UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 20172018
or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________________.
Commission file number: 000-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA | 23-2451943 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
90-92 MAIN STREET, WELLSBORO, PA 16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one):
Large accelerated filer¨Accelerated filerxNon-accelerated filer¨Smaller reporting company¨
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨Nox
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Common Stock ($1.00 par value) |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
CITIZENS & NORTHERN CORPORATION
Index
2
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
(In Thousands, Except Share and Per Share Data) (Unaudited)
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
ASSETS | ||||||||||||||||
Cash and due from banks: | ||||||||||||||||
Noninterest-bearing | $ | 19,902 | $ | 17,551 | $ | 20,978 | $ | 25,664 | ||||||||
Interest-bearing | 12,948 | 14,558 | 17,363 | 14,580 | ||||||||||||
Total cash and due from banks | 32,850 | 32,109 | 38,341 | 40,244 | ||||||||||||
Available-for-sale securities, at fair value | 365,086 | 395,077 | ||||||||||||||
Available-for-sale debt securities, at fair value | 358,706 | 355,937 | ||||||||||||||
Marketable equity security | 941 | 971 | ||||||||||||||
Loans held for sale | 437 | 142 | 551 | 765 | ||||||||||||
Loans receivable | 801,012 | 751,835 | 822,532 | 815,713 | ||||||||||||
Allowance for loan losses | (8,900 | ) | (8,473 | ) | (8,815 | ) | (8,856 | ) | ||||||||
Loans, net | 792,112 | 743,362 | 813,717 | 806,857 | ||||||||||||
Bank-owned life insurance | 19,985 | 19,704 | 18,935 | 20,083 | ||||||||||||
Accrued interest receivable | 4,027 | 3,963 | 4,279 | 4,048 | ||||||||||||
Bank premises and equipment, net | 15,366 | 15,397 | 14,824 | 15,432 | ||||||||||||
Foreclosed assets held for sale | 1,650 | 2,180 | 2,678 | 1,598 | ||||||||||||
Deferred tax asset, net | 4,319 | 5,117 | 5,122 | 3,289 | ||||||||||||
Intangible assets - Goodwill and core deposit intangibles | 11,956 | 11,959 | 11,951 | 11,954 | ||||||||||||
Other assets | 12,133 | 13,282 | 15,394 | 15,781 | ||||||||||||
TOTAL ASSETS | $ | 1,259,921 | $ | 1,242,292 | $ | 1,285,439 | $ | 1,276,959 | ||||||||
LIABILITIES | ||||||||||||||||
Deposits: | ||||||||||||||||
Noninterest-bearing | $ | 236,758 | $ | 224,175 | $ | 260,961 | $ | 241,214 | ||||||||
Interest-bearing | 784,867 | 759,668 | 782,986 | 767,235 | ||||||||||||
Total deposits | 1,021,625 | 983,843 | 1,043,947 | 1,008,449 | ||||||||||||
Short-term borrowings | 7,739 | 26,175 | 8,421 | 61,766 | ||||||||||||
Long-term borrowings | 31,256 | 38,454 | 32,985 | 9,189 | ||||||||||||
Accrued interest and other liabilities | 8,288 | 7,812 | 10,099 | 9,112 | ||||||||||||
TOTAL LIABILITIES | 1,068,908 | 1,056,284 | 1,095,452 | 1,088,516 | ||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation | ||||||||||||||||
preference per share; no shares issued | 0 | 0 | ||||||||||||||
Common stock, par value $1.00 per share; authorized 20,000,000 shares; | ||||||||||||||||
issued 12,655,171; outstanding 12,197,527 at September 30, 2017 and | ||||||||||||||||
12,113,228 December 31, 2016 | 12,655 | 12,655 | ||||||||||||||
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued | 0 | 0 | ||||||||||||||
Common stock, par value $1.00 per share; authorized 20,000,000 shares; issued 12,655,171; outstanding 12,297,274 at September 30, 2018 and 12,214,525 December 31, 2017 | 12,655 | 12,655 | ||||||||||||||
Paid-in capital | 71,818 | 71,730 | 72,197 | 72,035 | ||||||||||||
Retained earnings | 114,836 | 112,790 | 120,283 | 113,608 | ||||||||||||
Treasury stock, at cost; 457,644 shares at September 30, 2017 and 541,943 | ||||||||||||||||
shares at December 31, 2016 | (8,670 | ) | (10,269 | ) | ||||||||||||
Accumulated other comprehensive income (loss) | 374 | (898 | ) | |||||||||||||
Treasury stock, at cost; 357,897 shares at September 30, 2018 and 440,646 shares at December 31, 2017 | (6,780 | ) | (8,348 | ) | ||||||||||||
Accumulated other comprehensive loss | (8,368 | ) | (1,507 | ) | ||||||||||||
TOTAL STOCKHOLDERS' EQUITY | 191,013 | 186,008 | 189,987 | 188,443 | ||||||||||||
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | $ | 1,259,921 | $ | 1,242,292 | $ | 1,285,439 | $ | 1,276,959 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Income | 3 Months Ended | 9 Months Ended | ||||||||||||||
(In Thousands Except Per Share Data) (Unaudited) | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | ||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest and fees on loans: | ||||||||||||||||
Taxable | $ | 9,754 | $ | 8,889 | $ | 28,530 | $ | 25,872 | ||||||||
Tax-exempt | 561 | 531 | 1,677 | 1,482 | ||||||||||||
Interest on mortgages held for sale | 3 | 10 | 9 | 20 | ||||||||||||
Interest on balances with depository institutions | 173 | 67 | 319 | 140 | ||||||||||||
Income from available-for-sale debt securities: | ||||||||||||||||
Taxable | 1,624 | 1,335 | 4,368 | 4,090 | ||||||||||||
Tax-exempt | 680 | 789 | 2,105 | 2,459 | ||||||||||||
Dividends on marketable equity security | 5 | 5 | 16 | 15 | ||||||||||||
Total interest and dividend income | 12,800 | 11,626 | 37,024 | 34,078 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Interest on deposits | 1,033 | 639 | 2,641 | 1,735 | ||||||||||||
Interest on short-term borrowings | 39 | 9 | 320 | 131 | ||||||||||||
Interest on long-term borrowings | 169 | 337 | 352 | 1,050 | ||||||||||||
Total interest expense | 1,241 | 985 | 3,313 | 2,916 | ||||||||||||
Net interest income | 11,559 | 10,641 | 33,711 | 31,162 | ||||||||||||
Provision for loan losses | 60 | 322 | 332 | 778 | ||||||||||||
Net interest income after provision for loan losses | 11,499 | 10,319 | 33,379 | 30,384 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Trust and financial management revenue | 1,427 | 1,292 | 4,375 | 3,969 | ||||||||||||
Brokerage revenue | 235 | 187 | 718 | 551 | ||||||||||||
Insurance commissions, fees and premiums | 15 | 26 | 72 | 98 | ||||||||||||
Service charges on deposit accounts | 1,331 | 1,186 | 3,837 | 3,399 | ||||||||||||
Service charges and fees | 95 | 97 | 263 | 263 | ||||||||||||
Interchange revenue from debit card transactions | 660 | 561 | 1,880 | 1,649 | ||||||||||||
Net gains from sale of loans | 164 | 297 | 514 | 651 | ||||||||||||
Loan servicing fees, net | 74 | 35 | 263 | 162 | ||||||||||||
Increase in cash surrender value of life insurance | 100 | 97 | 295 | 281 | ||||||||||||
Other noninterest income | 361 | 288 | 1,340 | 1,013 | ||||||||||||
Sub-total | 4,462 | 4,066 | 13,557 | 12,036 | ||||||||||||
Gain on restricted equity security | 571 | 0 | 2,321 | 0 | ||||||||||||
Realized (losses) gains on available-for-sale debt securities, net | (2 | ) | 5 | (284 | ) | 257 | ||||||||||
Total noninterest income | 5,031 | 4,071 | 15,594 | 12,293 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Salaries and wages | 4,263 | 3,985 | 12,580 | 11,825 | ||||||||||||
Pensions and other employee benefits | 1,237 | 1,209 | 4,047 | 3,870 | ||||||||||||
Occupancy expense, net | 648 | 580 | 1,898 | 1,758 | ||||||||||||
Furniture and equipment expense | 317 | 340 | 901 | 968 | ||||||||||||
Data processing expenses | 667 | 595 | 2,002 | 1,785 | ||||||||||||
Automated teller machine and interchange expense | 347 | 346 | 988 | 945 | ||||||||||||
Pennsylvania shares tax | 326 | 336 | 998 | 1,008 | ||||||||||||
Professional fees | 305 | 224 | 860 | 599 | ||||||||||||
Telecommunications | 177 | 143 | 567 | 409 | ||||||||||||
Directors' fees | 197 | 177 | 549 | 548 | ||||||||||||
Other noninterest expense | 1,349 | 1,257 | 4,022 | 3,851 | ||||||||||||
Total noninterest expense | 9,833 | 9,192 | 29,412 | 27,566 | ||||||||||||
Income before income tax provision | 6,697 | 5,198 | 19,561 | 15,111 | ||||||||||||
Income tax provision | 1,111 | 1,262 | 3,229 | 3,620 | ||||||||||||
NET INCOME | $ | 5,586 | $ | 3,936 | $ | 16,332 | $ | 11,491 | ||||||||
EARNINGS PER COMMON SHARE - BASIC | $ | 0.45 | $ | 0.32 | $ | 1.33 | $ | 0.94 | ||||||||
EARNINGS PER COMMON SHARE - DILUTED | $ | 0.45 | $ | 0.32 | $ | 1.33 | $ | 0.94 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Comprehensive Income | Three Months Ended | Nine Months Ended | ||||||||||||||
(In Thousands) (Unaudited) | September 30, | September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 5,586 | $ | 3,936 | $ | 16,332 | $ | 11,491 | ||||||||
Unrealized (losses) gains on available-for-sale securities: | ||||||||||||||||
Unrealized holding (losses) gains on available-for-sale securities | (2,567 | ) | (213 | ) | (8,698 | ) | 2,067 | |||||||||
Reclassification adjustment for losses (gains) realized in income | 2 | (5 | ) | 284 | (257 | ) | ||||||||||
Other comprehensive (loss) gain on available-for-sale securities | (2,565 | ) | (218 | ) | (8,414 | ) | 1,810 | |||||||||
Unfunded pension and postretirement obligations: | ||||||||||||||||
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain | 0 | 0 | 93 | 166 | ||||||||||||
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | (3 | ) | (6 | ) | (13 | ) | (18 | ) | ||||||||
Other comprehensive (loss) gain on unfunded retirement obligations | (3 | ) | (6 | ) | 80 | 148 | ||||||||||
Other comprehensive (loss) income before income tax | (2,568 | ) | (224 | ) | (8,334 | ) | 1,958 | |||||||||
Income tax related to other comprehensive loss (income) | 539 | 78 | 1,750 | (686 | ) | |||||||||||
Net other comprehensive (loss) income | (2,029 | ) | (146 | ) | (6,584 | ) | 1,272 | |||||||||
Comprehensive income | $ | 3,557 | $ | 3,790 | $ | 9,748 | $ | 12,763 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Income
(In Thousands Except Per Share Data) (Unaudited)
3 Months Ended | 9 Months Ended | |||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest and fees on loans: | ||||||||||||||||
Taxable | $ | 8,889 | $ | 8,347 | $ | 25,872 | $ | 24,407 | ||||||||
Tax-exempt | 531 | 457 | 1,482 | 1,357 | ||||||||||||
Interest on mortgages held for sale | 10 | 7 | 20 | 21 | ||||||||||||
Interest on balances with depository institutions | 67 | 29 | 140 | 89 | ||||||||||||
Income from available-for-sale securities: | ||||||||||||||||
Taxable | 1,335 | 1,429 | 4,090 | �� | 4,474 | |||||||||||
Tax-exempt | 789 | 835 | 2,459 | 2,578 | ||||||||||||
Dividends | 5 | 27 | 15 | 66 | ||||||||||||
Total interest and dividend income | 11,626 | 11,131 | 34,078 | 32,992 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Interest on deposits | 639 | 549 | 1,735 | 1,550 | ||||||||||||
Interest on short-term borrowings | 9 | 30 | 131 | 133 | ||||||||||||
Interest on long-term borrowings | 337 | 365 | 1,050 | 1,090 | ||||||||||||
Total interest expense | 985 | 944 | 2,916 | 2,773 | ||||||||||||
Net interest income | 10,641 | 10,187 | 31,162 | 30,219 | ||||||||||||
Provision for loan losses | 322 | 538 | 778 | 1,224 | ||||||||||||
Net interest income after provision for loan losses | 10,319 | 9,649 | 30,384 | 28,995 | ||||||||||||
OTHER INCOME | ||||||||||||||||
Service charges on deposit accounts | 1,168 | 1,221 | 3,346 | 3,523 | ||||||||||||
Service charges and fees | 115 | 118 | 316 | 335 | ||||||||||||
Trust and financial management revenue | 1,292 | 1,172 | 3,969 | 3,567 | ||||||||||||
Brokerage revenue | 187 | 216 | 551 | 569 | ||||||||||||
Insurance commissions, fees and premiums | 26 | 26 | 98 | 74 | ||||||||||||
Interchange revenue from debit card transactions | 561 | 481 | 1,649 | 1,431 | ||||||||||||
Net gains from sale of loans | 297 | 236 | 651 | 699 | ||||||||||||
Loan servicing fees, net | 35 | 28 | 162 | 39 | ||||||||||||
Increase in cash surrender value of life insurance | 97 | 97 | 281 | 286 | ||||||||||||
Other operating income | 288 | 289 | 1,013 | 957 | ||||||||||||
Sub-total | 4,066 | 3,884 | 12,036 | 11,480 | ||||||||||||
Realized gains on available-for-sale securities, net | 5 | 584 | 257 | 1,089 | ||||||||||||
Total other income | 4,071 | 4,468 | 12,293 | 12,569 | ||||||||||||
OTHER EXPENSES | ||||||||||||||||
Salaries and wages | 3,985 | 3,901 | 11,825 | 11,701 | ||||||||||||
Pensions and other employee benefits | 1,216 | 1,060 | 3,890 | 3,499 | ||||||||||||
Occupancy expense, net | 580 | 601 | 1,758 | 1,770 | ||||||||||||
Furniture and equipment expense | 471 | 435 | 1,372 | 1,301 | ||||||||||||
FDIC Assessments | 93 | 151 | 283 | 448 | ||||||||||||
Pennsylvania shares tax | 336 | 287 | 1,008 | 932 | ||||||||||||
Professional fees | 269 | 245 | 750 | 816 | ||||||||||||
Automated teller machine and interchange expense | 346 | 291 | 945 | 807 | ||||||||||||
Software subscriptions | 299 | 237 | 870 | 729 | ||||||||||||
Other operating expense | 1,597 | 1,371 | 4,865 | 4,183 | ||||||||||||
Total other expenses | 9,192 | 8,579 | 27,566 | 26,186 | ||||||||||||
Income before income tax provision | 5,198 | 5,538 | 15,111 | 15,378 | ||||||||||||
Income tax provision | 1,262 | 1,451 | 3,620 | 3,847 | ||||||||||||
NET INCOME | $ | 3,936 | $ | 4,087 | $ | 11,491 | $ | 11,531 | ||||||||
EARNINGS PER COMMON SHARE - BASIC | $ | 0.32 | $ | 0.34 | $ | 0.94 | $ | 0.95 | ||||||||
EARNINGS PER COMMON SHARE - DILUTED | $ | 0.32 | $ | 0.34 | $ | 0.94 | $ | 0.95 |
CONSOLIDATED STATEMENTS OF CASH FLOWS | 9 Months Ended | |||||||
(In Thousands) (Unaudited) | Sept. 30, | Sept. 30, | ||||||
2018 | 2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 16,332 | $ | 11,491 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 332 | 778 | ||||||
Realized losses (gains) on available-for-sale securities, net | 284 | (257 | ) | |||||
Unrealized loss on marketable equity security | 30 | 0 | ||||||
Gain on restricted equity security | (2,321 | ) | 0 | |||||
Depreciation and amortization expense | 1,317 | 1,239 | ||||||
Accretion and amortization on securities, net | 747 | 866 | ||||||
Increase in cash surrender value of life insurance | (295 | ) | (281 | ) | ||||
Stock-based compensation and other expense | 500 | 475 | ||||||
Deferred income taxes | (83 | ) | 112 | |||||
Decrease in fair value of servicing rights | 58 | 145 | ||||||
Gains on sales of loans, net | (514 | ) | (651 | ) | ||||
Origination of loans for sale | (16,029 | ) | (19,277 | ) | ||||
Proceeds from sales of loans | 16,617 | 19,473 | ||||||
Decrease in accrued interest receivable and other assets | 138 | 207 | ||||||
Increase in accrued interest payable and other liabilities | 1,067 | 624 | ||||||
Other | 277 | 86 | ||||||
Net Cash Provided by Operating Activities | 18,457 | 15,030 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities of certificates of deposit | 2,280 | 348 | ||||||
Purchase of certificates of deposit | (1,350 | ) | (100 | ) | ||||
Proceeds from sales of available-for-sale securities | 17,755 | 24,118 | ||||||
Proceeds from calls and maturities of available-for-sale securities | 36,648 | 47,285 | ||||||
Purchase of available-for-sale securities | (66,617 | ) | (40,211 | ) | ||||
Redemption of Federal Home Loan Bank of Pittsburgh stock | 4,283 | 5,487 | ||||||
Purchase of Federal Home Loan Bank of Pittsburgh stock | (2,874 | ) | (4,725 | ) | ||||
Net increase in loans | (9,674 | ) | (50,128 | ) | ||||
Proceeds from sale of restricted equity security | 884 | 0 | ||||||
Proceeds from bank owned life insurance | 1,443 | 0 | ||||||
Purchase of premises and equipment | (962 | ) | (1,209 | ) | ||||
Proceeds from sale of foreclosed assets | 1,381 | 1,035 | ||||||
Other | 128 | 144 | ||||||
Net Cash Used in Investing Activities | (16,675 | ) | (17,956 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase in deposits | 35,498 | 37,782 | ||||||
Net decrease in short-term borrowings | (53,345 | ) | (18,436 | ) | ||||
Proceeds from long-term borrowings | 24,000 | 3,000 | ||||||
Repayments of long-term borrowings | (204 | ) | (10,198 | ) | ||||
Sale of treasury stock | 93 | 98 | ||||||
Common dividends paid | (8,797 | ) | (8,331 | ) | ||||
Net Cash (Used in) Provided by Financing Activities | (2,755 | ) | 3,915 | |||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (973 | ) | 989 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 37,004 | 28,621 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 36,031 | $ | 29,610 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Accrued sale of restricted equity security | $ | 1,437 | $ | 0 | ||||
Assets acquired through foreclosure of real estate loans | $ | 2,489 | $ | 608 | ||||
Interest paid | $ | 3,245 | $ | 2,942 | ||||
Income taxes paid | $ | 2,777 | $ | 3,163 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Comprehensive Income
(In Thousands) (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 3,936 | $ | 4,087 | $ | 11,491 | $ | 11,531 | ||||||||
Unrealized (losses) gains on available-for-sale securities: | ||||||||||||||||
Unrealized holding (losses) gains on available-for-sale securities | (213 | ) | (1,661 | ) | 2,067 | 5,544 | ||||||||||
Reclassification adjustment for gains realized in income | (5 | ) | (584 | ) | (257 | ) | (1,089 | ) | ||||||||
Other comprehensive (loss) gain on available-for-sale securities | (218 | ) | (2,245 | ) | 1,810 | 4,455 | ||||||||||
Unfunded pension and postretirement obligations: | ||||||||||||||||
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain | 0 | 0 | 166 | 26 | ||||||||||||
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost | (6 | ) | (5 | ) | (18 | ) | (15 | ) | ||||||||
Other comprehensive (loss) gain on unfunded retirement obligations | (6 | ) | (5 | ) | 148 | 11 | ||||||||||
Other comprehensive (loss) income before income tax | (224 | ) | (2,250 | ) | 1,958 | 4,466 | ||||||||||
Income tax related to other comprehensive income | 78 | 786 | (686 | ) | (1,564 | ) | ||||||||||
Net other comprehensive (loss) income | (146 | ) | (1,464 | ) | 1,272 | 2,902 | ||||||||||
Comprehensive income | $ | 3,790 | $ | 2,623 | $ | 12,763 | $ | 14,433 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
9 Months Ended | ||||||||
Sept. 30, | Sept. 30, | |||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 11,491 | $ | 11,531 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 778 | 1,224 | ||||||
Realized gains on available-for-sale securities, net | (257 | ) | (1,089 | ) | ||||
Depreciation expense | 1,239 | 1,188 | ||||||
Accretion and amortization on securities, net | 866 | 1,065 | ||||||
Increase in cash surrender value of life insurance | (281 | ) | (286 | ) | ||||
Stock-based compensation and other expense | 475 | 484 | ||||||
Deferred income taxes | 112 | 7 | ||||||
Decrease in fair value of servicing rights | 145 | 247 | ||||||
Gains on sales of loans, net | (651 | ) | (699 | ) | ||||
Origination of loans for sale | (19,277 | ) | (19,366 | ) | ||||
Proceeds from sales of loans | 19,473 | 19,565 | ||||||
Decrease (increase) in accrued interest receivable and other assets | 207 | (305 | ) | |||||
Increase in accrued interest payable and other liabilities | 624 | 187 | ||||||
Other | 86 | 84 | ||||||
Net Cash Provided by Operating Activities | 15,030 | 13,837 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities of certificates of deposit | 348 | 1,060 | ||||||
Purchase of certificates of deposit | (100 | ) | (2,280 | ) | ||||
Proceeds from sales of available-for-sale securities | 24,118 | 21,573 | ||||||
Proceeds from calls and maturities of available-for-sale securities | 47,285 | 54,472 | ||||||
Purchase of available-for-sale securities | (40,211 | ) | (59,582 | ) | ||||
Redemption of Federal Home Loan Bank of Pittsburgh stock | 5,487 | 3,661 | ||||||
Purchase of Federal Home Loan Bank of Pittsburgh stock | (4,725 | ) | (2,364 | ) | ||||
Net increase in loans | (50,128 | ) | (39,647 | ) | ||||
Proceeds from bank owned life insurance | 0 | 1,442 | ||||||
Purchase of premises and equipment | (1,209 | ) | (1,188 | ) | ||||
Proceeds from sale of foreclosed assets | 1,035 | 361 | ||||||
Other | 144 | 115 | ||||||
Net Cash Used in Investing Activities | (17,956 | ) | (22,377 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase in deposits | 37,782 | 56,265 | ||||||
Net decrease in short-term borrowings | (18,436 | ) | (38,906 | ) | ||||
Proceeds from long-term borrowings | 3,000 | 0 | ||||||
Repayments of long-term borrowings | (10,198 | ) | (229 | ) | ||||
Purchase of treasury stock | 0 | (3,723 | ) | |||||
Sale of treasury stock | 98 | 126 | ||||||
Tax benefit from compensation plans | 0 | 129 | ||||||
Common dividends paid | (8,331 | ) | (8,333 | ) | ||||
Net Cash Provided by Financing Activities | 3,915 | 5,329 | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 989 | (3,211 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 28,621 | 33,313 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 29,610 | $ | 30,102 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Accrued purchase of available-for-sale securities | $ | 0 | $ | 1,494 | ||||
Assets acquired through foreclosure of real estate loans | $ | 608 | $ | 1,508 | ||||
Interest paid | $ | 2,942 | $ | 2,764 | ||||
Income taxes paid | $ | 3,163 | $ | 3,185 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands Except Share and Per Share Data)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Common | Treasury | Common | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||||
Shares | Shares | Stock | Capital | Earnings | (Loss) Income | Stock | Total | |||||||||||||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | 12,655,171 | 541,943 | $ | 12,655 | $ | 71,730 | $ | 112,790 | $ | (898 | ) | $ | (10,269 | ) | $ | 186,008 | ||||||||||||||||
Net income | 11,491 | 11,491 | ||||||||||||||||||||||||||||||
Other comprehensive income, net | 1,272 | 1,272 | ||||||||||||||||||||||||||||||
Cash dividends declared on common stock, $0.78 per share | (9,445 | ) | (9,445 | ) | ||||||||||||||||||||||||||||
Shares issued for dividend reinvestment Plan | (48,092 | ) | 203 | 911 | 1,114 | |||||||||||||||||||||||||||
Shares issued from treasury and redeemed related to exercise of stock options | (9,681 | ) | (86 | ) | 184 | 98 | ||||||||||||||||||||||||||
Restricted stock granted | (30,782 | ) | (583 | ) | 583 | 0 | ||||||||||||||||||||||||||
Forfeiture of restricted stock | 4,256 | 79 | (79 | ) | 0 | |||||||||||||||||||||||||||
Stock-based compensation expense | 475 | 475 | ||||||||||||||||||||||||||||||
Balance, September 30, 2017 | 12,655,171 | 457,644 | $ | 12,655 | $ | 71,818 | $ | 114,836 | $ | 374 | $ | (8,670 | ) | $ | 191,013 | |||||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||
Balance, December 31, 2015 | 12,655,171 | 474,548 | $ | 12,655 | $ | 71,654 | $ | 109,454 | $ | 2,528 | $ | (8,804 | ) | $ | 187,487 | |||||||||||||||||
Net income | 11,531 | 11,531 | ||||||||||||||||||||||||||||||
Other comprehensive income, net | 2,902 | 2,902 | ||||||||||||||||||||||||||||||
Cash dividends declared on common stock, $0.78 per share | (9,435 | ) | (9,435 | ) | ||||||||||||||||||||||||||||
Shares issued for dividend reinvestment Plan | (53,596 | ) | 90 | 1,012 | 1,102 | |||||||||||||||||||||||||||
Treasury stock purchased | 187,300 | (3,723 | ) | (3,723 | ) | |||||||||||||||||||||||||||
Shares issued from treasury and redeemed related to exercise of stock options | (7,371 | ) | (13 | ) | 139 | 126 | ||||||||||||||||||||||||||
Restricted stock granted | (35,427 | ) | (658 | ) | 658 | 0 | ||||||||||||||||||||||||||
Forfeiture of restricted stock | 2,719 | 48 | (48 | ) | 0 | |||||||||||||||||||||||||||
Stock-based compensation expense | 480 | 480 | ||||||||||||||||||||||||||||||
Other stock-based expense | (225 | ) | 4 | 4 | ||||||||||||||||||||||||||||
Tax effect of stock option exercises | (2 | ) | (2 | ) | ||||||||||||||||||||||||||||
Tax benefit from dividends on restricted stock | 17 | 17 | ||||||||||||||||||||||||||||||
Tax benefit from compensation plans | 114 | 114 | ||||||||||||||||||||||||||||||
Balance, September 30, 2016 | 12,655,171 | 567,948 | $ | 12,655 | $ | 71,616 | $ | 111,664 | $ | 5,430 | $ | (10,762 | ) | $ | 190,603 |
Accumulated | ||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Common | Treasury | Common | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||||
Shares | Shares | Stock | Capital | Earnings | (Loss) Income | Stock | Total | |||||||||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||
Balance, December 31, 2017 | 12,655,171 | 440,646 | $ | 12,655 | $ | 72,035 | $ | 113,608 | $ | (1,507 | ) | $ | (8,348 | ) | $ | 188,443 | ||||||||||||||||
Impact of change in enacted income tax rate (a) | 325 | (325 | ) | 0 | ||||||||||||||||||||||||||||
Impact of change in method of premium amortization of callable debt securities (b) | (26 | ) | 26 | 0 | ||||||||||||||||||||||||||||
Impact of change in method of accounting for marketable equity security (c) | (22 | ) | 22 | 0 | ||||||||||||||||||||||||||||
Net income | 16,332 | 16,332 | ||||||||||||||||||||||||||||||
Other comprehensive loss, net | (6,584 | ) | (6,584 | ) | ||||||||||||||||||||||||||||
Cash dividends declared on common stock, $0.81 per share | (9,934 | ) | (9,934 | ) | ||||||||||||||||||||||||||||
Shares issued for dividend reinvestment plan | (45,283 | ) | 279 | 858 | 1,137 | |||||||||||||||||||||||||||
Shares issued from treasury and redeemed related to exercise of stock options | (10,853 | ) | (110 | ) | 203 | 93 | ||||||||||||||||||||||||||
Restricted stock granted | (34,552 | ) | (655 | ) | 655 | 0 | ||||||||||||||||||||||||||
Forfeiture of restricted stock | 7,939 | 148 | (148 | ) | 0 | |||||||||||||||||||||||||||
Stock-based compensation expense | 500 | 500 | ||||||||||||||||||||||||||||||
Balance, September 30, 2018 | 12,655,171 | 357,897 | $ | 12,655 | $ | 72,197 | $ | 120,283 | $ | (8,368 | ) | $ | (6,780 | ) | $ | 189,987 | ||||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||
Balance, December 31, 2016 | 12,655,171 | 541,943 | $ | 12,655 | $ | 71,730 | $ | 112,790 | $ | (898 | ) | $ | (10,269 | ) | $ | 186,008 | ||||||||||||||||
Net income | 11,491 | 11,491 | ||||||||||||||||||||||||||||||
Other comprehensive income, net | 1,272 | 1,272 | ||||||||||||||||||||||||||||||
Cash dividends declared on common stock, $0.78 per share | (9,445 | ) | (9,445 | ) | ||||||||||||||||||||||||||||
Shares issued for dividend reinvestment plan | (48,092 | ) | 203 | 911 | 1,114 | |||||||||||||||||||||||||||
Shares issued from treasury and redeemed related to exercise of stock options | (9,681 | ) | (86 | ) | 184 | 98 | ||||||||||||||||||||||||||
Restricted stock granted | (30,782 | ) | (583 | ) | 583 | 0 | ||||||||||||||||||||||||||
Forfeiture of restricted stock | 4,256 | 79 | (79 | ) | 0 | |||||||||||||||||||||||||||
Stock-based compensation expense | 475 | 475 | ||||||||||||||||||||||||||||||
Balance, September 30, 2017 | 12,655,171 | 457,644 | $ | 12,655 | $ | 71,818 | $ | 114,836 | $ | 374 | $ | (8,670 | ) | $ | 191,013 |
(a) | As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of Accounting Standards Update (ASU) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, effective January 1, 2018. |
(b) | As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), effective January 1, 2018. |
(c) | As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, effective January 1, 2018. |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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”), as well as C&N Bank’s wholly-owned subsidiary, C&N Financial Services Corporation. In December 2017, C&N Bank established a new entity, Northern Tier Holding LLC, for the purpose of acquiring, holding and disposing of real property acquired by the Bank. 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, with the exception of the consolidated balance sheet dated December 31, 2016,2017, 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 20162017 information has been reclassified for consistency with the 20172018 presentation.
Operating results reported for the three-month and nine-month periods ended September 30, 20172018 might not be indicative of the results for the year ending December 31, 2017.2018. 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, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606).Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Corporation applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Corporation’s interest income and certain noninterest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Corporation’s largest sources of noninterest revenue which are subject to the guidance include Trust and financial management revenue, service charges on deposit accounts and interchange revenue from debit card transactions. Adoption of ASU 2014-09 did not change the timing and pattern of the Corporation’s revenue recognition related to scoped-in noninterest income. New disclosures required by the ASU have been included in Note 13.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits, but does not require, entities to reclassify tax effects stranded in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income. The Corporation elected early adoption and adopted this standard update, effective January 1, 2018. The Corporation’s stranded tax effects were related to valuation of the net deferred tax asset attributable to items of accumulated other comprehensive income (loss), which are unrealized gains (losses) on available-for-sale securities and unfunded defined benefit plan obligations. Adoption resulted in a reclassification between two categories of stockholders’ equity at January 1, 2018, with an increase of $325,000 in retained earnings and a decrease in accumulated other comprehensive loss for the same amount (no net change in stockholders’ equity).
Effective January 1, 2018, the Corporation elected early adoption of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). This Update shortens the amortization period for certain callable debt securities held at a premium. Discounts will continue to be amortized to maturity. Adoption resulted in a reduction in retained earnings and corresponding increase in accumulated other comprehensive loss (no net change in stockholders’ equity) of $26,000 at January 1, 2018 for the cumulative after-tax impact of the change in accounting for debt securities held as of that date.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Effective January 1, 2018, the Corporation adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 was effective for the Corporation on January 1, 2018 and resulted in the following changes:
· | A marketable equity security previously included in available-for-sale securities on the consolidated balance sheets is presented as a separate asset. |
· | Changes in the fair value of the marketable equity security are captured in the consolidated statements of income. |
· | Retained earnings was reduced and a corresponding increase in accumulated other comprehensive loss was recognized (no net change in stockholders’ equity) of $22,000 at January 1, 2018 for the after-tax impact of the change in accounting for the unrealized loss on the marketable equity security. |
· | As described in more detail in Note 6, in the second quarter 2018, an unrealized gain of $866,000 (pre-tax) was recognized in the unaudited, consolidated statements of income on a restricted equity security (Visa Class B stock). As required by ASU 2016-01, the Corporation considered the pricing of observable transactions in determining the carrying value of this equity security that does not have a readily determinable fair value. In the third quarter 2018, the Corporation sold the shares held as of June 30, 2018, recording an additional gain of $571,000 as the proceeds of $1,437,000 exceeded the carrying value of the restricted equity security of $866,000 prior to the sale. |
· | Adoption of ASU 2016-01 also resulted in the use of an exit price to determine the fair value of financial instruments not measured at fair value in the consolidated balance sheets. Further information regarding valuation of financial instruments is provided in Note 5. |
Recently Issued But Not Yet Effective Accounting Pronouncements
ASU 2016-02, Leases (Topic 842) changes current GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of Topic 842. Topic 842 would not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. Topic 842 will become effective for the Corporation for annual and interim periods beginning in the first quarter 2019. Adoption of Topic 842 is not expected to have a material impact on the Corporation’s consolidated financial statements. The Corporation leases certain properties and equipment under operating leases that will result in the recognition of lease assets and lease liabilities on the consolidated balance sheet under Topic 842; however, the majority of the Corporation’s properties and equipment are owned, not leased.
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 will be effective for the Corporation beginning in the first quarter 2020. Earlier adoption is permitted beginning in the first quarter 2019; however, the Corporation does not currently plan to early adopt the ASU. The Corporation has formed a cross functional management team that is assessing alternative loss estimation methodologies and the Corporation’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations. The Corporation will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.
ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) simplifies the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This Update will become effective for the Corporation’s annual and interim goodwill impairment tests beginning in the first quarter 2020. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
ASU 2018-13, Fair Value Measurement (Topic 820) modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for the Corporation beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial position or results of operations.
ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans – General (Subtopic 715-20) modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for the Corporation beginning in the first quarter 2021. Adoption on a retrospective basis for all periods presented is required. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.
ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance will become effective for the Corporation beginning in the first quarter 2020, with early adoption permitted. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.
2. PER SHARE DATA
Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.
Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using weighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation's common stock during the period.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | |||||||||||||||||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||||||||||
Net income | $ | 3,936,000 | $ | 4,087,000 | $ | 11,491,000 | $ | 11,531,000 | $ | 5,586,000 | $ | 3,936,000 | $ | 16,332,000 | $ | 11,491,000 | ||||||||||||||||
Less: Dividends and undistributed earnings allocated to participating securities | (20,000 | ) | (22,000 | ) | (59,000 | ) | (63,000 | ) | (28,000 | ) | (20,000 | ) | (83,000 | ) | (59,000 | ) | ||||||||||||||||
Net income attributable to common shares | $ | 3,916,000 | $ | 4,065,000 | $ | 11,432,000 | $ | 11,468,000 | $ | 5,558,000 | $ | 3,916,000 | $ | 16,249,000 | $ | 11,432,000 | ||||||||||||||||
Basic weighted-average common shares outstanding | 12,124,854 | 12,014,267 | 12,105,673 | 12,032,619 | 12,228,833 | 12,124,854 | 12,209,879 | 12,105,673 | ||||||||||||||||||||||||
Basic earnings per common share (a) | $ | 0.32 | $ | 0.34 | $ | 0.94 | $ | 0.95 | $ | 0.45 | $ | 0.32 | $ | 1.33 | $ | 0.94 | ||||||||||||||||
Diluted | ||||||||||||||||||||||||||||||||
Net income attributable to common shares | $ | 3,916,000 | $ | 4,065,000 | $ | 11,432,000 | $ | 11,468,000 | $ | 5,558,000 | $ | 3,916,000 | $ | 16,249,000 | $ | 11,432,000 | ||||||||||||||||
Basic weighted-average common shares outstanding | 12,124,854 | 12,014,267 | 12,105,673 | 12,032,619 | 12,228,833 | 12,124,854 | 12,209,879 | 12,105,673 | ||||||||||||||||||||||||
Dilutive effect of potential common stock arising from stock options | 37,409 | 29,799 | 40,624 | 24,020 | 42,703 | 37,409 | 38,790 | 40,624 | ||||||||||||||||||||||||
Diluted weighted-average common shares outstanding | 12,162,263 | 12,044,066 | 12,146,297 | 12,056,639 | 12,271,536 | 12,162,263 | 12,248,669 | 12,146,297 | ||||||||||||||||||||||||
Diluted earnings per common share (a) | $ | 0.32 | $ | 0.34 | $ | 0.94 | $ | 0.95 | $ | 0.45 | $ | 0.32 | $ | 1.33 | $ | 0.94 | ||||||||||||||||
Weighted-average non-vested restricted shares outstanding | 60,462 | 61,233 | 62,262 | 62,825 |
(a) Basic and diluted earnings per share under the two-class method are determined on net income reported on the consolidated statements of income, statement less earnings allocated to nonvestednon-vested restricted shares with nonforfeitable dividends (participating securities).
The weighted-average number of nonvested restricted shares outstanding was 61,233 shares in the three-month period ended September 30, 2017 and 64,130 shares in the three-month period ended September 30, 2016. The weighted-average number of nonvested restricted shares outstanding was 62,825 shares in the nine-month period ended September 30, 2017 and 65,935 shares in the nine-month period ended September 30, 2016.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
StockAnti-dilutive stock options that were anti-dilutive wereare excluded from net income per share calculations. There were no anti-dilutive instruments in the three-month or nine-month periods ended September 30, 2017. Weighted-average common shares available from anti-dilutive instruments totaled 22,715 shares in the third quarter 20162018 and 39,054 shares in the nine-month period ended September 30, 2016.2017.
3. COMPREHENSIVE INCOME
Comprehensive income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income.income (loss). The components of other comprehensive income (loss), and the related tax effects, are as follows:
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains on available-for-sale securities | $ | 2,067 | $ | (723 | ) | $ | 1,344 | |||||
Reclassification adjustment for (gains) realized in income | (257 | ) | 89 | (168 | ) | |||||||
Other comprehensive income on available-for-sale securities | 1,810 | (634 | ) | 1,176 | ||||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses | ||||||||||||
included in other comprehensive income | 166 | (58 | ) | 108 | ||||||||
Amortization of net transition obligation, prior service cost and net | ||||||||||||
actuarial loss included in net periodic benefit cost | (18 | ) | 6 | (12 | ) | |||||||
Other comprehensive income on unfunded retirement obligations | 148 | (52 | ) | 96 | ||||||||
Total other comprehensive income | $ | 1,958 | $ | (686 | ) | $ | 1,272 |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains on available-for-sale securities | $ | 5,544 | $ | (1,941 | ) | $ | 3,603 | |||||
Reclassification adjustment for (gains) realized in income | (1,089 | ) | 381 | (708 | ) | |||||||
Other comprehensive income on available-for-sale securities | 4,455 | (1,560 | ) | 2,895 | ||||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses | ||||||||||||
included in other comprehensive income | 26 | (9 | ) | 17 | ||||||||
Amortization of net transition obligation, prior service cost and net | ||||||||||||
actuarial loss included in net periodic benefit cost | (15 | ) | 5 | (10 | ) | |||||||
Other comprehensive income on unfunded retirement obligations | 11 | (4 | ) | 7 | ||||||||
Total other comprehensive income | $ | 4,466 | $ | (1,564 | ) | $ | 2,902 |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses on available-for-sale securities | $ | (8,698 | ) | $ | 1,826 | $ | (6,872 | ) | ||||
Reclassification adjustment for losses realized in income | 284 | (59 | ) | 225 | ||||||||
Other comprehensive loss on available-for-sale securities | (8,414 | ) | 1,767 | (6,647 | ) | |||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses included in other comprehensive income | 93 | (19 | ) | 74 | ||||||||
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | (13 | ) | 2 | (11 | ) | |||||||
Other comprehensive income on unfunded retirement obligations | 80 | (17 | ) | 63 | ||||||||
Total other comprehensive loss | $ | (8,334 | ) | $ | 1,750 | $ | (6,584 | ) |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
Three Months Ended September 30, 2017 | ||||||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses on available-for-sale securities | $ | (213 | ) | $ | 75 | $ | (138 | ) | ||||
Reclassification adjustment for (gains) realized in income | (5 | ) | 1 | (4 | ) | |||||||
Other comprehensive loss on available-for-sale securities | (218 | ) | 76 | (142 | ) | |||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses | ||||||||||||
included in other comprehensive income | 0 | 0 | 0 | |||||||||
Amortization of net transition obligation, prior service cost and net | ||||||||||||
actuarial loss included in net periodic benefit cost | (6 | ) | 2 | (4 | ) | |||||||
Other comprehensive loss on unfunded retirement obligations | (6 | ) | 2 | (4 | ) | |||||||
Total other comprehensive loss | $ | (224 | ) | $ | 78 | $ | (146 | ) |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
Three Months Ended September 30, 2016 | ||||||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses on available-for-sale securities | $ | (1,661 | ) | $ | 580 | $ | (1,081 | ) | ||||
Reclassification adjustment for (gains) realized in income | (584 | ) | 204 | (380 | ) | |||||||
Other comprehensive loss on available-for-sale securities | (2,245 | ) | 784 | (1,461 | ) | |||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses | ||||||||||||
included in other comprehensive income | 0 | 0 | 0 | |||||||||
Amortization of net transition obligation, prior service cost and net | ||||||||||||
actuarial loss included in net periodic benefit cost | (5 | ) | 2 | (3 | ) | |||||||
Other comprehensive loss on unfunded retirement obligations | (5 | ) | 2 | (3 | ) | |||||||
Total other comprehensive loss | $ | (2,250 | ) | $ | 786 | $ | (1,464 | ) |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||
Unrealized gains on available-for-sale securities: | �� | |||||||||||
Unrealized holding gains on available-for-sale securities | $ | 2,067 | $ | (723 | ) | $ | 1,344 | |||||
Reclassification adjustment for (gains) realized in income | (257 | ) | 89 | (168 | ) | |||||||
Other comprehensive income on available-for-sale securities | 1,810 | (634 | ) | 1,176 | ||||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses included in other comprehensive income | 166 | (58 | ) | 108 | ||||||||
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | (18 | ) | 6 | (12 | ) | |||||||
Other comprehensive income on unfunded retirement obligations | 148 | (52 | ) | 96 | ||||||||
Total other comprehensive income | $ | 1,958 | $ | (686 | ) | $ | 1,272 |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
Three Months Ended September 30, 2018 | ||||||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses on available-for-sale securities | $ | (2,567 | ) | $ | 539 | $ | (2,028 | ) | ||||
Reclassification adjustment for losses realized in income | 2 | (0 | ) | 2 | ||||||||
Other comprehensive loss on available-for-sale securities | (2,565 | ) | 539 | (2,026 | ) | |||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses included in other comprehensive income | 0 | 0 | 0 | |||||||||
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | (3 | ) | 0 | (3 | ) | |||||||
Other comprehensive loss on unfunded retirement obligations | (3 | ) | 0 | (3 | ) | |||||||
Total other comprehensive loss | $ | (2,568 | ) | $ | 539 | $ | (2,029 | ) |
(In Thousands) | Before-Tax | Income Tax | Net-of-Tax | |||||||||
Amount | Effect | Amount | ||||||||||
Three Months Ended September 30, 2017 | ||||||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses on available-for-sale securities | $ | (213 | ) | $ | 75 | $ | (138 | ) | ||||
Reclassification adjustment for (gains) realized in income | (5 | ) | 1 | (4 | ) | |||||||
Other comprehensive loss on available-for-sale securities | (218 | ) | 76 | (142 | ) | |||||||
Unfunded pension and postretirement obligations: | ||||||||||||
Changes from plan amendments and actuarial gains and losses included in other comprehensive income | 0 | 0 | 0 | |||||||||
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | (6 | ) | 2 | (4 | ) | |||||||
Other comprehensive loss on unfunded retirement obligations | (6 | ) | 2 | (4 | ) | |||||||
Total other comprehensive loss | $ | (224 | ) | $ | 78 | $ | (146 | ) |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 | ||||||||||||||||||||
Holding Gains | Unfunded | Other | (Losses) | Unfunded | Other | |||||||||||||||||||
(Losses) | Retirement | Comprehensive | Gains | Retirement | Comprehensive | |||||||||||||||||||
on Securities | Obligations | Income | on Securities | Obligations | Loss | |||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||
Balance, beginning of period | $ | (1,566 | ) | $ | 59 | $ | (1,507 | ) | ||||||||||||||||
Impact of change in enacted income tax rate | (337 | ) | 12 | (325 | ) | |||||||||||||||||||
Impact of change in the method of premium amortization of callable debt securities | 26 | 0 | 26 | |||||||||||||||||||||
Impact of change in the method of accounting for marketable equity security | 22 | 0 | 22 | |||||||||||||||||||||
Other comprehensive (loss) income during nine months ended September 30, 2018 | (6,647 | ) | 63 | (6,584 | ) | |||||||||||||||||||
Balance, end of period | $ | (8,502 | ) | $ | 134 | $ | (8,368 | ) | ||||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||
Balance, beginning of period | $ | (949 | ) | $ | 51 | $ | (898 | ) | $ | (949 | ) | $ | 51 | $ | (898 | ) | ||||||||
Change during nine months ended September 30, 2017 | 1,176 | 96 | 1,272 | |||||||||||||||||||||
Other comprehensive income during nine months ended September 30, 2017 | 1,176 | 96 | 1,272 | |||||||||||||||||||||
Balance, end of period | $ | 227 | $ | 147 | $ | 374 | $ | 227 | $ | 147 | $ | 374 | ||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||
Balance, beginning of period | $ | 2,493 | $ | 35 | $ | 2,528 | $ | (6,476 | ) | $ | 137 | $ | (6,339 | ) | ||||||||||
Change during nine months ended September 30, 2016 | 2,895 | 7 | 2,902 | |||||||||||||||||||||
Other comprehensive (loss) during three months ended September 30, 2018 | (2,026 | ) | (3 | ) | (2,029 | ) | ||||||||||||||||||
Balance, end of period | $ | 5,388 | $ | 42 | $ | 5,430 | $ | (8,502 | ) | $ | 134 | $ | (8,368 | ) | ||||||||||
Three Months Ended September 30, 2017 | ||||||||||||||||||||||||
Balance, beginning of period | $ | 369 | $ | 151 | $ | 520 | $ | 369 | $ | 151 | $ | 520 | ||||||||||||
Change during three months ended September 30, 2017 | (142 | ) | (4 | ) | (146 | ) | ||||||||||||||||||
Other comprehensive (loss) during three months ended September 30, 2017 | (142 | ) | (4 | ) | (146 | ) | ||||||||||||||||||
Balance, end of period | $ | 227 | $ | 147 | $ | 374 | $ | 227 | $ | 147 | $ | 374 | ||||||||||||
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||
Balance, beginning of period | $ | 6,849 | $ | 45 | $ | 6,894 | ||||||||||||||||||
Change during three months ended September 30, 2016 | (1,461 | ) | (3 | ) | (1,464 | ) | ||||||||||||||||||
Balance, end of period | $ | 5,388 | $ | 42 | $ | 5,430 |
Items reclassified out of each component of other comprehensive (loss) income are as follows:
For the Nine Months Ended September 30, 2017 | ||||||
(In Thousands) | ||||||
Reclassified from | ||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | ||||
Comprehensive Income Components | Comprehensive Income | Statements of Income | ||||
Unrealized gains and losses on available-for-sale Securities | $ | (257 | ) | Realized gains on available-for-sale securities, net | ||
89 | Income tax provision | |||||
(168 | ) | Net of tax | ||||
Amortization of defined benefit pension and postretirement items: | ||||||
Prior service cost | (23 | ) | Pensions and other employee benefits | |||
Actuarial loss | 5 | Pensions and other employee benefits | ||||
(18 | ) | Total before tax | ||||
6 | Income tax provision | |||||
(12 | ) | Net of tax | ||||
Total reclassifications for the period | $ | (180 | ) |
For the Nine Months Ended September 30, 2018 | ||||||
(In Thousands) | ||||||
Reclassified from | ||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | ||||
Comprehensive Loss Components | Comprehensive Loss | Statements of Income | ||||
Unrealized gains and losses on available-for-sale securities | $ | 284 | Realized losses on available-for-sale debt securities, net | |||
(59 | ) | Income tax provision | ||||
225 | Net of tax | |||||
Amortization of defined benefit pension and postretirement items: | ||||||
Prior service cost | (23 | ) | Other noninterest expense | |||
Actuarial loss | 10 | Other noninterest expense | ||||
(13 | ) | Total before tax | ||||
2 | Income tax provision | |||||
(11 | ) | Net of tax | ||||
Total reclassifications for the period | $ | 214 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
For the Nine Months Ended September 30, 2016 | ||||||||||||
For the Nine Months Ended September 30, 2017 | ||||||||||||
(In Thousands) | ||||||||||||
Reclassified from | Reclassified from | |||||||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | Accumulated Other | Affected Line Item in the Consolidated | ||||||||
Comprehensive Income Components | Comprehensive Income | Statements of Income | ||||||||||
Comprehensive Loss Components | Comprehensive Loss | Statements of Income | ||||||||||
Unrealized gains and losses on available-for-sale securities | $ | (1,089 | ) | Realized gains on available-for-sale securities, net | $ | (257 | ) | Realized gains on available-for-sale debt securities, net | ||||
381 | Income tax provision | 89 | Income tax provision | |||||||||
(708 | ) | Net of tax | (168 | ) | Net of tax | |||||||
Amortization of defined benefit pension and postretirement items: | ||||||||||||
Prior service cost | (23 | ) | Pensions and other employee benefits | (23 | ) | Other noninterest expense | ||||||
Actuarial loss | 8 | Pensions and other employee benefits | 5 | Other noninterest expense | ||||||||
(15 | ) | Total before tax | (18 | ) | Total before tax | |||||||
5 | Income tax provision | 6 | Income tax provision | |||||||||
(10 | ) | Net of tax | (12 | ) | Net of tax | |||||||
Total reclassifications for the period | $ | (718 | ) | $ | (180 | ) |
For the Three Months Ended September 30, 2017 | ||||||||||||
For the Three Months Ended September 30, 2018 | ||||||||||||
(In Thousands) | ||||||||||||
Reclassified from | Reclassified from | |||||||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | Accumulated Other | Affected Line Item in the Consolidated | ||||||||
Comprehensive Income Components | Comprehensive Income | Statements of Income | ||||||||||
Comprehensive Loss Components | Comprehensive Loss | Statements of Income | ||||||||||
Unrealized gains and losses on available-for-sale securities | $ | (5 | ) | Realized gains on available-for-sale securities, net | $ | 2 | Realized losses on available-for-sale debt securities, net | |||||
1 | Income tax provision | (0 | ) | Income tax provision | ||||||||
(4 | ) | Net of tax | 2 | Net of tax | ||||||||
Amortization of defined benefit pension and postretirement items: | ||||||||||||
Prior service cost | (8 | ) | Pensions and other employee benefits | (7 | ) | Other noninterest expense | ||||||
Actuarial loss | 2 | Pensions and other employee benefits | 4 | Other noninterest expense | ||||||||
(6 | ) | Total before tax | (3 | ) | Total before tax | |||||||
2 | Income tax provision | (0 | ) | Income tax provision | ||||||||
(4 | ) | Net of tax | (3 | ) | Net of tax | |||||||
Total reclassifications for the period | $ | (8 | ) | $ | (1 | ) |
For the Three Months Ended September 30, 2016 | ||||||
(In Thousands) | ||||||
Reclassified from | ||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | ||||
Comprehensive Income Components | Comprehensive Income | Statements of Income | ||||
Unrealized gains and losses on available-for-sale Securities | $ | (584 | ) | Realized gains on available-for-sale securities, net | ||
204 | Income tax provision | |||||
(380 | ) | Net of tax | ||||
Amortization of defined benefit pension and postretirement items: | ||||||
Prior service cost | (8 | ) | Pensions and other employee benefits | |||
Actuarial loss | 3 | Pensions and other employee benefits | ||||
(5 | ) | Total before tax | ||||
2 | Income tax provision | |||||
(3 | ) | Net of tax | ||||
Total reclassifications for the period | $ | (383 | ) |
For the Three Months Ended September 30, 2017 | ||||||
(In Thousands) | ||||||
Reclassified from | ||||||
Details about Accumulated Other | Accumulated Other | Affected Line Item in the Consolidated | ||||
Comprehensive Loss Components | Comprehensive Loss | Statements of Income | ||||
Unrealized gains and losses on available-for-sale securities | $ | (5 | ) | Realized gains on available-for-sale debt securities, net | ||
1 | Income tax provision | |||||
(4 | ) | Net of tax | ||||
Amortization of defined benefit pension and postretirement items: | ||||||
Prior service cost | (8 | ) | Other noninterest expense | |||
Actuarial loss | 2 | Other noninterest expense | ||||
(6 | ) | Total before tax | ||||
2 | Income tax provision | |||||
(4 | ) | Net of tax | ||||
Total reclassifications for the period | $ | (8 | ) |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
4. CASH AND DUE FROM BANKS
Cash and due from banks at September 30, 20172018 and December 31, 20162017 include the following:
(In thousands) | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | ||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Cash and cash equivalents | $ | 29,610 | $ | 28,621 | $ | 36,031 | $ | 37,004 | ||||||||
Certificates of deposit | 3,240 | 3,488 | 2,310 | 3,240 | ||||||||||||
Total cash and due from banks | $ | 32,850 | $ | 32,109 | $ | 38,341 | $ | 40,244 |
Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.
The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $17,213,000$14,783,000 at September 30, 20172018 and $16,654,000$17,178,000 at December 31, 2016.2017.
5. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB Accounting Standards Codification (ASC) topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.
Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.
The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
At September 30, 20172018 and December 31, 2016,2017, assets measured at fair value and the valuation methods used are as follows:
September 30, 2017 | ||||||||||||||||
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 SECURITIES: | ||||||||||||||||
Obligations of U.S. Government agencies | $ | 0 | $ | 7,946 | $ | 0 | $ | 7,946 | ||||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 0 | 110,557 | 0 | 110,557 | ||||||||||||
Taxable | 0 | 27,816 | 0 | 27,816 | ||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 0 | 54,917 | 0 | 54,917 | ||||||||||||
Residential collateralized mortgage obligations | 0 | 129,243 | 0 | 129,243 | ||||||||||||
Commercial mortgage-backed securities | 0 | 33,629 | 0 | 33,629 | ||||||||||||
Total debt securities | 0 | 364,108 | 0 | 364,108 | ||||||||||||
Marketable equity securities | 978 | 0 | 0 | 978 | ||||||||||||
Total available-for-sale securities | 978 | 364,108 | 0 | 365,086 | ||||||||||||
Servicing rights | 0 | 0 | 1,277 | 1,277 | ||||||||||||
Total recurring fair value measurements | $ | 978 | $ | 364,108 | $ | 1,277 | $ | 366,363 | ||||||||
Nonrecurring fair value measurements | ||||||||||||||||
Impaired loans with a valuation allowance | $ | 0 | $ | 0 | $ | 3,258 | $ | 3,258 | ||||||||
Valuation allowance | 0 | 0 | (1,077 | ) | (1,077 | ) | ||||||||||
Impaired loans, net | 0 | 0 | 2,181 | 2,181 | ||||||||||||
Foreclosed assets held for sale | 0 | 0 | 1,650 | 1,650 | ||||||||||||
Total nonrecurring fair value measurements | $ | 0 | $ | 0 | $ | 3,831 | $ | 3,831 |
September 30, 2018 | ||||||||||||||||
Quoted Prices | Other | |||||||||||||||
in Active | Observable | Unobservable | Total | |||||||||||||
Markets | Inputs | Inputs | Fair | |||||||||||||
(In Thousands) | (Level 1) | (Level 2) | (Level 3) | Value | ||||||||||||
Recurring fair value measurements | ||||||||||||||||
AVAILABLE-FOR-SALE DEBT SECURITIES: | ||||||||||||||||
Obligations of U.S. Government agencies | $ | 0 | $ | 4,768 | $ | 0 | $ | 4,768 | ||||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 0 | 91,712 | 0 | 91,712 | ||||||||||||
Taxable | 0 | 27,642 | 0 | 27,642 | ||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 0 | 55,131 | 0 | 55,131 | ||||||||||||
Residential collateralized mortgage obligations | 0 | 142,631 | 0 | 142,631 | ||||||||||||
Commercial mortgage-backed securities | 0 | 36,822 | 0 | 36,822 | ||||||||||||
Total available-for-sale debt securities | 0 | 358,706 | 0 | 358,706 | ||||||||||||
Marketable equity security | 941 | 0 | 0 | 941 | ||||||||||||
Servicing rights | 0 | 0 | 1,381 | 1,381 | ||||||||||||
Total recurring fair value measurements | $ | 941 | $ | 358,706 | $ | 1,381 | $ | 361,028 | ||||||||
Nonrecurring fair value measurements | ||||||||||||||||
Impaired loans with a valuation allowance | $ | 0 | $ | 0 | $ | 3,623 | $ | 3,623 | ||||||||
Valuation allowance | 0 | 0 | (1,059 | ) | (1,059 | ) | ||||||||||
Impaired loans, net | 0 | 0 | 2,564 | 2,564 | ||||||||||||
Foreclosed assets held for sale | 0 | 0 | 2,678 | 2,678 | ||||||||||||
Total nonrecurring fair value measurements | $ | 0 | $ | 0 | $ | 5,242 | $ | 5,242 | ||||||||
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
December 31, 2016 | December 31, 2017 | |||||||||||||||||||||||||||||||
Quoted Prices | Other | Quoted Prices | Other | |||||||||||||||||||||||||||||
in Active | Observable | Unobservable | Total | in Active | Observable | Unobservable | Total | |||||||||||||||||||||||||
Markets | Inputs | Inputs | Fair | 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 SECURITIES: | ||||||||||||||||||||||||||||||||
AVAILABLE-FOR-SALE DEBT SECURITIES: | ||||||||||||||||||||||||||||||||
Obligations of U.S. Government agencies | $ | 0 | $ | 9,541 | $ | 0 | $ | 9,541 | $ | 0 | $ | 7,873 | $ | 0 | $ | 7,873 | ||||||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||||||||||
Tax-exempt | 0 | 119,037 | 0 | 119,037 | 0 | 105,111 | 0 | 105,111 | ||||||||||||||||||||||||
Taxable | 0 | 30,297 | 0 | 30,297 | 0 | 25,573 | 0 | 25,573 | ||||||||||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||||||||||||||
Residential pass-through securities | 0 | 58,404 | 0 | 58,404 | 0 | 52,347 | 0 | 52,347 | ||||||||||||||||||||||||
Residential collateralized mortgage obligations | 0 | 146,608 | 0 | 146,608 | 0 | 131,814 | 0 | 131,814 | ||||||||||||||||||||||||
Commercial mortgage-Backed securities | 0 | 30,219 | 0 | 30,219 | ||||||||||||||||||||||||||||
Total debt securities | 0 | 394,106 | 0 | 394,106 | ||||||||||||||||||||||||||||
Marketable equity securities | 971 | 0 | 0 | 971 | ||||||||||||||||||||||||||||
Total available-for-sale securities | 971 | 394,106 | 0 | 395,077 | ||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 0 | 33,219 | 0 | 33,219 | ||||||||||||||||||||||||||||
Total available-for-sale debt securities | 0 | 355,937 | 0 | 355,937 | ||||||||||||||||||||||||||||
Marketable equity security | 971 | 0 | 0 | 971 | ||||||||||||||||||||||||||||
Servicing rights | 0 | 0 | 1,262 | 1,262 | 0 | 0 | 1,299 | 1,299 | ||||||||||||||||||||||||
Total recurring fair value measurements | $ | 971 | $ | 394,106 | $ | 1,262 | $ | 396,339 | $ | 971 | $ | 355,937 | $ | 1,299 | $ | 358,207 | ||||||||||||||||
Nonrecurring fair value measurements | ||||||||||||||||||||||||||||||||
Impaired loans with a valuation allowance | $ | 0 | $ | 0 | $ | 3,372 | $ | 3,372 | $ | 0 | $ | 0 | $ | 3,776 | $ | 3,776 | ||||||||||||||||
Valuation allowance | 0 | 0 | (674 | ) | (674 | ) | 0 | 0 | (1,183 | ) | (1,183 | ) | ||||||||||||||||||||
Impaired loans, net | 0 | 0 | 2,698 | 2,698 | 0 | 0 | 2,593 | 2,593 | ||||||||||||||||||||||||
Foreclosed assets held for sale | 0 | 0 | 2,180 | 2,180 | 0 | 0 | 1,598 | 1,598 | ||||||||||||||||||||||||
Total nonrecurring fair value measurements | $ | 0 | $ | 0 | $ | 4,878 | $ | 4,878 | $ | 0 | $ | 0 | $ | 4,191 | $ | 4,191 |
Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.
At September 30, 20172018 and December 31, 2016,2017, quantitative information regarding significant techniques and inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:
Fair Value at | ||||||||||||||
9/30/17 | Valuation | Unobservable | Method or Value As of | |||||||||||
Asset | (In Thousands) | Technique | Input(s) | 9/30/17 | ||||||||||
Servicing rights | $ | 1,277 | Discounted cash flow | Discount rate | 13.00 | % | Rate used through modeling period | |||||||
Loan prepayment speeds | 147.00 | % | 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 | ||||||||||||||
9/30/18 | Valuation | Unobservable | Method or Value As of | |||||||||||
Asset | (In Thousands) | Technique | Input(s) | 9/30/18 | ||||||||||
Servicing rights | $ | 1,381 | Discounted cash flow | Discount rate | 12.50 | % | Rate used through modeling period | |||||||
Loan prepayment speeds | 121.00 | % | 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 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Fair Value at | Fair Value at | |||||||||||||||||||||||||||
12/31/16 | Valuation | Unobservable | Method or Value As of | 12/31/17 | Valuation | Unobservable | Method or Value As of | |||||||||||||||||||||
Asset | (In Thousands) | Technique | Input(s) | 12/31/16 | (In Thousands) | Technique | Input(s) | 12/31/17 | ||||||||||||||||||||
Servicing rights | $ | 1,262 | Discounted cash flow | Discount rate | 13.00 | % | Rate used through modeling period | $ | 1,299 | Discounted cash flow | Discount rate | 13.00 | % | Rate used through modeling period | ||||||||||||||
Loan prepayment speeds | 138.00 | % | Weighted-average PSA | Loan prepayment speeds | 140.00 | % | Weighted-average PSA | |||||||||||||||||||||
Servicing fees | 0.25 | % | of loan balances | Servicing fees | 0.25 | % | of loan balances | |||||||||||||||||||||
4.00 | % | of payments are late | 4.00 | % | of payments are late | |||||||||||||||||||||||
5.00 | % | late fees assessed | 5.00 | % | late fees assessed | |||||||||||||||||||||||
$ | 1.94 | Miscellaneous fees per account per month | $ | 1.94 | Miscellaneous fees per account per month | |||||||||||||||||||||||
Servicing costs | $ | 6.00 | Monthly servicing cost per account | Servicing costs | $ | 6.00 | Monthly servicing cost per account | |||||||||||||||||||||
$ | 24.00 | Additional monthly servicing cost per loan on loans more than 30 days delinquent | $ | 24.00 | Additional monthly servicing cost per loan on loans more than 30 days delinquent | |||||||||||||||||||||||
1.50 | % | of loans more than 30 days delinquent | 1.50 | % | of loans more than 30 days delinquent | |||||||||||||||||||||||
3.00 | % | annual increase in servicing costs | 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) | Three Months Ended | Nine Months Ended | ||||||||||||||
Sept. 30, 2017 | Sept. 30, 2016 | Sept. 30, 2017 | Sept. 30, 2016 | |||||||||||||
Servicing rights balance, beginning of period | $ | 1,279 | $ | 1,224 | $ | 1,262 | $ | 1,296 | ||||||||
Issuances of servicing rights | 65 | 52 | 160 | 159 | ||||||||||||
Unrealized losses included in earnings | (67 | ) | (68 | ) | (145 | ) | (247 | ) | ||||||||
Servicing rights balance, end of period | $ | 1,277 | $ | 1,208 | $ | 1,277 | $ | 1,208 |
(In Thousands) | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||||||||||||||||||
Restricted Equity Security | Servicing Rights | Total | Restricted Equity Security | Servicing Rights | Total | |||||||||||||||||||
Balance, beginning of period | $ | 866 | $ | 1,370 | $ | 2,236 | $ | 0 | $ | 1,299 | $ | 1,299 | ||||||||||||
Issuances of servicing rights | 0 | 43 | 43 | 0 | 140 | 140 | ||||||||||||||||||
Unrealized gains (losses) included in earnings | (866 | ) | (32 | ) | (898 | ) | 0 | (58 | ) | (58 | ) | |||||||||||||
Balance, end of period | $ | 0 | $ | 1,381 | $ | 1,381 | $ | 0 | $ | 1,381 | $ | 1,381 |
(In Thousands) | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
Restricted Equity Security | Servicing Rights | Total | Restricted Equity Security | Servicing Rights | Total | |||||||||||||||||||
Balance, beginning of period | $ | 0 | $ | 1,279 | $ | 1,279 | $ | 0 | $ | 1,262 | $ | 1,262 | ||||||||||||
Issuances of servicing rights | 0 | 65 | 65 | 0 | 160 | 160 | ||||||||||||||||||
Unrealized gains (losses) included in earnings | 0 | (67 | ) | (67 | ) | 0 | (145 | ) | (145 | ) | ||||||||||||||
Balance, end of period | $ | 0 | $ | 1,277 | $ | 1,277 | $ | 0 | $ | 1,277 | $ | 1,277 |
Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial and agricultural loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
At September 30, 20172018 and December 31, 2016,2017, quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (Level 3 methodologies) are as follows:
(In Thousands, Except | Weighted- | Weighted- | ||||||||||||||||||||||||||||||||||||||
Percentages) | Valuation | Average | Valuation | Average) | ||||||||||||||||||||||||||||||||||||
Balance at | Allowance at | Fair Value at | Valuation | Unobservable | Discount at | Balance at | Allowance at | Fair Value at | Valuation | Unobservable | Discount at | |||||||||||||||||||||||||||||
Asset | 9/30/17 | 9/30/17 | 9/30/17 | Technique | Inputs | 9/30/17 | 9/30/18 | 9/30/18 | 9/30/18 | Technique | Inputs | 9/30/18 | ||||||||||||||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans -first liens | $ | 509 | $ | 118 | $ | 391 | Sales comparison | Discount to appraised value | 26 | % | ||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | $ | 2,686 | $ | 952 | $ | 1,734 | Sales comparison | Discount to appraised value | 16 | % | 2,550 | 816 | 1,734 | Sales comparison | Discount to appraised value | 16 | % | |||||||||||||||||||||||
Commercial and industrial | 75 | 75 | 0 | Sales comparison | Discount to appraised value | 100 | % | 75 | 75 | 0 | Sales comparison | Discount to appraised value | 100 | % | ||||||||||||||||||||||||||
Loans secured by farmland | 497 | 50 | 447 | Sales comparison | Discount to appraised value | 53 | % | 489 | 50 | 439 | Sales comparison | Discount to appraised value | 56 | % | ||||||||||||||||||||||||||
Total impaired loans | $ | 3,258 | $ | 1,077 | $ | 2,181 | $ | 3,623 | $ | 1,059 | $ | 2,564 | ||||||||||||||||||||||||||||
Foreclosed assets held for sale - real estate: | ||||||||||||||||||||||||||||||||||||||||
Foreclosed assets held for sale -real estate: | ||||||||||||||||||||||||||||||||||||||||
Residential (1-4 family) | $ | 640 | $ | 0 | $ | 640 | Sales comparison | Discount to appraised value | 35 | % | $ | 328 | $ | 0 | $ | 328 | Sales comparison | Discount to appraised value | 46 | % | ||||||||||||||||||||
Land | 646 | 0 | 646 | Sales comparison | Discount to appraised value | 34 | % | 110 | 0 | 110 | Sales comparison | Discount to appraised value | 61 | % | ||||||||||||||||||||||||||
Commercial real estate | 364 | 0 | 364 | Sales comparison | Discount to appraised value | 63 | % | 2,240 | 0 | 2,240 | Sales comparison | Discount to appraised value | 32 | % | ||||||||||||||||||||||||||
Total foreclosed assets held for sale | $ | 1,650 | $ | 0 | $ | 1,650 | $ | 2,678 | $ | 0 | $ | 2,678 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
(In Thousands, Except | Weighted- | Weighted- | ||||||||||||||||||||||||||||||||||||||
Percentages) | Valuation | Average | Valuation | Average | ||||||||||||||||||||||||||||||||||||
Balance at | Allowance at | Fair Value at | Valuation | Unobservable | Discount at | Balance at | Allowance at | Fair Value at | Valuation | Unobservable | Discount at | |||||||||||||||||||||||||||||
Asset | 12/31/16 | 12/31/16 | 12/31/16 | Technique | Inputs | 12/31/16 | 12/31/17 | 12/31/17 | 12/31/17 | Technique | Inputs | 12/31/17 | ||||||||||||||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans -first liens | $ | 515 | $ | 122 | $ | 393 | Sales comparison | Discount to appraised value | 26 | % | ||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | $ | 2,773 | $ | 528 | $ | 2,245 | Sales comparison | Discount to appraised value | 7 | % | 2,641 | 919 | 1,722 | Sales comparison | Discount to appraised value | 16 | % | |||||||||||||||||||||||
Commercial and industrial | 95 | 95 | 0 | Sales comparison | Discount to appraised value | 100 | % | 126 | 92 | 34 | Sales comparison | Discount to appraised value | 72 | % | ||||||||||||||||||||||||||
Loans secured by farmland | 504 | 51 | 453 | Sales comparison | Discount to appraised value | 55 | % | 494 | 50 | 444 | Sales comparison | Discount to appraised value | 53 | % | ||||||||||||||||||||||||||
Total impaired loans | $ | 3,372 | $ | 674 | $ | 2,698 | $ | 3,776 | $ | 1,183 | $ | 2,593 | ||||||||||||||||||||||||||||
Foreclosed assets held for sale -real estate: | ||||||||||||||||||||||||||||||||||||||||
Residential (1-4 family) | $ | 1,102 | $ | 0 | $ | 1,102 | Sales comparison | Discount to appraised value | 35 | % | $ | 721 | $ | 0 | $ | 721 | Sales comparison | Discount to appraised value | 37 | % | ||||||||||||||||||||
Land | 650 | 0 | 650 | Sales comparison | Discount to appraised value | 33 | % | 632 | 0 | 632 | Sales comparison | Discount to appraised value | 35 | % | ||||||||||||||||||||||||||
Commercial real estate | 428 | 0 | 428 | Sales comparison | Discount to appraised value | 50 | % | 245 | 0 | 245 | Sales comparison | Discount to appraised value | 71 | % | ||||||||||||||||||||||||||
Total foreclosed assets held for sale | $ | 2,180 | $ | 0 | $ | 2,180 | $ | 1,598 | $ | 0 | $ | 1,598 |
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.
The Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term instruments approximate fair values.
CERTIFICATES OF DEPOSIT - Fair values for certificates of deposit, included in cash and due from banks in the consolidated balance sheet, are based on quoted market prices for certificates of similar remaining maturities.
SECURITIES - Fair values for securities, excluding restricted equity securities, are based on quoted market prices or other methods as described above. The carrying value of restricted equity securities approximates fair value based on applicable redemption provisions.
LOANS HELD FOR SALE - Fair values of loans held for sale are determined based on applicable sale prices available under the Federal Home Loan Banks’ MPF Xtra and MPF Original programs.
LOANS - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for estimated prepayments based on historical experience, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. Fair value of nonperforming loans is based on recent appraisals or estimates prepared by the Corporation’s lending officers.
SERVICING RIGHTS - The fair value of servicing rights, included in other assets in the consolidated balance sheet, is determined through a discounted cash flow valuation. Significant inputs include expected net servicing income, the discount rate and the expected prepayment speeds of the underlying loans.
DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable on demand at September 30, 2017 and December 31, 2016. The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
BORROWED FUNDS -The estimated fair value of borrowings is estimated using discounted cash flow analyses based on rates currently available to the Corporation for similar types of borrowing arrangements.
ACCRUED INTEREST - Thevalues, and related carrying amounts, of accrued interest receivable and payable approximatethe Corporation’s financial instruments that are not recorded at fair values.value are as follows:
(In Thousands) | Fair Value | September 30, 2018 | December 31, 2017 | |||||||||||||||||
Hierarchy | Carrying | Fair | Carrying | Fair | ||||||||||||||||
Level | Amount | Value | Amount | Value | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 36,031 | $ | 36,031 | $ | 37,004 | $ | 37,004 | |||||||||||
Certificates of deposit | Level 2 | 2,310 | 2,298 | 3,240 | 3,234 | |||||||||||||||
Restricted equity securities (included in Other Assets) | Level 2 | 5,147 | 5,147 | 6,556 | 6,556 | |||||||||||||||
Loans, net | Level 3 | 813,717 | 811,384 | 806,857 | 789,891 | |||||||||||||||
Accrued interest receivable | Level 2 | 4,279 | 4,279 | 4,048 | 4,048 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits with no stated maturity | Level 2 | 815,607 | 815,607 | 794,778 | 794,778 | |||||||||||||||
Time deposits | Level 2 | 228,340 | 228,484 | 213,671 | 213,734 | |||||||||||||||
Short-term borrowings | Level 2 | 8,421 | 8,185 | 61,766 | 61,643 | |||||||||||||||
Long-term borrowings | Level 2 | 32,985 | 32,987 | 9,189 | 9,256 | |||||||||||||||
Accrued interest payable | Level 2 | 114 | 114 | 46 | 46 |
OFF-BALANCE SHEET COMMITMENTS -
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.
The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments are as follows:
(In Thousands) | Valuation | September 30, 2017 | December 31, 2016 | |||||||||||||||
Method(s) | Carrying | Fair | Carrying | Fair | ||||||||||||||
Used | Amount | Value | Amount | Value | ||||||||||||||
Financial assets: | ||||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 29,610 | $ | 29,610 | $ | 28,621 | $ | 28,621 | |||||||||
Certificates of deposit | Level 2 | 3,240 | 3,239 | 3,488 | 3,481 | |||||||||||||
Available-for-sale securities | See Above | 365,086 | 365,086 | 395,077 | 395,077 | |||||||||||||
Restricted equity securities (included in Other Assets) | Level 2 | 3,664 | 3,664 | 4,426 | 4,426 | |||||||||||||
Loans held for sale | Level 1 | 437 | 437 | 142 | 142 | |||||||||||||
Loans, net | Level 3 | 792,112 | 777,413 | 743,362 | 725,787 | |||||||||||||
Accrued interest receivable | Level 2 | 4,027 | 4,027 | 3,963 | 3,963 | |||||||||||||
Servicing rights | Level 3 | 1,277 | 1,277 | 1,262 | 1,262 | |||||||||||||
Financial liabilities: | ||||||||||||||||||
Deposits with no stated maturity | Level 2 | 801,942 | 801,942 | 771,625 | 771,625 | |||||||||||||
Time deposits | Level 2 | 219,683 | 220,017 | 212,218 | 212,274 | |||||||||||||
Short-term borrowings | Level 2 | 7,739 | 7,626 | 26,175 | 26,024 | |||||||||||||
Long-term borrowings | Level 2 | 31,256 | 31,460 | 38,454 | 39,062 | |||||||||||||
Accrued interest payable | Level 2 | 39 | 39 | 65 | 65 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
6. SECURITIES
Amortized cost and fair value of available-for-sale debt securities at September 30, 20172018 and December 31, 20162017 are summarized as follows:
September 30, 2017 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | Fair | |||||||||||||
(In Thousands) | Cost | Gains | Losses | Value | ||||||||||||
Obligations of U.S. Government agencies | $ | 8,028 | $ | 0 | $ | (82 | ) | $ | 7,946 | |||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 108,521 | 2,678 | (642 | ) | 110,557 | |||||||||||
Taxable | 27,538 | 316 | (38 | ) | 27,816 | |||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 55,247 | 113 | (443 | ) | 54,917 | |||||||||||
Residential collateralized mortgage obligations | 130,375 | 323 | (1,455 | ) | 129,243 | |||||||||||
Commercial mortgage-backed securities | 34,028 | 31 | (430 | ) | 33,629 | |||||||||||
Total debt securities | 363,737 | 3,461 | (3,090 | ) | 364,108 | |||||||||||
Marketable equity securities | 1,000 | 0 | (22 | ) | 978 | |||||||||||
Total | $ | 364,737 | $ | 3,461 | $ | (3,112 | ) | $ | 365,086 |
December 31, 2016 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | Fair | |||||||||||||
(In Thousands) | Cost | Gains | Losses | Value | ||||||||||||
Obligations of U.S. Government agencies | $ | 9,671 | $ | 5 | $ | (135 | ) | $ | 9,541 | |||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 118,140 | 2,592 | (1,695 | ) | 119,037 | |||||||||||
Taxable | 30,073 | 303 | (79 | ) | 30,297 | |||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 58,922 | 306 | (824 | ) | 58,404 | |||||||||||
Residential collateralized mortgage obligations | 147,915 | 408 | (1,715 | ) | 146,608 | |||||||||||
Commercial mortgage-backed securities | 30,817 | 0 | (598 | ) | 30,219 | |||||||||||
Total debt securities | 395,538 | 3,614 | (5,046 | ) | 394,106 | |||||||||||
Marketable equity securities | 1,000 | 0 | (29 | ) | 971 | |||||||||||
Total | $ | 396,538 | $ | 3,614 | $ | (5,075 | ) | $ | 395,077 |
September 30, 2018 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | Fair | |||||||||||||
(In Thousands) | Cost | Gains | Losses | Value | ||||||||||||
Obligations of U.S. Government agencies | $ | 4,815 | $ | 0 | $ | (47 | ) | $ | 4,768 | |||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 92,837 | 1,104 | (2,229 | ) | 91,712 | |||||||||||
Taxable | 27,975 | 21 | (354 | ) | 27,642 | |||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 57,279 | 46 | (2,194 | ) | 55,131 | |||||||||||
Residential collateralized mortgage obligations | 148,074 | 8 | (5,451 | ) | 142,631 | |||||||||||
Commercial mortgage-backed securities | 38,488 | 0 | (1,666 | ) | 36,822 | |||||||||||
Total available-for-sale-debt securities | $ | 369,468 | $ | 1,179 | $ | (11,941 | ) | $ | 358,706 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
December 31, 2017 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | Fair | |||||||||||||
(In Thousands) | Cost | Gains | Losses | Value | ||||||||||||
Obligations of U.S. Government agencies | $ | 8,026 | $ | 0 | $ | (153 | ) | $ | 7,873 | |||||||
Obligations of states and political subdivisions: | ||||||||||||||||
Tax-exempt | 103,673 | 2,291 | (853 | ) | 105,111 | |||||||||||
Taxable | 25,431 | 226 | (84 | ) | 25,573 | |||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 52,992 | 79 | (724 | ) | 52,347 | |||||||||||
Residential collateralized mortgage obligations | 134,314 | 110 | (2,610 | ) | 131,814 | |||||||||||
Commercial mortgage-backed securities | 33,881 | 4 | (666 | ) | 33,219 | |||||||||||
Total available-for-sale debt securities | $ | 358,317 | $ | 2,710 | $ | (5,090 | ) | $ | 355,937 |
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 September 30, 20172018 and December 31, 2016:2017:
September 30, 2017 | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | 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 U.S. Government agencies | $ | 7,946 | $ | (82 | ) | $ | 0 | $ | 0 | $ | 7,946 | $ | (82 | ) | $ | 4,768 | $ | (47 | ) | $ | 0 | $ | 0 | $ | 4,768 | $ | (47 | ) | ||||||||||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt | 21,028 | (238 | ) | 14,890 | (404 | ) | 35,918 | (642 | ) | 25,713 | (465 | ) | 28,785 | (1,764 | ) | 54,498 | (2,229 | ) | ||||||||||||||||||||||||||||||
Taxable | 7,073 | (38 | ) | 0 | 0 | 7,073 | (38 | ) | 16,635 | (200 | ) | 5,362 | (154 | ) | 21,997 | (354 | ) | |||||||||||||||||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential pass-through securities | 47,572 | (443 | ) | 0 | 0 | 47,572 | (443 | ) | 13,528 | (178 | ) | 40,904 | (2,016 | ) | 54,432 | (2,194 | ) | |||||||||||||||||||||||||||||||
Residential collateralized mortgage obligations | 64,948 | (747 | ) | 25,718 | (708 | ) | 90,666 | (1,455 | ) | 53,399 | (884 | ) | 87,703 | (4,567 | ) | 141,102 | (5,451 | ) | ||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 24,890 | (275 | ) | 4,760 | (155 | ) | 29,650 | (430 | ) | 8,798 | (147 | ) | 28,024 | (1,519 | ) | 36,822 | (1,666 | ) | ||||||||||||||||||||||||||||||
Total debt securities | 173,457 | (1,823 | ) | 45,368 | (1,267 | ) | 218,825 | (3,090 | ) | |||||||||||||||||||||||||||||||||||||||
Marketable equity securities | 1,000 | (22 | ) | 0 | 0 | 1,000 | (22 | ) | ||||||||||||||||||||||||||||||||||||||||
Total temporarily impaired available-for-sale securities | $ | 174,457 | $ | (1,845 | ) | $ | 45,368 | $ | (1,267 | ) | $ | 219,825 | $ | (3,112 | ) | |||||||||||||||||||||||||||||||||
Total temporarily impaired available-for-sale debt securities | $ | 122,841 | $ | (1,921 | ) | $ | 190,778 | $ | (10,020 | ) | $ | 313,619 | $ | (11,941 | ) |
December 31, 2016 | 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 U.S. Government agencies | $ | 7,899 | $ | (135 | ) | $ | 0 | $ | 0 | $ | 7,899 | $ | (135 | ) | ||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||
Tax-exempt | 54,479 | (1,676 | ) | 1,278 | (19 | ) | 55,757 | (1,695 | ) | |||||||||||||||
Taxable | 9,594 | (79 | ) | 0 | 0 | 9,594 | (79 | ) | ||||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||||||
Residential pass-through securities | 48,674 | (824 | ) | 0 | 0 | 48,674 | (824 | ) | ||||||||||||||||
Residential collateralized mortgage obligations | 85,198 | (1,124 | ) | 16,073 | (591 | ) | 101,271 | (1,715 | ) | |||||||||||||||
Commercial mortgage-backed securities | 30,219 | (598 | ) | 0 | 0 | 30,219 | (598 | ) | ||||||||||||||||
Total debt securities | 236,063 | (4,436 | ) | 17,351 | (610 | ) | 253,414 | (5,046 | ) | |||||||||||||||
Marketable equity securities | 1,000 | (29 | ) | 0 | 0 | 1,000 | (29 | ) | ||||||||||||||||
Total temporarily impaired available-for-sale securities | $ | 237,063 | $ | (4,465 | ) | $ | 17,351 | $ | (610 | ) | $ | 254,414 | $ | (5,075 | ) |
December 31, 2017 | 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 U.S. Government agencies | $ | 0 | $ | 0 | $ | 7,873 | $ | (153 | ) | $ | 7,873 | $ | (153 | ) | ||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||
Tax-exempt | 19,050 | (135 | ) | 24,391 | (718 | ) | 43,441 | (853 | ) | |||||||||||||||
Taxable | 9,279 | (45 | ) | 2,116 | (39 | ) | 11,395 | (84 | ) | |||||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||||||||||
Residential pass-through securities | 25,255 | (242 | ) | 22,549 | (482 | ) | 47,804 | (724 | ) | |||||||||||||||
Residential collateralized mortgage obligations | 50,812 | (589 | ) | 68,558 | (2,021 | ) | 119,370 | (2,610 | ) | |||||||||||||||
Commercial mortgage-backed securities | 14,713 | (173 | ) | 14,569 | (493 | ) | 29,282 | (666 | ) | |||||||||||||||
Total temporarily impaired available-for-sale debt securities | $ | 119,109 | $ | (1,184 | ) | $ | 140,056 | $ | (3,906 | ) | $ | 259,165 | $ | (5,090 | ) |
21
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Gross realized gains and losses from available-for-sale securities were as follows:
(In Thousands) | 3 Months Ended | 9 Months Ended | ||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Gross realized gains from sales | $ | 47 | $ | 584 | $ | 315 | $ | 1,090 | ||||||||
Gross realized losses from sales | (42 | ) | 0 | (58 | ) | (1 | ) | |||||||||
Net realized gains | $ | 5 | $ | 584 | $ | 257 | $ | 1,089 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
(In Thousands) | 3 Months Ended | 9 Months Ended | ||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Gross realized gains from sales and calls | $ | 45 | $ | 47 | $ | 45 | $ | 315 | ||||||||
Gross realized losses from sales | (47 | ) | (42 | ) | (329 | ) | (58 | ) | ||||||||
Net realized (losses) gains | $ | (2 | ) | $ | 5 | $ | (284 | ) | $ | 257 |
The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of September 30, 2017.2018. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized | Fair | Amortized | Fair | |||||||||||||
(In Thousands) | Cost | Value | Cost | Value | ||||||||||||
Due in one year or less | $ | 12,478 | $ | 12,491 | $ | 23,128 | $ | 23,337 | ||||||||
Due from one year through five years | 71,673 | 73,134 | 39,807 | 39,533 | ||||||||||||
Due from five years through ten years | 36,361 | 36,517 | 38,688 | 37,515 | ||||||||||||
Due after ten years | 23,575 | 24,177 | 24,004 | 23,737 | ||||||||||||
Sub-total | 144,087 | 146,319 | 125,627 | 124,122 | ||||||||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||||||||||
Residential pass-through securities | 55,247 | 54,917 | 57,279 | 55,131 | ||||||||||||
Residential collateralized mortgage obligations | 130,375 | 129,243 | 148,074 | 142,631 | ||||||||||||
Commercial mortgage-backed securities | 34,028 | 33,629 | 38,488 | 36,822 | ||||||||||||
Total | $ | 363,737 | $ | 364,108 | $ | 369,468 | $ | 358,706 |
The Corporation’s mortgage-backed securities 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 $224,612,000$236,671,000 at September 30, 20172018 and $230,803,000$217,925,000 at December 31, 20162017 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 8 for information concerning securities pledged to secure borrowing arrangements.
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery.
A summary of information management considered in evaluating debt and equity securities for other-than-temporary impairment (“OTTI”) at September 30, 20172018 is provided below.
Debt Securities
At September 30, 2017,2018, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of debt securities at September 30, 2018 and December 31, 2017 to be temporary.
Equity Securities22
The Corporation’s marketable equity securities at September 30, 2017 and December 31, 2016 consisted exclusively of one mutual fund. At September 30, 2017, there was an unrealized loss on the mutual fund of $22,000, and at December 31, 2016 there was an unrealized loss of $29,000. Management determined an OTTI charge was not required on this security at September 30, 2017 and December 31, 2016.
The Corporation had no realized gains or losses from the sale of equity securities in the first nine months of 2017. The Corporation realized gains from sales of bank stocks totaling $560,000 in the three-month period ended September 30, 2016 and $837,000 during the first nine months of 2016.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Equity Securities
The Corporation’s marketable equity security, with a carrying value of $941,000 at September 30, 2018 and $971,000 at December 31, 2017, consisted exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $59,000 at September 30 2018 and $29,000 at December 31, 2017. The increase in the unrealized loss of $7,000 in the third quarter of 2018 and $30,000 in the nine months ended September 30, 2018 is included in other noninterest income in the consolidated statements of income.
C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheet, was $3,534,000$5,017,000 at September 30, 20172018 and $4,296,000$6,426,000 at December 31, 2016.2017. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at September 30, 20172018 and December 31, 2016.2017. 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.
In the second quarter 2018, the Corporation recorded a pre-tax gain on a restricted equity security (Visa Class B stock) of $1,750,000. The Corporation had received 19,789 shares of Visa Class B stock pursuant to Visa’s 2007 initial public offering. Until the second quarter 2018, the carrying value of the shares was $0, which represented the Corporation’s cost basis. Class B shares are subject to restrictions on transfer, essentially limiting their transferability to other owners of Class B shares. In June 2018, the Corporation sold 10,000 of the shares for a price of $88.43 per share in a transaction that settled in July 2018. As required by ”U.S. GAAP”, companies must consider the pricing of observable transactions in determining the carrying value of equity securities that do not have readily determinable fair values. Accordingly, the Corporation’s second quarter 2018 gain was based on the price per share of the sale initiated in June 2018, applied to the total of 19,789 shares. In the third quarter 2018, the Corporation sold the remaining 9,789 shares for $1,437,000, or approximately $146.80 per share, recognizing an additional gain of $571,000. At September 30, 2018, the balance of other assets in the unaudited, consolidated balance sheet included a receivable of $1,437,000 from the third quarter 2018 sale of the Visa Class B shares.
A summary of the realized and unrealized gains and losses recognized on equity securities is as follows:
(In Thousands) | 3 Months Ended | 9 Months Ended | ||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net gains and losses recognized during the period on equity securities | $ | 564 | $ | 0 | $ | 2,291 | $ | 0 | ||||||||
Less: net gains and losses recognized during the period on equity securities sold during the period | (571 | ) | 0 | (2,321 | ) | 0 | ||||||||||
Unrealized gains and losses recognized during the period on equity securities still held at the reporting date | $ | (7 | ) | $ | 0 | $ | (30 | ) | $ | 0 |
23
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
7. LOANS
The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at September 30, 20172018 and December 31, 20162017 are summarized by segment, and by classes within each segment, as follows:
Summary of Loans by Type | ||||||||||||||||
(In Thousands) | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | ||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Residential mortgage: | ||||||||||||||||
Residential mortgage loans - first liens | $ | 355,285 | $ | 334,102 | $ | 366,516 | $ | 359,987 | ||||||||
Residential mortgage loans - junior liens | 24,694 | 23,706 | 25,748 | 25,325 | ||||||||||||
Home equity lines of credit | 36,534 | 38,057 | 34,283 | 35,758 | ||||||||||||
1-4 Family residential construction | 25,286 | 24,908 | 27,661 | 26,216 | ||||||||||||
Total residential mortgage | 441,799 | 420,773 | 454,208 | 447,286 | ||||||||||||
Commercial: | ||||||||||||||||
Commercial loans secured by real estate | 158,520 | 150,468 | 159,212 | 159,266 | ||||||||||||
Commercial and industrial | 83,243 | 83,854 | 91,472 | 88,276 | ||||||||||||
Political subdivisions | 54,730 | 38,068 | 53,294 | 59,287 | ||||||||||||
Commercial construction and land | 13,937 | 14,287 | 12,278 | 14,527 | ||||||||||||
Loans secured by farmland | 7,744 | 7,294 | 7,208 | 7,255 | ||||||||||||
Multi-family (5 or more) residential | 7,566 | 7,896 | 7,670 | 7,713 | ||||||||||||
Agricultural loans | 6,137 | 3,998 | 5,670 | 6,178 | ||||||||||||
Other commercial loans | 12,383 | 11,475 | 14,140 | 10,986 | ||||||||||||
Total commercial | 344,260 | 317,340 | 350,944 | 353,488 | ||||||||||||
Consumer | 14,953 | 13,722 | 17,380 | 14,939 | ||||||||||||
Total | 801,012 | 751,835 | 822,532 | 815,713 | ||||||||||||
Less: allowance for loan losses | (8,900 | ) | (8,473 | ) | (8,815 | ) | (8,856 | ) | ||||||||
Loans, net | $ | 792,112 | $ | 743,362 | $ | 813,717 | $ | 806,857 |
The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in the Pennsylvania and New York counties that comprise the market serviced by Citizens & Northern Bank. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either September 30, 20172018 or December 31, 2016.2017.
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 September 30, 20172018 and December 31, 2016,2017, management determined that no allowance for credit losses related to unfunded loan commitments was required.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and nine-month periods ended September 30, 20172018 and 20162017 were as follows:
Three Months Ended September 30, 2017 | June 30, | Sept. 30, | ||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2018 | June 30, | Sept. 30, | ||||||||||||||||||||||||||||||||||||||
(In Thousands) | 2017 Balance | Charge-offs | Recoveries | Provision (Credit) | 2017 Balance | 2018 Balance | Charge-offs | Recoveries | Provision (Credit) | 2018 Balance | ||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 3,052 | $ | 0 | $ | 1 | $ | 112 | $ | 3,165 | $ | 3,055 | $ | (21 | ) | $ | 1 | $ | 98 | $ | 3,133 | |||||||||||||||||||
Residential mortgage loans - junior liens | 261 | 0 | 1 | 3 | 265 | 353 | 0 | 1 | (25 | ) | 329 | |||||||||||||||||||||||||||||
Home equity lines of credit | 332 | 0 | 0 | (6 | ) | 326 | 292 | (13 | ) | 0 | 15 | 294 | ||||||||||||||||||||||||||||
1-4 Family residential construction | 251 | 0 | 0 | (8 | ) | 243 | 247 | 0 | 0 | (21 | ) | 226 | ||||||||||||||||||||||||||||
Total residential mortgage | 3,896 | 0 | 2 | 101 | 3,999 | 3,947 | (34 | ) | 2 | 67 | 3,982 | |||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 2,610 | 0 | 0 | 27 | 2,637 | 2,613 | 0 | 0 | (67 | ) | 2,546 | |||||||||||||||||||||||||||||
Commercial and industrial | 910 | 0 | 1 | 93 | 1,004 | 973 | (11 | ) | 2 | 34 | 998 | |||||||||||||||||||||||||||||
Commercial construction and land | 162 | 0 | 0 | (13 | ) | 149 | 135 | 0 | 0 | (21 | ) | 114 | ||||||||||||||||||||||||||||
Loans secured by farmland | 107 | 0 | 0 | 3 | 110 | 106 | 0 | 0 | (2 | ) | 104 | |||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 169 | 0 | 0 | 2 | 171 | 174 | 0 | 0 | (7 | ) | 167 | |||||||||||||||||||||||||||||
Agricultural loans | 42 | 0 | 0 | 16 | 58 | 46 | 0 | 0 | 0 | 46 | ||||||||||||||||||||||||||||||
Other commercial loans | 105 | 0 | 0 | 12 | 117 | 134 | 0 | 0 | (3 | ) | 131 | |||||||||||||||||||||||||||||
Total commercial | 4,105 | 0 | 1 | 140 | 4,246 | 4,181 | (11 | ) | 2 | (66 | ) | 4,106 | ||||||||||||||||||||||||||||
Consumer | 134 | (67 | ) | 7 | 81 | 155 | 204 | (47 | ) | 12 | 59 | 228 | ||||||||||||||||||||||||||||
Unallocated | 500 | 0 | 0 | 0 | 500 | 499 | 0 | 0 | 0 | 499 | ||||||||||||||||||||||||||||||
Total Allowance for Loan Losses | $ | 8,635 | $ | (67 | ) | $ | 10 | $ | 322 | $ | 8,900 | $ | 8,831 | $ | (92 | ) | $ | 16 | $ | 60 | $ | 8,815 |
Three Months Ended September 30, 2016 | June 30, | Sept. 30, | ||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2017 | June 30, | Sept. 30, | ||||||||||||||||||||||||||||||||||||||
(In Thousands) | 2016 Balance | Charge-offs | Recoveries | Provision (Credit) | 2016 Balance | 2017 Balance | Charge-offs | Recoveries | Provision (Credit) | 2017 Balance | ||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 2,830 | $ | (31 | ) | $ | 2 | $ | 155 | $ | 2,956 | $ | 3,052 | $ | 0 | $ | 1 | $ | 112 | $ | 3,165 | |||||||||||||||||||
Residential mortgage loans - junior liens | 239 | 0 | 0 | 9 | 248 | 261 | 0 | 1 | 3 | 265 | ||||||||||||||||||||||||||||||
Home equity lines of credit | 359 | 0 | 0 | 0 | 359 | 332 | 0 | 0 | (6 | ) | 326 | |||||||||||||||||||||||||||||
1-4 Family residential construction | 222 | 0 | 0 | 14 | 236 | 251 | 0 | 0 | (8 | ) | 243 | |||||||||||||||||||||||||||||
Total residential mortgage | 3,650 | (31 | ) | 2 | 178 | 3,799 | 3,896 | 0 | 2 | 101 | 3,999 | |||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 2,083 | 0 | 0 | 304 | 2,387 | 2,610 | 0 | 0 | 27 | 2,637 | ||||||||||||||||||||||||||||||
Commercial and industrial | 1,038 | (2 | ) | 1 | 1 | 1,038 | 910 | 0 | 1 | 93 | 1,004 | |||||||||||||||||||||||||||||
Commercial construction and land | 105 | 0 | 0 | 41 | 146 | 162 | 0 | 0 | (13 | ) | 149 | |||||||||||||||||||||||||||||
Loans secured by farmland | 103 | 0 | 0 | 3 | 106 | 107 | 0 | 0 | 3 | 110 | ||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 248 | 0 | 0 | (5 | ) | 243 | 169 | 0 | 0 | 2 | 171 | |||||||||||||||||||||||||||||
Agricultural loans | 47 | 0 | 0 | (4 | ) | 43 | 42 | 0 | 0 | 16 | 58 | |||||||||||||||||||||||||||||
Other commercial loans | 119 | 0 | 0 | (3 | ) | �� | 116 | 105 | 0 | 0 | 12 | 117 | ||||||||||||||||||||||||||||
Total commercial | 3,743 | (2 | ) | 1 | 337 | 4,079 | 4,105 | 0 | 1 | 140 | 4,246 | |||||||||||||||||||||||||||||
Consumer | 138 | (28 | ) | 12 | 23 | 145 | 134 | (67 | ) | 7 | 81 | 155 | ||||||||||||||||||||||||||||
Unallocated | 398 | 0 | 0 | 0 | 398 | 500 | 0 | 0 | 0 | 500 | ||||||||||||||||||||||||||||||
Total Allowance for Loan Losses | $ | 7,929 | $ | (61 | ) | $ | 15 | $ | 538 | $ | 8,421 | $ | 8,635 | $ | (67 | ) | $ | 10 | $ | 322 | $ | 8,900 |
25
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Nine Months Ended September 30, 2017 | Dec. 31, | Sept. 30, | ||||||||||||||||||
(In Thousands) | 2016 Balance | Charge-offs | Recoveries | Provision (Credit) | 2017 Balance | |||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||
Residential mortgage loans - first liens | $ | 3,033 | $ | (162 | ) | $ | 15 | $ | 279 | $ | 3,165 | |||||||||
Residential mortgage loans - junior liens | 258 | (16 | ) | 3 | 20 | 265 | ||||||||||||||
Home equity lines of credit | 350 | 0 | 0 | (24 | ) | 326 | ||||||||||||||
1-4 Family residential construction | 249 | 0 | 0 | (6 | ) | 243 | ||||||||||||||
Total residential mortgage | 3,890 | (178 | ) | 18 | 269 | 3,999 | ||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial loans secured by real estate | 2,380 | (96 | ) | 0 | 353 | 2,637 | ||||||||||||||
Commercial and industrial | 999 | (1 | ) | 3 | 3 | 1,004 | ||||||||||||||
Commercial construction and land | 162 | 0 | 0 | (13 | ) | 149 | ||||||||||||||
Loans secured by farmland | 110 | 0 | 0 | 0 | 110 | |||||||||||||||
Multi-family (5 or more) residential | 241 | 0 | 0 | (70 | ) | 171 | ||||||||||||||
Agricultural loans | 40 | 0 | 0 | 18 | 58 | |||||||||||||||
Other commercial loans | 115 | 0 | 0 | 2 | 117 | |||||||||||||||
Total commercial | 4,047 | (97 | ) | 3 | 293 | 4,246 | ||||||||||||||
Consumer | 138 | (127 | ) | 30 | 114 | 155 | ||||||||||||||
Unallocated | 398 | 0 | 0 | 102 | 500 | |||||||||||||||
Total Allowance for Loan Losses | $ | 8,473 | $ | (402 | ) | $ | 51 | $ | 778 | $ | 8,900 |
Nine Months Ended September 30, 2018 | Dec. 31, | Sept. 30, | ||||||||||||||||||
(In Thousands) | 2017 Balance | Charge-offs | Recoveries | Provision (Credit) | 2018 Balance | |||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||
Residential mortgage loans - first liens | $ | 3,200 | $ | (108 | ) | $ | 3 | $ | 38 | $ | 3,133 | |||||||||
Residential mortgage loans - junior liens | 224 | 0 | 4 | 101 | 329 | |||||||||||||||
Home equity lines of credit | 296 | (25 | ) | 0 | 23 | 294 | ||||||||||||||
1-4 Family residential construction | 243 | 0 | 0 | (17 | ) | 226 | ||||||||||||||
Total residential mortgage | 3,963 | (133 | ) | 7 | 145 | 3,982 | ||||||||||||||
Commercial: | ||||||||||||||||||||
Commercial loans secured by real estate | 2,584 | (21 | ) | 0 | (17 | ) | 2,546 | |||||||||||||
Commercial and industrial | 1,065 | (144 | ) | 5 | 72 | 998 | ||||||||||||||
Commercial construction and land | 150 | 0 | 0 | (36 | ) | 114 | ||||||||||||||
Loans secured by farmland | 105 | 0 | 0 | (1 | ) | 104 | ||||||||||||||
Multi-family (5 or more) residential | 172 | 0 | 0 | (5 | ) | 167 | ||||||||||||||
Agricultural loans | 57 | 0 | 0 | (11 | ) | 46 | ||||||||||||||
Other commercial loans | 102 | 0 | 0 | 29 | 131 | |||||||||||||||
Total commercial | 4,235 | (165 | ) | 5 | 31 | 4,106 | ||||||||||||||
Consumer | 159 | (120 | ) | 33 | 156 | 228 | ||||||||||||||
Unallocated | 499 | 0 | 0 | 0 | 499 | |||||||||||||||
Total Allowance for Loan Losses | $ | 8,856 | $ | (418 | ) | $ | 45 | $ | 332 | $ | 8,815 |
Nine Months Ended September 30, 2016 | Dec. 31, | Sept. 30, | ||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2017 | Dec. 31, | Sept. 30, | ||||||||||||||||||||||||||||||||||||||
(In Thousands) | 2015 Balance | Charge-offs | Recoveries | Provision (Credit) | 2016 Balance | 2016 Balance | Charge-offs | Recoveries | Provision (Credit) | 2017 Balance | ||||||||||||||||||||||||||||||
Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 2,645 | $ | (73 | ) | $ | 2 | $ | 382 | $ | 2,956 | $ | 3,033 | $ | (162 | ) | $ | 15 | $ | 279 | $ | 3,165 | ||||||||||||||||||
Residential mortgage loans - junior liens | 219 | 0 | 0 | 29 | 248 | 258 | (16 | ) | 3 | 20 | 265 | |||||||||||||||||||||||||||||
Home equity lines of credit | 347 | 0 | 0 | 12 | 359 | 350 | 0 | 0 | (24 | ) | 326 | |||||||||||||||||||||||||||||
1-4 Family residential construction | 207 | 0 | 0 | 29 | 236 | 249 | 0 | 0 | (6 | ) | 243 | |||||||||||||||||||||||||||||
Total residential mortgage | 3,418 | (73 | ) | 2 | 452 | 3,799 | 3,890 | (178 | ) | 18 | 269 | 3,999 | ||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 1,939 | 0 | 2 | 446 | 2,387 | 2,380 | (96 | ) | 0 | 353 | 2,637 | |||||||||||||||||||||||||||||
Commercial and industrial | 981 | (2 | ) | 2 | 57 | 1,038 | 999 | (1 | ) | 3 | 3 | 1,004 | ||||||||||||||||||||||||||||
Commercial construction and land | 58 | 0 | 0 | 88 | 146 | 162 | 0 | 0 | (13 | ) | 149 | |||||||||||||||||||||||||||||
Loans secured by farmland | 106 | 0 | 0 | 0 | 106 | 110 | 0 | 0 | 0 | 110 | ||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 675 | (595 | ) | 0 | 163 | 243 | 241 | 0 | 0 | (70 | ) | 171 | ||||||||||||||||||||||||||||
Agricultural loans | 45 | 0 | 0 | (2 | ) | 43 | 40 | 0 | 0 | 18 | 58 | |||||||||||||||||||||||||||||
Other commercial loans | 118 | 0 | 0 | (2 | ) | 116 | 115 | 0 | 0 | 2 | 117 | |||||||||||||||||||||||||||||
Total commercial | 3,922 | (597 | ) | 4 | 750 | 4,079 | 4,047 | (97 | ) | 3 | 293 | 4,246 | ||||||||||||||||||||||||||||
Consumer | 122 | (67 | ) | 39 | 51 | 145 | 138 | (127 | ) | 30 | 114 | 155 | ||||||||||||||||||||||||||||
Unallocated | 427 | 0 | 0 | (29 | ) | 398 | 398 | 0 | 0 | 102 | 500 | |||||||||||||||||||||||||||||
Total Allowance for Loan Losses | $ | 7,889 | $ | (737 | ) | $ | 45 | $ | 1,224 | $ | 8,421 | $ | 8,473 | $ | (402 | ) | $ | 51 | $ | 778 | $ | 8,900 |
In the evaluation of the loan portfolio, management determines two major components for the allowance for loan losses – (1) a specific component based on an assessment of certain larger relationships, mainly commercial purpose loans, on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio based on a collective evaluation of pools of loans with similar risk characteristics. The general component is assigned to each pool of loans based on both historical net charge-off experience, and an evaluation of certain qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the above methodologies for estimating specific and general losses in the portfolio.
26
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 below.that follows.
The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of September 30, 20172018 and December 31, 2016:2017:
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
(In Thousands) | Special | Special | ||||||||||||||||||||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||
Residential Mortgage: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 346,545 | $ | 314 | $ | 8,372 | $ | 54 | $ | 355,285 | $ | 357,841 | $ | 281 | $ | 8,342 | $ | 52 | $ | 366,516 | ||||||||||||||||||||
Residential mortgage loans - junior liens | 24,463 | 107 | 124 | 0 | 24,694 | 25,214 | 95 | 439 | 0 | 25,748 | ||||||||||||||||||||||||||||||
Home equity lines of credit | 35,933 | 62 | 539 | 0 | 36,534 | 33,611 | 59 | 613 | 0 | 34,283 | ||||||||||||||||||||||||||||||
1-4 Family residential construction | 25,286 | 0 | 0 | 0 | 25,286 | 27,661 | 0 | 0 | 0 | 27,661 | ||||||||||||||||||||||||||||||
Total residential mortgage | 432,227 | 483 | 9,035 | 54 | 441,799 | 444,327 | 435 | 9,394 | 52 | 454,208 | ||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 149,607 | 1,394 | 7,519 | 0 | 158,520 | 152,701 | 765 | 5,746 | 0 | 159,212 | ||||||||||||||||||||||||||||||
Commercial and Industrial | 77,045 | 3,658 | 2,529 | 11 | 83,243 | 85,405 | 4,922 | 1,145 | 0 | 91,472 | ||||||||||||||||||||||||||||||
Political subdivisions | 54,730 | 0 | 0 | 0 | 54,730 | 53,294 | 0 | 0 | 0 | 53,294 | ||||||||||||||||||||||||||||||
Commercial construction and land | 13,848 | 10 | 79 | 0 | 13,937 | 12,202 | 0 | 76 | 0 | 12,278 | ||||||||||||||||||||||||||||||
Loans secured by farmland | 5,759 | 587 | 1,385 | 13 | 7,744 | 5,218 | 611 | 1,367 | 12 | 7,208 | ||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 6,974 | 0 | 592 | 0 | 7,566 | 7,278 | 0 | 392 | 0 | 7,670 | ||||||||||||||||||||||||||||||
Agricultural loans | 5,133 | 278 | 726 | 0 | 6,137 | 4,912 | 84 | 674 | 0 | 5,670 | ||||||||||||||||||||||||||||||
Other commercial loans | 12,310 | 0 | 73 | 0 | 12,383 | 14,069 | 0 | 71 | 0 | 14,140 | ||||||||||||||||||||||||||||||
Total commercial | 325,406 | 5,927 | 12,903 | 24 | 344,260 | 335,079 | 6,382 | 9,471 | 12 | 350,944 | ||||||||||||||||||||||||||||||
Consumer | 14,840 | 0 | 113 | 0 | 14,953 | 17,336 | 0 | 44 | 0 | 17,380 | ||||||||||||||||||||||||||||||
Totals | $ | 772,473 | $ | 6,410 | $ | 22,051 | $ | 78 | $ | 801,012 | $ | 796,742 | $ | 6,817 | $ | 18,909 | $ | 64 | $ | 822,532 |
27
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
(In Thousands) | Special | Special | ||||||||||||||||||||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | Pass | Mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||
Residential Mortgage: | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 324,377 | $ | 408 | $ | 9,258 | $ | 59 | $ | 334,102 | $ | 350,609 | $ | 307 | $ | 9,019 | $ | 52 | $ | 359,987 | ||||||||||||||||||||
Residential mortgage loans - junior liens | 23,274 | 132 | 300 | 0 | 23,706 | 24,795 | 104 | 426 | 0 | 25,325 | ||||||||||||||||||||||||||||||
Home equity lines of credit | 37,360 | 123 | 574 | 0 | 38,057 | 35,233 | 61 | 464 | 0 | 35,758 | ||||||||||||||||||||||||||||||
1-4 Family residential construction | 24,820 | 0 | 88 | 0 | 24,908 | 26,216 | 0 | 0 | 0 | 26,216 | ||||||||||||||||||||||||||||||
Total residential mortgage | 409,831 | 663 | 10,220 | 59 | 420,773 | 436,853 | 472 | 9,909 | 52 | 447,286 | ||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 139,358 | 3,092 | 8,018 | 0 | 150,468 | 150,806 | 936 | 7,524 | 0 | 159,266 | ||||||||||||||||||||||||||||||
Commercial and Industrial | 79,202 | 4,180 | 461 | 11 | 83,854 | 82,724 | 3,896 | 1,645 | 11 | 88,276 | ||||||||||||||||||||||||||||||
Political subdivisions | 38,068 | 0 | 0 | 0 | 38,068 | 59,287 | 0 | 0 | 0 | 59,287 | ||||||||||||||||||||||||||||||
Commercial construction and land | 14,136 | 70 | 81 | 0 | 14,287 | 14,449 | 0 | 78 | 0 | 14,527 | ||||||||||||||||||||||||||||||
Loans secured by farmland | 5,745 | 129 | 1,404 | 16 | 7,294 | 5,283 | 581 | 1,379 | 12 | 7,255 | ||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 7,277 | 0 | 619 | 0 | 7,896 | 7,130 | 0 | 583 | 0 | 7,713 | ||||||||||||||||||||||||||||||
Agricultural loans | 3,208 | 0 | 790 | 0 | 3,998 | 5,203 | 270 | 705 | 0 | 6,178 | ||||||||||||||||||||||||||||||
Other commercial loans | 11,401 | 0 | 74 | 0 | 11,475 | 10,913 | 0 | 73 | 0 | 10,986 | ||||||||||||||||||||||||||||||
Total commercial | 298,395 | 7,471 | 11,447 | 27 | 317,340 | 335,795 | 5,683 | 11,987 | 23 | 353,488 | ||||||||||||||||||||||||||||||
Consumer | 13,546 | 0 | 176 | 0 | 13,722 | 14,853 | 0 | 86 | 0 | 14,939 | ||||||||||||||||||||||||||||||
Totals | $ | 721,772 | $ | 8,134 | $ | 21,843 | $ | 86 | $ | 751,835 | $ | 787,501 | $ | 6,155 | $ | 21,982 | $ | 75 | $ | 815,713 |
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 loans area loan: (1) is subject to a restructuring agreement.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. Throughout 2016At September 30, 2018 and at MarchDecember 31, 2017, a three-year average net charge-off rate was used for all loan classes. At June 30, 2017 and September 30, 2017, a five-year average net charge-off rate was used for commercial loans secured by real estate and for multi-family residential loans, while a three-year average net charge-off rate was used for all other loan classes.
Qualitative risk factors are evaluated for the impact on each of the three segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. The adjustment for qualitative factors is applied as an increase or decrease to the average net charge-off rate for each loan class within each segment.
The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. Further, the residential mortgage segment is significantly affected by the values of residential real estate that provide collateral for the loans. The majority of the Corporation’s commercial segment loans (approximately 55%54% at September 30, 2017)2018) is secured by real estate, and accordingly, the Corporation’s risk for the commercial segment is significantly affected by commercial real estate values. The consumer segment includes a wide mix of loans for different purposes, primarily secured loans, including loans secured by motor vehicles, manufactured housing and other types of collateral.
28
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.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 September 30, 20172018 and December 31, 2016.2017. 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.
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 September 30, 20172018 and December 31, 2016:2017:
September 30, 2017 | Loans: | Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | Loans: | Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Individually | Collectively | Individually | Collectively | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||||||||||||||||
Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | |||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 723 | $ | 354,562 | $ | 355,285 | $ | 0 | $ | 3,165 | $ | 3,165 | $ | 994 | $ | 365,522 | $ | 366,516 | $ | 0 | $ | 3,133 | $ | 3,133 | ||||||||||||||||||||||||
Residential mortgage loans - junior liens | 62 | 24,632 | 24,694 | 0 | 265 | 265 | 293 | 25,455 | 25,748 | 118 | 211 | 329 | ||||||||||||||||||||||||||||||||||||
Home equity lines of credit | 0 | 36,534 | 36,534 | 0 | 326 | 326 | 0 | 34,283 | 34,283 | 0 | 294 | 294 | ||||||||||||||||||||||||||||||||||||
1-4 Family residential construction | 0 | 25,286 | 25,286 | 0 | 243 | 243 | 0 | 27,661 | 27,661 | 0 | 226 | 226 | ||||||||||||||||||||||||||||||||||||
Total residential mortgage | 785 | 441,014 | 441,799 | 0 | 3,999 | 3,999 | 1,287 | 452,921 | 454,208 | 118 | 3,864 | 3,982 | ||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 5,917 | 152,603 | 158,520 | 952 | 1,685 | 2,637 | 4,155 | 155,057 | 159,212 | 816 | 1,730 | 2,546 | ||||||||||||||||||||||||||||||||||||
Commercial and industrial | 476 | 82,767 | 83,243 | 165 | 839 | 1,004 | 201 | 91,271 | 91,472 | 75 | 923 | 998 | ||||||||||||||||||||||||||||||||||||
Political subdivisions | 0 | 54,730 | 54,730 | 0 | 0 | 0 | 0 | 53,294 | 53,294 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial construction and land | 0 | 13,937 | 13,937 | 0 | 149 | 149 | 0 | 12,278 | 12,278 | 0 | 114 | 114 | ||||||||||||||||||||||||||||||||||||
Loans secured by farmland | 1,371 | 6,373 | 7,744 | 50 | 60 | 110 | 1,352 | 5,856 | 7,208 | 50 | 54 | 104 | ||||||||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 392 | 7,174 | 7,566 | 0 | 171 | 171 | 392 | 7,278 | 7,670 | 0 | 167 | 167 | ||||||||||||||||||||||||||||||||||||
Agricultural loans | 8 | 6,129 | 6,137 | 0 | 58 | 58 | 674 | 4,996 | 5,670 | 0 | 46 | 46 | ||||||||||||||||||||||||||||||||||||
Other commercial loans | 0 | 12,383 | 12,383 | 0 | 117 | 117 | 0 | 14,140 | 14,140 | 0 | 131 | 131 | ||||||||||||||||||||||||||||||||||||
Total commercial | 8,164 | 336,096 | 344,260 | 1,167 | 3,079 | 4,246 | 6,774 | 344,170 | 350,944 | 941 | 3,165 | 4,106 | ||||||||||||||||||||||||||||||||||||
Consumer | 20 | 14,933 | 14,953 | 0 | 155 | 155 | 17 | 17,363 | 17,380 | 0 | 228 | 228 | ||||||||||||||||||||||||||||||||||||
Unallocated | 500 | 499 | ||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 8,969 | $ | 792,043 | $ | 801,012 | $ | 1,167 | $ | 7,233 | $ | 8,900 | $ | 8,078 | $ | 814,454 | $ | 822,532 | $ | 1,059 | $ | 7,257 | $ | 8,815 |
29
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
December 31, 2016 | Loans: | Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | Loans: | Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Individually | Collectively | Individually | Collectively | Individually | Collectively | Individually | Collectively | |||||||||||||||||||||||||||||||||||||||||
Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | |||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 753 | $ | 333,349 | $ | 334,102 | $ | 0 | $ | 3,033 | $ | 3,033 | $ | 984 | $ | 359,003 | $ | 359,987 | $ | 0 | $ | 3,200 | $ | 3,200 | ||||||||||||||||||||||||
Residential mortgage loans - junior liens | 68 | 23,638 | 23,706 | 0 | 258 | 258 | 302 | 25,023 | 25,325 | 122 | 102 | 224 | ||||||||||||||||||||||||||||||||||||
Home equity lines of credit | 0 | 38,057 | 38,057 | 0 | 350 | 350 | 0 | 35,758 | 35,758 | 0 | 296 | 296 | ||||||||||||||||||||||||||||||||||||
1-4 Family residential construction | 0 | 24,908 | 24,908 | 0 | 249 | 249 | 0 | 26,216 | 26,216 | 0 | 243 | 243 | ||||||||||||||||||||||||||||||||||||
Total residential mortgage | 821 | 419,952 | 420,773 | 0 | 3,890 | 3,890 | 1,286 | 446,000 | 447,286 | 122 | 3,841 | 3,963 | ||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 8,005 | 142,463 | 150,468 | 528 | 1,852 | 2,380 | 5,873 | 153,393 | 159,266 | 919 | 1,665 | 2,584 | ||||||||||||||||||||||||||||||||||||
Commercial and industrial | 212 | 83,642 | 83,854 | 95 | 904 | 999 | 568 | 87,708 | 88,276 | 188 | 877 | 1,065 | ||||||||||||||||||||||||||||||||||||
Political subdivisions | 0 | 38,068 | 38,068 | 0 | 0 | 0 | 0 | 59,287 | 59,287 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial construction and land | 0 | 14,287 | 14,287 | 0 | 162 | 162 | 0 | 14,527 | 14,527 | 0 | 150 | 150 | ||||||||||||||||||||||||||||||||||||
Loans secured by farmland | 1,394 | 5,900 | 7,294 | 51 | 59 | 110 | 1,365 | 5,890 | 7,255 | 50 | 55 | 105 | ||||||||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 392 | 7,504 | 7,896 | 0 | 241 | 241 | 392 | 7,321 | 7,713 | 0 | 172 | 172 | ||||||||||||||||||||||||||||||||||||
Agricultural loans | 13 | 3,985 | 3,998 | 0 | 40 | 40 | 7 | 6,171 | 6,178 | 0 | 57 | 57 | ||||||||||||||||||||||||||||||||||||
Other commercial loans | 0 | 11,475 | 11,475 | 0 | 115 | 115 | 0 | 10,986 | 10,986 | 0 | 102 | 102 | ||||||||||||||||||||||||||||||||||||
Total commercial | 10,016 | 307,324 | 317,340 | 674 | 3,373 | 4,047 | 8,205 | 345,283 | 353,488 | 1,157 | 3,078 | 4,235 | ||||||||||||||||||||||||||||||||||||
Consumer | 23 | 13,699 | 13,722 | 0 | 138 | 138 | 20 | 14,919 | 14,939 | 0 | 159 | 159 | ||||||||||||||||||||||||||||||||||||
Unallocated | 398 | 499 | ||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 10,860 | $ | 740,975 | $ | 751,835 | $ | 674 | $ | 7,401 | $ | 8,473 | $ | 9,511 | $ | 806,202 | $ | 815,713 | $ | 1,279 | $ | 7,078 | $ | 8,856 |
Summary information related to impaired loans at September 30, 20172018 and December 31, 20162017 is as follows:
(In Thousands) | September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||
Unpaid | Unpaid | Unpaid | Unpaid | |||||||||||||||||||||||||||||||||||||||||||||
Principal | Recorded | Related | Principal | Recorded | Related | Principal | Recorded | Related | Principal | Recorded | Related | |||||||||||||||||||||||||||||||||||||
Balance | Investment | Allowance | Balance | Investment | Allowance | Balance | Investment | Allowance | Balance | Investment | Allowance | |||||||||||||||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 752 | $ | 723 | $ | 0 | $ | 783 | $ | 753 | $ | 0 | $ | 753 | $ | 724 | $ | 0 | $ | 740 | $ | 711 | $ | 0 | ||||||||||||||||||||||||
Residential mortgage loans - junior liens | 62 | 62 | 0 | 68 | 68 | 0 | 54 | 54 | 0 | 60 | 60 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 3,231 | 3,231 | 0 | 6,975 | 5,232 | 0 | 1,605 | 1,605 | 0 | 3,230 | 3,230 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial and industrial | 78 | 78 | 0 | 117 | 117 | 0 | 126 | 126 | 0 | 119 | 119 | 0 | ||||||||||||||||||||||||||||||||||||
Loans secured by farmland | 874 | 874 | 0 | 890 | 890 | 0 | 863 | 863 | 0 | 871 | 871 | 0 | ||||||||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 987 | 392 | 0 | 987 | 392 | 0 | 987 | 392 | 0 | 987 | 392 | 0 | ||||||||||||||||||||||||||||||||||||
Agricultural loans | 8 | 8 | 0 | 13 | 13 | 0 | 674 | 674 | 0 | 8 | 8 | 0 | ||||||||||||||||||||||||||||||||||||
Consumer | 20 | 20 | 0 | 23 | 23 | 0 | 17 | 17 | 0 | 20 | 20 | 0 | ||||||||||||||||||||||||||||||||||||
Total with no related allowance recorded | 6,012 | 5,388 | 0 | 9,856 | 7,488 | 0 | 5,079 | 4,455 | 0 | 6,035 | 5,411 | 0 | ||||||||||||||||||||||||||||||||||||
With a related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | 270 | 270 | 0 | 273 | 273 | 122 | ||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - junior liens | 239 | 239 | 118 | 242 | 242 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 2,686 | 2,686 | 952 | 2,773 | 2,773 | 528 | 2,550 | 2,550 | 816 | 2,641 | 2,641 | 919 | ||||||||||||||||||||||||||||||||||||
Commercial and industrial | 398 | 398 | 165 | 95 | 95 | 95 | 75 | 75 | 75 | 449 | 449 | 188 | ||||||||||||||||||||||||||||||||||||
Loans secured by farmland | 497 | 497 | 50 | 504 | 504 | 51 | 489 | 489 | 50 | 495 | 495 | 50 | ||||||||||||||||||||||||||||||||||||
Total with a related allowance recorded | 3,581 | 3,581 | 1,167 | 3,372 | 3,372 | 674 | 3,623 | 3,623 | 1,059 | 4,100 | 4,100 | 1,279 | ||||||||||||||||||||||||||||||||||||
Total | $ | 9,593 | $ | 8,969 | $ | 1,167 | $ | 13,228 | $ | 10,860 | $ | 674 | $ | 8,702 | $ | 8,078 | $ | 1,059 | $ | 10,135 | $ | 9,511 | $ | 1,279 |
In the table immediately above, two loans to one borrower are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. These loans are collateralized by one property, and the allowance associated with these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The average balance of impaired loans and interest income recognized on impaired loans is as follows:
Interest Income Recognized on | Interest Income Recognized on | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average Investment in Impaired Loans | Impaired Loans on a Cash Basis | Average Investment in Impaired Loans | Impaired Loans on a Cash Basis | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first lien | $ | 733 | $ | 789 | $ | 738 | $ | 818 | $ | 8 | $ | 11 | $ | 25 | $ | 33 | $ | 1,067 | $ | 733 | $ | 1,102 | $ | 738 | $ | 17 | $ | 8 | $ | 47 | $ | 25 | ||||||||||||||||||||||||||||||||
Residential mortgage loans - junior lien | 64 | 72 | 65 | 72 | 1 | 0 | 3 | 2 | 295 | 64 | 298 | 65 | 3 | 1 | 10 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total residential mortgage | 797 | 861 | 803 | 890 | 9 | 11 | 28 | 35 | 1,362 | 797 | 1,400 | 803 | 20 | 9 | 57 | 28 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 6,200 | 7,022 | 6,377 | 6,524 | 36 | 83 | 127 | 274 | 4,050 | 6,200 | 4,921 | 6,377 | 25 | 36 | 95 | 127 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 393 | 577 | 317 | 619 | 13 | 7 | 20 | 17 | 184 | 393 | 346 | 317 | 4 | 13 | 11 | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans secured by farmland | 1,378 | 1,408 | 1,382 | 1,413 | 10 | 13 | 32 | 51 | 1,355 | 1,378 | 1,359 | 1,382 | 11 | 10 | 27 | 32 | ||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 392 | 492 | 392 | 541 | 0 | 0 | 0 | 0 | 392 | 392 | 392 | 392 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Agricultural loans | 10 | 13 | 11 | 14 | 0 | 0 | 1 | 1 | 677 | 10 | 512 | 11 | 16 | 0 | 34 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial | 8,373 | 9,512 | 8,479 | 9,111 | 59 | 103 | 180 | 343 | 6,658 | 8,373 | 7,530 | 8,479 | 56 | 59 | 167 | 180 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 25 | 17 | 27 | 16 | 0 | 0 | 0 | 0 | 17 | 25 | 18 | 27 | 1 | 0 | 1 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 9,195 | $ | 10,390 | $ | 9,309 | $ | 10,017 | $ | 68 | $ | 114 | $ | 208 | $ | 378 | $ | 8,037 | $ | 9,195 | $ | 8,948 | $ | 9,309 | $ | 77 | $ | 68 | $ | 225 | $ | 208 |
Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans, including impaired loans, is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
The breakdown by portfolio segment and class of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:
(In Thousands) | September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||
Past Due | Past Due | Past Due | Past Due | |||||||||||||||||||||||||||||
90+ Days and | 90+ Days and | 90+ Days and | 90+ Days and | |||||||||||||||||||||||||||||
Accruing | Nonaccrual | Accruing | Nonaccrual | Accruing | Nonaccrual | Accruing | Nonaccrual | |||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 1,739 | $ | 4,352 | $ | 3,022 | $ | 3,770 | $ | 1,615 | $ | 4,248 | $ | 2,340 | $ | 5,131 | ||||||||||||||||
Residential mortgage loans - junior liens | 4 | 0 | 114 | 0 | 137 | 239 | 105 | 242 | ||||||||||||||||||||||||
Home equity lines of credit | 208 | 59 | 320 | 11 | 102 | 27 | 203 | 44 | ||||||||||||||||||||||||
Total residential mortgage | 1,951 | 4,411 | 3,456 | 3,781 | 1,854 | 4,514 | 2,648 | 5,417 | ||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 126 | 5,732 | 2,774 | 3,080 | 292 | 3,810 | 175 | 5,645 | ||||||||||||||||||||||||
Commercial and industrial | 632 | 476 | 286 | 119 | 708 | 155 | 603 | 517 | ||||||||||||||||||||||||
Commercial construction and land | 53 | 0 | 0 | 0 | 0 | 52 | 26 | 52 | ||||||||||||||||||||||||
Loans secured by farmland | 215 | 1,313 | 219 | 1,331 | 261 | 1,300 | 271 | 1,308 | ||||||||||||||||||||||||
Multi-family (5 or more) residential | 0 | 392 | 0 | 392 | 0 | 392 | 0 | 392 | ||||||||||||||||||||||||
Agricultural loans | 0 | 8 | 0 | 13 | 0 | 674 | 0 | 7 | ||||||||||||||||||||||||
Total commercial | 1,026 | 7,921 | 3,279 | 4,935 | 1,261 | 6,383 | 1,075 | 7,921 | ||||||||||||||||||||||||
Consumer | 2 | 68 | 103 | 20 | 9 | 14 | 1 | 66 | ||||||||||||||||||||||||
Totals | $ | 2,979 | $ | 12,400 | $ | 6,838 | $ | 8,736 | $ | 3,124 | $ | 10,911 | $ | 3,724 | $ | 13,404 |
31
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual.
The table below presents a summary of the contractual aging of loans as of September 30, 20172018 and December 31, 2016:2017:
As of September 30, 2017 | As of December 31, 2016 | As of September 30, 2018 | As of December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current & | Current & | Current & | Current & | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | Past Due | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than | 30-89 | 90+ | Less than | 30-89 | 90+ | Less than | 30-89 | 90+ | Less than | 30-89 | 90+ | |||||||||||||||||||||||||||||||||||||||||||||||||||||
30 Days | Days | Days | Total | 30 Days | Days | Days | Total | 30 Days | Days | Days | Total | 30 Days | Days | Days | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 347,083 | $ | 4,410 | $ | 3,792 | $ | 355,285 | $ | 321,670 | $ | 6,695 | $ | 5,737 | $ | 334,102 | $ | 359,582 | $ | 3,320 | $ | 3,614 | $ | 366,516 | $ | 347,032 | $ | 7,967 | $ | 4,988 | $ | 359,987 | ||||||||||||||||||||||||||||||||
Residential mortgage loans - junior liens | 24,409 | 281 | 4 | 24,694 | 23,268 | 324 | 114 | 23,706 | 25,499 | 112 | 137 | 25,748 | 25,133 | 87 | 105 | 25,325 | ||||||||||||||||||||||||||||||||||||||||||||||||
Home equity lines of credit | 35,908 | 369 | 257 | 36,534 | 37,603 | 134 | 320 | 38,057 | 33,734 | 438 | 111 | 34,283 | 34,789 | 732 | 237 | 35,758 | ||||||||||||||||||||||||||||||||||||||||||||||||
1-4 Family residential construction | 24,597 | 689 | 0 | 25,286 | 24,567 | 341 | 0 | 24,908 | 27,340 | 321 | 0 | 27,661 | 25,667 | 549 | 0 | 26,216 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total residential mortgage | 431,997 | 5,749 | 4,053 | 441,799 | 407,108 | 7,494 | 6,171 | 420,773 | 446,155 | 4,191 | 3,862 | 454,208 | 432,621 | 9,335 | 5,330 | 447,286 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans secured by real estate | 155,276 | 215 | 3,029 | 158,520 | 147,464 | 82 | 2,922 | 150,468 | 157,281 | 505 | 1,426 | 159,212 | 155,917 | 311 | 3,038 | 159,266 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 82,407 | 151 | 685 | 83,243 | 83,364 | 185 | 305 | 83,854 | 90,661 | 36 | 775 | 91,472 | 87,306 | 303 | 667 | 88,276 | ||||||||||||||||||||||||||||||||||||||||||||||||
Political subdivisions | 54,730 | 0 | 0 | 54,730 | 38,068 | 0 | 0 | 38,068 | 53,294 | 0 | 0 | 53,294 | 59,287 | 0 | 0 | 59,287 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial construction and land | 13,858 | 26 | 53 | 13,937 | 14,199 | 88 | 0 | 14,287 | 12,226 | 0 | 52 | 12,278 | 14,400 | 49 | 78 | 14,527 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans secured by farmland | 6,726 | 57 | 961 | 7,744 | 6,181 | 83 | 1,030 | 7,294 | 5,448 | 743 | 1,017 | 7,208 | 6,226 | 12 | 1,017 | 7,255 | ||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family (5 or more) residential | 7,135 | 39 | 392 | 7,566 | 7,439 | 65 | 392 | 7,896 | 7,260 | 18 | 392 | 7,670 | 7,321 | 0 | 392 | 7,713 | ||||||||||||||||||||||||||||||||||||||||||||||||
Agricultural loans | 6,052 | 77 | 8 | 6,137 | 3,981 | 4 | 13 | 3,998 | 5,664 | 0 | 6 | 5,670 | 6,114 | 57 | 7 | 6,178 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other commercial loans | 12,383 | 0 | 0 | 12,383 | 11,475 | 0 | 0 | 11,475 | 14,140 | 0 | 0 | 14,140 | 10,986 | 0 | 0 | 10,986 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial | 338,567 | 565 | 5,128 | 344,260 | 312,171 | 507 | 4,662 | 317,340 | 345,974 | 1,302 | 3,668 | 350,944 | 347,557 | 732 | 5,199 | 353,488 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 14,720 | 163 | 70 | 14,953 | 13,446 | 153 | 123 | 13,722 | 17,309 | 48 | 23 | 17,380 | 14,760 | 123 | 56 | 14,939 | ||||||||||||||||||||||||||||||||||||||||||||||||
Totals | $ | 785,284 | $ | 6,477 | $ | 9,251 | $ | 801,012 | $ | 732,725 | $ | 8,154 | $ | 10,956 | $ | 751,835 | $ | 809,438 | $ | 5,541 | $ | 7,553 | $ | 822,532 | $ | 794,938 | $ | 10,190 | $ | 10,585 | $ | 815,713 |
Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at September 30, 20172018 and December 31, 20162017 is as follows:
Current & | ||||||||||||||||
(In Thousands) | Past Due | Past Due | Past Due | |||||||||||||
Less than | 30-89 | 90+ | ||||||||||||||
30 Days | Days | Days | Total | |||||||||||||
September 30, 2017 Nonaccrual Totals | $ | 5,629 | $ | 499 | $ | 6,272 | $ | 12,400 | ||||||||
December 31, 2016 Nonaccrual Totals | $ | 4,199 | $ | 419 | $ | 4,118 | $ | 8,736 |
Current & | ||||||||||||||||
(In Thousands) | Past Due | Past Due | Past Due | |||||||||||||
Less than | 30-89 | 90+ | ||||||||||||||
30 Days | Days | Days | Total | |||||||||||||
September 30, 2018 Nonaccrual Totals | $ | 5,396 | $ | 1,086 | $ | 4,429 | $ | 10,911 | ||||||||
December 31, 2017 Nonaccrual Totals | $ | 5,802 | $ | 741 | $ | 6,861 | $ | 13,404 |
Loans whose terms are modified are classified as Troubled Debt Restructurings (TDRs) if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at September 30, 20172018 and December 31, 20162017 is as follows:
Current & | ||||||||||||||||||||
(In Thousands) | Past Due | Past Due | Past Due | |||||||||||||||||
Less than | 30-89 | 90+ | ||||||||||||||||||
30 Days | Days | Days | Nonaccrual | Total | ||||||||||||||||
September 30, 2017 Totals | $ | 658 | $ | 0 | $ | 0 | $ | 3,075 | $ | 3,733 | ||||||||||
December 31, 2016 Totals | $ | 5,453 | $ | 350 | $ | 0 | $ | 2,874 | $ | 8,677 |
Current & | ||||||||||||||||||||
(In Thousands) | Past Due | Past Due | Past Due | |||||||||||||||||
Less than | 30-89 | 90+ | ||||||||||||||||||
30 Days | Days | Days | Nonaccrual | Total | ||||||||||||||||
September 30, 2018 Totals | $ | 597 | $ | 101 | $ | 0 | $ | 2,925 | $ | 3,623 | ||||||||||
December 31, 2017 Totals | $ | 636 | $ | 0 | $ | 0 | $ | 3,027 | $ | 3,663 |
32
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
At September 30, 20172018 and December 31, 2016,2017, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.
There were no TDRs that occurred during the three-month periods ended September 30, 2018 and 2017. TDRs that occurred during the nine-month periods ended September 30, 20172018 and 20162017 are as follows:
(Balances in Thousands) | Three Months Ended | Three Months Ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
Post- | Post- | |||||||||||||||
Number | Modification | Number | Modification | |||||||||||||
of | Recorded | of | Recorded | |||||||||||||
Loans | Investment | Loans | Investment | |||||||||||||
Consumer, | ||||||||||||||||
Accepted short fall from sale of residential real estate on a mortgage loan and made unsecured loan to same borrower | 0 | $ | 0 | 1 | $ | 25 |
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
Post- | Post- | |||||||||||||||
Number | Modification | Number | Modification | |||||||||||||
of | Recorded | of | Recorded | |||||||||||||
Loans | Investment | Loans | Investment | |||||||||||||
Residential mortgage, | ||||||||||||||||
Extended maturity with interest rate reduction | 0 | $ | 0 | 1 | $ | 102 | ||||||||||
Commercial and industrial, | ||||||||||||||||
Extended maturity with interest rate increase | 0 | 0 | 1 | 5 | ||||||||||||
Consumer, | ||||||||||||||||
Accepted short fall from sale of residential real | ||||||||||||||||
estate on a mortgage loan and made unsecured | ||||||||||||||||
loan to same borrower | 0 | 0 | 1 | 25 | ||||||||||||
Total | 0 | $ | 0 | 3 | $ | 132 |
(Balances in Thousands) | Nine Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2018 | September 30, 2017 | |||||||||||||||
Post- | Post- | |||||||||||||||
Number | Modification | Number | Modification | |||||||||||||
of | Recorded | of | Recorded | |||||||||||||
Loans | Investment | Loans | Investment | |||||||||||||
Residential mortgage - first liens, | ||||||||||||||||
Reduced monthly payments for a six-month period | 1 | $ | 80 | 0 | $ | 0 | ||||||||||
Commercial loans secured by real estate, | ||||||||||||||||
Extended interest only payments for a six-month period | 2 | 36 | 0 | 0 | ||||||||||||
Commercial and industrial, | ||||||||||||||||
Extended interest only payments for a six-month period | 1 | 46 | 0 | 0 | ||||||||||||
Total | 4 | $ | 162 | 0 | $ | 0 |
ThereIn the nine-month periods ended September 30, 2018 and 2017, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months in the three-month periods ended September 30, 2017 and 2016. In the nine-month periods ended September 30 2017 and 2016, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:
(Balances in Thousands) | Nine Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
Number | Number | |||||||||||||||
of | Recorded | of | Recorded | |||||||||||||
Loans | Investment | Loans | Investment | |||||||||||||
Residential mortgage - first liens | 0 | $ | 0 | 1 | $ | 242 | ||||||||||
Residential mortgage - junior liens | 0 | 0 | 1 | 30 | ||||||||||||
Commercial and industrial | 0 | 0 | 1 | 5 | ||||||||||||
Consumer | 0 | 0 | 1 | 28 | ||||||||||||
Total | 0 | $ | 0 | 4 | $ | 305 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Qmonths.
The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in Foreclosed assets held for sale in the unaudited Consolidated Balance Sheet)consolidated balance sheets) is as follows:
(In Thousands) | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | ||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Foreclosed residential real estate | $ | 640 | $ | 1,102 | $ | 328 | $ | 721 |
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) | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | ||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Residential real estate in process of foreclosure | $ | 1,871 | $ | 2,738 | $ | 704 | $ | 1,789 |
8. BORROWED FUNDS
Short-term borrowings (initial maturity within one year) include the following:
(In Thousands) | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | ||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
FHLB-Pittsburgh borrowings | $ | 3,000 | $ | 21,000 | $ | 3,000 | $ | 58,000 | ||||||||
Customer repurchase agreements | 4,739 | 5,175 | 5,421 | 3,766 | ||||||||||||
Total short-term borrowings | $ | 7,739 | $ | 26,175 | $ | 8,421 | $ | 61,766 |
The FHLB-Pittsburgh loan facilities are collateralized by qualifying loans secured by real estate with a book value totaling $495,047,000$489,621,000 at September 30, 20172018 and $471,454,000$488,889,000 at December 31, 2016.2017. Also, the FHLB-Pittsburgh loan facilities require the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were $3,534,000$5,017,000 at September 30, 20172018 and $4,296,000$6,426,000 at December 31, 2016.2017.
At September 30, 2017,2018, the short-term borrowing from FHLB-Pittsburgh consisted of an advance of $3,000,000 was a term borrowingwhich matured in October 2018, with an interest rate of 1.23%, maturing in June 2018.1.83%. At December 31, 2016,2017, the short-term borrowingborrowings from FHLB-Pittsburgh of $21,000,000 was$58,000,000 included an overnight borrowing of $29,000,000 with an interest rate of 0.74%1.54% and other short-term advances totaling $29,000,000 with a weighted average rate of 1.69%.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average interest rate paid by the Corporation on customer repurchase agreements was 0.10% at September 30, 20172018 and December 31, 2016.2017. The carrying value of the underlying securities was $10,099,000 at September 30, 2018 and $12,158,000 at December 31, 2017.
Long-term borrowings are as follows:
(In Thousands) | Sept. 30, | Dec. 31, | ||||||
2017 | 2016 | |||||||
FHLB-Pittsburgh borrowings | $ | 4,256 | $ | 11,454 | ||||
Repurchase agreement | 27,000 | 27,000 | ||||||
Total long-term borrowings | $ | 31,256 | $ | 38,454 |
Long-term borrowings from FHLB-Pittsburgh are as follows:
(In Thousands) | Sept. 30, | Dec. 31, | ||||||
2017 | 2016 | |||||||
Loan matured in June 2017 with a rate of 6.83% | $ | 0 | $ | 4 | ||||
Loan matured in September 2017 with a rate of 3.81% | 0 | 10,000 | ||||||
Loan maturing in December 2018 with a rate of 1.35% | 3,000 | 0 | ||||||
Loan maturing in April 2020 with a rate of 4.79% | 510 | 646 | ||||||
Loan maturing in June 2025 with a rate of 4.91% | 746 | 804 | ||||||
Total long-term FHLB-Pittsburgh borrowings | $ | 4,256 | $ | 11,454 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The repurchase agreement included in long-term borrowings has an interest rate of 3.595% and an effective maturity date in December 2017.
The “Repurchase Date,” as defined in the Master Repurchase Agreement between the Corporation and the broker-dealer, occurred quarterly on or about the 20th of each March, June, September and December until the “Final Repurchase Date” (as defined) on December 20, 2017. The Corporation paid interest, and the borrowing was putable by the issuer, on each Repurchase Date. The Final Repurchase Date is the effective maturity date of the borrowing.
Securities sold under repurchase agreements were delivered to the broker-dealer who is the counter-party to the transactions. The broker-dealer may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and has agreed to resell to the Corporation substantially identical securities at the maturities of the agreements. The Master Repurchase Agreement provides that the Agreement constitutes a “netting contract,” as defined; however, the Corporation and the broker-dealer have no other obligations to one another and accordingly, no netting has occurred.
The carrying value of the underlying securities was $30,055,000 at September 30, 2017 and $31,494,000 at December 31, 2016, detailed in the following table:
(In Thousands) | Sept. 30, | Dec. 31, | ||||||
2017 | 2016 | |||||||
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | ||||||||
Residential pass-through securities | $ | 14,120 | $ | 18,181 | ||||
Residential collateralized mortgage obligations | 16,935 | 13,313 | ||||||
Total | $ | 30,055 | $ | 31,494 |
(In Thousands) | Sept. 30, | Dec. 31, | ||||||
2018 | 2017 | |||||||
Loan maturing in November 2018 with a rate of 1.63% | $ | 3,000 | $ | 3,000 | ||||
Loan maturing in December 2018 with a rate of 1.35% | 3,000 | 3,000 | ||||||
Loan maturing in January 2019 with a rate of 1.83% | 2,000 | 2,000 | ||||||
Loan maturing in February 2019 with a rate of 1.95% | 3,000 | 0 | ||||||
Loan maturing in March 2019 with a rate of 2.15% | 3,000 | 0 | ||||||
Loan maturing in April 2019 with a rate of 2.24% | 3,000 | 0 | ||||||
Loan maturing in May 2019 with a rate of 2.30% | 3,000 | 0 | ||||||
Loan maturing in June 2019 with a rate of 2.42% | 3,000 | 0 | ||||||
Loan maturing in July 2019 with a rate of 2.41% | 3,000 | 0 | ||||||
Loan maturing in August 2019 with a rate of 2.48% | 3,000 | 0 | ||||||
Loan maturing in September 2019 with a rate of 2.53% | 3,000 | 0 | ||||||
Loan maturing in April 2020 with a rate of 4.79% | 320 | 463 | ||||||
Loan maturing in June 2025 with a rate of 4.91% | 665 | 726 | ||||||
Total long-term FHLB-Pittsburgh borrowings | $ | 32,985 | $ | 9,189 |
9. DEFINED BENEFIT PLANS
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. The plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at September 30, 20172018 and December 31, 2016,2017 and are not expected to significantly affect the Corporation's future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.
In an acquisition in 2007, the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan. This plan covers certain employees who were employed by Citizens Trust Company on December 31, 2002, when the plan was amended to discontinue admittance of any future participant and to freeze benefit accruals. Information related to the Citizens Trust Company Retirement Plan has been included in the tables that follow. The Corporation uses a December 31 measurement date for this plan.
The components of net periodic benefit costs from these defined benefit plans are as follows:
Defined Benefit Plans | ||||||||||||||||
(In Thousands) | Pension | Postretirement | ||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Service cost | $ | 0 | $ | 0 | $ | 27 | $ | 27 | ||||||||
Interest cost | 18 | 20 | 43 | 47 | ||||||||||||
Expected return on plan assets | (23 | ) | (20 | ) | 0 | 0 | ||||||||||
Amortization of prior service cost | 0 | 0 | (23 | ) | (23 | ) | ||||||||||
Recognized net actuarial loss | 5 | 8 | 0 | 0 | ||||||||||||
Net periodic benefit cost | $ | 0 | $ | 8 | $ | 47 | $ | 51 |
Defined Benefit Plans | ||||||||||||||||
(In Thousands) | Pension | Postretirement | ||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, | Sept. 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Service cost | $ | 0 | $ | 0 | $ | 30 | $ | 27 | ||||||||
Interest cost | 19 | 18 | 38 | 43 | ||||||||||||
Expected return on plan assets | (15 | ) | (23 | ) | 0 | 0 | ||||||||||
Amortization of prior service cost | 0 | 0 | (23 | ) | (23 | ) | ||||||||||
Recognized net actuarial loss | 10 | 5 | 0 | 0 | ||||||||||||
Net periodic benefit cost | $ | 14 | $ | 0 | $ | 45 | $ | 47 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Defined Benefit Plans | ||||||||||||||||||||||||||||||||
(In Thousands) | Pension | Postretirement | Pension | Postretirement | ||||||||||||||||||||||||||||
Three Months Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Service cost | $ | 0 | $ | 0 | $ | 9 | $ | 9 | $ | 0 | $ | 0 | $ | 10 | $ | 9 | ||||||||||||||||
Interest cost | 6 | 7 | 15 | 16 | 6 | 6 | 12 | 15 | ||||||||||||||||||||||||
Expected return on plan assets | (8 | ) | (7 | ) | 0 | 0 | (5 | ) | (8 | ) | 0 | 0 | ||||||||||||||||||||
Amortization of prior service cost | 0 | 0 | (8 | ) | (8 | ) | 0 | 0 | (7 | ) | (8 | ) | ||||||||||||||||||||
Recognized net actuarial loss | 2 | 3 | 0 | 0 | 4 | 2 | 0 | 0 | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 0 | $ | 3 | $ | 16 | $ | 17 | $ | 5 | $ | 0 | $ | 15 | $ | 16 |
Service cost, interest cost and expected return on plan assets are included in pensions and other employee benefits expense in the consolidated statements of income in the first nine months of 2018 and 2017. Amortization of prior service cost and the recognized net actuarial loss are included in other noninterest expense in the consolidated statements of income in the first nine months of 2018 and 2017.
In the first nine months of 2017,2018, the Corporation funded postretirement contributions totaling $36,000,$35,000, with estimated annual postretirement contributions of $62,000$60,000 expected in 20172018 for the full year. No defined benefit pension contributions are required in 2017,2018, though the Corporation may make discretionary contributions.
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 2017,2018, the Corporation awarded 22,31225,466 shares of restricted stock under the Stock Incentive Plan and 8,4709,086 shares of restricted stock under the Independent Directors Stock Incentive Plan. The 20172018 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and vesting for one-half of the 14,89716,578 restricted shares awarded to Executive Officers depends on the Corporation meeting a return on average equity (“ROAE”) target each year. The 20172018 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year.
Compensation cost related to restricted stock is recognized based on the market pricefair value of the stock at the grant date over the vesting period.period, adjusted for estimated and actual forfeitures. Management has estimated restricted stock expense in the first nine months of 20172018 based on an assumption that the ROAE target for awards to Executive Officers in 2016, 2017 and 20172018 will not be met, resulting in forfeiture of the restricted stock.
AnnualTotal annual stock-based compensation for the year ending December 31, 20172018 is estimated to total $632,000.$664,000. If the ROAE targets for awards to Executive Officers in 2016, 2017 and 20172018 are met or exceeded, total annual stock-based compensation would increase by approximately $123,000.$190,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $162,000 in the third quarter 2018 and $500,000 in the nine-month period ended September 30, 2018. Total stock-based compensation expense attributable to restricted stock awards amounted to $153,000 in the third quarter 2017 and $475,000 in the nine-month period ended September 30, 2017. Total stock-based compensation expense attributable to restricted stock awards amounted to $155,000 in the third quarter 2016 and $480,000 in the nine-month period ended September 30, 2016.
35
11. INCOME TAXES
The net deferred tax asset at September 30, 20172018 and December 31, 20162017 represents the following temporary difference components:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(In Thousands) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Deferred tax assets: | ||||||||||||||||
Unrealized holding losses on securities | $ | 0 | $ | 512 | ||||||||||||
Unrealized holding losses on available-for-sale securities: | ||||||||||||||||
Included in accumulated other comprehensive loss | $ | 2,260 | $ | 843 | ||||||||||||
Included in retained earnings | 0 | (337 | ) | |||||||||||||
Allowance for loan losses | 3,150 | 2,998 | 1,885 | 1,894 | ||||||||||||
Other deferred tax assets | 2,582 | 2,658 | 1,901 | 1,726 | ||||||||||||
Total deferred tax assets | 5,732 | 6,168 | 6,046 | 4,126 | ||||||||||||
Deferred tax liabilities: | ||||||||||||||||
Unrealized holding gains on securities | 122 | 0 | ||||||||||||||
Defined benefit plans - ASC 835 | 79 | 27 | ||||||||||||||
Defined benefit plans - ASC 835: | ||||||||||||||||
Included in accumulated other comprehensive loss | 36 | 31 | ||||||||||||||
Included in retained earnings | 0 | (12 | ) | |||||||||||||
Bank premises and equipment | 1,101 | 913 | 825 | 751 | ||||||||||||
Core deposit intangibles | 5 | 6 | 2 | 3 | ||||||||||||
Other deferred tax liabilities | 106 | 105 | 61 | 64 | ||||||||||||
Total deferred tax liabilities | 1,413 | 1,051 | 924 | 837 | ||||||||||||
Deferred tax asset, net | $ | 4,319 | $ | 5,117 | $ | 5,122 | $ | 3,289 |
CITIZENS & NORTHERN CORPORATION – FORM 10-QIn December 2017, the Corporation recognized an adjustment in the carrying value of the net deferred tax asset as a result of a reduction in the federal corporate income tax rate to 21%, effective January 1, 2018, from the 35% marginal rate that had previously been in effect. At December 31, 2017, the portion of the adjustment attributable to items of accumulated other comprehensive income (loss) were stranded in retained earnings, including components related to unrealized losses on securities and defined benefit plans. As described in Note 1, the Corporation elected early adoption of ASU 2018-02, resulting in a reclassification between two categories of stockholders’ equity at January 1, 2018, with an increase of $325,000 in retained earnings and a decrease in accumulated other comprehensive loss for the same amount. Management believes the Corporation’s accounting for the effects of the reduction in the federal income tax rate is materially complete at September 30, 2018.
The provision for income tax for the three-month and nine monthnine-month periods ended September 30, 20172018 and 20162017 is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The effective tax rates for the Corporation are as follows:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
(Dollars In thousands) | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Income before income tax provision | $ | 5,198 | $ | 5,538 | $ | 15,111 | $ | 15,378 | $ | 6,697 | $ | 5,198 | $ | 19,561 | $ | 15,111 | ||||||||||||||||
Income tax provision | 1,262 | 1,451 | 3,620 | 3,847 | 1,111 | 1,262 | 3,229 | 3,620 | ||||||||||||||||||||||||
Effective tax rate | 24.28 | % | 26.20 | % | 23.96 | % | 25.02 | % | 16.59 | % | 24.28 | % | 16.51 | % | 23.96 | % |
The effective tax rate for each period presented differs from the statutory rate of 21% for the period ended September 30, 2018 and 35% for the period ended September 30, 2017 principally because of the effects of tax-exempt interest income.
The Corporation has investments in three limited partnerships that manage affordable housing projects that have qualified for the federal low-income housing tax credit. The Corporation’s expected return from these investments is based on the receipt of tax credits and tax benefits from deductions of operating losses. The Corporation uses the effective yield method to account for these investments, with the benefits recognized as a reduction of the provision for income taxes. For two of the three limited partnership investments, the tax credits have been received in full in prior years, and the Corporation has fully realized the benefits of the credits and amortized its initial investments in the partnerships. The most recent affordable housing project was completed in 2013, and the Corporation received tax credits in 2013 through 20162017 and expects to continue to receive tax credits annually through 2022. The carrying amount of the Corporation’s investment is $634,000$526,000 at September 30, 20172018 and $713,000$608,000 at December 31, 20162017 (included in Other Assets in the consolidated balance sheets). For the year ending December 31, 2017,2018, the estimated amount of tax credits and other tax benefits to be received is $157,000$150,000 and the estimated amount to be recognized as a reduction of the provision for income taxes is $73,000.$54,000. The total reduction in the provision for income taxes resulting from this investment is $14,000 in the third quarter 2018 and $41,000 for the nine months ended September 30, 2018, and $18,000 in the third quarter 2017 and $55,000 for the nine months ended September 30, 2017, and $19,000 in the third quarter 2016 and $57,000 for the nine months ended September 30, 2016.2017.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation has no unrecognized tax benefits, nor pending examination issues related to tax positions taken in preparation of its income tax returns. With limited exceptions, the Corporation is no longer subject to examination by the Internal Revenue Service for years prior to 2014.
12. 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.
13. RECENT ACCOUNTING PRONOUNCEMENTSREVENUE RECOGNITION
The FASB issues Accounting Standards Updates (ASUs) toAs disclosed in Note 1, as of January 1, 2018, the FASB 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.
In May 2014, the FASB issuedCorporation adopted ASU 2014-09, Revenue from Contracts with Customers which provides a principles-based framework for revenue recognition under U.S. GAAP.(Topic 606), as well as subsequent ASUs that modified ASC 606. The core principleCompany has elected to apply the ASU and all related ASUs using the modified retrospective implementation method. The implementation of the five-stepguidance had no material impact on the measurement or recognition of revenue recognition frameworkof prior periods. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that an entity should recognizesignificantly affects the determination of the amount and timing of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Several additional ASUs have been issued subsequent to ASU 2014-09 to provide clarifying guidancefrom contracts with customers.
Additional disclosures related to various revenue recognition areas and to defer the effective date of the standard by a year, making it applicable for the Corporation in the first quarter 2018 and for the annual period ending December 31, 2018. The amendments should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. Additionally, the ASU requires expanded disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. More than 70% of the Corporation’s revenue comes from net interest income and is explicitly out of the scope of ASU 2014-09. The Corporation’s largest sources of noninterest revenue whichincome within the consolidated statements of income that are subject to ASC 606 are as follows:
Trust and financial management revenue– C&N Bank’s trust division provides a wide range of financial services, including wealth management services for individuals, businesses and retirement funds, administration of 401(k) and other retirement plans, retirement planning, estate planning and estate settlement services. Trust clients are located primarily within the guidance includeCorporation’s geographic markets. Assets held in a fiduciary capacity by C&N Bank are not the Corporation’s assets and are therefore not included in the consolidated balance sheets. The fair value of trust assets under management was approximately $952,824,000 at September 30, 2018 and $916,580,000 at December 31, 2017. Trust and financial management revenue serviceis included within noninterest income in the consolidated statements of income.
Trust revenue is recorded on a cash basis, which is not materially different from the accrual basis. The majority (approximately 81%, based on annual 2017 results) of trust revenue is earned and collected monthly, with the amount determined based on a percentage of the fair value of the trust assets under management. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The services provided under such a contract represent a single performance obligation under the ASU because it embodies a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. None of the contracts with trust customers provide for incentive-based fees. In addition to wealth management fees, trust revenue includes fees for provision of services, including employee benefit plan administration, tax return preparation and estate planning and settlement. Fees for such services are billed based on contractual arrangements or established fee schedules and are typically billed upon completion of providing such services. The costs of acquiring trust customers are incremental and recognized within noninterest expense in the consolidated statements of income.
Service charges on deposit accounts - Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and interchange revenue from debit card transactions. Management has reviewed the Corporation’s larger noninterest revenue streamsa variety of other monthly or transactional fees for services provided to retail and does not expect the adoption of ASU 2014-09business customers, mainly associated with checking accounts. All deposit liabilities are considered to have a material effect onone-day terms and therefore related fees are recognized in income at the Corporation’s financial condition or resultstime when the services are provided to the customers. Incremental costs of operations. Management isobtaining deposit contracts are not significant and are recognized as expense when incurred within noninterest expense in the processconsolidated statements of reviewing the expanded disclosure requirements that will be effective in the first quarter 2018.income.
37
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
In January 2016,Interchange revenue from debit card transactions– The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the FASB issued ASU 2016-01, Recognitiontime when the services are provided and Measurementrelated fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements of Financial Assets and Liabilities. This makes significant changes in U.S. GAAP related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes provided for in this Update that are applicable toincome.
14. PENDING MERGER
On September 28, 2018, the Corporation, are as follows: (1) require equity investments (except those accounted for underalong with Monument Bancorp, Inc. (“Monument”), announced the equity methodsigning of accounting or those that resultan Agreement and Plan of Merger. Monument is the parent company of Monument Bank, a commercial bank which operates two community bank offices and one loan production office in consolidationBucks County, Pennsylvania. As of September 30, 2018, Monument reported total assets of $361 million. Under the terms of the investee)Agreement and Plan of Merger, Monument will merge into the Corporation, and Monument Bank will merge into C&N Bank. In the transaction, Monument shareholders will elect to be measured at fair value with changesreceive either 1.0144 shares of Corporation common stock or $28.10 in fair value recognized in net income; however, an entity may choosecash for each share of Monument common stock owned, subject to measure equity investmentsproration to ensure that, do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investmentoverall, 20% of the same issuer; (2) for equity investments without readily determinable fair values, require a qualitative assessment to identify impairment,Monument shares will be converted into cash and if a qualitative assessment indicates that impairment exists, requiring an entity to measure the investment at fair value; (3) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require an entity to present separately in other comprehensive income the portion80% of the Monument shares will be converted into Corporation stock. The estimated total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (at September 30, 2017 and December 31, 2016, the Corporation has no liabilities for which the fair value measurement option has been elected); (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update will become effective for the Corporation for annual and interim periods beginning in the first quarter 2018. With limited exceptions, early adoption of the amendments in this Update is not permitted. Amendments are to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively. The Corporation’s current exposure related to investments in marketable equity securities and other issues considered in ASU 2016-01 is limited, and accordingly, initial adoption of this ASU is not expected to have a significant impact on the Corporation’s financial position. Management is in the process of reviewing the changes in disclosure requirements that will become effective in the first quarter 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. Specifically, a lessee should recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lesseepurchase consideration would be permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. Topic 842 would not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP; however, the principal change from current GAAP is that lease assets and liabilities arising from operating leases would be recognized on the balance sheet. Topic 842 provides several other changes or clarifications to existing GAAP, and will require qualitative disclosures, along with quantitative disclosures, so that financial statement users can understand more about the nature of an entity’s leasing activities. In transition, Topic 842 provides that lessees and lessors are required to recognize and measure leasesvalued at the beginning of the earliest period presented using a modified retrospective approach, including optional practical expedients. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees will be required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting dateapproximately $42.7 million based on the present valueclosing price of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. Topic 842 will become effective forCorporation’s common stock on September 27, 2018. The transaction, which has been approved by the Corporation for annual and interim periods beginning inBoard of Directors of both companies, is expected to be completed during the firstsecond quarter 2019. The CorporationConsummation of the Merger is in the early stagessubject to approval by Monument’s shareholders, regulatory approvals and other customary conditions of evaluating the potential impact of adopting this amendment.closing.
In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures. This ASU eliminates the requirement that when an investment qualifies for the equity method as a result of an increase in the level of ownership interest or influence, an investor must adjust the investment, results of operations and retained earnings retroactively as if the equity method had been in effect during all previous periods the investment had been held. The ASU requires the equity method investor to add the cost of acquiring an additional interest in the investee to the basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method. The ASU further requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method recognize through earnings the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update were effective for the Corporation for annual and interim periods beginning in the first quarter 2017. Initial adoption of this ASU in 2017 did not have a significant impact on the Corporation.38
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. This ASU changes several aspects of accounting for share-based payment transactions, and includes some changes that apply only to nonpublic companies. This Update includes amendments that currently apply, or may apply in the future, to the Corporation related to the following: (1) accounting for the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments in this Update were effective for the Corporation for annual and interim periods beginning in the first quarter 2017. The ASU provides separate transition provisions for each of the amendments. Initial adoption of this ASU in 2017 did not have a significant impact on the Corporation.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This ASU will result in significant changes in the Corporation’s accounting for credit losses related to loans receivable and investment securities. A summary of significant provisions of this ASU is as follows:
The Corporation is in the early stages of evaluating the potential impact of adopting this amendment.
In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. This Update provides clarification regarding eight specific cash flow issues with the objective of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For the Corporation, the amendments in this Update are effective beginning in the first quarter 2018. The amendments in this Update should be applied using a retroactive transition method to each period presented. The Corporation anticipates there will be no adjustments to the Consolidated Statements of Cash Flows, as previously reported, as a result of the clarifications provided in the Update.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This Update will become effective for the Corporation’s annual and interim goodwill impairment tests beginning in the first quarter of 2020.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). This Update will shorten the amortization period for certain callable debt securities held at a premium. Under current U.S. GAAP, entities generally amortize the premium over the contractual life of the instrument. Discounts will continue to be amortized to maturity. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2019. An entity should apply the amendments in this Update through a cumulative-effect adjustment directly to retained earnings as of the beginning of the year of adoption. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Corporation does not expect adoption of the amendments to have a significant impact on its financial position.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
· | changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates |
· | changes in general economic conditions |
· | legislative or regulatory changes |
· | downturn in demand for loan, deposit and other financial services in the Corporation’s market area |
· | increased competition from other banks and non-bank providers of financial services |
· | technological changes and increased technology-related costs |
· | changes in accounting principles, or the application of generally accepted accounting principles. |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
EARNINGS OVERVIEW
Basic andThird quarter 2018 net income was $0.45 per diluted earnings per common share, were $0.32 for the third quarter 2017, as compared to $0.34$0.52 in the second quarter 20172018 and $0.34$0.32 in the third quarter 2016.2017. Third quarter 2018 earnings included a net benefit of $0.03 per diluted share from a gain on a restricted equity security (Visa Inc. Class B stock) and a loss on available-for-sale debt securities, while second quarter 2018 earnings included a net benefit of $0.10 per diluted share from a gain on Visa Class B stock, partially offset by a loss on available-for-sale debt securities. For the nine months ended September 30, 2017, basic2018, net income was $1.33 per diluted share, including a net benefit of $0.13 per diluted share from the gain on Visa Class B stock and diluted earnings per common share were $0.94 as compared to $0.95the loss on available-for-
sale debt securities. In comparison, for the first nine months ended September 30, 2017, net income was $0.94 per diluted share including a benefit of 2016. $0.01 per diluted share from a gain on available-for-sale debt securities.
In 2018, C&N has recorded pre-tax gains on Visa Class B stock totaling $2,321,000, including gains of $1,750,000 in the second quarter and $571,000 in the third quarter. Prior to the sales, C&N held 19,789 shares of Visa Class B stock pursuant to Visa’s 2007 initial public offering. Until the second quarter 2018, the carrying value of the shares was $0, which represented C&N’s cost basis. In the second quarter 2018, C&N sold 10,000 of the shares, for a realized gain of $884,000, and recorded an unrealized gain (on the 9,789 shares still held at June 30, 2018) of $866,000. In the third quarter 2018, C&N sold 9,789 shares for total proceeds of $1,437,000, and holds no more shares as of September 30, 2018.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The returntable below provides a reconciliation of C&N’s third quarter and September 30, 2018 year-to-date unaudited earnings results to the comparative 2017 results excluding the gain on average assets for the first nine months of 2017 was 1.23%,Visa Class B stock and the returngains and losses on average equity was 8.13%. Highlightsavailable-for-sale debt securities.
(Dollars In Thousands, Except Per Share Data) | ||||||||||||||||||||||||||||||||
(Unaudited) | 3rd Quarter 2018 | 3rd Quarter 2017 | ||||||||||||||||||||||||||||||
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 | $ | 6,697 | $ | 1,111 | $ | 5,586 | $ | 0.45 | $ | 5,198 | $ | 1,262 | $ | 3,936 | $ | 0.32 | ||||||||||||||||
Less: Gain on Restricted Equity Security | (571 | ) | (119 | ) | (452 | ) | 0 | 0 | 0 | |||||||||||||||||||||||
Net Losses (Gains) on Available-for-sale Debt Securities | 2 | 0 | 2 | (5 | ) | (2 | ) | (3 | ) | |||||||||||||||||||||||
Earnings Information, Excluding Effect of Gain on Restricted Equity Security and Net Gains and Losses on Available-for-sale Debt Securities | $ | 6,128 | $ | 992 | $ | 5,136 | $ | 0.42 | $ | 5,193 | $ | 1,260 | $ | 3,933 | $ | 0.32 | ||||||||||||||||
9 Months Ended Sept. 30, 2018 | 9 Months Ended Sept. 30, 2017 | |||||||||||||||||||||||||||||||
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 | $ | 19,561 | $ | 3,229 | $ | 16,332 | $ | 1.33 | $ | 15,111 | $ | 3,620 | $ | 11,491 | $ | 0.94 | ||||||||||||||||
Less: Gain on Restricted Equity Security | (2,321 | ) | (487 | ) | (1,834 | ) | 0 | 0 | 0 | |||||||||||||||||||||||
Net Losses (Gains) on Available-for-sale Debt Securities | 284 | 59 | 225 | (257 | ) | (90 | ) | (167 | ) | |||||||||||||||||||||||
Earnings Information, Excluding Effect of Gain on Restricted Equity Security and Net Gains and Losses on Available-for-sale Debt Securities | $ | 17,524 | $ | 2,801 | $ | 14,723 | $ | 1.20 | $ | 14,854 | $ | 3,530 | $ | 11,324 | $ | 0.93 |
(1) | Income tax has been allocated to the gain on restricted equity security and net losses (gains) on available-for-sale debt securities based on marginal income tax rates of 21% for 2018 and 35% for 2017. |
Additional highlights related to the Corporation’s earnings results for the comparative periods are presented below.
Third Quarter 2018 as Compared to Third Quarter 2017
Net income of $5,586,000 in the third quarter 2018 was $1,650,000 higher than the third quarter 2017 amount. Excluding the after-tax impact of the gain on Visa Class B stock and net (losses) gains on available-for-sale debt securities as described above, adjusted third quarter 2018 net income of $5,136,000 exceeded adjusted third quarter 2017 net income of $3,933,000 by $1,203,000 (30.6%). The marginal federal income tax rate in effect in 2018 is 21%, down from the 2017 marginal rate of 35%. Accordingly, the effective tax rate of 16.6% for the third quarter 2017 of $3,936,0002018 was significantly lower by $151,000 (3.7%) than the third quarter 2016 amount. Some2017 effective tax rate of 24.3%. Pre-tax income, excluding the moregain on Visa Class B stock and net (losses) gains on available-for-sale debt securities, totaled $6,128,000 in the third quarter 2018, an increase of $935,000 (18.0%) over adjusted pre-tax income of $5,193,000 in the third quarter 2017. Other significant fluctuations in revenues and expenses between the three-month period ended September 30, 2017 and the corresponding period in 2016earnings-related variances were as follows:
· | Net interest income increased |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
· | The |
· | Noninterest |
· | Total noninterest expense increased |
Nine Months Ended September 30, 2018 as Compared to Nine Months Ended September 30, 2017
For the nine months ended September 30, 2018, net income of $16,332,000 was $4,841,000 higher than the corresponding amount for the first nine months of 2017. Excluding the after-tax impact of the gain on Visa Class B stock and net (losses) gains on available-for-sale debt securities as described above, adjusted year-to-date 2018 net income of $14,723,000 exceeded adjusted net income for the first nine months of 2017 of $11,324,000 by $3,399,000 (30.0%). As a result of the lower marginal federal income tax rate in effect in 2018, the effective tax rate was 16.5% for the first nine months of 2018, down from 24.0% for the first nine months of 2017. Pre-tax income, excluding the gain on Visa Class B stock and net (losses) gains on available-for-sale debt securities, totaled $17,524,000 for the first nine months of 2018, an increase of $2,670,000 (18.0%) over adjusted pre-tax income of $14,854,000 for the first nine months of 2017. Other significant earnings-related variances were as follows:
· | Net interest income was higher by $2,549,000 (8.2%) for the first nine months of 2018 as compared to the amount for the first nine months of 2017. The net interest margin was 3.86% for the first nine months of 2018, up from 3.81% for the first nine months of 2017. The average yield on earning assets was 4.23% in the first nine months of 2018, up from 4.15% in the first nine months of 2017, reflecting an increase in average yield on loans of 0.12%. Average total loans outstanding were higher by $47.8 million (6.2%) for the first nine months of 2018 as compared to the first nine months of 2017, while average total available-for-sale debt securities were lower by $17.9 million. Average total deposits were $38.8 million (3.9%) higher for the first nine months of 2018 as compared to 2017. In the first nine months of 2018, average brokered deposits totaled $1,685,000, while there were no brokered deposits in the first nine months of 2017. The average rate paid on interest-bearing liabilities was 0.53% in the first nine months of 2018, up 0.05% as compared to 2017. The average rate paid on deposits was up 0.14% in the first nine months of 2018 as compared to 2017, while the average cost of borrowed funds dropped to 1.75% from 2.59% because of the pay-off of higher-cost borrowings that matured in the latter portion of 2017. |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
· |
Net income was $11,491,000 for the first nine months of 2017, a decrease of $40,000 (0.4%) from net income for the first nine months of 2016. Some of the more significant fluctuations in revenues and expenses between the nine-month period ended September 30, 2017 and the corresponding period in 2016 were as follows:
· | Noninterest |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
· | Total noninterest |
o | Salaries and wages expense increased |
o | Pensions and other employee benefits expense increased |
o | Professional fees increased $261,000 (43.6%), including $100,000 of merger-related expense as noted above, along with consulting costs related to Board governance and committee structures, implementation of new accounting standards, certification of a |
o | Other noninterest expense increased $171,000, including an increase in donations expense of |
o | Occupancy expense increased $140,000 (8.0%), including the effects of accelerated depreciation on the |
o | In addition to items previously described, costs associated with new |
More detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE I - QUARTERLY FINANCIAL DATA | ||||||||||||||||||||||||||||
(Dollars In Thousands, Except Per Share Data) (Unaudited) | For the Three Months Ended: | |||||||||||||||||||||||||||
Sept. 30, | June 30, | Mar. 31, | Dec. 31, | Sept. 30, | June 30, | Mar. 31, | ||||||||||||||||||||||
2017 | 2017 | 2017 | 2016 | 2016 | 2016 | 2016 | ||||||||||||||||||||||
Interest income | $ | 11,626 | $ | 11,340 | $ | 11,112 | $ | 11,106 | $ | 11,131 | $ | 10,924 | $ | 10,937 | ||||||||||||||
Interest expense | 985 | 978 | 953 | 920 | 944 | 925 | 904 | |||||||||||||||||||||
Net interest income | 10,641 | 10,362 | 10,159 | 10,186 | 10,187 | 9,999 | 10,033 | |||||||||||||||||||||
Provision (credit) for loan losses | 322 | 4 | 452 | (3 | ) | 538 | 318 | 368 | ||||||||||||||||||||
Net interest income after provision (credit) for loan losses | 10,319 | 10,358 | 9,707 | 10,189 | 9,649 | 9,681 | 9,665 | |||||||||||||||||||||
Other income | 4,066 | 4,106 | 3,864 | 4,031 | 3,884 | 3,906 | 3,690 | |||||||||||||||||||||
Net gains on available-for-sale securities | 5 | 107 | 145 | 69 | 584 | 122 | 383 | |||||||||||||||||||||
Other expenses | 9,192 | 9,076 | 9,298 | 8,558 | 8,579 | 8,535 | 9,072 | |||||||||||||||||||||
Income before income tax provision | 5,198 | 5,495 | 4,418 | 5,731 | 5,538 | 5,174 | 4,666 | |||||||||||||||||||||
Income tax provision | 1,262 | 1,374 | 984 | 1,500 | 1,451 | 1,303 | 1,093 | |||||||||||||||||||||
Net income | $ | 3,936 | $ | 4,121 | $ | 3,434 | $ | 4,231 | $ | 4,087 | $ | 3,871 | $ | 3,573 | ||||||||||||||
Net income attributable to common shares | $ | 3,916 | $ | 4,100 | $ | 3,416 | $ | 4,209 | $ | 4,065 | $ | 3,850 | $ | 3,553 | ||||||||||||||
Basic earnings per common share | $ | 0.32 | $ | 0.34 | $ | 0.28 | $ | 0.35 | $ | 0.34 | $ | 0.32 | $ | 0.29 | ||||||||||||||
Diluted earnings per common share | $ | 0.32 | $ | 0.34 | $ | 0.28 | $ | 0.35 | $ | 0.34 | $ | 0.32 | $ | 0.29 |
Table I – QUARTERLY FINANCIAL DATA
(Dollars In Thousands, Except Per Share Data) | For the Three Months Ended: | |||||||||||||||||||||||||||
(Unaudited) | Sept. 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | |||||||||||||||||||||
2018 | 2018 | 2018 | 2017 | 2017 | 2017 | 2017 | ||||||||||||||||||||||
Interest income | $ | 12,800 | $ | 12,334 | $ | 11,890 | $ | 11,785 | $ | 11,626 | $ | 11,340 | $ | 11,112 | ||||||||||||||
Interest expense | 1,241 | 1,079 | 993 | 999 | 985 | 978 | 953 | |||||||||||||||||||||
Net interest income | 11,559 | 11,255 | 10,897 | 10,786 | 10,641 | 10,362 | 10,159 | |||||||||||||||||||||
Provision (credit) for loan losses | 60 | (20 | ) | 292 | 23 | 322 | 4 | 452 | ||||||||||||||||||||
Net interest income after provision (credit) for loan losses | 11,499 | 11,275 | 10,605 | 10,763 | 10,319 | 10,358 | 9,707 | |||||||||||||||||||||
Noninterest income | 4,462 | 4,689 | 4,406 | 4,117 | 4,066 | 4,106 | 3,864 | |||||||||||||||||||||
Net gains on securities | 569 | 1,468 | 0 | 0 | 5 | 107 | 145 | |||||||||||||||||||||
Noninterest expense | 9,833 | 9,684 | 9,895 | 9,401 | 9,192 | 9,076 | 9,298 | |||||||||||||||||||||
Income before income tax provision | 6,697 | 7,748 | 5,116 | 5,479 | 5,198 | 5,495 | 4,418 | |||||||||||||||||||||
Income tax provision | 1,111 | 1,377 | 741 | 3,536 | 1,262 | 1,374 | 984 | |||||||||||||||||||||
Net income | $ | 5,586 | $ | 6,371 | $ | 4,375 | $ | 1,943 | $ | 3,936 | $ | 4,121 | $ | 3,434 | ||||||||||||||
Net income attributable to common shares | $ | 5,558 | $ | 6,339 | $ | 4,352 | $ | 1,933 | $ | 3,916 | $ | 4,100 | $ | 3,416 | ||||||||||||||
Basic earnings per common share | $ | 0.45 | $ | 0.52 | $ | 0.36 | $ | 0.16 | $ | 0.32 | $ | 0.34 | $ | 0.28 | ||||||||||||||
Diluted earnings per common share | $ | 0.45 | $ | 0.52 | $ | 0.36 | $ | 0.16 | $ | 0.32 | $ | 0.34 | $ | 0.28 |
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.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes the allowance for loan losses is adequate and reasonable. Analytical information related to the Corporation’s aggregate loans and the related allowance for loan losses is summarized by loan segment and classes of loans in Note 7 to the unaudited consolidated financial statements. Additional discussion of the Corporation’s allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
As described in Note 6 to the unaudited consolidated financial statements, management evaluates securities for other-than-temporary impairment (OTTI). In making that evaluation, consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery. Management’s assessments of the likelihood and potential for recovery in value of securities are subjective and based on sensitive assumptions.
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 20172018 and September 30, 2016.2017. 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.
43
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Nine-Month Periods Ended September 30, 20172018 and 20162017
For the nine-month periods, fully taxable equivalent net interest income was $33,240,000$34,692,000 in 2017, $943,000 (2.9%2018, $1,452,000 (4.4%) higher than in 2016.2017. Interest income was $1,084,000$1,851,000 higher in 20172018 as compared to 2016;2017, while interest expense was also higher by $141,000$399,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.81%3.86% in 20172018 as compared to 3.77%3.81% in 2016, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.67% in the nine-month period ended September 30, 2017, from 3.64% in the nine-month period ended September 30, 2016.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $36,154,000 in 2017, an increase of 3.1% from 2016. The overall yield on earning assets increased to 4.15% in 2017 from 4.09% in 2016, reflecting the impact of loan growth and a reduction in lower-yielding securities as a percentage of total earning assets.
Interest and fees on loans receivable increased $1,656,000, or 6.3%. The average balance of gross loans receivable increased $57,563,000, or 8.0%, to $773,138,000 in 2017 from $715,575,000 in 2016. The Corporation experienced growth in both mortgage and commercial loans. The Corporation’s average yield on loans receivable declined to 4.87% in 2017 from 4.94% in 2016 as average interest rates on new loans have been lower than the average rates on loans that have been fully or partially paid off.
As indicated in Table III, average available-for-sale securities (at amortized cost) totaled $374,298,000 in 2017, a decrease of $33,049,000 (8.1%) from 2016. The Corporation’s yield on securities was 2.81% in 2017 as compared to 2.78% in 2016.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $141,000, or 5.1%, to $2,914,000 in 2017 from $2,773,000 in 2016. Table III shows that the overall cost of funds on interest-bearing liabilities increased to 0.48% in 2017 from 0.45% in 2016. The increase in interest expense is mainly a result of increases in rates paid on interest checking accounts and certificates of deposit.
Total average deposits (interest-bearing and noninterest-bearing) increased 2.1%, to $985,961,000 in 2017 from $965,584,000 in 2016. Increases in the average balances of demand deposits, savings and interest checking accounts were contributors to the increase in total average deposits, while the average balances of money market accounts and Individual Retirement Accounts (IRAs) declined.
Total average borrowed funds decreased $3,618,000 to $60,858,000 in 2017 from $64,476,000 in 2016. The average rate on borrowed funds was 2.59% in 2017 compared to 2.53% in 2016 primarily due to an increase in short term borrowing rates in 2017.
Three-Month Periods Ended September 30, 2017 and 2016
For the three-month periods, fully taxable equivalent net interest income was $11,337,000 in 2017, which was $468,000 (4.3%) higher than in 2016. Interest income was $507,000 higher in 2017 as compared to 2016, while interest expense was higher by $39,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.83% in 2017 as compared to 3.74% in 2016, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.68%3.70% in 2018, up from 3.67% in 2017.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $38,005,000 in 2018, an increase of 5.1% from 2017. Interest and fees on loans receivable increased $2,507,000, or 8.9%, to $30,642,000 in 2018 from $28,135,000 in 2017. Table IV shows the increase in interest on loans includes $1,735,000 attributable to an increase in volume and $772,000 related to an increase in average rate. The average balance of loans receivable increased $47,820,000 (6.2%) to $820,958,000 in 2018 from $773,138,000 in 2017. The increase in average balance reflects growth in the average balance of both commercial and residential mortgage loans. The average rate on taxable loans in 2018 was 5.12% compared to 4.90% in 2017 as compared to 3.61%current rates on variable rate loans and rates on recent new loan originations have increased, consistent with increases in 2016.market interest rates. The yield on earningtax-exempt loans receivable decreased to 3.69% in 2018 compared to 4.51% in 2017. This decrease reflects the reduced tax benefit on tax-exempt assets increasedas compared to 4.16%taxable assets resulting from the marginal tax rate being reduced to 21% in 2018 from 35% in 2017.
Interest income on available-for-sale debt securities totaled $7,019,000 in 2018, a reduction of $825,000 from the total for 2017. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $355,420,000 in 2018, a decrease of $17,878,000 (4.8%) from 2017. The average yield on available-for-sale debt securities decreased to 2.64% in 2018 from 2.81% in 2017. The reduction in yield on available-for-sale debt securities includes the impact of a reduced tax benefit on tax-exempt municipal bonds as a result of the reduction in the third quarterfederal income tax rate.
Interest income from interest-bearing deposits in banks totaled $319,000 in 2018, an increase of $179,000 over the total for 2017. The most significant categories of assets within this category include interest-bearing balances held with the Federal Reserve and investments in certificates of deposit issued by other banks. The increase in interest income from interest-bearing deposits with banks includes the effects of an increase in yield to 1.80% in 2018 from 1.10% in 2017, consistent with market increases in short-term interest rates, and an increase in average balance to $23,727,000 in 2018 from 4.07%$17,042,000 in the third quarter 2016, while2017.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $399,000, or 13.7%, to $3,313,000 in 2018 from $2,914,000 in 2017. Table III shows that the overall cost of funds on interest-bearing liabilities increased to 0.53% in 2018 from 0.48% in 2017.
Total average deposit balances (interest-bearing and noninterest-bearing) increased 3.9%, to $1,024,735,000 in 2018 from $985,961,000 in 2017. Increases in the average balances of demand deposits, certificates of deposit, interest checking and savings were partially offset by reductions in money market and Individual Retirement Accounts.
Interest expense on deposits increased $907,000 in 2018 over 2017. The average rate on interest-bearing deposits increased to 0.45% in 2018 from 0.31% in 2017. Interest expense on certificates of deposit increased $418,000 in 2018 of which $301,000 is from an increase in average rate and $117,000 due to an increase in volume. Interest expense on interest checking accounts increased $348,000 and on money market accounts increased $106,000, in 2018 as compared to 2017, primarily due to increases in the average rates paid.
Interest expense on borrowed funds decreased $508,000 in 2018 as compared to 2017, including a reduction in interest expense on long-term borrowings partially offset by an increase in interest expense on short-term borrowings. Total average borrowed funds decreased $9,412,000 to $51,446,000 in 2018 from $60,858,000 in 2017. The average rate on total borrowed funds was 1.75% in 2018 compared to 2.59% in 2017.
Interest expense on short-term borrowings in 2018 exceeded interest expense in the same period of 2017 by $190,000 as result of a series of advances from FHLB-Pittsburgh that mature in monthly amounts of $3,000,000 through October 2018, as well as an increase in short-term interest rates. These short-term advances were originated in the third quarterand fourth quarters of 2017 to pay off a portion of a total of $37,000,000 in long-term borrowings that matured during that time period. Average short-term borrowings totaled $29,515,000 for the first nine months of 2018, an increase of $6,397,000 over 2017. The weighted-average rate on short-term borrowings was 1.45% in 2018 as compared to 0.75% in 2017.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Interest expense on long-term debt decreased $698,000 in 2018 as compared to 2017, mainly from 0.46%repayment of the $37 million in higher-cost borrowings (weighted-average rate of 3.65%) in the third quarter 2016.and fourth quarters of 2017 as referred to above. Borrowings are classified as long-term within the Tables based on their term at origination. The average balance of long-term borrowings in 2018 of $21,931,000 consisted mainly of FHLB advances maturing in 2019 and had a weighted-average rate of 2.15%. In comparison, average long-term borrowings in the same period of 2017 totaled $37,740,000, with an average rate of 3.72%.
Three-Month Periods Ended September 30, 2018 and 2017
For the three-month periods, fully taxable equivalent net interest income was $11,880,000 in 2018, which was $543,000 (4.8%) higher than in 2017. Interest income was $801,000 higher in 2018 as compared to 2017, while interest expense was higher by $258,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.87% in 2018 as compared to 3.83% in 2017, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) remained unchanged at 3.68% in 2018 as compared to 2017.
Interest income totaled $12,320,000$13,121,000 in 2017,2018, an increase of $507,000 (4.3%$801,000 (6.5%) from 2016.2017. Interest and fees from loans receivable increased $656,000,$760,000, or 7.3%7.8%, in 20172018 as compared to 2016,2017, and interest income from interest-bearing deposits in banks increased $106,000, while income from available-for-sale securities decreased $190,000 (7.0%$57,000 (2.2%). As indicated in Table III, for the three-month periods, the average balance of gross loans receivable increased 7.5%4.1% to $820,432,000 in 2018 from $788,346,000 in 2017 from $733,016,000 in 2016.2017. The average rate of return on loans was 5.06% in 2018, up from 4.88% in 2017.
The increase in interest income from interest-bearing deposits with banks includes the effects of an increase in yield to 1.99% in the third quarter 2018 from 1.25% in 2017, down slightlyconsistent with market increases in short-term interest rates, and an increase in average balance to $34,540,000 in 2018 from 4.91%$21,260,000 in 2016. 2017.
Total average available-for-sale securities (at amortized cost) in 2017 decreased2018 increased slightly to $363,495,000$362,529,000 from $404,526,000$362,495,000 in 2016.2017. The average rate of return on available-for-sale securities was 2.71% for 2018, down from 2.78% for 2017, upin 2017. The reduction in average rate of return on available-for-sale securities is a result of a reduced tax benefit on tax exempt municipal bonds due to the marginal tax rate decreasing to 21% in 2018 from 2.69%35% in 2016.2017.
For the three-month periods, interest expense increased $39,000,$258,000, or 4.1%26.2%, to $1,241,000 in 2018 from $983,000 in 2017 from $944,000 in 2016. This included an increase of $89,000 in interest2017. Interest expense on deposits increased $395,000, as the average rate paid on deposits increased 0.05%,to 0.52% in 2018 from 0.33% in 2017, including increases of 0.10%0.39% on certificates of deposit, 0.24% on interest checking and 0.08%0.14% on certificates of deposit.money market accounts. Total average deposits (interest-bearing and noninterest-bearing) amounted to $1,010,201,000$1,047,599,000 in the third quarter 2017,of 2018, an increase of $26,848,000 (2.7%$37,398,000 (3.7%) fromover the third quarter 20162017 total. The increase in total average deposits consistedincluded an increase in certificates of increasesdeposits of $22,130,000 and an increase in noninterest-bearing demand deposits of $16,959,000 and an overall increase in interest bearing deposits of $9,889,000, including increases of $18,844,000 in interest checking and $11,756,000 in savings accounts partially offset by decreases in money market accounts, IRAs and certificates of deposit.$19,254,000.
Interest expense on total borrowed funds decreased $50,000$137,000 in 20172018 as compared to 2016.2017. Interest expense on short-term borrowings decreased $22,000 andincreased $31,000 while interest expense on long-term borrowings decreased by $28,000$168,000 in 20172018 as compared to 2016.2017. The average balance of total borrowed funds decreased slightly to $43,437,000 in the third quarter 2018 from $43,608,000 in the third quarter 2017, from $57,226,000 in the third quarter 2016, while the average rate on borrowed funds increaseddecreased to 1.90% in the third quarter 2018 from 3.14% in the third quarter 2017 from 2.75% in the third quarter 2016.2017.
Interest expense on short-term borrowings increased $31,000 to $39,000 in 2018 from $8,000 in 2017. The increase in interest expense on short-term borrowings reflects the impact of higher short-term interest rates in 2018 as compared to 2017 as the average rate on short-term borrowings increased to 1.18% in 2018 from 0.44% in 2017. The average balance of short-term borrowings decreasedincreased to $13,062,000 in the third quarter 2018 from $7,139,000 in the third quarter 2017 from $18,655,000 in 2016, and the average rate on short-term borrowings decreased to 0.44% in 2017 from 0.64% in 2016.2017.
The average balance of long-term borrowings was $36,469,000$30,375,000 in the third quarter 2017,2018, at an average rate of 3.67%2.21%, down from an average balance of $38,571,000$36,469,000 at an average rate of 3.76%3.67% in the third quarter 2016. Borrowings are classified as2017. As described above, the reduction in average balance and rate on long-term withinborrowings reflects the Tables based on their term at origination; however, within this category, a borrowingrepayment of higher cost borrowings totaling $37,000,000 in the third and fourth quarters of 2017, with a balancelong-term borrowings in 2018 consisting mainly of $10,000,000 at a rate of 3.81% maturedFHLB advances maturing in September 2017 and a borrowing with a balance of $27,000,000 at a rate of 3.595% matures in December 2017.2019.
45
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
September 30, | Increase/ | September 30, | Increase/ | September 30, | Increase/ | September 30, | Increase/ | |||||||||||||||||||||||||||||||||||||||||
(In Thousands) | 2017 | 2016 | (Decrease) | 2017 | 2016 | (Decrease) | 2018 | 2017 | (Decrease) | 2018 | 2017 | (Decrease) | ||||||||||||||||||||||||||||||||||||
INTEREST INCOME | ||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | $ | 1,341 | $ | 1,456 | $ | (115 | ) | $ | 4,106 | $ | 4,540 | $ | (434 | ) | $ | 1,624 | $ | 1,335 | $ | 289 | $ | 4,368 | $ | 4,090 | $ | 278 | ||||||||||||||||||||||
Tax-exempt | 1,202 | 1,277 | (75 | ) | 3,753 | 3,941 | (188 | ) | 856 | 1,202 | (346 | ) | 2,651 | 3,754 | (1,103 | ) | ||||||||||||||||||||||||||||||||
Total available-for-sale securities | 2,543 | 2,733 | (190 | ) | 7,859 | 8,481 | (622 | ) | ||||||||||||||||||||||||||||||||||||||||
Total available-for-sale debt securities | 2,480 | 2,537 | (57 | ) | 7,019 | 7,844 | (825 | ) | ||||||||||||||||||||||||||||||||||||||||
Dividends on marketable equity security | 5 | 6 | (1 | ) | 16 | 15 | 1 | |||||||||||||||||||||||||||||||||||||||||
Interest-bearing due from banks | 67 | 29 | 38 | 140 | 89 | 51 | 173 | 67 | 106 | 319 | 140 | 179 | ||||||||||||||||||||||||||||||||||||
Loans held for sale | 10 | 7 | 3 | 20 | 21 | (1 | ) | 3 | 10 | (7 | ) | 9 | 20 | (11 | ) | |||||||||||||||||||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 8,889 | 8,347 | 542 | 25,872 | 24,407 | 1,465 | 9,754 | 8,889 | 865 | 28,530 | 25,872 | 2,658 | ||||||||||||||||||||||||||||||||||||
Tax-exempt | 811 | 697 | 114 | 2,263 | 2,072 | 191 | 706 | 811 | (105 | ) | 2,112 | 2,263 | (151 | ) | ||||||||||||||||||||||||||||||||||
Total loans receivable | 9,700 | 9,044 | 656 | 28,135 | 26,479 | 1,656 | 10,460 | 9,700 | 760 | 30,642 | 28,135 | 2,507 | ||||||||||||||||||||||||||||||||||||
Total Interest Income | 12,320 | 11,813 | 507 | 36,154 | 35,070 | 1,084 | 13,121 | 12,320 | 801 | 38,005 | 36,154 | 1,851 | ||||||||||||||||||||||||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest checking | 141 | 78 | 63 | 324 | 210 | 114 | 278 | 141 | 137 | 672 | 324 | 348 | ||||||||||||||||||||||||||||||||||||
Money market | 94 | 89 | 5 | 264 | 254 | 10 | 155 | 94 | 61 | 370 | 264 | 106 | ||||||||||||||||||||||||||||||||||||
Savings | 36 | 34 | 2 | 106 | 99 | 7 | 38 | 36 | 2 | 113 | 106 | 7 | ||||||||||||||||||||||||||||||||||||
Certificates of deposit | 255 | 238 | 17 | 717 | 660 | 57 | 441 | 255 | 186 | 1,135 | 717 | 418 | ||||||||||||||||||||||||||||||||||||
Individual Retirement Accounts | 111 | 109 | 2 | 322 | 326 | (4 | ) | 120 | 111 | 9 | 350 | 322 | 28 | |||||||||||||||||||||||||||||||||||
Other time deposits | 1 | 1 | 0 | 1 | 1 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 638 | 549 | 89 | 1,734 | 1,550 | 184 | 1,033 | 638 | 395 | 2,641 | 1,734 | 907 | ||||||||||||||||||||||||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||||||||||||||||||||||||||
Short-term | 8 | 30 | (22 | ) | 130 | 133 | (3 | ) | 39 | 8 | 31 | 320 | 130 | 190 | ||||||||||||||||||||||||||||||||||
Long-term | 337 | 365 | (28 | ) | 1,050 | 1,090 | (40 | ) | 169 | 337 | (168 | ) | 352 | 1,050 | (698 | ) | ||||||||||||||||||||||||||||||||
Total borrowed funds | 345 | 395 | (50 | ) | 1,180 | 1,223 | (43 | ) | 208 | 345 | (137 | ) | 672 | 1,180 | (508 | ) | ||||||||||||||||||||||||||||||||
Total Interest Expense | 983 | 944 | 39 | 2,914 | 2,773 | 141 | 1,241 | 983 | 258 | 3,313 | 2,914 | 399 | ||||||||||||||||||||||||||||||||||||
Net Interest Income | $ | 11,337 | $ | 10,869 | $ | 468 | $ | 33,240 | $ | 32,297 | $ | 943 | $ | 11,880 | $ | 11,337 | $ | 543 | $ | 34,692 | $ | 33,240 | $ | 1,452 |
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% for 2018 and 35%. for 2017.
46
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(Dollars in Thousands)
3 Months | 3 Months | 9 Months | 9 Months | 3 Months | 3 Months | 9 Months | 9 Months | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ended | Rate of | Ended | Rate of | Ended | Rate of | Ended | Rate of | Ended | Rate of | Ended | Rate of | Ended | Rate of | Ended | Rate of | |||||||||||||||||||||||||||||||||||||||||||||||||
9/30/2017 | Return/ | 9/30/2016 | Return/ | 9/30/2017 | Return/ | 9/30/2016 | Return/ | 9/30/2018 | Return/ | 9/30/2017 | Return/ | 9/30/2018 | Return/ | 9/30/2017 | Return/ | |||||||||||||||||||||||||||||||||||||||||||||||||
Average | Cost of | Average | Cost of | Average | Cost of | Average | Cost of | Average | Cost of | Average | Cost of | Average | Cost of | Average | Cost of | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance | Funds % | Balance | Funds % | Balance | Funds % | Balance | Funds % | Balance | Funds % | Balance | Funds % | Balance | Funds % | Balance | Funds % | |||||||||||||||||||||||||||||||||||||||||||||||||
EARNING ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities, at amortized cost: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale debt securities, at amortized cost: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | $ | 251,774 | 2.11 | % | $ | 291,847 | 1.98 | % | $ | 259,539 | 2.12 | % | $ | 298,421 | 2.03 | % | $ | 269,054 | 2.39 | % | $ | 250,774 | 2.11 | % | $ | 255,638 | 2.28 | % | $ | 258,539 | 2.12 | % | ||||||||||||||||||||||||||||||||
Tax-exempt | 111,721 | 4.27 | % | 112,679 | 4.51 | % | 114,759 | 4.37 | % | 108,926 | 4.83 | % | 93,475 | 3.63 | % | 111,721 | 4.27 | % | 99,782 | 3.55 | % | 114,759 | 4.37 | % | ||||||||||||||||||||||||||||||||||||||||
Total available-for-sale securities | 363,495 | 2.78 | % | 404,526 | 2.69 | % | 374,298 | 2.81 | % | 407,347 | 2.78 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total available-for-sale debt securities | 362,529 | 2.71 | % | 362,495 | 2.78 | % | 355,420 | 2.64 | % | 373,298 | 2.81 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Marketable equity security | 945 | 2.10 | % | 1,000 | 2.38 | % | 953 | 2.24 | % | 1,000 | 2.14 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing due from banks | 21,260 | 1.25 | % | 17,138 | 0.67 | % | 17,042 | 1.10 | % | 20,566 | 0.58 | % | 34,540 | 1.99 | % | 21,260 | 1.25 | % | 23,727 | 1.80 | % | 17,042 | 1.10 | % | ||||||||||||||||||||||||||||||||||||||||
Loans held for sale | 781 | 5.08 | % | 556 | 5.01 | % | 496 | 5.39 | % | 516 | 5.44 | % | 179 | 6.65 | % | 781 | 5.08 | % | 205 | 5.87 | % | 496 | 5.39 | % | ||||||||||||||||||||||||||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 717,012 | 4.92 | % | 671,408 | 4.95 | % | 706,065 | 4.90 | % | 654,256 | 4.98 | % | 744,793 | 5.20 | % | 717,012 | 4.92 | % | 744,461 | 5.12 | % | 706,065 | 4.90 | % | ||||||||||||||||||||||||||||||||||||||||
Tax-exempt | 71,334 | 4.51 | % | 61,608 | 4.50 | % | 67,073 | 4.51 | % | 61,319 | 4.51 | % | 75,639 | 3.70 | % | 71,334 | 4.51 | % | 76,497 | 3.69 | % | 67,073 | 4.51 | % | ||||||||||||||||||||||||||||||||||||||||
Total loans receivable | 788,346 | 4.88 | % | 733,016 | 4.91 | % | 773,138 | 4.87 | % | 715,575 | 4.94 | % | 820,432 | 5.06 | % | 788,346 | 4.88 | % | 820,958 | 4.99 | % | 773,138 | 4.87 | % | ||||||||||||||||||||||||||||||||||||||||
Total Earning Assets | 1,173,882 | 4.16 | % | 1,155,236 | 4.07 | % | 1,164,974 | 4.15 | % | 1,144,004 | 4.09 | % | 1,218,625 | 4.27 | % | 1,173,882 | 4.16 | % | 1,201,263 | 4.23 | % | 1,164,974 | 4.15 | % | ||||||||||||||||||||||||||||||||||||||||
Cash | 18,325 | 17,523 | 17,213 | 16,548 | 18,697 | 18,325 | 17,867 | 17,213 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain/loss on securities | 1,449 | 9,654 | 402 | 8,154 | (8,641 | ) | 1,449 | (7,482 | ) | 402 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses | (8,769 | ) | (8,050 | ) | (8,755 | ) | (7,913 | ) | (8,984 | ) | (8,769 | ) | (9,049 | ) | (8,755 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Bank premises and equipment | 15,431 | 15,379 | 15,618 | 15,409 | 15,023 | 15,431 | 15,298 | 15,618 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible Assets | 11,958 | 11,966 | 11,958 | 11,968 | 11,953 | 11,958 | 11,953 | 11,958 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 40,944 | 38,225 | 42,038 | 38,563 | 44,675 | 40,944 | 43,017 | 42,038 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Assets | $ | 1,253,220 | $ | 1,239,933 | $ | 1,243,448 | $ | 1,226,733 | $ | 1,291,348 | $ | 1,253,220 | $ | 1,272,867 | $ | 1,243,448 | ||||||||||||||||||||||||||||||||||||||||||||||||
INTEREST-BEARING LIABILITIES | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest checking | $ | 219,633 | 0.25 | % | $ | 200,789 | 0.15 | % | $ | 208,071 | 0.21 | % | $ | 197,628 | 0.14 | % | $ | 223,105 | 0.49 | % | $ | 219,633 | 0.25 | % | $ | 217,935 | 0.41 | % | $ | 208,071 | 0.21 | % | ||||||||||||||||||||||||||||||||
Money market | 194,947 | 0.19 | % | 205,158 | 0.17 | % | 192,265 | 0.18 | % | 199,211 | 0.17 | % | 185,267 | 0.33 | % | 194,947 | 0.19 | % | 181,972 | 0.27 | % | 192,265 | 0.18 | % | ||||||||||||||||||||||||||||||||||||||||
Savings | 145,025 | 0.10 | % | 133,269 | 0.10 | % | 142,292 | 0.10 | % | 131,880 | 0.10 | % | 153,514 | 0.10 | % | 145,025 | 0.10 | % | 151,946 | 0.10 | % | 142,292 | 0.10 | % | ||||||||||||||||||||||||||||||||||||||||
Certificates of deposit | 119,351 | 0.85 | % | 123,475 | 0.77 | % | 116,500 | 0.82 | % | 118,256 | 0.75 | % | 141,481 | 1.24 | % | 119,351 | 0.85 | % | 133,692 | 1.14 | % | 116,500 | 0.82 | % | ||||||||||||||||||||||||||||||||||||||||
Individual Retirement Accounts | 96,934 | 0.45 | % | 103,259 | 0.42 | % | 97,981 | 0.44 | % | 104,280 | 0.42 | % | 90,693 | 0.52 | % | 96,934 | 0.45 | % | 92,621 | 0.51 | % | 97,981 | 0.44 | % | ||||||||||||||||||||||||||||||||||||||||
Other time deposits | 1,472 | 0.27 | % | 1,523 | 0.26 | % | 1,126 | 0.12 | % | 1,157 | 0.12 | % | 1,446 | 0.27 | % | 1,472 | 0.27 | % | 1,106 | 0.12 | % | 1,126 | 0.12 | % | ||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 777,362 | 0.33 | % | 767,473 | 0.28 | % | 758,235 | 0.31 | % | 752,412 | 0.28 | % | 795,506 | 0.52 | % | 777,362 | 0.33 | % | 779,272 | 0.45 | % | 758,235 | 0.31 | % | ||||||||||||||||||||||||||||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Short-term | 7,139 | 0.44 | % | 18,655 | 0.64 | % | 23,118 | 0.75 | % | 25,828 | 0.69 | % | 13,062 | 1.18 | % | 7,139 | 0.44 | % | 29,515 | 1.45 | % | 23,118 | 0.75 | % | ||||||||||||||||||||||||||||||||||||||||
Long-term | 36,469 | 3.67 | % | 38,571 | 3.76 | % | 37,740 | 3.72 | % | 38,648 | 3.77 | % | 30,375 | 2.21 | % | 36,469 | 3.67 | % | 21,931 | 2.15 | % | 37,740 | 3.72 | % | ||||||||||||||||||||||||||||||||||||||||
Total borrowed funds | 43,608 | 3.14 | % | 57,226 | 2.75 | % | 60,858 | 2.59 | % | 64,476 | 2.53 | % | 43,437 | 1.90 | % | 43,608 | 3.14 | % | 51,446 | 1.75 | % | 60,858 | 2.59 | % | ||||||||||||||||||||||||||||||||||||||||
Total Interest-bearing Liabilities | 820,970 | 0.48 | % | 824,699 | 0.46 | % | 819,093 | 0.48 | % | 816,888 | 0.45 | % | 838,943 | 0.59 | % | 820,970 | 0.48 | % | 830,718 | 0.53 | % | 819,093 | 0.48 | % | ||||||||||||||||||||||||||||||||||||||||
Demand deposits | 232,839 | 215,880 | 227,726 | 213,172 | 252,093 | 232,839 | 245,463 | 227,726 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 8,801 | 9,057 | 8,181 | 8,249 | 11,147 | 8,801 | 9,630 | 8,181 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | 1,062,610 | 1,049,636 | 1,055,000 | 1,038,309 | 1,102,183 | 1,062,610 | 1,085,811 | 1,055,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders' equity, excluding other comprehensive income/loss | 189,520 | 183,966 | 188,041 | 183,078 | 195,854 | 189,520 | 192,807 | 188,041 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive income/loss | 1,090 | 6,331 | 407 | 5,346 | (6,689 | ) | 1,090 | (5,751 | ) | 407 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Stockholders' Equity | 190,610 | 190,297 | 188,448 | 188,424 | 189,165 | 190,610 | 187,056 | 188,448 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 1,253,220 | $ | 1,239,933 | $ | 1,243,448 | $ | 1,226,733 | $ | 1,291,348 | $ | 1,253,220 | $ | 1,272,867 | $ | 1,243,448 | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest Rate Spread | 3.68 | % | 3.61 | % | 3.67 | % | 3.64 | % | 3.68 | % | 3.68 | % | 3.70 | % | 3.67 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Net Interest Income/Earning Assets | 3.83 | % | 3.74 | % | 3.81 | % | 3.77 | % | 3.87 | % | 3.83 | % | 3.86 | % | 3.81 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Deposits (Interest-bearing and Demand) | $ | 1,010,201 | $ | 983,353 | $ | 985,961 | $ | 965,584 | $ | 1,047,599 | $ | 1,010,201 | $ | 1,024,735 | $ | 985,961 |
(1) Annualized 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% in 2018 and 35% in 2017.
(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.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands) | 3 Months Ended 9/30/17 vs. 9/30/16 | 9 Months Ended 9/30/17 vs. 9/30/16 | 3 Months Ended 9/30/18 vs. 9/30/17 | 9 Months Ended 9/30/18 vs. 9/30/17 | ||||||||||||||||||||||||||||||||||||||||||||
Change in | Change in | Total | Change in | Change in | Total | Change in | Change in | Total | Change in | Change in | Total | |||||||||||||||||||||||||||||||||||||
Volume | Rate | Change | Volume | Rate | Change | Volume | Rate | Change | Volume | Rate | Change | |||||||||||||||||||||||||||||||||||||
EARNING ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | $ | (206 | ) | $ | 91 | $ | (115 | ) | $ | (612 | ) | $ | 178 | $ | (434 | ) | $ | 101 | $ | 188 | $ | 289 | $ | (46 | ) | $ | 324 | $ | 278 | |||||||||||||||||||
Tax-exempt | (13 | ) | (62 | ) | (75 | ) | 202 | (390 | ) | (188 | ) | (181 | ) | (165 | ) | (346 | ) | (453 | ) | (650 | ) | (1,103 | ) | |||||||||||||||||||||||||
Total available-for-sale securities | (219 | ) | 29 | (190 | ) | (410 | ) | (212 | ) | (622 | ) | |||||||||||||||||||||||||||||||||||||
Total available-for-sale debt securities | (80 | ) | 23 | (57 | ) | (499 | ) | (326 | ) | (825 | ) | |||||||||||||||||||||||||||||||||||||
Marketable equity security | (2 | ) | 1 | (1 | ) | (1 | ) | 2 | 1 | |||||||||||||||||||||||||||||||||||||||
Interest-bearing due from banks | 8 | 30 | 38 | (17 | ) | 68 | 51 | 49 | 57 | 106 | 68 | 111 | 179 | |||||||||||||||||||||||||||||||||||
Loans held for sale | 3 | 0 | 3 | (1 | ) | 0 | (1 | ) | (9 | ) | 2 | (7 | ) | (13 | ) | 2 | (11 | ) | ||||||||||||||||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 583 | (41 | ) | 542 | 1,886 | (421 | ) | 1,465 | 354 | 511 | 865 | 1,442 | 1,216 | 2,658 | ||||||||||||||||||||||||||||||||||
Tax-exempt | 112 | 2 | 114 | 192 | (1 | ) | 191 | 49 | (154 | ) | (105 | ) | 293 | (444 | ) | (151 | ) | |||||||||||||||||||||||||||||||
Total loans receivable | 695 | (39 | ) | 656 | 2,078 | (422 | ) | 1,656 | 403 | 357 | 760 | 1,735 | 772 | 2,507 | ||||||||||||||||||||||||||||||||||
Total Interest Income | 487 | 20 | 507 | 1,650 | (566 | ) | 1,084 | 361 | 440 | 801 | 1,290 | 561 | 1,851 | |||||||||||||||||||||||||||||||||||
INTEREST-BEARING LIABILITIES | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest checking | 8 | 55 | 63 | 12 | 102 | 114 | 3 | 134 | 137 | 16 | 332 | 348 | ||||||||||||||||||||||||||||||||||||
Money market | (5 | ) | 10 | 5 | (9 | ) | 19 | 10 | (5 | ) | 66 | 61 | (15 | ) | 121 | 106 | ||||||||||||||||||||||||||||||||
Savings | 3 | (1 | ) | 2 | 8 | (1 | ) | 7 | 2 | 0 | 2 | 7 | 0 | 7 | ||||||||||||||||||||||||||||||||||
Certificates of deposit | (8 | ) | 25 | 17 | (10 | ) | 67 | 57 | 52 | 134 | 186 | 117 | 301 | 418 | ||||||||||||||||||||||||||||||||||
Individual Retirement Accounts | (7 | ) | 9 | 2 | (21 | ) | 17 | (4 | ) | (8 | ) | 17 | 9 | (19 | ) | 47 | 28 | |||||||||||||||||||||||||||||||
Other time deposits | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | (9 | ) | 98 | 89 | (20 | ) | 204 | 184 | 44 | 351 | 395 | 106 | 801 | 907 | ||||||||||||||||||||||||||||||||||
Borrowed funds: | ||||||||||||||||||||||||||||||||||||||||||||||||
Short-term | (21 | ) | (1 | ) | (22 | ) | (15 | ) | 12 | (3 | ) | 14 | 17 | 31 | 44 | 146 | 190 | |||||||||||||||||||||||||||||||
Long-term | (19 | ) | (9 | ) | (28 | ) | (26 | ) | (14 | ) | (40 | ) | (55 | ) | (113 | ) | (168 | ) | (347 | ) | (351 | ) | (698 | ) | ||||||||||||||||||||||||
Total borrowed funds | (40 | ) | (10 | ) | (50 | ) | (41 | ) | (2 | ) | (43 | ) | (41 | ) | (96 | ) | (137 | ) | (303 | ) | (205 | ) | (508 | ) | ||||||||||||||||||||||||
Total Interest Expense | (49 | ) | 88 | 39 | (61 | ) | 202 | 141 | 3 | 255 | 258 | (197 | ) | 596 | 399 | |||||||||||||||||||||||||||||||||
Net Interest Income | $ | 536 | $ | (68 | ) | $ | 468 | $ | 1,711 | $ | (768 | ) | $ | 943 | $ | 358 | $ | 185 | $ | 543 | $ | 1,487 | $ | (35 | ) | $ | 1,452 |
(1) Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% for 2018 and 35%. for 2017.
(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.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
NONINTEREST INCOME
TABLE V - COMPARISON OF NONINTEREST INCOME
(Dollars In Thousands)
9 Months Ended | 9 Months Ended | |||||||||||||||||||||||||||||||
September 30, | $ | % | September 30, | $ | % | |||||||||||||||||||||||||||
2017 | 2016 | Change | Change | 2018 | 2017 | Change | Change | |||||||||||||||||||||||||
Service charges on deposit accounts | $ | 3,346 | $ | 3,523 | $ | (177 | ) | (5.0 | ) | |||||||||||||||||||||||
Service charges and fees | 316 | 335 | (19 | ) | (5.7 | ) | ||||||||||||||||||||||||||
Trust and financial management revenue | 3,969 | 3,567 | 402 | 11.3 | $ | 4,375 | $ | 3,969 | $ | 406 | 10.2 | |||||||||||||||||||||
Brokerage revenue | 551 | 569 | (18 | ) | (3.2 | ) | 718 | 551 | 167 | 30.3 | ||||||||||||||||||||||
Insurance commissions, fees and premiums | 98 | 74 | 24 | 32.4 | 72 | 98 | (26 | ) | (26.5 | ) | ||||||||||||||||||||||
Service charges on deposit accounts | 3,837 | 3,399 | 438 | 12.9 | ||||||||||||||||||||||||||||
Service charges and fees | 263 | 263 | 0 | 0.0 | ||||||||||||||||||||||||||||
Interchange revenue from debit card transactions | 1,649 | 1,431 | 218 | 15.2 | 1,880 | 1,649 | 231 | 14.0 | ||||||||||||||||||||||||
Net gains from sales of loans | 651 | 699 | (48 | ) | (6.9 | ) | 514 | 651 | (137 | ) | (21.0 | ) | ||||||||||||||||||||
Loan servicing fees, net | 162 | 39 | 123 | 315.4 | 263 | 162 | 101 | 62.3 | ||||||||||||||||||||||||
Increase in cash surrender value of life insurance | 281 | 286 | (5 | ) | (1.7 | ) | 295 | 281 | 14 | 5.0 | ||||||||||||||||||||||
Other operating income | 1,013 | 957 | 56 | 5.9 | ||||||||||||||||||||||||||||
Total noninterest income before realized gains on available-for-sale securities, net | $ | 12,036 | $ | 11,480 | $ | 556 | 4.8 | |||||||||||||||||||||||||
Other noninterest income | 1,340 | 1,013 | 327 | 32.3 | ||||||||||||||||||||||||||||
Total noninterest income before realized gains on securities, net | $ | 13,557 | $ | 12,036 | $ | 1,521 | 12.6 |
Table V excludes realizedthe gain on a restricted equity security (Visa Class B stock) and net (losses) gains on available-for-sale debt securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis. Total noninterest income shown in Table V increased $556,000 (4.8%$1,521,000 (12.6%) in the first nine months of 20172018 over the first nine months of 20162017 amount. The most significant variances include the following:
· | Service charges on deposit accounts increased $438,000 (12.9%), mainly due to increased fees from the overdraft privilege program and reflecting the benefit of operational improvements to the program that were instituted early in 2018. |
· | Trust and financial management revenue increased |
· | Interchange revenue from debit card transactions increased |
· | As a result of increased volume, broker-dealer revenue increased $167,000 (30.3%). |
· | Loan servicing fees, net, increased |
· | Other |
· | Net gains from sales of loans |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE VI - COMPARISON OF NONINTEREST INCOME
(Dollars In Thousands)
3 Months Ended | 3 Months Ended | |||||||||||||||||||||||||||||||
September 30, | $ | % | September 30, | $ | % | |||||||||||||||||||||||||||
2017 | 2016 | Change | Change | 2018 | 2017 | Change | Change | |||||||||||||||||||||||||
Service charges on deposit accounts | $ | 1,168 | $ | 1,221 | $ | (53 | ) | (4.3 | ) | |||||||||||||||||||||||
Service charges and fees | 115 | 118 | (3 | ) | (2.5 | ) | ||||||||||||||||||||||||||
Trust and financial management revenue | 1,292 | 1,172 | 120 | 10.2 | $ | 1,427 | $ | 1,292 | $ | 135 | 10.4 | |||||||||||||||||||||
Brokerage revenue | 187 | 216 | (29 | ) | (13.4 | ) | 235 | 187 | 48 | 25.7 | ||||||||||||||||||||||
Insurance commissions, fees and premiums | 26 | 26 | 0 | 0.0 | 15 | 26 | (11 | ) | (42.3 | ) | ||||||||||||||||||||||
Service charges on deposit accounts | 1,331 | 1,186 | 145 | 12.2 | ||||||||||||||||||||||||||||
Service charges and fees | 95 | 97 | (2 | ) | (2.1 | ) | ||||||||||||||||||||||||||
Interchange revenue from debit card transactions | 561 | 481 | 80 | 16.6 | 660 | 561 | 99 | 17.6 | ||||||||||||||||||||||||
Net gains from sales of loans | 297 | 236 | 61 | 25.8 | 164 | 297 | (133 | ) | (44.8 | ) | ||||||||||||||||||||||
Loan servicing fees, net | 35 | 28 | 7 | 25.0 | 74 | 35 | 39 | 111.4 | ||||||||||||||||||||||||
Increase in cash surrender value of life insurance | 97 | 97 | 0 | 0.0 | 100 | 97 | 3 | 3.1 | ||||||||||||||||||||||||
Other operating income | 288 | 289 | (1 | ) | (0.3 | ) | ||||||||||||||||||||||||||
Total noninterest income before realized gains on available-for-sale securities, net | $ | 4,066 | $ | 3,884 | $ | 182 | 4.7 | |||||||||||||||||||||||||
Other noninterest income | 361 | 288 | 73 | 25.3 | ||||||||||||||||||||||||||||
Total noninterest income before realized gains on securities, net | $ | 4,462 | $ | 4,066 | $ | 396 | 9.7 |
Table VI excludes realizedthe gain on a restricted equity security (Visa Class B stock) and net (losses) gains on available-for-sale debt securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis. Total noninterest income shown in Table VI increased $182,000 (4.7%$396,000 (9.7%) in the third quarter of 2017 as compared to2018 over the third quarter of 2016.2017 amount. The most significant variances include the following:
· | Service charges on deposit accounts increased $145,000 (12.2%) in the third quarter 2018 over the third quarter 2017 total, mainly due to increased fees from the overdraft privilege program and reflecting the benefit of operational improvements to the program that were instituted early in 2018. |
· | Trust and financial management revenue increased |
· | Interchange revenue from debit card transactions increased |
· | As a result of increased volume, broker-dealer revenue increased $48,000 (25.7%). |
· | Loan servicing fees, net, increased $39,000 (111.4%). The fair value of mortgage servicing rights decreased by $32,000 in the third quarter of 2018 as compared to a reduction of $67,000 in the same period of 2017. |
· | Other noninterest income increased $73,000, including a $35,000 increase in dividends received on Federal Home Loan Bank of Pittsburgh stock and a $30,000 increase in interchange revenue from credit card transactions. |
· | Net gains from sales of loans |
50
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
NONINTEREST EXPENSE
TABLE VII - COMPARISON OF NONINTEREST EXPENSE
(Dollars In Thousands)
9 Months Ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
Salaries and wages | $ | 11,825 | $ | 11,701 | $ | 124 | 1.1 | |||||||||
Pensions and other employee benefits | 3,890 | 3,499 | 391 | 11.2 | ||||||||||||
Occupancy expense, net | 1,758 | 1,770 | (12 | ) | (0.7 | ) | ||||||||||
Furniture and equipment expense | 1,372 | 1,301 | 71 | 5.5 | ||||||||||||
FDIC Assessments | 283 | 448 | (165 | ) | (36.8 | ) | ||||||||||
Pennsylvania shares tax | 1,008 | 932 | 76 | 8.2 | ||||||||||||
Professional fees | 750 | 816 | (66 | ) | (8.1 | ) | ||||||||||
Automated teller machine and interchange expense | 945 | 807 | 138 | 17.1 | ||||||||||||
Software subscriptions | 870 | 729 | 141 | 19.3 | ||||||||||||
Other operating expense | 4,865 | 4,183 | 682 | 16.3 | ||||||||||||
Total noninterest expense | $ | 27,566 | $ | 26,186 | $ | 1,380 | 5.3 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Nine Months Ended | ||||||||||||||||
September 30, | $ | % | ||||||||||||||
2018 | 2017 | Change | Change | |||||||||||||
Salaries and wages | $ | 12,580 | $ | 11,825 | $ | 755 | 6.4 | |||||||||
Pensions and other employee benefits | 4,047 | 3,870 | 177 | 4.6 | ||||||||||||
Occupancy expense, net | 1,898 | 1,758 | 140 | 8.0 | ||||||||||||
Furniture and equipment expense | 901 | 968 | (67 | ) | (6.9 | ) | ||||||||||
Data processing expenses | 2,002 | 1,785 | 217 | 12.2 | ||||||||||||
Automated teller machine and interchange expense | 988 | 945 | 43 | 4.6 | ||||||||||||
Pennsylvania shares tax | 998 | 1,008 | (10 | ) | (1.0 | ) | ||||||||||
Professional fees | 860 | 599 | 261 | 43.6 | ||||||||||||
Telecommunications | 567 | 409 | 158 | 38.6 | ||||||||||||
Directors' fees | 549 | 548 | 1 | 0.2 | ||||||||||||
Other noninterest expense | 4,022 | 3,851 | 171 | 4.4 | ||||||||||||
Total noninterest expense | $ | 29,412 | $ | 27,566 | $ | 1,846 | 6.7 |
As shown in Table VII, total noninterest expense increased $1,380,000 (5.3%$1,846,000 (6.7%) in the first nine months of 20172018 as compared to the first nine months of 2016.2017. The most significant variances include the following:
· |
· | Professional fees were $261,000 higher in 2018 than in 2017. The increase in professional fees included |
· | Data processing expenses increased $217,000, including costs associated with the new mortgage loan |
· | Pensions and other employee benefits expense increased |
· |
o | Donations expense increased $228,000. In June 2018, the Corporation donated the real estate for its existing Towanda banking facility to a nonprofit organization and entered into a 12-month lease with the nonprofit organization, with a 6-month renewal option, allowing banking operations to continue until a new location in the Towanda market can be obtained and prepared for use. The amount recorded for the Towanda real estate donation, based on the net book value of the property at that time, was $250,000. |
o | Legal fees and expenses increased $69,000, including $100,000 of fees incurred through September 30, 2018 related to the pending merger with Monument Bancorp, Inc. |
o | Consulting fees related to the overdraft privilege program totaled $66,000 in 2018 with no corresponding expense in 2017. |
o | Credit card processing and rewards expenses increased $63,000 to $94,000 in 2018 from $31,000 in 2017. The Corporation implemented an in-house credit card program in the latter portion of 2016 and has seen a gradual increase in activity since then. |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
o | Loan collection expense, net of recoveries, is $216,000 lower in 2018 than in 2017, with net recoveries of $13,000 in 2018 as compared to net expenses of $203,000 in 2017. Most of the Corporation’s loan collection expenses include property taxes and other costs related to commercial and residential loans secured by real estate. The net reduction in collection expense in 2018 as compared to 2017 includes a reduction in expenses incurred of $110,000 and an increase in recoveries of expenses incurred in prior years of $106,000. |
o | Recoveries of sales and use tax totaled $50,000 in the first nine months of 2018, resulting in a reduction in expense. In comparison, expense associated with |
· |
· |
TABLE VIII - COMPARISON OF NONINTEREST EXPENSE
(Dollars In Thousands)
3 Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
September 30, | $ | % | September 30, | $ | % | |||||||||||||||||||||||||||
2017 | 2016 | Change | Change | 2018 | 2017 | Change | Change | |||||||||||||||||||||||||
Salaries and wages | $ | 3,985 | $ | 3,901 | $ | 84 | 2.2 | $ | 4,263 | $ | 3,985 | $ | 278 | 7.0 | ||||||||||||||||||
Pensions and other employee benefits | 1,216 | 1,060 | 156 | 14.7 | 1,237 | 1,209 | 28 | 2.3 | ||||||||||||||||||||||||
Occupancy expense, net | 580 | 601 | (21 | ) | (3.5 | ) | 648 | 580 | 68 | 11.7 | ||||||||||||||||||||||
Furniture and equipment expense | 471 | 435 | 36 | 8.3 | 317 | 340 | (23 | ) | (6.8 | ) | ||||||||||||||||||||||
FDIC Assessments | 93 | 151 | (58 | ) | (38.4 | ) | ||||||||||||||||||||||||||
Data processing expenses | 667 | 595 | 72 | 12.1 | ||||||||||||||||||||||||||||
Automated teller machine and interchange expense | 347 | 346 | 1 | 0.3 | ||||||||||||||||||||||||||||
Pennsylvania shares tax | 336 | 287 | 49 | 17.1 | 326 | 336 | (10 | ) | (3.0 | ) | ||||||||||||||||||||||
Professional fees | 269 | 245 | 24 | 9.8 | 305 | 224 | 81 | 36.2 | ||||||||||||||||||||||||
Automated teller machine and interchange expense | 346 | 291 | 55 | 18.9 | ||||||||||||||||||||||||||||
Software subscriptions | 299 | 237 | 62 | 26.2 | ||||||||||||||||||||||||||||
Other operating expense | 1,597 | 1,371 | 226 | 16.5 | ||||||||||||||||||||||||||||
Total noninterestexpense | $ | 9,192 | $ | 8,579 | $ | 613 | 7.1 | |||||||||||||||||||||||||
Telecommunications | 177 | 143 | 34 | 23.8 | ||||||||||||||||||||||||||||
Directors' fees | 197 | 177 | 20 | 11.3 | ||||||||||||||||||||||||||||
Other noninterest expense | 1,349 | 1,257 | 92 | 7.3 | ||||||||||||||||||||||||||||
Total noninterest expense | $ | 9,833 | $ | 9,192 | $ | 641 | 7.0 |
As shown in Table VIII, total noninterest expense increased $613,000 (7.1%$641,000 (7.0%) in the third quarter 20172018 as compared to the third quarter 2016.2017. The most significant variances include the following:
· |
· |
· |
· |
52
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
INCOME TAXES
The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first nine months of 2018 was $3,229,000, or 16.5% of pre-tax earnings, which was $391,000 lower than the provision for the first nine months of 2017 of $3,620,000, or 24.0% of pre-tax income. The Corporation benefited from the reduction in the federal corporate income tax rate to 21%, effective January 1, 2018, from the 35% marginal tax rate in effect throughout 2017. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first nine months of 2018 and 35% for the first nine months of 2017 principally because of the effects of tax-exempt interest income.
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At September 30, 2018 the net deferred tax asset was $5,122,000, up from $3,289,000 at December 31, 2017. The most significant change in temporary difference components was a net increase of $1,754,000 related to unrealized losses on available-for-sale securities. At September 30, 2018, the net deferred tax asset associated with the unrealized loss was $2,260,000, while at December 31, 2017, the deferred tax asset associated with the unrealized loss was $506,000, including $843,000 recorded as an offset to the pre-tax unrealized loss within accumulated other comprehensive loss, partially offset by $337,000 charged against retained earnings.
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 September 30, 2018 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.
Additional information related to income taxes is presented in Note 11 to the unaudited, consolidated financial statements.
FINANCIAL CONDITION
This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. 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 Management’s Discussion and Analysis. Other significant balance sheet items, including the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. 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 September 30, 2017,2018, and management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition in 2017.2018.
Gross loans outstanding (excluding mortgage loans held for sale) were $822,532,000 at September 30, 2018, up 0.8% from $815,713,000 at December 31, 2017 and 2.7% from $801,012,000 at September 30, 2017, up 6.5% from $751,835,000 at December 31, 2016 and up 7.9 % from $742,338,000 at September 30, 2016.2017. Total outstanding mortgages and other consumer real estate loans were $21,026,000 (5.0%$6,922,000 (1.5%) higher at September 30, 20172018 as compared to December 31, 20162017 and increased $31,539,000 (7.7%) compared to September 30, 2016. Total outstanding commercial loans were higher by $26,920,000 (8.5%) at September 30, 2017 as compared to December 31, 2016 and $24,988,000 (7.8%$12,409,000 (2.8%) as compared to September 30, 2016.2017. Total outstanding commercial loans were lower by $2,544,000 (0.7%) at September 30, 2018 as compared to December 31, 2017 and higher by $6,684,000 (1.9%) compared to September 30, 2017. Average loans outstanding in the first nine months of 20172018 of $773,138,000$820,958,000 were $57,563,000 (8.0%$47,820,000 (6.2%) higher than the corresponding total in the first nine months of 2016. The increase in loans outstanding over the last quarter of 2016 and first three quarters of 2017 have included significant increases in mortgages and other consumer real estate loans as well as commercial loans.2017.
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 “Political subdivisions”“Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $65,741,000 at September 30, 2018, up from $61,245,000 at December 31, 2017 and $53,559,000 at September 30, 2017, up from $47,508,000 at December 31, 2016 and $48,670,000 at September 30, 2016.2017. At September 30, 2017,2018, the balance of participation loans outstanding includes a total of $45,369,000$54,464,000 to businesses located outside of the Corporation’s market area, including $11,806,000$9,612,000 from participations in loans originated through the Corporation’s membership in a network that originates loans throughout the U.S. The Corporation’s participation loans originated through the network consist of loans to businesses that are larger than the Corporation’s typical commercial customer base. The loans originated through the network are considered “leveraged loans,” meaning the businesses typically have minimal tangible book equity and the extent of collateral available is limited, though at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Total leveraged participation loans, including loans originated through the network and two loans originated through another lead institution, totaled $13,490,000$14,813,000 at September 30, 2017, $15,207,0002018 and $15,328,000 at December 31, 2016 and $14,688,000 at September 30, 2016.2017.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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. 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.
For loan sales originated under the MPF Xtra and Original programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received, or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At September 30, 2017,2018, the total outstanding balance of loans the Corporation has repurchased
as a result of identified instances of noncompliance amounted to $1,817,000,$1,769,000, and the corresponding total outstanding balance repurchased at December 31, 20162017 was $1,852,000.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q$1,805,000.
At September 30, 2018, outstanding balances of loans sold and serviced through the two programs totaled $171,516,000, including loans sold through the MPF Xtra program of $99,636,000 and loans sold through the Original program of $71,880,000. At December 31, 2017, outstanding balances of loans sold and serviced through the two programs totaled $169,581,000,$169,725,000, including loans sold through the MPF Xtra program of $109,692,000$107,117,000 and loans sold through the Original program of $59,889,000. At December 31, 2016, outstanding balances of loans sold and serviced through the two programs totaled $163,296,000, including loans sold through the MPF Xtra program of $116,978,000 and loans sold through the Original program of $46,318,000.$62,608,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, 20172018 and December 31, 2016.2017.
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 September 30, 2017,2018, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $3,907,000, and the Corporation has recorded ana related allowance in the amount of $244,000 for credit losses on loans sold under the MPF Original Programof $310,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheet. The corresponding recorded allowance atsheets. At December 31, 20162017, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $196,000.$5,742,000, and the related allowance for credit losses was $260,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.
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 $8,900,000$8,815,000 at September 30, 2017, up2018, down slightly from $8,473,000$8,856,000 at December 31, 2016.2017. Table X shows total specific allowances on impaired loans increased $493,000decreased $220,000 to $1,167,000$1,059,000 at September 30, 20172018 from $674,000$1,279,000 at December 31, 2016.2017. The net increase inlargest individual loan balance for which a specific allowances in the first nine months of 2017 included an increase of $424,000 in the allowance related to onehas been recorded is a real estate secured commercial loan. The increase in the specific allowance for this loan was based onwith an updated appraisal. At September 30, 2017, the outstanding balance of this loan was $2,686,000,$2,550,000 and the relateda specific allowance was $952,000.
Table X also shows that the collectively determined portion of the allowance related to commercial loans decreased $294,000, to $3,079,000$816,000 at September 30, 20172018, down from $3,373,000an outstanding balance of $2,641,000 and a specific allowance of $919,000 at December 31, 2016. The decrease in the collectively determined allowance on commercial loans resulted from an aggregate improvement (reduction) in the net charge-off experience and qualitative factors used to value the allowance on commercial loans, partially offset by the impact of an increase in outstanding loans. The aggregate net charge-off experience factor used in the allowance calculation on commercial loans was 0.09% lower at September 30, 2017 as compared to December 31, 2016. The Corporation’s aggregate net charge-off rate on commercial loans has been improving over the past several quarters, as the effects on the overall rate of a large ($1,486,000) charge-off in 2014 on a commercial loan secured by real estate has gradually diminished. The qualitative factors used in the allowance calculation for commercial loans were 0.06% lower at September 30, 2017 as compared to December 31, 2016, reflecting a pattern of overall improvement in loan delinquency levels and a reduction in the unemployment rate throughout most of the Corporation’s market area over the previous 12-18 months.
Throughout 2016 and at March 31, 2017, a rolling three-year average net charge-off rate was used for all loan classes. At June 30, 2017 and September 30, 2017, 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. The change in time period for these two loan classes was based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio.
2017.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The provision (credit) for loan losses by segment in the three-month and nine-month periods ended September 30, 20172018 and 20162017 is as follows:
(In Thousands) | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | ||||||||||||||||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Residential mortgage | $ | 101 | $ | 178 | $ | 269 | $ | 452 | $ | 67 | $ | 101 | $ | 145 | $ | 269 | ||||||||||||||||
Commercial | 140 | 337 | 293 | 750 | (66 | ) | 140 | 31 | 293 | |||||||||||||||||||||||
Consumer | 81 | 23 | 114 | 51 | 59 | 81 | 156 | 114 | ||||||||||||||||||||||||
Unallocated | 0 | 0 | 102 | (29 | ) | 0 | 0 | 0 | 102 | |||||||||||||||||||||||
Total | $ | 322 | $ | 538 | $ | 778 | $ | 1,224 | $ | 60 | $ | 322 | $ | 332 | $ | 778 |
The overall decreases in the provision (credit) for loan losses for the third quarter and first nine months of 2017 as compared to the corresponding periods of 2016 reflect decreases in the collectively determined allowance for loan losses including a reduction in the qualitative factors used to determine the allowance as well as a reduction in the historical average net charge-offs as a percentage of outstanding loans as described above. More detail related to the largest segments, residential mortgage and commercial, is further detailed as follows:
3 Months | 3 Months | 9 Months | 9 Months | |||||||||||||
Residential mortgage segment | Ended | Ended | Ended | Ended | ||||||||||||
(In thousands) | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | ||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs | $ | 30 | $ | (2 | ) | $ | 122 | $ | 160 | |||||||
Increase (decrease) in collectively determined portion of the allowance attributable to: | ||||||||||||||||
Loan growth | 38 | 15 | 61 | 63 | ||||||||||||
Changes in historical loss experience factors | (1 | ) | 3 | (38 | ) | 42 | ||||||||||
Changes in qualitative factors | 0 | 85 | 0 | 4 | ||||||||||||
Total provision for loan losses - Residential mortgage segment | $ | 67 | $ | 101 | $ | 145 | $ | 269 |
3 Months | 3 Months | 9 Months | 9 Months | |||||||||||||
Commercial segment | Ended | Ended | Ended | Ended | ||||||||||||
(In thousands) | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | ||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs | $ | (25 | ) | $ | 83 | $ | (56 | ) | $ | 587 | ||||||
Increase (decrease) in collectively determined portion of the allowance attributable to: | ||||||||||||||||
Loan growth | 9 | 19 | 44 | 64 | ||||||||||||
Changes in historical loss experience factors | (50 | ) | 3 | 43 | (259 | ) | ||||||||||
Changes in qualitative factors | 0 | 35 | 0 | (99 | ) | |||||||||||
Total (credit) provision for loan losses - Commercial segment | $ | (66 | ) | $ | 140 | $ | 31 | $ | 293 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
3 Months | 3 Months | 9 Months | 9 Months | |||||||||||||
Consumer segment | Ended | Ended | Ended | Ended | ||||||||||||
(In thousands) | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | ||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Increase in total specific allowance onimpaired loans, adjusted for the effect of netcharge-offs | $ | 35 | $ | 60 | $ | 87 | $ | 97 | ||||||||
Increase (decrease) in collectively determinedportion of the allowance attributable to: | ||||||||||||||||
Loan growth | 16 | 0 | 25 | 7 | ||||||||||||
Changes in historical loss experience factors | 8 | 21 | 34 | 12 | ||||||||||||
Changes in qualitative factors | 0 | 0 | 10 | (2 | ) | |||||||||||
Total provision for loan losses - | ||||||||||||||||
Consumer segment | $ | 59 | $ | 81 | $ | 156 | $ | 114 |
3 Months | 3 Months | 9 Months | 9 Months | |||||||||||||
Total - All segments | Ended | Ended | Ended | Ended | ||||||||||||
(In thousands) | Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | ||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs | $ | 40 | $ | 141 | $ | 153 | $ | 844 | ||||||||
Increase (decrease) in collectively determined portion of the allowance attributable to: | ||||||||||||||||
Loan growth | 63 | 34 | 130 | 134 | ||||||||||||
Changes in historical loss experience factors | (43 | ) | 27 | 39 | (205 | ) | ||||||||||
Changes in qualitative factors | 0 | 120 | 10 | (97 | ) | |||||||||||
Subtotal | 60 | 322 | 332 | 676 | ||||||||||||
Unallocated | 0 | 0 | 0 | 102 | ||||||||||||
Total provision for loan losses - All segments | $ | 60 | $ | 322 | $ | 332 | $ | 778 |
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.
In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase 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 XI 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 1.92%1.71% at September 30, 2017,2018, down from 2.07%2.10% at December 31, 2016,2017, and nonperforming assets as a percentage of total assets was 1.35%1.30% at September 30, 2017,2018, down from 1.43%1.47% at December 31, 2016.2017. Table XI presents data at September 30, 20172018 and at the end of each of the years ended December 31, 20122013 through 2016.2017. For the range of dates presented in Table XI, total nonperforming loans as a percentage of loans has ranged from a low of 1.41%1.71% at December 31, 2012September 30, 2018 to a high of 2.80% at December 31, 2013, and total nonperforming assets as a percentage of assets have ranged from a low of 0.82%1.30% at December 31, 2012September 30, 2018 to a high of 1.53% at December 31, 2013.
The balance of loans subject to troubled debt restructurings (TDRs) was $3,733,000 at September 30, 2017, which was $4,944,000 lower than the corresponding total at December 31, 2016, mainly due to removal of one commercial relationship from TDR status. At September 30, 2017, the outstanding contractual balances of loans to this borrower totaled $6,454,000, and the recorded investments totaled $4,649,000. In 2014, the Corporation entered into a forbearance agreement with this commercial borrower which was extended for two additional twelve-month periods, most recently in July 2016. The Corporation recorded a charge-off of $1,486,000 in the second quarter 2014, as the payment amounts based on the forbearance agreement were not sufficient to fully amortize the contractual amount of principal outstanding on the loans. In December 2016, the Corporation and the borrower entered into a modification agreement, terminating the forbearance agreement and establishing loan terms with essentially the same interest rate and monthly payment amounts as had been in effect under the forbearance agreement. The interest rates provided for in the modification agreement were equal to or greater than rates the Corporation would be willing to accept for loans with comparable terms to borrowers with a comparable risk profile at the time of the modification. The borrower has made all required payments on the loans in accordance with the terms of the forbearance agreement, as extended, and the modification agreement. Accordingly, the loans were restored to full accrual status at December 31, 2016 and are no longer included in the amounts reported as TDRs at September 30, 2017.CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Total impaired loans of $8,969,000$8,078,000 at September 30, 20172018 are down $1,891,000$1,433,000 from the corresponding amount at December 31, 20162017 of $10,860,000, including$9,511,000, while foreclosed assets held for sale increased $1,080,000 to a decreasebalance of $2,678,000 at September 30, 2018. In the second quarter 2018, the Corporation acquired two properties that had secured a commercial loan, recording the acquisition at an estimated fair value of $2,293,000 with no gain or loss recognized. In the third quarter 2018, the Corporation recorded a loss of $53,000 based on an updated estimate of costs to sell the properties, resulting in impaired loans without a valuation allowance of $2,100,000. This net decreasean adjustment in impaired loans is the result of: (1) removal from impairment statustheir carrying value to $2,240,000 at September 30, 2018. In October 2018, one of the loanstwo commercial properties referred to above was sold for $711,000, with no gain or loss recognized. Table XI shows that the modification agreement noted in the previous paragraph, partially offset by (2) the addition of one commercial loan secured by real estate with antotal outstanding balance of approximately $2.8 millionimpaired loans of $8,078,000 at September 30, 2017. This commercial loan was reviewed in2018 is lower than the third quarteryear-end balances from 2013 – 2017, to determine if a specific allowancewhile the balance of foreclosed assets held for loan losses would be required, and it was determined that no allowance was requiredsale at September 30, 2017 based on30. 2018 is higher than the estimated net realizable value ofyear-end amounts for the related collateral.previous five years.
Total nonperforming assets of $17,029,000$16,713,000 at September 30, 20172018 are $725,000$2,013,000 lower than the corresponding amount at December 31, 2016,2017, summarized as follows:
· | Total nonaccrual loans at September 30, |
· | Total loans past due 90 days or more and still accruing interest amounted to |
· | Foreclosed assets held for sale consisted of real estate, and totaled |
Over the period 2012-20162013-2017 and the first nine months of 2017,2018, 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.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 September 30, 2017.2018. 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.
Tables IX through XII present historical data related to loans and the allowance for loan losses.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars In Thousands)
9 Months Ended | ||||||||||||||||||||||||||||
Sept. 30, | Sept. 30, | Years Ended December 31, | ||||||||||||||||||||||||||
2017 | 2016 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||
Balance, beginning of year | $ | 8,473 | $ | 7,889 | $ | 7,889 | $ | 7,336 | $ | 8,663 | $ | 6,857 | $ | 7,705 | ||||||||||||||
Charge-offs: | ||||||||||||||||||||||||||||
Residential mortgage | (178 | ) | (73 | ) | (73 | ) | (217 | ) | (327 | ) | (95 | ) | (552 | ) | ||||||||||||||
Commercial | (97 | ) | (597 | ) | (597 | ) | (251 | ) | (1,715 | ) | (459 | ) | (498 | ) | ||||||||||||||
Consumer | (127 | ) | (67 | ) | (87 | ) | (94 | ) | (97 | ) | (117 | ) | (171 | ) | ||||||||||||||
Total charge-offs | (402 | ) | (737 | ) | (757 | ) | (562 | ) | (2,139 | ) | (671 | ) | (1,221 | ) | ||||||||||||||
Recoveries: | ||||||||||||||||||||||||||||
Residential mortgage | 18 | 2 | 3 | 1 | 25 | 24 | 18 | |||||||||||||||||||||
Commercial | 3 | 4 | 35 | 214 | 264 | 348 | 8 | |||||||||||||||||||||
Consumer | 30 | 39 | 82 | 55 | 47 | 58 | 59 | |||||||||||||||||||||
Total recoveries | 51 | 45 | 120 | 270 | 336 | 430 | 85 | |||||||||||||||||||||
Net charge-offs | (351 | ) | (692 | ) | (637 | ) | (292 | ) | (1,803 | ) | (241 | ) | (1,136 | ) | ||||||||||||||
Provision for loan losses | 778 | 1,224 | 1,221 | 845 | 476 | 2,047 | 288 | |||||||||||||||||||||
Balance, end of period | $ | 8,900 | $ | 8,421 | $ | 8,473 | $ | 7,889 | $ | 7,336 | $ | 8,663 | $ | 6,857 | ||||||||||||||
Net charge-offs as a % of average loans | 0.05 | % | 0.10 | % | 0.09 | % | 0.04 | % | 0.29 | % | 0.04 | % | 0.16 | % |
Nine Months Ended | ||||||||||||||||||||||||||||
Sept. 30, | Sept. 30, | Years Ended December 31, | ||||||||||||||||||||||||||
2018 | 2017 | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||
Balance, beginning of year | $ | 8,856 | $ | 8,473 | $ | 8,473 | $ | 7,889 | $ | 7,336 | $ | 8,663 | $ | 6,857 | ||||||||||||||
Charge-offs: | ||||||||||||||||||||||||||||
Residential mortgage | (133 | ) | (178 | ) | (197 | ) | (73 | ) | (217 | ) | (327 | ) | (95 | ) | ||||||||||||||
Commercial | (165 | ) | (97 | ) | (132 | ) | (597 | ) | (251 | ) | (1,715 | ) | (459 | ) | ||||||||||||||
Consumer | (120 | ) | (127 | ) | (150 | ) | (87 | ) | (94 | ) | (97 | ) | (117 | ) | ||||||||||||||
Total charge-offs | (418 | ) | (402 | ) | (479 | ) | (757 | ) | (562 | ) | (2,139 | ) | (671 | ) | ||||||||||||||
Recoveries: | ||||||||||||||||||||||||||||
Residential mortgage | 7 | 18 | 19 | 3 | 1 | 25 | 24 | |||||||||||||||||||||
Commercial | 5 | 3 | 4 | 35 | 214 | 264 | 348 | |||||||||||||||||||||
Consumer | 33 | 30 | 38 | 82 | 55 | 47 | 58 | |||||||||||||||||||||
Total recoveries | 45 | 51 | 61 | 120 | 270 | 336 | 430 | |||||||||||||||||||||
Net charge-offs | (373 | ) | (351 | ) | (418 | ) | (637 | ) | (292 | ) | (1,803 | ) | (241 | ) | ||||||||||||||
Provision for loan losses | 332 | 778 | 801 | 1,221 | 845 | 476 | 2,047 | |||||||||||||||||||||
Balance, end of period | $ | 8,815 | $ | 8,900 | $ | 8,856 | $ | 8,473 | $ | 7,889 | $ | 7,336 | $ | 8,663 | ||||||||||||||
Net charge-offs as a % of average loans | 0.05 | % | 0.05 | % | 0.05 | % | 0.09 | % | 0.04 | % | 0.29 | % | 0.04 | % |
TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands)
Sept. 30, | As of December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||
ASC 310 - Impaired loans | $ | 1,167 | $ | 674 | $ | 820 | $ | 769 | $ | 2,333 | $ | 623 | ||||||||||||
ASC 450 - Collective segments: | ||||||||||||||||||||||||
Commercial | 3,079 | 3,373 | 3,103 | 2,732 | 2,583 | 2,594 | ||||||||||||||||||
Residential mortgage | 3,999 | 3,890 | 3,417 | 3,295 | 3,156 | 3,011 | ||||||||||||||||||
Consumer | 155 | 138 | 122 | 145 | 193 | 188 | ||||||||||||||||||
Unallocated | 500 | 398 | 427 | 395 | 398 | 441 | ||||||||||||||||||
Total Allowance | $ | 8,900 | $ | 8,473 | $ | 7,889 | $ | 7,336 | $ | 8,663 | $ | 6,857 |
Sept. 30, | As of December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||
ASC 310 - Impaired loans | $ | 1,059 | $ | 1,279 | $ | 674 | $ | 820 | $ | 769 | $ | 2,333 | ||||||||||||
ASC 450 - Collective segments: | ||||||||||||||||||||||||
Commercial | 3,165 | 3,078 | 3,373 | 3,103 | 2,732 | 2,583 | ||||||||||||||||||
Residential mortgage | 3,864 | 3,841 | 3,890 | 3,417 | 3,295 | 3,156 | ||||||||||||||||||
Consumer | 228 | 159 | 138 | 122 | 145 | 193 | ||||||||||||||||||
Unallocated | 499 | 499 | 398 | 427 | 395 | 398 | ||||||||||||||||||
Total Allowance | $ | 8,815 | $ | 8,856 | $ | 8,473 | $ | 7,889 | $ | 7,336 | $ | 8,663 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS | ||||||||||||||||||||||||
AND TROUBLED DEBT RESTRUCTURINGS (TDRs) | ||||||||||||||||||||||||
(Dollars In Thousands) | As of | |||||||||||||||||||||||
Sept. 30, | As of December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||
Impaired loans with a valuation allowance | $ | 3,581 | $ | 3,372 | $ | 1,933 | $ | 3,241 | $ | 9,889 | $ | 2,710 | ||||||||||||
Impaired loans without a valuation allowance | 5,388 | 7,488 | 8,041 | 9,075 | 6,432 | 4,719 | ||||||||||||||||||
Total impaired loans | $ | 8,969 | $ | 10,860 | $ | 9,974 | $ | 12,316 | $ | 16,321 | $ | 7,429 | ||||||||||||
Total loans past due 30-89 days and still accruing | $ | 5,978 | $ | 7,735 | $ | 7,057 | $ | 7,121 | $ | 8,305 | $ | 7,756 | ||||||||||||
Nonperforming assets: | ||||||||||||||||||||||||
Total nonaccrual loans | $ | 12,400 | $ | 8,736 | $ | 11,517 | $ | 12,610 | $ | 14,934 | $ | 7,353 | ||||||||||||
Total loans past due 90 days or more and still accruing | 2,979 | 6,838 | 3,229 | 2,843 | 3,131 | 2,311 | ||||||||||||||||||
Total nonperforming loans | 15,379 | 15,574 | 14,746 | 15,453 | 18,065 | 9,664 | ||||||||||||||||||
Foreclosed assets held for sale (real estate) | 1,650 | 2,180 | 1,260 | 1,189 | 892 | 879 | ||||||||||||||||||
Total nonperforming assets | $ | 17,029 | $ | 17,754 | $ | 16,006 | $ | 16,642 | $ | 18,957 | $ | 10,543 | ||||||||||||
Loans subject to troubled debt restructurings (TDRs): | ||||||||||||||||||||||||
Performing | $ | 658 | $ | 5,803 | $ | 1,186 | $ | 1,807 | $ | 3,267 | $ | 906 | ||||||||||||
Nonperforming | 3,075 | 2,874 | 5,178 | 5,388 | 908 | 1,155 | ||||||||||||||||||
Total TDRs | $ | 3,733 | $ | 8,677 | $ | 6,364 | $ | 7,195 | $ | 4,175 | $ | 2,061 | ||||||||||||
Total nonperforming loans as a % of loans | 1.92 | % | 2.07 | % | 2.09 | % | 2.45 | % | 2.80 | % | 1.41 | % | ||||||||||||
Total nonperforming assets as a % of assets | 1.35 | % | 1.43 | % | 1.31 | % | 1.34 | % | 1.53 | % | 0.82 | % | ||||||||||||
Allowance for loan losses as a % of total loans | 1.11 | % | 1.13 | % | 1.12 | % | 1.16 | % | 1.34 | % | 1.00 | % | ||||||||||||
Allowance for loan losses as a % of nonperforming loans | 57.87 | % | 54.40 | % | 53.50 | % | 47.47 | % | 47.95 | % | 70.95 | % |
TABLE XII - SUMMARY OF LOANS BY TYPE | ||||||||||||||||||||||||
Summary of Loans by Type | ||||||||||||||||||||||||
(In Thousands) | Sept. 30, | As of December 31, | ||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 355,285 | $ | 334,102 | $ | 304,783 | $ | 291,882 | $ | 299,831 | $ | 311,627 | ||||||||||||
Residential mortgage loans - junior liens | 24,694 | 23,706 | 21,146 | 21,166 | 23,040 | 26,748 | ||||||||||||||||||
Home equity lines of credit | 36,534 | 38,057 | 39,040 | 36,629 | 34,530 | 33,017 | ||||||||||||||||||
1-4 Family residential construction | 25,286 | 24,908 | 21,121 | 16,739 | 13,909 | 12,842 | ||||||||||||||||||
Total residential mortgage | 441,799 | 420,773 | 386,090 | 366,416 | 371,310 | 384,234 | ||||||||||||||||||
Commercial: | ||||||||||||||||||||||||
Commercial loans secured by real estate | 158,520 | 150,468 | 154,779 | 145,878 | 147,215 | 158,413 | ||||||||||||||||||
Commercial and industrial | 83,243 | 83,854 | 75,196 | 50,157 | 42,387 | 48,442 | ||||||||||||||||||
Political subdivisions | 54,730 | 38,068 | 40,007 | 17,534 | 16,291 | 31,789 | ||||||||||||||||||
Commercial construction and land | 13,937 | 14,287 | 5,122 | 6,938 | 17,003 | 28,200 | ||||||||||||||||||
Loans secured by farmland | 7,744 | 7,294 | 7,019 | 7,916 | 10,468 | 11,403 | ||||||||||||||||||
Multi-family (5 or more) residential | 7,566 | 7,896 | 9,188 | 8,917 | 10,985 | 6,745 | ||||||||||||||||||
Agricultural loans | 6,137 | 3,998 | 4,671 | 3,221 | 3,251 | 3,053 | ||||||||||||||||||
Other commercial loans | 12,383 | 11,475 | 12,152 | 13,334 | 14,631 | 362 | ||||||||||||||||||
Total commercial | 344,260 | 317,340 | 308,134 | 253,895 | 262,231 | 288,407 | ||||||||||||||||||
Consumer | 14,953 | 13,722 | 10,656 | 10,234 | 10,762 | 11,269 | ||||||||||||||||||
Total | 801,012 | 751,835 | 704,880 | 630,545 | 644,303 | 683,910 | ||||||||||||||||||
Less: allowance for loan losses | (8,900 | ) | (8,473 | ) | (7,889 | ) | (7,336 | ) | (8,663 | ) | (6,857 | ) | ||||||||||||
Loans, net | $ | 792,112 | $ | 743,362 | $ | 696,991 | $ | 623,209 | $ | 635,640 | $ | 677,053 |
TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(Dollars In Thousands)
Sept. 30, | As of December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||
Impaired loans with a valuation allowance | $ | 3,623 | $ | 4,100 | $ | 3,372 | $ | 1,933 | $ | 3,241 | $ | 9,889 | ||||||||||||
Impaired loans without a valuation allowance | 4,455 | 5,411 | 7,488 | 8,041 | 9,075 | 6,432 | ||||||||||||||||||
Total impaired loans | $ | 8,078 | $ | 9,511 | $ | 10,860 | $ | 9,974 | $ | 12,316 | $ | 16,321 | ||||||||||||
Total loans past due 30-89 days and still accruing | $ | 4,455 | $ | 9,449 | $ | 7,735 | $ | 7,057 | $ | 7,121 | $ | 8,305 | ||||||||||||
Nonperforming assets: | ||||||||||||||||||||||||
Total nonaccrual loans | $ | 10,911 | $ | 13,404 | $ | 8,736 | $ | 11,517 | $ | 12,610 | $ | 14,934 | ||||||||||||
Total loans past due 90 days or more and still accruing | 3,124 | 3,724 | 6,838 | 3,229 | 2,843 | 3,131 | ||||||||||||||||||
Total nonperforming loans | 14,035 | 17,128 | 15,574 | 14,746 | 15,453 | 18,065 | ||||||||||||||||||
Foreclosed assets held for sale (real estate) | 2,678 | 1,598 | 2,180 | 1,260 | 1,189 | 892 | ||||||||||||||||||
Total nonperforming assets | $ | 16,713 | $ | 18,726 | $ | 17,754 | $ | 16,006 | $ | 16,642 | $ | 18,957 | ||||||||||||
Loans subject to troubled debt restructurings (TDRs): | ||||||||||||||||||||||||
Performing | $ | 698 | $ | 636 | $ | 5,803 | $ | 1,186 | $ | 1,807 | $ | 3,267 | ||||||||||||
Nonperforming | 2,925 | 3,027 | 2,874 | 5,178 | 5,388 | 908 | ||||||||||||||||||
Total TDRs | $ | 3,623 | $ | 3,663 | $ | 8,677 | $ | 6,364 | $ | 7,195 | $ | 4,175 | ||||||||||||
Total nonperforming loans as a % of loans | 1.71 | % | 2.10 | % | 2.07 | % | 2.09 | % | 2.45 | % | 2.80 | % | ||||||||||||
Total nonperforming assets as a % of assets | 1.30 | % | 1.47 | % | 1.43 | % | 1.31 | % | 1.34 | % | 1.53 | % | ||||||||||||
Allowance for loan losses as a % of total loans | 1.07 | % | 1.09 | % | 1.13 | % | 1.12 | % | 1.16 | % | 1.34 | % | ||||||||||||
Allowance for loan losses as a % of nonperforming loans | 62.81 | % | 51.70 | % | 54.40 | % | 53.50 | % | 47.47 | % | 47.95 | % |
TABLE XII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands) | Sept. 30, | As of December 31, | ||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||
Residential mortgage: | ||||||||||||||||||||||||
Residential mortgage loans - first liens | $ | 366,516 | $ | 359,987 | $ | 334,102 | $ | 304,783 | $ | 291,882 | $ | 299,831 | ||||||||||||
Residential mortgage loans - junior liens | 25,748 | 25,325 | 23,706 | 21,146 | 21,166 | 23,040 | ||||||||||||||||||
Home equity lines of credit | 34,283 | 35,758 | 38,057 | 39,040 | 36,629 | 34,530 | ||||||||||||||||||
1-4 Family residential construction | 27,661 | 26,216 | 24,908 | 21,121 | 16,739 | 13,909 | ||||||||||||||||||
Total residential mortgage | 454,208 | 447,286 | 420,773 | 386,090 | 366,416 | 371,310 | ||||||||||||||||||
Commercial: | ||||||||||||||||||||||||
Commercial loans secured by real estate | 159,212 | 159,266 | 150,468 | 154,779 | 145,878 | 147,215 | ||||||||||||||||||
Commercial and industrial | 91,472 | 88,276 | 83,854 | 75,196 | 50,157 | 42,387 | ||||||||||||||||||
Political subdivisions | 53,294 | 59,287 | 38,068 | 40,007 | 17,534 | 16,291 | ||||||||||||||||||
Commercial construction and land | 12,278 | 14,527 | 14,287 | 5,122 | 6,938 | 17,003 | ||||||||||||||||||
Loans secured by farmland | 7,208 | 7,255 | 7,294 | 7,019 | 7,916 | 10,468 | ||||||||||||||||||
Multi-family (5 or more) residential | 7,670 | 7,713 | 7,896 | 9,188 | 8,917 | 10,985 | ||||||||||||||||||
Agricultural loans | 5,670 | 6,178 | 3,998 | 4,671 | 3,221 | 3,251 | ||||||||||||||||||
Other commercial loans | 14,140 | 10,986 | 11,475 | 12,152 | 13,334 | 14,631 | ||||||||||||||||||
Total commercial | 350,944 | 353,488 | 317,340 | 308,134 | 253,895 | 262,231 | ||||||||||||||||||
Consumer | 17,380 | 14,939 | 13,722 | 10,656 | 10,234 | 10,762 | ||||||||||||||||||
Total | 822,532 | 815,713 | 751,835 | 704,880 | 630,545 | 644,303 | ||||||||||||||||||
Less: allowance for loan losses | (8,815 | ) | (8,856 | ) | (8,473 | ) | (7,889 | ) | (7,336 | ) | (8,663 | ) | ||||||||||||
Loans, net | $ | 813,717 | $ | 806,857 | $ | 743,362 | $ | 696,991 | $ | 623,209 | $ | 635,640 |
59
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At September 30, 2017,2018, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $9,709,000.$15,053,000.
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 securities with a carrying value of $18,470,000$15,355,000 at September 30, 2017.2018.
The Corporation’s outstanding, available, and total credit facilities at September 30, 20172018 and December 31, 20162017 are as follows:
Outstanding | Available | Total Credit | Outstanding | Available | Total Credit | |||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | Sept. 30, | Dec. 31, | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank of Pittsburgh | $ | 7,256 | $ | 32,454 | $ | 351,683 | $ | 306,767 | $ | 358,939 | $ | 339,221 | $ | 35,985 | $ | 67,189 | $ | 326,354 | $ | 295,441 | $ | 362,339 | $ | 362,630 | ||||||||||||||||||||||||
Federal Reserve Bank Discount Window | 0 | 0 | 18,009 | 15,636 | 18,009 | 15,636 | 0 | 0 | 14,856 | 15,877 | 14,856 | 15,877 | ||||||||||||||||||||||||||||||||||||
Other correspondent banks | 0 | 0 | 45,000 | 45,000 | 45,000 | 45,000 | 0 | 0 | 45,000 | 45,000 | 45,000 | 45,000 | ||||||||||||||||||||||||||||||||||||
Total credit facilities | $ | 7,256 | $ | 32,454 | $ | 414,692 | $ | 367,403 | $ | 421,948 | $ | 399,857 | $ | 35,985 | $ | 67,189 | $ | 386,210 | $ | 356,318 | $ | 422,195 | $ | 423,507 |
At September 30, 2017,2018, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of a short-term borrowingborrowings of $3,000,000 and long-term borrowings with a total amount of $4,256,000.$32,985,000. At December 31, 2016,2017, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $21,000,000$29,000,000, short-term borrowings of $29,000,000 and long-term borrowings with a total amount of $11,454,000.$9,189,000. Additional information regarding borrowed funds is included in Note 8 ofto the unaudited consolidated financial statements.
Additionally, the Corporation uses repurchase agreements placed with brokers to borrow funds secured by investment assets and “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.obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At September 30, 2017,2018, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $146,551,000.$164,204,000.
Management believes the Corporation is well-positioned to meet its short-term and long-term obligations.
STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY
As required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (discussed further in the Recent Legislative Developments section of Management’s Discussion and Analysis), in August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, 2018; however, C&N Bank areremains subject to various regulatory capital requirements administered by the federal banking agencies.
Details concerning capital ratios at September 30, 20172018 and December 31, 20162017 are presented below. Management believes, as of September 30, 2017 and December 31, 2016,2018, that the Corporation and C&N Bank meetmeets all capital adequacy requirements to which they areit is subject and maintainmaintains a capital conservation buffersbuffer (described in more detail below) that allowallows the Corporation and C&N 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 September 30, 20172018 and December 31, 20162017 exceed the Corporation’s Board policy threshold levels.
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 | ||||||||||||||||||||||||||||||||
September 30, 2017: | ||||||||||||||||||||||||||||||||||||||||
Total capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 187,820 | 23.56 | % | $ | 63,768 | ³8% | $ | 73,732 | ³9.25% | $ | 79,710 | ³10% | $ | 83,696 | ³10.5% | ||||||||||||||||||||||||
C&N Bank | 166,093 | 20.95 | % | 63,415 | ³8% | 73,324 | ³9.25% | 79,269 | ³10% | 83,232 | ³10.5% | |||||||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 178,676 | 22.42 | % | 47,826 | ³6% | 57,790 | ³7.25% | 63,768 | ³8% | 67,754 | ³8.5% | |||||||||||||||||||||||||||||
C&N Bank | 156,949 | 19.80 | % | 47,561 | ³6% | 57,470 | ³7.25% | 63,415 | ³8% | 67,379 | ³8.5% | |||||||||||||||||||||||||||||
Common equity tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 178,676 | 22.42 | % | 35,870 | ³4.5% | 45,833 | ³5.75% | 51,812 | ³6.5% | 55,797 | ³7% | |||||||||||||||||||||||||||||
C&N Bank | 156,949 | 19.80 | % | 35,671 | ³4.5% | 45,580 | ³5.75% | 51,525 | ³6.5% | 55,488 | ³7% | |||||||||||||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 178,676 | 14.40 | % | 49,632 | ³4% | N/A | N/A | 62,041 | ³5% | 62,041 | ³5% | |||||||||||||||||||||||||||||
C&N Bank | 156,949 | 12.80 | % | 49,053 | ³4% | N/A | N/A | 61,316 | ³5% | 61,316 | ³5% | |||||||||||||||||||||||||||||
December 31, 2016: | ||||||||||||||||||||||||||||||||||||||||
Total capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 183,597 | 23.60 | % | $ | 62,245 | ³8% | $ | 67,108 | ³8.625% | $ | 77,806 | ³10% | $ | 81,697 | ³10.5% | ||||||||||||||||||||||||
C&N Bank | 162,705 | 21.03 | % | 61,894 | ³8% | 66,730 | ³8.625% | 77,368 | ³10% | 81,236 | ³10.5% | |||||||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 174,928 | 22.48 | % | 46,684 | ³6% | 51,547 | ³6.625% | 62,245 | ³8% | 66,135 | ³8.5% | |||||||||||||||||||||||||||||
C&N Bank | 154,036 | 19.91 | % | 46,421 | ³6% | 51,256 | ³6.625% | 61,894 | ³8% | 65,762 | ³8.5% | |||||||||||||||||||||||||||||
Common equity tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 174,928 | 22.48 | % | 35,013 | ³4.5% | 39,876 | ³5.125% | 50,574 | ³6.5% | 54,464 | ³7% | |||||||||||||||||||||||||||||
C&N Bank | 154,036 | 19.91 | % | 34,815 | ³4.5% | 39,651 | ³5.125% | 50,289 | ³6.5% | 54,157 | ³7% | |||||||||||||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 174,928 | 14.27 | % | 49,026 | ³4% | N/A | N/A | 61,282 | ³5% | 61,282 | ³5% | |||||||||||||||||||||||||||||
C&N Bank | 154,036 | 12.73 | % | 48,404 | ³4% | N/A | N/A | 60,506 | ³5% | 60,506 | ³5% |
(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 | |||||||||||||||||||||||||||||||
September 30, 2018: | ||||||||||||||||||||||||||||||||||||||||
Total capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 195,531 | 23.88 | % | N/A | N/A | N/A | N/A | N/A | N/A | $ | 85,988 | ³10.5% | |||||||||||||||||||||||||||
C&N Bank | 173,160 | 21.26 | % | 65,171 | ³8% | 80,446 | ³9.875% | 81,464 | ³10% | 85,537 | ³10.5% | |||||||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 186,406 | 22.76 | % | N/A | N/A | N/A | N/A | N/A | N/A | 69,610 | ³8.5% | |||||||||||||||||||||||||||||
C&N Bank | 164,035 | 20.14 | % | 48,878 | ³6% | 64,153 | ³7.875% | 65,171 | ³8% | 69,244 | ³8.5% | |||||||||||||||||||||||||||||
Common equity tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 186,406 | 22.76 | % | N/A | N/A | N/A | N/A | N/A | N/A | 57,326 | ³7% | |||||||||||||||||||||||||||||
C&N Bank | 164,035 | 20.14 | % | 36,659 | ³4.5% | 51,933 | ³6.375% | 52,952 | ³6.5% | 57,025 | ³7% | |||||||||||||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 186,406 | 14.50 | % | N/A | N/A | N/A | N/A | N/A | N/A | 102,874 | ³8% | |||||||||||||||||||||||||||||
C&N Bank | 164,035 | 12.90 | % | 50,854 | ³4% | N/A | N/A | 63,568 | ³5% | 101,708 | ³8% | |||||||||||||||||||||||||||||
December 31, 2017: | ||||||||||||||||||||||||||||||||||||||||
Total capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 187,097 | 23.07 | % | $ | 64,872 | ³8% | $ | 75,008 | ³9.25% | $ | 81,090 | ³10% | $ | 85,144 | ³10.5% | ||||||||||||||||||||||||
C&N Bank | 165,142 | 20.47 | % | 64,528 | ³8% | 74,611 | ³9.25% | 80,661 | ³10% | 84,694 | ³10.5% | |||||||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 177,981 | 21.95 | % | 48,654 | ³6% | 58,790 | ³7.25% | 64,872 | ³8% | 68,926 | ³8.5% | |||||||||||||||||||||||||||||
C&N Bank | 156,026 | 19.34 | % | 48,396 | ³6% | 58,479 | ³7.25% | 64,528 | ³8% | 68,561 | ³8.5% | |||||||||||||||||||||||||||||
Common equity tier 1 capital to risk-weighted assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 177,981 | 21.95 | % | 36,490 | ³4.5% | 46,626 | ³5.75% | 52,708 | ³6.5% | 56,763 | ³7% | |||||||||||||||||||||||||||||
C&N Bank | 156,026 | 19.34 | % | 36,297 | ³4.5% | 46,380 | ³5.75% | 52,429 | ³6.5% | 56,462 | ³7% | |||||||||||||||||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||||||||||||||||||||||
Consolidated | 177,981 | 14.23 | % | 50,023 | ³4% | N/A | N/A | 62,529 | ³5% | 62,529 | ³5% | |||||||||||||||||||||||||||||
C&N Bank | 156,026 | 12.63 | % | 49,418 | ³4% | N/A | N/A | 61,772 | ³5% | 61,772 | ³5% |
Management expects the Corporation and C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions and the applicable capital conservation buffersbuffer, including the impact of the pending merger discussed in Note 14 to the unaudited, consolidated financial statements, for the next 12 months and for the foreseeable future.
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, the Corporation and C&N Bank areis 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.
In July 2013, the federal regulatory authorities issued a new capital rule based, in part, on revisions developed by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). The Corporation and C&N Bank became subject to the new rule effective January 1, 2015. Generally, the new rule implemented higher minimum capital requirements, revised the definition of regulatory capital components and related calculations, added a new common equity tier 1 capital ratio, implemented a new capital conservation buffer, increased the risk weighting for past due loans and provided a transition period for several aspects of the new rule.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The current (new) capital rule provides that, in order 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. The current and remaining transition schedule for newcapital ratios, including the capital conservation buffer, is as follows:
As of January 1: | ||||||||||||
2017 | 2018 | 2019 | ||||||||||
Minimum common equity tier 1 capital ratio | 4.5 | % | 4.5 | % | 4.5 | % | ||||||
Common equity tier 1 capital conservation buffer | 1.25 | % | 1.875 | % | 2.5 | % | ||||||
Minimum common equity tier 1 capital ratio plus | ||||||||||||
capital conservation buffer | 5.75 | % | 6.375 | % | 7.0 | % | ||||||
Phase-in of most deductions from common equity | ||||||||||||
tier 1 capital | 80 | % | 100 | % | 100 | % | ||||||
Minimum tier 1 capital ratio | 6.0 | % | 6.0 | % | 6.0 | % | ||||||
Minimum tier 1 capital ratio plus capital | ||||||||||||
conservation buffer | 7.25 | % | 7.875 | % | 8.5 | % | ||||||
Minimum total capital ratio | 8.0 | % | 8.0 | % | 8.0 | % | ||||||
Minimum total capital ratio plus capital | ||||||||||||
conservation buffer | 9.25 | % | 9.875 | % | 10.5 | % |
As of January 1: | ||||||||
2018 | 2019 | |||||||
Minimum common equity tier 1 capital ratio | 4.5 | % | 4.5 | % | ||||
Common equity tier 1 capital conservation buffer | 1.875 | % | 2.5 | % | ||||
Minimum common equity tier 1 capital ratio plus capital conservation buffer | 6.375 | % | 7.0 | % | ||||
Phase-in of most deductions from common equity tier 1 capital | 100 | % | 100 | % | ||||
Minimum tier 1 capital ratio | 6.0 | % | 6.0 | % | ||||
Minimum tier 1 capital ratio plus capital conservation buffer | 7.875 | % | 8.5 | % | ||||
Minimum total capital ratio | 8.0 | % | 8.0 | % | ||||
Minimum total capital ratio plus capital conservation buffer | 9.875 | % | 10.5 | % |
As fully phased in, a banking organization with a buffer greater than 2.5% 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. The new rule also prohibits a banking organization 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% | ||||
≤1.875% and >1.25% | ||||
≤1.25% and >0.625% | ||||
≤0.625% |
At September 30, 2017, the Corporation’s2018, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 15.56%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 12.95%13.26%.
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 securities, net of deferred income tax, amounted to $227,000($8,502,000) at September 30, 20172018 and ($949,000)1,566,000) at December 31, 2016.2017. Changes in accumulated other comprehensive income (loss) are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale securities for other-than-temporary impairment at September 30, 2017.
2018.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 $147,000$134,000 at September 30, 20172018 and $51,000$59,000 at December 31, 2016.2017.
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 securities and changes in underfunded or overfunded defined benefit plans. Fluctuations in interest rates significantly affect fair values of available-for-sale securities, and accordingly have an effect on Other Comprehensive Income (Loss) in each period.
Comprehensive Income totaled $3,790,000$3,557,000 for the three months ended September 30, 20172018 as compared to $2,623,000$3,790,000 in the third quarter 2016.2017. For the three months ended September 30, 2017,2018, Comprehensive Income included: (1) Net Income of $3,936,000,$5,586,000, which was $151,000 lower$1,650,000 higher than in the third quarter 2016;2017; (2) Other Comprehensive Loss from a decrease in net unrealized gains on available-for-sale securities of ($142,000)2,026,000) as compared to Other Comprehensive Loss of ($1,461,000) from a decrease in net unrealized gains on available-for-sale securities142,000) in the third quarter 2016;2017; and (3) Other Comprehensive Loss from defined benefit plans of ($3,000) for the third quarter 2018 as compared to ($4,000) for the third quarter 2017 as compared to ($3,000) for the third quarter 2016.2017.
Comprehensive Income totaled $12,763,000 forFor the nine months ended September 30, 20172018, Comprehensive Income totaled $9,748,000 as compared to $14,433,000$12,763,000 for the first nine months of 2017. For the nine months ended September 30, 2016. In the nine months ended September 30, 2017,2018, Comprehensive Income included: (1) Net Income of $11,491,000, which was $40,000 lower than in$16,332,000, up $4,841,000 from net income for the first nine months of 2016;2017; (2) Other Comprehensive IncomeLoss from an increase in net unrealized gains on available-for-sale securities net of deferred income tax, of $1,176,000($6,647,000) as compared to Other Comprehensive Income of $2,895,000$1,176,000 in the first nine months of 2016;2017; and (3) Other Comprehensive Income from defined benefit plans of $96,000$63,000 for the nine months ended September 30, 2018 as compared to Other Comprehensive Income of $7,000 in the first nine months of 2016.
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$96,000 for the first nine months of 2017 was $3,620,000, or 24% of pre-tax earnings, $227,000 lower than the provision for the first nine months of 2016 of $3,847,000, or 25% of pre-tax income. The Corporation’s effective tax rates differ from the statutory rate of 35% principally because of the effects of tax-exempt interest income.
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At September 30, 2017 the net deferred tax asset was $4,319,000, down from $5,117,000 at December 31, 2016. The most significant change in temporary difference components was a net reduction of $634,000 related to unrealized gains and losses on available-for-sale securities. At September 30, 2017, the net deferred tax liability associated with the unrealized gain was $122,000, while at December 31, 2016, the deferred tax asset associated with the unrealized loss was $512,000.
The Corporation uses currently enacted tax rates to value deferred tax assets and liabilities. The U.S. Congress is in the process of evaluating draft legislation which includes a reduction in U.S. corporate income tax rates. If corporate tax rates were reduced, management expects the Corporation would record an initial charge against earnings to lower the carrying amount of the net deferred tax asset, and then would record a lower tax provision going forward on an ongoing basis.
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. Further, as discussed above, realization of deferred tax assets would be impacted if income tax rates are lowered from currently enacted levels.
Management believes the recorded net deferred tax asset at September 30, 2017 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.
Additional information related to income taxes is presented in Note 11 to the unaudited, consolidated financial statements.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q2017.
INFLATION
The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. Since September 2007, the Federal Reserve has maintained the fed funds target rate at extremely low levels by historical standards. Further, throughout the period of low interest rates, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. Since late 2015, the Federal Reserve has begun to move its fed funds target rate higher, in an effort to re-establish a more normalized level by historical standards, with eight separate 0.25% increases infrom December 2015 and 2016, March 2017 and June 2017,through September 2018, resulting in the current range of 1%2.00% to 1.25%2.25%. Inflation has remained subdued, measured for most of 2016through 2017 and the first nine months of 20172018 at levels at or just below the Federal Open Market Committee’s 2% longer run objective, though there have been some reports of wage pressureobjective. The FOMC noted in its latest statement that the labor market has continued to strengthen, and that economic activity continues to rise at a solid rate with household spending and business fixed investment growing strongly. The Committee continues to suggest that as market conditions continue to improve, further gradual increases in the U.S. employment picture has gradually improved over the past several years.federal funds rate will be warranted.
Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including any indicators of inflationary pressures, in managing interest rate and other financial risks.
RECENT LEGISLATIVE DEVELOPMENTS
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Most of the changes made by the new Act can be grouped into five general areas: mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified as systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation.
As noted in the Stockholders’ Equity and Capital Adequacy section of Management’s Discussion and Analysis, as required by the Act, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement, raising the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company, subject to other conditions. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, 2018. Further, qualification as a small bank holding company allows the Corporation to file more abbreviated, and less frequent, consolidated and holding company reports with the Federal Reserve.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Some of the other key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings.
The Corporation continues to analyze the changes implemented by the Act, but does not believe that such changes will materially impact the Corporation’s business, operations, or financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices of the Corporation’s financial instruments. In addition to the effects of interest rates, the market prices of the Corporation’s debt securities within the available-for-sale securities portfolio are affected by fluctuations in the risk premiums (amounts of spread over risk-free rates) demanded by investors. Management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).
The Corporation’s major category of market risk, interest rate risk, is discussed in the following section.
INTEREST RATE RISK
Business risk arising from changes in interest rates is an inherent factor in operating a bank. A significant portion of the Corporation’s assets are long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change.
The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the market value of portfolio equity. For purposes of these calculations, the market value of portfolio equity includes the fair values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects the amount of potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.
The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and market value of portfolio equity. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.
The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in the market value of portfolio equity from the baseline values based on current rates.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Table XIII, which follows this discussion, is based on the results of calculations performed using the simulation model as of July 31, 2017September 30, 2018 and December 31, 2016. Table XIII reflects two significant changes to the analysis using July 31, 2017 data as compared to the analysis based on December 31, 2016 data, as follows:
Table XIII2017. The table shows that as of the respective dates, the changes in net interest income and changes in market value were within the policy limits in all scenarios.
65
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE XIII - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
July 31, 2017 Data | ||||||||||||||||||||||||||||||||||||||||
September 30, 2018 Data | ||||||||||||||||||||||||||||||||||||||||
(Dollars In Thousands) | Period Ending July 31, 2018 | Period Ending September 30, 2019 | ||||||||||||||||||||||||||||||||||||||
Basis Point | Interest | Interest | Net Interest | NII | NII | Interest | Interest | Net Interest | NII | NII | ||||||||||||||||||||||||||||||
Change in Rates | Income | Expense | Income (NII) | % Change | Risk Limit | Income | Expense | Income (NII) | % Change | Risk Limit | ||||||||||||||||||||||||||||||
+400 | $ | 55,775 | $ | 18,524 | $ | 37,251 | -8.5 | % | 25.0 | % | $ | 62,241 | $ | 19,731 | $ | 42,510 | -7.8 | % | 25.0 | % | ||||||||||||||||||||
+300 | 52,948 | 14,786 | 38,162 | -6.2 | % | 20.0 | % | 59,575 | 16,088 | 43,487 | -5.7 | % | 20.0 | % | ||||||||||||||||||||||||||
+200 | 50,134 | 11,047 | 39,087 | -4.0 | % | 15.0 | % | 56,921 | 12,445 | 44,476 | -3.6 | % | 15.0 | % | ||||||||||||||||||||||||||
+100 | 47,293 | 7,309 | 39,984 | -1.8 | % | 10.0 | % | 54,158 | 8,802 | 45,356 | -1.7 | % | 10.0 | % | ||||||||||||||||||||||||||
0 | 44,329 | 3,630 | 40,699 | 0.0 | % | 0.0 | % | 51,296 | 5,170 | 46,126 | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||
-100 | 41,209 | 2,690 | 38,519 | -5.4 | % | 10.0 | % | 47,952 | 3,370 | 44,582 | -3.3 | % | 10.0 | % | ||||||||||||||||||||||||||
-200 | 39,217 | 2,450 | 36,767 | -9.7 | % | 15.0 | % | 44,731 | 2,678 | 42,053 | -8.8 | % | 15.0 | % | ||||||||||||||||||||||||||
-300 | 38,711 | 2,302 | 36,409 | -10.5 | % | 20.0 | % | 42,647 | 2,436 | 40,211 | -12.8 | % | 20.0 | % | ||||||||||||||||||||||||||
-400 | 38,483 | 2,302 | 36,181 | -11.1 | % | 25.0 | % | 42,314 | 2,436 | 39,878 | -13.5 | % | 25.0 | % |
Market Value of Portfolio Equity at July 31, 2017 | Market Value of Portfolio Equity at September 30, 2018 | |||||||||||||||||||||||
Present | Present | Present | Present | Present | Present | |||||||||||||||||||
Basis Point | Value | Value | Value | Value | Value | Value | ||||||||||||||||||
Change in Rates | Equity | % Change | Risk Limit | Equity | % Change | Risk Limit | ||||||||||||||||||
+400 | $ | 194,644 | -15.0 | % | 40.0 | % | $ | 200,924 | -16.5 | % | 40.0 | % | ||||||||||||
+300 | 201,803 | -11.9 | % | 30.0 | % | 209,456 | -13.0 | % | 30.0 | % | ||||||||||||||
+200 | 210,522 | -8.1 | % | 25.0 | % | 220,194 | -8.5 | % | 25.0 | % | ||||||||||||||
+100 | 219,626 | -4.1 | % | 15.0 | % | 230,238 | -4.4 | % | 15.0 | % | ||||||||||||||
0 | 228,967 | 0.0 | % | 0.0 | % | 240,719 | 0.0 | % | 0.0 | % | ||||||||||||||
-100 | 229,156 | 0.1 | % | 15.0 | % | 242,264 | 0.6 | % | 15.0 | % | ||||||||||||||
-200 | 228,292 | -0.3 | % | 25.0 | % | 241,271 | 0.2 | % | 25.0 | % | ||||||||||||||
-300 | 254,212 | 11.0 | % | 30.0 | % | 240,940 | 0.1 | % | 30.0 | % | ||||||||||||||
-400 | 292,504 | 27.7 | % | 40.0 | % | 273,246 | 13.5 | % | 40.0 | % |
December 31, 2016 Data | ||||||||||||||||||||||||||||||||||||||||
December 31, 2017 Data | December 31, 2017 Data | |||||||||||||||||||||||||||||||||||||||
(Dollars in Thousands) | Period Ending December 31, 2017 | Period Ending December 31, 2018 | ||||||||||||||||||||||||||||||||||||||
Basis Point | Interest | Interest | Net Interest | NII | NII | Interest | Interest | Net Interest | NII | NII | ||||||||||||||||||||||||||||||
Change in Rates | Income | Expense | Income (NII) | % Change | Risk Limit | Income | Expense | Income (NII) | % Change | Risk Limit | ||||||||||||||||||||||||||||||
+400 | $ | 53,712 | $ | 22,315 | $ | 31,397 | -20.5 | % | 25.0 | % | $ | 57,619 | $ | 19,730 | $ | 37,889 | -10.8 | % | 25.0 | % | ||||||||||||||||||||
+300 | 51,128 | 17,545 | 33,583 | -15.0 | % | 20.0 | % | 54,978 | 15,852 | 39,126 | -7.9 | % | 20.0 | % | ||||||||||||||||||||||||||
+200 | 48,500 | 12,809 | 35,691 | -9.6 | % | 15.0 | % | 52,334 | 11,974 | 40,360 | -5.0 | % | 15.0 | % | ||||||||||||||||||||||||||
+100 | 45,845 | 8,102 | 37,743 | -4.4 | % | 10.0 | % | 49,620 | 8,095 | 41,525 | -2.2 | % | 10.0 | % | ||||||||||||||||||||||||||
0 | 43,132 | 3,643 | 39,489 | 0.0 | % | 0.0 | % | 46,717 | 4,243 | 42,474 | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||
-100 | 40,581 | 2,978 | 37,603 | -4.8 | % | 10.0 | % | 43,581 | 2,781 | 40,800 | -3.9 | % | 10.0 | % | ||||||||||||||||||||||||||
-200 | 38,881 | 2,949 | 35,932 | -9.0 | % | 15.0 | % | 41,290 | 2,216 | 39,074 | -8.0 | % | 15.0 | % | ||||||||||||||||||||||||||
-300 | 38,269 | 2,936 | 35,333 | -10.5 | % | 20.0 | % | 40,463 | 2,191 | 38,272 | -9.9 | % | 20.0 | % | ||||||||||||||||||||||||||
-400 | 38,104 | 2,936 | 35,168 | -10.9 | % | 25.0 | % | 40,194 | 2,191 | 38,003 | -10.5 | % | 25.0 | % |
Market Value of Portfolio Equity at December 31, 2016 | Market Value of Portfolio Equity at December 31, 2017 | |||||||||||||||||||||||
Present | Present | Present | Present | Present | Present | |||||||||||||||||||
Basis Point | Value | Value | Value | Value | Value | Value | ||||||||||||||||||
Change in Rates | Equity | % Change | Risk Limit | Equity | % Change | Risk Limit | ||||||||||||||||||
+400 | $ | 168,600 | -24.6 | % | 50.0 | % | $ | 195,385 | -16.8 | % | 40.0 | % | ||||||||||||
+300 | 180,500 | -19.3 | % | 45.0 | % | 203,648 | -13.3 | % | 30.0 | % | ||||||||||||||
+200 | 194,471 | -13.1 | % | 35.0 | % | 213,689 | -9.0 | % | 25.0 | % | ||||||||||||||
+100 | 208,830 | -6.7 | % | 25.0 | % | 224,389 | -4.4 | % | 15.0 | % | ||||||||||||||
0 | 223,744 | 0.0 | % | 0.0 | % | 234,759 | 0.0 | % | 0.0 | % | ||||||||||||||
-100 | 227,806 | 1.8 | % | 25.0 | % | 236,030 | 0.5 | % | 15.0 | % | ||||||||||||||
-200 | 229,602 | 2.6 | % | 35.0 | % | 234,863 | 0.0 | % | 25.0 | % | ||||||||||||||
-300 | 252,118 | 12.7 | % | 45.0 | % | 252,464 | 7.5 | % | 30.0 | % | ||||||||||||||
-400 | 290,792 | 30.0 | % | 50.0 | % | 292,124 | 24.4 | % | 40.0 | % |
66
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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.
There were no significant changes in the Corporation’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 |
There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed February 15, 2018.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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 | ||||||||||||
July 1 - 31, 2017 | 0 | $ | 0 | 0 | 600,000 | |||||||||||
August 1 - 31, 2017 | 0 | $ | 0 | 0 | 600,000 | |||||||||||
September 1 - 30, 2017 | 0 | $ | 0 | 0 | 600,000 |
Issuer Purchases of Equity Securities
The following table sets forth a summary of the purchases by the Corporation, on the open market, of its equity securities during the third quarter 2018:
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 Programs | ||||||||||||
July 1 - 31, 2018 | 0 | $ | 0 | 0 | 600,000 | |||||||||||
August 1 - 31, 2018 | 0 | $ | 0 | 0 | 600,000 | |||||||||||
September 1 - 30, 2018 | 0 | $ | 0 | 0 | 600,000 |
Note to Table: Effective April 21, 2016, the Corporation’s Board of Directors approved a treasury stock repurchase program. Under this stock repurchase program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation's common stock or slightly less than 5% of the Corporation's issued and outstanding shares at April 19, 2016. The Board of Directors’ April 21, 2016 authorization provides that: (1) the new treasury stock repurchase program shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. To date, no purchases have been made under this repurchase program.
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Mine Safety Disclosures |
Not applicable
Item 5. | Other Information |
None
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Item 6. Exhibits
Item 6. | Exhibits |
69
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 | |||
November | By: | ||
Date | President and Chief Executive Officer | ||
November | By: | ||
Date | Treasurer and Chief Financial Officer |