changes in historical loss experience factors  (40)  5 

(42)

2

 

(82)

 

7

Changes in qualitative factors  237   0 

135

(84)

 

372

 

(84)

Total provision for loan losses -        

Total (credit) provision for loan losses -

 

  

 

  

Residential mortgage segment $198  $75 

$

(65)

$

3

$

133

$

78

51

3 Months 

3 Months 

6 Months 

6 Months 

Commercial segment

Ended

Ended

Ended

Ended

(In thousands)

June 30,

June 30,

June 30,

June 30,

    

2020

2019

2020

    

2019

(Decrease) increase in total specific allowance on

 

  

 

  

impaired loans, adjusted for the effect of net

 

  

 

  

charge-offs

$

(134)

$

(196)

$

1,041

$

(1,303)

 

  

 

  

(Decrease) increase in collectively determined

 

  

 

  

portion of the allowance attributable to:

 

  

 

  

Loan (reduction) growth

(117)

310

 

(110)

 

324

Changes in historical loss experience factors

14

(314)

 

(7)

 

(312)

Changes in qualitative factors

113

149

 

270

 

91

Total (credit) provision for loan losses -

 

  

 

  

Commercial segment

$

(124)

$

(51)

$

1,194

$

(1,200)

3 Months 

3 Months 

6 Months 

6 Months 

Consumer segment

Ended

Ended

Ended

Ended

(In thousands)

June 30,

June 30,

June 30,

June 30,

    

2020

2019

2020

    

2019

Increase in total specific allowance on

 

  

 

  

impaired loans, adjusted for the effect of net

 

  

 

  

charge-offs

$

23

$

16

$

43

$

44

 

  

 

  

(Decrease) increase in collectively determined

 

  

 

  

portion of the allowance attributable to:

 

  

 

  

Loan (reduction) growth

(12)

18

 

(22)

 

18

Changes in historical loss experience factors

6

(10)

 

0

 

0

Changes in qualitative factors

(4)

20

 

4

 

13

Total provision for loan losses -

 

  

 

  

Consumer segment

$

13

$

44

$

25

$

75

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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)

3 Months 

3 Months 

6 Months 

6 Months 

Total - All segments

Ended

Ended

Ended

Ended

(In thousands)

June 30,

June 30,

June 30,

June 30,

    

2020

2019

2020

2019

(Decrease) increase in total specific allowance on

 

  

 

  

impaired loans, adjusted for the effect of net

 

  

 

  

charge-offs

$

(143)

$

(149)

$

1,067

$

(1,160)

 

  

 

  

Increase (decrease) in collectively determined

 

  

 

  

portion of the allowance attributable to:

 

  

 

  

Loan (reduction) growth

(255)

382

 

(272)

 

398

Changes in historical loss experience factors

(22)

(322)

 

(89)

 

(305)

Changes in qualitative factors

244

85

 

646

 

20

Sub-total

(176)

(4)

 

1,352

 

(1,047)

Unallocated

0

0

 

0

 

86

Total (credit) provision for loan losses -

 

  

 

  

All segments

$

(176)

$

(4)

$

1,352

$

(961)

 

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 (reduction) 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 IXXI 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%1.74% at March 31,June 30, 2020, up from 0.88% at December 31, 2019, and nonperforming assets as a percentage of total assets was 0.99%1.33% at March 31,June 30, 2020, up from 0.80% at December 31, 2019. At March 31,June 30, 2020, these ratios were affected by the net impact of classification as nonperforming of the commercial loan noted aboveloans with an outstanding balance of $3.5 million that had not been classified as such at December 31, 2019.specific allowances referred to above.

Table IXXI presents data at March 31,June 30, 2020 and at the end of each of the years ended December 31, 2015 through 2019. Table IXXI shows that total nonperforming loans as a percentage of loans of 1.23%1.74% at March 31,June 30, 2020, though up from December 31, 2019, was lower than the corresponding year-end ratio from 2015 through 2018. Similarly, the March 31,June 30, 2020 ratio of total nonperforming assets as a percentage of assets of 0.99%1.33% was lower than the corresponding ratio from 2016 through 2018 and slightly higher than the level at December 31, 2015 through 2018. These improved credit-related ratios reflect the impact of acquired loans from Monument with minimal nonperforming loans at March 31, 2020.1.31%.

Total impaired loans of $8,290,000$14,280,000 at March 31,June 30, 2020 are up $2,804,000$8,794,000 from the corresponding amount at December 31, 2019 of $5,486,000. The increase in impaired loans includes the net impact of classification as impaired of the commercial loanloans referred to above with an outstanding balancein the discussion of $3.5 million and a specific allowanceallowances.

71

Table of $1,193,000 at March 31, 2020.Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Total nonperforming assets of $16,087,000$23,168,000 at March 31,June 30, 2020 are $2,776,000$9,857,000 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.

Total nonaccrual loans at June 30, 2020 of $18,763,000 was $9,545,000 higher than the corresponding December 31, 2019 total of $9,218,000. Similar to the discussions above related to impaired loans and nonperforming assets, this increase reflects the impact of net changes in classification as impaired of the commercial loans subject to specific allowances described above.
Total loans past due 90 days or more and still accruing interest amounted to $2,812,000 at June 30, 2020, an increase of $1,605,000 from the total at December 31, 2019. The increase includes an $845,000 increase on residential mortgages and $451,000 from loans secured by commercial real estate. Management has evaluated the loans within this category and determined they are well secured and in the process of collection at June 30, 2020.
Foreclosed assets held for sale consisted of real estate and totaled $1,593,000 at June 30, 2020, a decrease of $1,293,000 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 June 30, 2020, the Corporation held eight such properties for sale, with total carrying values of $118,000 related to residential real estate, $70,000 of land and $1,405,000 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 threesix 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,June 30, 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.

53

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Tables VIIIX through XXII present historical data related to loans and the allowance for loan losses.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VIIIX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars In Thousands)

(Dollars In Thousands)

 

June 30,

June 30,

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

 

(107)

 

(190)

 

(158)

 

(197)

 

(73)

 

(217)

Commercial

 

(124)

 

(6)

 

(6)

 

(165)

 

(132)

 

(597)

 

(251)

Consumer

 

(70)

 

(66)

 

(183)

 

(174)

 

(150)

 

(87)

 

(94)

Total charge-offs

 

(194)

 

(179)

 

(379)

 

(497)

 

(479)

 

(757)

 

(562)

Recoveries:

 

 

 

  

 

  

 

  

 

  

 

  

Residential mortgage

 

5

 

6

 

12

 

8

 

19

 

3

 

1

Commercial

 

0

 

3

 

6

 

317

 

4

 

35

 

214

Consumer

 

27

 

22

 

39

 

41

 

38

 

82

 

55

Total recoveries

 

32

 

31

 

57

 

366

 

61

 

120

 

270

Net charge-offs

 

(162)

 

(148)

 

(322)

 

(131)

 

(418)

 

(637)

 

(292)

Provision (credit) for loan losses

 

1,352

 

(961)

 

849

 

584

 

801

 

1,221

 

845

Balance, end of period

$

11,026

$

8,200

$

9,836

$

9,309

$

8,856

$

8,473

$

7,889

Net charge-offs as a % of

 

 

  

 

  

 

  

 

  

 

  

 

  

average loans

 

0.01

%  

 

0.02

%  

 

0.03

%  

 

0.02

%  

 

0.05

%  

 

0.09

%  

 

0.04

%

  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 VIIIX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)

(In Thousands)

June 30,

As of December 31,

    

2020

    

2019

    

2018

    

2017

    

2016

    

2015

ASC 310 - Impaired loans

$

1,956

$

1,051

$

1,605

$

1,279

$

674

$

820

ASC 450 - Collective segments:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

4,066

 

3,913

 

3,102

 

3,078

 

3,373

 

3,103

Residential mortgage

 

4,156

 

4,006

 

3,870

 

3,841

 

3,890

 

3,417

Consumer

 

263

 

281

 

233

 

159

 

138

 

122

Unallocated

 

585

 

585

 

499

 

499

 

398

 

427

Total Allowance

$

11,026

$

9,836

$

9,309

$

8,856

$

8,473

$

7,889

  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 

54

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IXXI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

(Dollars In Thousands)

(Dollars In Thousands)

June 30,

As of December 31,

 

    

2020

    

2019

    

2018

    

2017

    

2016

    

2015

 

Impaired loans with a valuation allowance

$

12,189

$

3,375

$

4,851

$

4,100

$

3,372

$

1,933

Impaired loans without a valuation allowance

 

2,091

 

2,111

 

4,923

 

5,411

 

7,488

 

8,041

Total impaired loans

$

14,280

$

5,486

$

9,774

$

9,511

$

10,860

$

9,974

Total loans past due 30-89 days and still accruing

$

5,124

$

8,889

$

7,142

$

9,449

$

7,735

$

7,057

Nonperforming assets:

 

 

  

 

  

 

  

 

  

 

  

Total nonaccrual loans

$

18,763

$

9,218

$

13,113

$

13,404

$

8,736

$

11,517

Total loans past due 90 days or more and still accruing

 

2,812

 

1,207

 

2,906

 

3,724

 

6,838

 

3,229

Total nonperforming loans

 

21,575

 

10,425

 

16,019

 

17,128

 

15,574

 

14,746

Foreclosed assets held for sale (real estate)

 

1,593

 

2,886

 

1,703

 

1,598

 

2,180

 

1,260

Total nonperforming assets

$

23,168

$

13,311

$

17,722

$

18,726

$

17,754

$

16,006

Loans subject to troubled debt restructurings (TDRs):

 

 

  

 

  

 

  

 

  

 

  

Performing

$

265

$

889

$

655

$

636

$

5,803

$

1,186

Nonperforming

 

790

 

1,737

 

2,884

 

3,027

 

2,874

 

5,178

Total TDRs

$

1,055

$

2,626

$

3,539

$

3,663

$

8,677

$

6,364

Total nonperforming loans as a % of loans

 

1.74

%  

 

0.88

%  

 

1.94

%  

 

2.10

%  

 

2.07

%  

 

2.09

%

Total nonperforming assets as a % of assets

 

1.33

%  

 

0.80

%  

 

1.37

%  

 

1.47

%  

 

1.43

%  

 

1.31

%

Allowance for loan losses as a % of total loans

 

0.89

%  

 

0.83

%  

 

1.12

%  

 

1.09

%  

 

1.13

%  

 

1.12

%

Allowance for loan losses as a % of nonperforming loans

 

51.11

%  

 

94.35

%  

 

58.11

%  

 

51.70

%  

 

54.40

%  

 

53.50

%

  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 

55

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE XII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)

June

December 31,

    

2020

    

2019

    

2018

    

2017

    

2016

    

2015

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

$

493,214

$

510,641

$

372,339

$

359,987

$

334,102

$

304,783

Residential mortgage loans - junior liens

 

25,632

 

27,503

 

25,450

 

25,325

 

23,706

 

21,146

Home equity lines of credit

 

31,826

 

33,638

 

34,319

 

35,758

 

38,057

 

39,040

1-4 Family residential construction

 

15,621

 

14,798

 

24,698

 

26,216

 

24,908

 

21,121

Total residential mortgage

 

566,293

 

586,580

 

456,806

 

447,286

 

420,773

 

386,090

Commercial:

 

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

 

293,304

 

301,227

 

162,611

 

159,266

 

150,468

 

154,779

Commercial and industrial

 

120,202

 

126,374

 

91,856

 

88,276

 

83,854

 

75,196

Small Business Administration - Paycheck

Protection Program

97,103

0

0

0

0

0

Political subdivisions

 

43,134

 

53,570

 

53,263

 

59,287

 

38,068

 

40,007

Commercial construction and land

 

40,348

 

33,555

 

11,962

 

14,527

 

14,287

 

5,122

Loans secured by farmland

 

11,433

 

12,251

 

7,146

 

7,255

 

7,294

 

7,019

Multi-family (5 or more) residential

 

32,699

 

31,070

 

7,180

 

7,713

 

7,896

 

9,188

Agricultural loans

 

3,874

 

4,319

 

5,659

 

6,178

 

3,998

 

4,671

Other commercial loans

 

16,579

 

16,535

 

13,950

 

10,986

 

11,475

 

12,152

Total commercial

 

658,676

 

578,901

 

353,627

 

353,488

 

317,340

 

308,134

Consumer

 

16,444

 

16,741

 

17,130

 

14,939

 

13,722

 

10,656

Total

 

1,241,413

 

1,182,222

 

827,563

 

815,713

 

751,835

 

704,880

Less: allowance for loan losses

 

(11,026)

 

(9,836)

 

(9,309)

 

(8,856)

 

(8,473)

 

(7,889)

Loans, net

$

1,230,387

$

1,172,386

$

818,254

$

806,857

$

743,362

$

696,991

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,June 30, 2020, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $11,555,000.

$49,736,000.

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$15,092,000 at March 31,June 30, 2020.

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The Corporation’s outstanding, available, and total credit facilities at March 31,June 30, 2020 and December 31, 2019 are as follows:

Outstanding

Available

Total Credit

(In Thousands)

    

June 30,

    

Dec. 31,

    

June 30,

    

Dec. 31,

    

June 30,

    

Dec. 31,

2020

2019

2020

2019

2020

2019

Federal Home Loan Bank of Pittsburgh

$

85,504

$

136,424

$

486,093

$

416,122

$

571,597

$

552,546

Federal Reserve Bank Discount Window

 

0

 

0

 

14,605

 

14,244

 

14,605

 

14,244

Other correspondent banks

 

0

 

0

 

45,000

 

45,000

 

45,000

 

45,000

Total credit facilities

$

85,504

$

136,424

$

545,698

$

475,366

$

631,202

$

611,790

  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,June 30, 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$12,200,000, long-term borrowings of $72,944,000.$72,904,000 and a letter of credit of $400,000. 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,June 30, 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.$164,652,000.

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 MonumentCovenant merger.

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Details concerning capital ratios at March 31,June 30, 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,June 30, 2020; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. Management believes, as of March 31,June 30, 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,June 30, 2020 and December 31, 2019 exceed the Corporation’s Board policy threshold levels.

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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 didhas not electelected 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.

(Dollars in Thousands)

Minimum To Be

 

Minimum To Maintain

Well

 

Minimum

Capital Conservation

Capitalized Under

Minimum To Meet

 

Capital

Buffer at Reporting

Prompt Corrective

the Corporation's

 

Actual

Requirement

Date

Action Provisions

Policy Thresholds

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

June 30, 2020:

  

  

  

  

  

  

  

  

  

  

 

Total capital to risk-weighted assets:

  

  

  

  

  

  

  

  

  

  

 

Consolidated

$

232,614

21.32

%  

N/A

N/A

N/A

N/A

N/A

N/A

$

114,568

≥10.5

%

C&N Bank

 

187,731

 

17.20

%  

87,323

 

≥8

%

114,611

 

≥10.5

%

109,153

 

≥10

%

114,611

 

≥10.5

%

Tier 1 capital to risk-weighted assets:

 

 

 

  

 

 

  

 

  

 

  

 

  

 

 

  

Consolidated

 

214,805

 

19.69

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

92,746

 

≥8.5

%

C&N Bank

 

176,422

 

16.16

%  

65,492

 

≥6

%

92,780

 

≥8.5

%

87,323

 

≥8

%

92,780

 

≥8.5

%

Common equity tier 1 capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

  

 

  

Consolidated

 

214,805

 

19.69

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

76,379

 

≥7

%

C&N Bank

 

176,422

 

16.16

%  

49,119

 

≥4.5

%

76,407

 

≥7.0

%

70,950

 

≥6.5

%

76,407

 

≥7

%

Tier 1 capital to average assets:

 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

  

Consolidated

 

214,805

 

12.82

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

134,034

 

≥8

%

C&N Bank

 

176,422

 

10.63

%  

66,381

 

≥4

%

N/A

 

N/A

 

82,976

 

≥5

%

132,762

 

≥8

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

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

 

≥10.5

%

C&N Bank

 

205,863

 

18.75

%  

87,817

 

≥8

%

115,260

 

≥10.5

%

109,771

 

≥10

%

 

115,260

 

≥10.5

%

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

 

≥8.5

%

C&N Bank

 

195,694

 

17.83

%  

65,863

 

≥6

%

93,306

 

≥8.5

%

87,817

 

≥8

%

 

93,306

 

≥8.5

%

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

 

≥7

%

C&N Bank

 

195,694

 

17.83

%  

49,397

 

≥4.5

%

76,840

 

≥7.0

%

71,351

 

≥6.5

%

 

76,840

 

≥7

%

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

 

≥8

%

C&N Bank

 

195,694

 

12.24

%  

63,940

 

≥4

%

N/A

 

N/A

 

79,925

 

≥5

%

 

127,879

 

≥8

%

56

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,June 30, 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.

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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,June 30, 2020, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:

57

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Minimum common equity tier 1 capital ratio

4.5

4.5

%

Minimum common equity tier 1 capital ratio plus
capital conservation buffer

7.0

7.0

%

Minimum tier 1 capital ratio

6.0

6.0

%

Minimum tier 1 capital ratio plus capital
conservation buffer

8.5

8.5

%

Minimum total capital ratio

8.0

8.0

%

Minimum total capital ratio plus capital
conservation buffer

10.5

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

60

%

≤1.875% and >1.25%

40

40

%

≤1.25% and >0.625%

20

20

%

≤0.625%

0

0

%

At March 31,June 30, 2020, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 11.02%9.20%.

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$11,472,000 at March 31,June 30, 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��smanagement’s evaluation of available-for-sale debt securities for other-than-temporary impairment at March 31,June 30, 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$239,000 at March 31,June 30, 2020 and $180,000 at December 31, 2019.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.

58

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Comprehensive Income totaled $9,949,000$7,675,000 for the firstsecond quarter 2020 as compared to $8,619,000$7,722,000 in the firstsecond quarter 2019. For the three months ended March 31,June 30, 2020, Comprehensive Income included: (1) Net Income of $4,166,000,$5,438,000, which was $924,000 lower$1,789,000 higher than in the firstsecond quarter 2019; (2) Other Comprehensive Income from available-for-sale debt securities of $5,719,000$2,242,000 as compared to Other Comprehensive Income of $3,366,000$4,079,000 in the second quarter 2019; and (3) Other Comprehensive Loss from defined benefit plans of ($5,000) as compared to ($6,000) for the second quarter 2019.

For the six months ended June 30, 2020, Comprehensive Income totaled $17,624,000 as compared to $16,341,000 in the first quartersix months of 2019. For the six months ended June 30, 2020, Comprehensive Income included: (1) Net Income of $9,604,000, which was $865,000 higher than net income for the first six months of 2019; (2) Other Comprehensive Income from available-for-sale debt securities of $7,961,000 as compared to Other Comprehensive Income of $7,445,000 from net unrealized gains on available-for-sale debt securities in the first six months of 2019; and (3) Other Comprehensive Income from defined benefit plans of $64,000 which was lower$59,000 for the first quartersix months ended June 30, 2020 as compared to $163,000Other Comprehensive Income of $157,000 for the first quartersix months of 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.

59

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 mergerinterruptions; 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.(acquired July 1, 2020).

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 firstsecond 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 

    

    

    

Total Number of

    

Maximum

Shares

Number of

Purchased

Shares that May

as Part of

Yet

Publicly

be Purchased

Total Number

Average

Announced

Under

of Shares

Price Paid

Plans

the Plans or

Period

Purchased

per Share

or Programs

Programs

April 1 - 30, 2020

 

0

$

0

 

0

 

600,000

May 1 - 31, 2020

 

0

$

0

 

0

 

600,000

June 1 - 30, 2020

 

0

$

0

 

0

 

600,000

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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'sCorporation’s common stock or slightly less than 5% of the Corporation's issued and outstanding shares at April 19, 2016.stock. 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

60

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 6.       Exhibits

2.

Plan of acquisition, reorganization, arrangement, liquidation or succession:

2.1

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

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.

3. (i) Articles of Incorporation

Incorporated by reference to Exhibit 3.1 of the Corporation'sCorporation’s Form 8-K filed September 21, 2009

3.

3. (ii) By-laws

Incorporated by reference to Exhibit 3.1(ii) of The Corporation'sCorporation’s Form S-4/A filed April 20, 2020

4.

Instruments defining the rights of Security holders, including Indentures

Not applicable

10.

Material contractsContracts:

Not applicable

10.1

Employment Agreement dated May 18, 2020 between the Corporation and Janice E. Ward

Filed herewith

10.2

Change in Control Agreement dated June 27, 2020 between the Corporation and Janice E. Ward

Filed herewith

10.3

Indemnification Agreement dated June 27, 2020 between the Corporation and Janice E. Ward

Filed herewith

10.4

Indemnification Agreement dated July 1, 2020 between the Corporation and Stephen Dorwart

Filed herewith

10.5

Indemnification Agreement dated July 1, 2020 between the Corporation and Robert Loughery

Filed herewith

15.

Letter re: unaudited interim information

Not applicable

18.

Letter re: change in accounting principles

Not applicable

19. Report furnished to security holders

22.

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

31.1 Certification of Chief Executive Officer

Filed herewith

31.2

31.2 Certification of Chief Financial Officer

Filed herewith

32. Section 1350 certificationsFiled herewith
99. Additional exhibitsNot applicable
100. XBRL-related documentsNot applicable
101. Interactive data fileFiled herewith
104. Cover page interactive data fileNot applicable

61

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

Filed herewith

SIGNATURES

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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,

August 6, 2020

By: /s/ J. Bradley Scovill

Date

President and Chief Executive Officer

May 7,

August 6, 2020

By: /s/ Mark A. Hughes

Date

Treasurer and Chief Financial Officer

62

84