UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
◻ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________________.
Commission file number: 000-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
| | |
PENNSYLVANIA |
| 23-2451943 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
90-92 MAIN STREET, WELLSBORO, PA 16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on Which Registered |
Common Stock Par Value $1.00 | | CZNC | | NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ Accelerated filer ⌧ Non-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 ☐ No ⌧
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) | 15,871,073 Shares Outstanding on August 3, 2020 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
CITIZENS & NORTHERN CORPORATION
Index
| | ||
Part I. Financial Information |
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Consolidated Balance Sheets (Unaudited) – June 30, 2020 and December 31, 2019 | Page 3 | ||
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Page 4 | |||
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Page 5 | |||
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Consolidated Statements of Cash Flows (Unaudited) – Six-month Periods Ended June 30, 2020 and 2019 | Page 6 | ||
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Page 7 - 8 | |||
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Pages 9 – 46 | |||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | Pages 46 – 79 | ||
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Page 79 | |||
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Pages 79 – 83 | |||
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Page 84 |
2
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data) (Unaudited)
| | | | | | |
|
| June 30, |
| December 31, | ||
| | 2020 | | 2019 | ||
ASSETS |
| |
|
| |
|
Cash and due from banks: |
| |
|
| |
|
Noninterest-bearing | | $ | 24,075 | | $ | 17,667 |
Interest-bearing | |
| 53,567 | |
| 17,535 |
Total cash and due from banks | |
| 77,642 | |
| 35,202 |
Available-for-sale debt securities, at fair value | |
| 332,188 | |
| 346,723 |
Marketable equity security | |
| 1,003 | |
| 979 |
Loans held for sale | |
| 1,258 | |
| 767 |
| | | | | | |
Loans receivable | |
| 1,241,413 | |
| 1,182,222 |
Allowance for loan losses | |
| (11,026) | |
| (9,836) |
Loans, net | |
| 1,230,387 | |
| 1,172,386 |
| | | | | | |
Bank-owned life insurance | |
| 18,843 | |
| 18,641 |
Accrued interest receivable | |
| 6,326 | |
| 5,001 |
Bank premises and equipment, net | |
| 18,332 | |
| 17,170 |
Foreclosed assets held for sale | |
| 1,593 | |
| 2,886 |
Deferred tax asset, net | |
| 93 | |
| 2,618 |
Goodwill | |
| 28,388 | |
| 28,388 |
Core deposit intangibles, net | |
| 1,123 | |
| 1,247 |
Other assets | |
| 28,290 | |
| 22,137 |
TOTAL ASSETS | | $ | 1,745,466 | | $ | 1,654,145 |
| | | | | | |
LIABILITIES | |
| | |
| |
Deposits: | |
| | |
| |
Noninterest-bearing | | $ | 353,707 | | $ | 285,904 |
Interest-bearing | |
| 1,027,471 | |
| 966,756 |
Total deposits | |
| 1,381,178 | |
| 1,252,660 |
Short-term borrowings | |
| 14,404 | |
| 86,220 |
Long-term borrowings | |
| 72,904 | |
| 52,127 |
Subordinated debt | |
| 6,500 | |
| 6,500 |
Accrued interest and other liabilities | |
| 14,689 | |
| 12,186 |
TOTAL LIABILITIES | |
| 1,489,675 | |
| 1,409,693 |
| | | | | | |
STOCKHOLDERS' EQUITY | |
| | |
| |
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation | |
| | |
| |
preference per share; 0 shares issued | |
| 0 | |
| 0 |
Common stock, par value $1.00 per share; authorized 20,000,000 shares; | |
| | |
| |
issued 13,934,996 and outstanding 13,807,157 at June 30, 2020; | |
| | |
| |
issued 13,934,996 and outstanding 13,716,445 at December 31, 2019 | |
| 13,935 | |
| 13,935 |
Paid-in capital | |
| 103,954 | |
| 104,519 |
Retained earnings | |
| 128,661 | |
| 126,480 |
Treasury stock, at cost; 127,839 shares at June 30, 2020 and 218,551 | |
| | |
| |
shares at December 31, 2019 | |
| (2,470) | |
| (4,173) |
Accumulated other comprehensive income | |
| 11,711 | |
| 3,691 |
TOTAL STOCKHOLDERS' EQUITY | |
| 255,791 | |
| 244,452 |
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | | $ | 1,745,466 | | $ | 1,654,145 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Income
(In Thousands Except Per Share Data) (Unaudited)
| | | | | | | | | | | | |
|
| 3 Months Ended | | 6 Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||
| | 2020 | | 2019 | | 2020 | | 2019 | ||||
INTEREST INCOME |
| |
|
| |
| | |
|
| |
|
Interest and fees on loans: |
| |
|
| |
| | |
|
| |
|
Taxable | | $ | 14,126 | | $ | 14,098 | | $ | 28,587 | | $ | 24,046 |
Tax-exempt | |
| 439 | |
| 524 | |
| 898 | |
| 1,088 |
Interest on mortgages held for sale | |
| 15 | |
| 6 | |
| 21 | |
| 9 |
Interest on balances with depository institutions | |
| 41 | |
| 149 | |
| 122 | |
| 265 |
Income from available-for-sale debt securities: | |
| | |
| | |
| | |
| |
Taxable | |
| 1,380 | |
| 1,826 | |
| 2,968 | |
| 3,660 |
Tax-exempt | |
| 507 | |
| 531 | |
| 944 | |
| 1,125 |
Dividends on marketable equity security | |
| 5 | |
| 5 | |
| 10 | |
| 11 |
Total interest and dividend income | |
| 16,513 | |
| 17,139 | |
| 33,550 | |
| 30,204 |
INTEREST EXPENSE | |
|
| |
| | |
|
| |
| |
Interest on deposits | |
| 1,784 | |
| 2,363 | |
| 3,939 | |
| 3,416 |
Interest on short-term borrowings | |
| 64 | |
| 228 | |
| 262 | |
| 307 |
Interest on long-term borrowings | |
| 313 | |
| 228 | |
| 608 | |
| 446 |
Interest on subordinated debt | |
| 106 | |
| 115 | |
| 213 | |
| 115 |
Total interest expense | |
| 2,267 | |
| 2,934 | |
| 5,022 | |
| 4,284 |
Net interest income | |
| 14,246 | |
| 14,205 | |
| 28,528 | |
| 25,920 |
(Credit) provision for loan losses | |
| (176) | |
| (4) | |
| 1,352 | |
| (961) |
Net interest income after (credit) provision for loan losses | |
| 14,422 | |
| 14,209 | |
| 27,176 | |
| 26,881 |
NONINTEREST INCOME | |
|
| |
|
| |
|
| |
|
|
Trust and financial management revenue | |
| 1,565 | |
| 1,583 | |
| 3,044 | |
| 2,943 |
Brokerage revenue | |
| 343 | |
| 361 | |
| 676 | |
| 668 |
Insurance commissions, fees and premiums | |
| 52 | |
| 48 | |
| 85 | |
| 78 |
Service charges on deposit accounts | |
| 831 | |
| 1,277 | |
| 2,081 | |
| 2,527 |
Service charges and fees | |
| 84 | |
| 89 | |
| 147 | |
| 168 |
Interchange revenue from debit card transactions | |
| 718 | |
| 699 | |
| 1,449 | |
| 1,342 |
Net gains from sale of loans | |
| 1,564 | |
| 221 | |
| 1,879 | |
| 308 |
Loan servicing fees, net | |
| (158) | |
| 35 | |
| (172) | |
| 63 |
Increase in cash surrender value of life insurance | |
| 98 | |
| 99 | |
| 202 | |
| 191 |
Other noninterest income | |
| 431 | |
| 437 | |
| 1,418 | |
| 967 |
Sub-total | | | 5,528 | | | 4,849 | | | 10,809 | | | 9,255 |
Realized gains on available-for-sale debt securities, net | | | 0 | | | 7 | | | 0 | | | 7 |
Total noninterest income | |
| 5,528 | |
| 4,856 | |
| 10,809 | |
| 9,262 |
NONINTEREST EXPENSE | |
| | |
| | |
|
| |
|
|
Salaries and wages | |
| 5,364 | |
| 5,276 | |
| 10,704 | |
| 9,769 |
Pensions and other employee benefits | |
| 1,619 | |
| 1,225 | |
| 3,657 | |
| 2,843 |
Occupancy expense, net | |
| 664 | |
| 665 | |
| 1,409 | |
| 1,322 |
Furniture and equipment expense | |
| 311 | |
| 333 | |
| 669 | |
| 634 |
Data processing expenses | |
| 1,040 | |
| 962 | |
| 2,058 | |
| 1,765 |
Automated teller machine and interchange expense | |
| 275 | |
| 277 | |
| 572 | |
| 466 |
Pennsylvania shares tax | |
| 423 | |
| 347 | |
| 845 | |
| 694 |
Professional fees | |
| 464 | |
| 331 | |
| 843 | |
| 553 |
Telecommunications | |
| 213 | |
| 176 | |
| 419 | |
| 340 |
Directors' fees | |
| 178 | |
| 141 | |
| 348 | |
| 324 |
Merger-related expenses | |
| 983 | |
| 3,301 | |
| 1,124 | |
| 3,612 |
Other noninterest expense | |
| 1,723 | |
| 1,689 | |
| 3,662 | |
| 3,408 |
Total noninterest expense | |
| 13,257 | |
| 14,723 | |
| 26,310 | |
| 25,730 |
Income before income tax provision | |
| 6,693 | |
| 4,342 | |
| 11,675 | |
| 10,413 |
Income tax provision | |
| 1,255 | |
| 693 | |
| 2,071 | |
| 1,674 |
NET INCOME | | $ | 5,438 | | $ | 3,649 | | $ | 9,604 | | $ | 8,739 |
EARNINGS PER COMMON SHARE - BASIC | | $ | 0.39 | | $ | 0.27 | | $ | 0.70 | | $ | 0.67 |
EARNINGS PER COMMON SHARE - DILUTED | | $ | 0.39 | | $ | 0.27 | | $ | 0.70 | | $ | 0.67 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Comprehensive Income
(In Thousands) (Unaudited)
| | | | | | | | | | | | |
|
| Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Net income | | $ | 5,438 | | $ | 3,649 | | $ | 9,604 | | $ | 8,739 |
| | | | | | | | | | | | |
Unrealized holding gains on available-for-sale debt securities | |
| 2,835 | |
| 5,163 | |
| 10,075 | |
| 9,424 |
| | | | | | | | | | | | |
Unfunded pension and postretirement obligations: | |
| | |
| | |
| | |
| |
Changes from plan amendments and actuarial gains and losses | |
| 0 | |
| 0 | |
| 88 | |
| 214 |
Amortization of prior service cost and net actuarial loss included in | |
| | |
| | |
| | |
| |
net periodic benefit cost | |
| (6) | |
| (7) | |
| (14) | |
| (15) |
Other comprehensive (loss) gain on unfunded retirement obligations | |
| (6) | |
| (7) | |
| 74 | |
| 199 |
| | | | | | | | | | | | |
Other comprehensive income before income tax | |
| 2,829 | |
| 5,156 | |
| 10,149 | |
| 9,623 |
Income tax related to other comprehensive income | |
| (592) | |
| (1,083) | |
| (2,129) | |
| (2,021) |
| | | | | | | | | | | | |
Net other comprehensive income | |
| 2,237 | |
| 4,073 | |
| 8,020 | |
| 7,602 |
| | | | | | | | | | | | |
Comprehensive income | | $ | 7,675 | | $ | 7,722 | | $ | 17,624 | | $ | 16,341 |
The accompanying notes are an integral part of these unaudited consolidated financial statements
5
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
| | | | | | |
|
| 6 Months Ended | ||||
| | June 30, | | June 30, | ||
| | 2020 |
| 2019 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| |
|
| |
|
Net income | | $ | 9,604 | | $ | 8,739 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Provision (credit) for loan losses | |
| 1,352 | |
| (961) |
Realized gains on available-for-sale debt securities, net | |
| 0 | |
| (7) |
Accretion and amortization on securities, net | | | 802 | | | 505 |
Increase in cash surrender value of life insurance | |
| (202) | |
| (191) |
Depreciation and amortization of bank premises and equipment | |
| 897 | |
| 843 |
Other accretion and amortization, net | |
| (578) | |
| (138) |
Stock-based compensation | |
| 424 | |
| 431 |
Deferred income taxes | |
| 396 | |
| 583 |
Decrease in fair value of servicing rights | |
| 396 | |
| 148 |
Gains on sales of loans, net | |
| (1,879) | |
| (308) |
Origination of loans held for sale | |
| (60,830) | |
| (9,783) |
Proceeds from sales of loans held for sale | |
| 61,815 | |
| 9,107 |
Increase in accrued interest receivable and other assets | |
| (9,085) | |
| (254) |
Increase (decrease) in accrued interest payable and other liabilities | |
| 2,630 | |
| (1,188) |
Other | |
| 15 | |
| 58 |
Net Cash Provided by Operating Activities | |
| 5,757 | |
| 7,584 |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
|
|
Net cash and cash equivalents used in business combination | | | 0 | | | (1,778) |
Proceeds from maturities of certificates of deposit | |
| 250 | |
| 100 |
Proceeds from sales of available-for-sale debt securities | |
| 6,722 | |
| 95,139 |
Proceeds from calls and maturities of available-for-sale debt securities | |
| 43,718 | |
| 34,825 |
Purchase of available-for-sale debt securities | |
| (26,632) | |
| (26,662) |
Redemption of Federal Home Loan Bank of Pittsburgh stock | |
| 5,076 | |
| 6,723 |
Purchase of Federal Home Loan Bank of Pittsburgh stock | |
| (3,616) | |
| (3,148) |
Net increase in loans | |
| (58,591) | |
| (30,385) |
Proceeds from bank owned life insurance | |
| 0 | |
| 796 |
Purchase of premises and equipment | |
| (2,085) | |
| (925) |
Proceeds from sale of foreclosed assets | |
| 1,265 | |
| 227 |
Other | |
| 116 | |
| 75 |
Net Cash (Used in) Provided by Investing Activities | |
| (33,777) | |
| 74,987 |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
|
|
Net increase in deposits | |
| 128,464 | |
| 26,931 |
Net decrease in short-term borrowings | |
| (71,822) | |
| (96,990) |
Proceeds from long-term borrowings | |
| 25,891 | |
| 22,500 |
Repayments of long-term borrowings and subordinated debt | |
| (5,114) | |
| (25,517) |
Sale of treasury stock | |
| 124 | |
| 198 |
Purchase of vested restricted stock | |
| (163) | |
| (189) |
Common dividends paid | |
| (6,670) | |
| (7,386) |
Net Cash Provided by (Used in) Financing Activities | |
| 70,710 | |
| (80,453) |
INCREASE IN CASH AND CASH EQUIVALENTS | |
| 42,690 | |
| 2,118 |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | |
| 31,122 | |
| 32,827 |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 73,812 | | $ | 34,945 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |
|
| |
|
|
Right-of-use assets recognized at adoption of ASU 2016-02 | | $ | 0 | | $ | 1,132 |
Leased assets obtained in exchange for new operating lease liabilities | | $ | 0 | | $ | 745 |
Assets acquired through foreclosure of real estate loans | | $ | 0 | | $ | 824 |
Interest paid | | $ | 4,961 | | $ | 3,846 |
Income taxes paid | | $ | 42 | | $ | 950 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands Except Share and Per Share Data) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | Accumulated | | | | | | | |
|
| | | | | | | | | | | | | | Other | | | | | | | |
|
| Common |
| Treasury |
| Common |
| Paid-in |
| Retained |
| Comprehensive |
| Treasury | | | | |||||
Three Months Ended June 30, 2020 |
| Shares |
| Shares |
| Stock |
| Capital |
| Earnings |
| Income (Loss) |
| Stock |
| Total | ||||||
Balance, March 31, 2020 |
| 13,934,996 |
| 147,836 | | $ | 13,935 | | $ | 103,731 | | $ | 126,944 | | $ | 9,474 | | $ | (2,856) | | $ | 251,228 |
Net income |
| |
| — | |
| — | |
| — | |
| 5,438 | |
| | |
| — | |
| 5,438 |
Other comprehensive income, net |
| |
| — | |
| — | |
| — | |
| — | |
| 2,237 | |
| — | |
| 2,237 |
Cash dividends declared on common stock, $.27 per share |
| |
| — | |
| — | |
| — | |
| (3,721) | |
| — | |
| — | |
| (3,721) |
Shares issued for dividend reinvestment plan |
| |
| (20,755) | |
| — | |
| (22) | |
| — | |
| — | |
| 401 | |
| 379 |
Forfeiture of restricted stock |
| |
| 758 | |
| — | |
| 15 | |
| — | |
| — | |
| (15) | |
| 0 |
Stock-based compensation expense |
| |
| — | |
| — | |
| 230 | |
| — | |
| — | |
| — | |
| 230 |
Balance, June 30, 2020 |
| 13,934,996 |
| 127,839 | | $ | 13,935 | | $ | 103,954 | | $ | 128,661 | | $ | 11,711 | | $ | (2,470) | | $ | 255,791 |
| | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Balance, March 31, 2019 |
| 12,655,171 |
| 262,127 | | $ | 12,655 | | $ | 71,963 | | $ | 123,155 | | $ | (641) | | $ | (5,005) | | $ | 202,127 |
Net income |
| |
| — | |
| — | |
| — | |
| 3,649 | |
| — | |
| — | |
| 3,649 |
Other comprehensive income, net |
| |
| — | |
| — | |
| — | |
| — | |
| 4,073 | |
| — | |
| 4,073 |
Cash dividends declared on common stock, $.27 per share |
| |
| — | |
| — | |
| — | |
| (3,692) | |
| — | |
| — | |
| (3,692) |
Shares issued for dividend reinvestment plan |
| |
| (12,685) | |
| — | |
| 126 | |
| — | |
| — | |
| 242 | |
| 368 |
Shares issued from treasury and redeemed related to exercise of stock options |
| |
| (5,433) | |
| — | |
| (68) | |
| — | |
| — | |
| 104 | |
| 36 |
Forfeiture of restricted stock |
| |
| 2,988 | |
| — | |
| 57 | |
| — | |
| — | |
| (57) | |
| 0 |
Stock-based compensation expense |
| |
| — | |
| — | |
| 202 | |
| — | |
| — | |
| — | |
| 202 |
Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs | | 1,279,825 | | — | | | 1,280 | | | 31,673 | | | — | | | — | | | — | | | 32,953 |
Balance, June 30, 2019 |
| 13,934,996 |
| 246,997 | | $ | 13,935 | | $ | 103,953 | | $ | 123,112 | | $ | 3,432 | | $ | (4,716) | | $ | 239,716 |
7
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands Except Share and Per Share Data) (Unaudited)
(Continued)
| | | | | | | | | | | | | | | | | | | | | | |
|
| |
| |
| | |
| | |
| | |
| Accumulated |
| | |
| | | |
| | | | | | | | | | | | | | | Other | | | | | | | |
| | Common | | Treasury | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | | | |||||
| | Shares | | Shares | | Stock | | Capital | | Earnings | | Income (Loss) | | Stock | | Total | ||||||
Six Months Ended June 30, 2020 |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2019 |
| 13,934,996 |
| 218,551 | | $ | 13,935 | | $ | 104,519 | | $ | 126,480 | | $ | 3,691 | | $ | (4,173) | | $ | 244,452 |
Net income |
| |
| | |
|
| |
|
| |
| 9,604 | |
|
| |
|
| |
| 9,604 |
Other comprehensive income, net |
| |
| | |
|
| |
|
| |
|
| |
| 8,020 | |
|
| |
| 8,020 |
Cash dividends declared on common stock, $.54 per share |
| |
| | |
|
| |
|
| |
| (7,423) | |
|
| |
|
| |
| (7,423) |
Shares issued for dividend reinvestment plan |
| |
| (34,700) | |
| | |
| 82 | |
| | |
| | |
| 671 | |
| 753 |
Shares issued from treasury and redeemed related to exercise of stock options |
| |
| (9,652) | |
| | |
| (62) | |
|
| |
|
| |
| 186 | |
| 124 |
Restricted stock granted |
| |
| (55,864) | |
| | |
| (1,079) | |
|
| |
|
| |
| 1,079 | |
| 0 |
Forfeiture of restricted stock |
| |
| 3,642 | |
| | |
| 70 | |
|
| |
|
| |
| (70) | |
| 0 |
Stock-based compensation expense |
| |
| | |
|
| |
| 424 | |
|
| |
|
| |
|
| |
| 424 |
Purchase of restricted stock for tax withholding |
| |
| 5,862 | |
| | |
|
| |
|
| |
|
| |
| (163) | |
| (163) |
Balance, June 30, 2020 |
| 13,934,996 |
| 127,839 | | $ | 13,935 | | $ | 103,954 | | $ | 128,661 | | $ | 11,711 | | $ | (2,470) | | $ | 255,791 |
| | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Balance, December 31, 2018 |
| 12,655,171 |
| 335,841 | | $ | 12,655 | | $ | 72,602 | | $ | 122,643 | | $ | (4,170) | | $ | (6,362) | | $ | 197,368 |
Net income |
| |
| | |
|
| |
|
| |
| 8,739 | |
|
| |
|
| |
| 8,739 |
Other comprehensive income, net |
| |
| | |
|
| |
|
| |
|
| |
| 7,602 | |
|
| |
| 7,602 |
Cash dividends declared on common stock, $.64 per share |
| |
| | |
|
| |
|
| |
| (8,270) | |
|
| |
|
| |
| (8,270) |
Shares issued for dividend reinvestment plan |
| |
| (33,172) | |
| | |
| 251 | |
|
| |
|
| |
| 633 | |
| 884 |
Shares issued from treasury and redeemed related to exercise of stock options |
| |
| (18,071) | |
| | |
| (146) | |
|
| |
|
| |
| 344 | |
| 198 |
Restricted stock granted |
| |
| (48,137) | |
| | |
| (918) | |
|
| |
|
| |
| 918 | |
| 0 |
Forfeiture of restricted stock |
| |
| 3,144 | |
| | |
| 60 | |
|
| |
|
| |
| (60) | |
| 0 |
Stock-based compensation expense |
| |
| | |
|
| |
| 431 | |
|
| |
|
| |
|
| |
| 431 |
Purchase of restricted stock for tax withholding |
| |
| 7,392 | |
| | |
|
| |
|
| |
|
| |
| (189) | |
| (189) |
Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs |
| 1,279,825 |
| | |
| 1,280 | |
| 31,673 | |
| | |
|
| |
|
| |
| 32,953 |
Balance, June 30, 2019 |
| 13,934,996 |
| 246,997 | |
| 13,935 | | $ | 103,953 | | $ | 123,112 | | $ | 3,432 | | $ | (4,716) | | $ | 239,716 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
8
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF INTERIM PRESENTATION AND STATUS OF RECENT ACCOUNTING PRONOUNCEMENTS
The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”). The consolidated financial statements also include C&N Bank’s wholly-owned subsidiaries, C&N Financial Services Corporation and Northern Tier Holding LLC. C&N Bank is the sole member of Northern Tier Holding LLC. All material intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 2019, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain 2019 information has been reclassified for consistency with the 2020 presentation.
Operating results reported for the six-month period ended June 30, 2020 might not be indicative of the results for the year ending December 31, 2020. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.
Recent Accounting Pronouncements - Adopted
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 became 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. Note 12 provides disclosure regarding fair value measurements of the Corporation’s financial instruments. Adoption of this ASU did not have a material impact on the Corporation’s consolidated financial position or results of operations.
9
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Recently Issued But Not Yet Effective Accounting Pronouncements
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The effect of implementing this ASU is recorded through a cumulative-effect adjustment to retained earnings. The Corporation has formed a cross functional management team and is working with an outside vendor assessing alternative loss estimation methodologies and the Corporation’s data and system needs to evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.
ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:
● | Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. |
● | Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue. |
The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. The Corporation expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04.
2. BUSINESS COMBINATION AND PENDING ACQUISITION
Business Combination – Acquisition of Monument Bancorp, Inc.
On April 1, 2019, the Corporation completed its acquisition of 100% of the common stock of Monument Bancorp, Inc.(“Monument”) Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Pursuant to the merger, Monument was merged into Citizens & Northern Corporation and Monument Bank was merged into C&N Bank.
Total purchase consideration was $42.7 million, including cash paid to former Monument shareholders totaling $9.6 million and 1,279,825 shares of Corporation common stock issued with a value of $33.1 million, net of costs directly related to stock issuance of $181,000.
10
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
In connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with 0 realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately 0 realized gain or loss. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets or liabilities in 2020.
Merger-related expenses, including legal and professional expenses and conversion of Monument’s customer accounting data into the Corporation’s core system, were $3,301,000 in the second quarter 2019 and $3,612,000 in the six-month period ended June 30, 2019.
Acquisition of Covenant Financial, Inc.
In December 2019, the Corporation announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”). In July 2020, the Corporation and Covenant announced the completion of the merger as of July 1, 2020. Covenant was the holding company for Covenant Bank, which operated banking offices in Bucks and Chester Counties of PA. Under the terms of the Agreement and Plan of Merger, Covenant merged into the Corporation, and Covenant Bank merged into C&N Bank. In the transaction, Covenant shareholders elected to receive either 0.6212 shares of Corporation common stock or $16.50 in cash for each share of Covenant common stock owned, subject to proration to ensure that, overall, 25% of the Covenant shares were converted into cash and 75% of the Covenant shares were converted into Corporation stock. The election and proration process commenced in June 2020 and was completed in early July 2020. Holders of Covenant common stock prior to the consummation of the merger own approximately 12.9% of the Corporation’s common stock outstanding following the merger.
Based on the average of the high and low trading price of the Corporation’s common stock of $20.32 per share on July 1, 2020, the total purchase consideration is valued at approximately $63.3 million. As of June 30, 2020, Covenant reported total assets of $608 million, including gross loans of $472 million, total deposits of $480 million and total stockholders’ equity of $44 million. As of the date the Corporation’s June 30, 2020 financial statements are issued, some of the information required to be disclosed under U.S. GAAP was not available since, given the short period between the July 1, 2020 merger date and the financial statement issuance, the calculation of the fair value of all material Covenant assets acquired and liabilities assumed had not yet been completed.
Merger-related expenses related to the planned acquisition of Covenant totaled $983,000 in the second quarter 2020 and $1,124,000 in the six-month period ended June 30, 2020. Merger-related expenses include severance and similar expenses as well as initial expenses related to conversion of Covenant’s core customer data into the Corporation’s core system and legal and other professional expenses. Management estimates total pre-tax merger-related expenses associated with the Covenant transaction will be approximately $8.0 million, including remaining expenses of approximately $6.6 million. Most of the expenses are expected to be incurred in the third quarter 2020.
3. PER SHARE DATA
Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.
11
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using weighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation’s common stock during the period.
| | | | | | | | | | | | |
(In Thousands, Except Share and Per Share Data) | | 3 Months Ended |
| 6 Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Basic | | |
|
| |
|
| |
|
| |
|
Net income | | $ | 5,438 | | $ | 3,649 | | $ | 9,604 | | $ | 8,739 |
Less: Dividends and undistributed earnings allocated to participating securities | |
| (33) | |
| (19) | |
| (54) | |
| (46) |
Net income attributable to common shares | | $ | 5,405 | | $ | 3,630 | | $ | 9,550 | | $ | 8,693 |
Basic weighted-average common shares outstanding | |
| 13,710,118 | |
| 13,597,848 | |
| 13,697,617 | |
| 12,956,916 |
Basic earnings per common share (a) | | $ | 0.39 | | $ | 0.27 | | $ | 0.70 | | $ | 0.67 |
Diluted | |
|
| |
|
| |
|
| |
|
|
Net income attributable to common shares | | $ | 5,405 | | $ | 3,630 | | $ | 9,550 | | $ | 8,693 |
Basic weighted-average common shares outstanding | |
| 13,710,118 | |
| 13,597,848 | |
| 13,697,617 | |
| 12,956,916 |
Dilutive effect of potential common stock arising from stock options | |
| 2,269 | |
| 25,106 | |
| 8,116 | |
| 25,445 |
Diluted weighted-average common shares outstanding | |
| 13,712,387 | |
| 13,622,954 | |
| 13,705,733 | |
| 12,982,361 |
Diluted earnings per common share (a) | | $ | 0.39 | | $ | 0.27 | | $ | 0.70 | | $ | 0.67 |
Weighted-average nonvested restricted shares outstanding | |
| 88,514 | |
| 70,366 | |
| 77,093 | |
| 68,016 |
(a) | Basic and diluted earnings per share under the two-class method are determined on net income reported on the consolidated statements of income, less earnings allocated to non-vested restricted shares with nonforfeitable dividends (participating securities). |
Anti-dilutive stock options are excluded from net income per share calculations. Weighted-average common shares available from anti-dilutive instruments totaled 39,012 shares in the three-month period ended June 30, 2020 and 19,506 shares in the six-month period ended June 30, 2020. There were 0 anti-dilutive instruments in the three-month and six-month periods ended June 30, 2019.
12
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
4. COMPREHENSIVE INCOME
Comprehensive income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income (loss). The components of other comprehensive income (loss), and the related tax effects, are as follows:
| | | | | | | | | |
(In Thousands) |
| Before-Tax |
| Income Tax |
| Net-of-Tax | |||
| | Amount | | Effect | | Amount | |||
Six Months Ended June 30, 2020 |
| |
|
| |
|
| |
|
Unrealized gains on available-for-sale debt securities, | | | | | | | | | |
Unrealized holding gains on available-for-sale debt securities | | $ | 10,075 | | $ | (2,114) | | $ | 7,961 |
| | | | | | | | | |
Unfunded pension and postretirement obligations: | |
|
| |
|
| |
|
|
Changes from plan amendments and actuarial gains and losses | |
| 88 | |
| (18) | |
| 70 |
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | |
| (14) | |
| 3 | |
| (11) |
Other comprehensive income on unfunded retirement obligations | |
| 74 | |
| (15) | |
| 59 |
| | | | | | | | | |
Total other comprehensive income | | $ | 10,149 | | $ | (2,129) | | $ | 8,020 |
| | | | | | | | | |
(In Thousands) |
| Before-Tax |
| Income Tax |
| Net-of-Tax | |||
| | Amount | | Effect | | Amount | |||
Six Months Ended June 30, 2019 |
| |
|
| |
|
| |
|
Unrealized gains on available-for-sale debt securities: | | | | | | | | | |
Unrealized holding gains on available-for-sale debt securities | | $ | 9,431 | | $ | (1,980) | | $ | 7,451 |
Reclassification adjustment for (gains) realized in income | | | (7) | | | 1 | | | (6) |
Other comprehensive income on available-for-sale debt securities | | | 9,424 | | | (1,979) | | | 7,445 |
| | | | | | | | | |
Unfunded pension and postretirement obligations: | |
|
| |
|
| |
|
|
Changes from plan amendments and actuarial gains and losses included in other comprehensive income | |
| 214 | |
| (45) | |
| 169 |
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | |
| (15) | |
| 3 | |
| (12) |
Other comprehensive income on unfunded retirement obligations | |
| 199 | |
| (42) | |
| 157 |
| | | | | | | | | |
Total other comprehensive income | | $ | 9,623 | | $ | (2,021) | | $ | 7,602 |
| | | | | | | | | |
(In Thousands) |
| Before-Tax |
| Income Tax |
| Net-of-Tax | |||
| | Amount | | Effect | | Amount | |||
Three Months Ended June 30, 2020 |
| |
|
| |
|
| |
|
Unrealized gains on available-for-sale debt securities, |
| |
|
| |
|
| |
|
Unrealized holding gains on available-for-sale debt securities | | $ | 2,835 | | $ | (593) | | $ | 2,242 |
Unfunded pension and postretirement obligations, | |
|
| |
|
| |
|
|
Amortization of prior service cost and net actuarial loss | |
|
| |
|
| |
|
|
included in net periodic benefit cost | |
| (6) | |
| 1 | |
| (5) |
Total other comprehensive income | | $ | 2,829 | | $ | (592) | | $ | 2,237 |
13
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| | | | | | | | | |
(In Thousands) |
| Before-Tax |
| Income Tax |
| Net-of-Tax | |||
| | Amount | | Effect | | Amount | |||
Three Months Ended June 30, 2019 |
| |
|
| |
|
| |
|
Unrealized gains on available-for-sale debt securities: |
| |
|
| |
|
| |
|
Unrealized holding gains on available-for-sale debt securities | | $ | 5,170 | | $ | (1,085) | | $ | 4,085 |
Reclassification adjustment for (gains) realized in income | |
| (7) | |
| 1 | |
| (6) |
Other comprehensive income on available-for-sale debt securities | |
| 5,163 | |
| (1,084) | |
| 4,079 |
Unfunded pension and postretirement obligations: | |
|
| |
|
| |
|
|
Amortization of prior service cost and net actuarial loss | |
|
| |
|
| |
|
|
included in net periodic benefit cost | |
| (7) | |
| 1 | |
| (6) |
Other comprehensive loss on unfunded retirement obligations | |
| (7) | |
| 1 | |
| (6) |
Total other comprehensive income | | $ | 5,156 | | $ | (1,083) | | $ | 4,073 |
The amounts shown in the table immediately above are included in the following line items in the consolidated statements of income:
|
| Affected Line Item in the |
|
Description | | Consolidated Statements of Income | |
Amortization of prior service cost and | | Other noninterest expense | |
net actuarial loss included in net | | | |
periodic benefit cost (Before-Tax) | | | |
Reclassification adjustment for (gains) | | Realized gains on available-for-sale | |
realized in income (Before-Tax) | | debt securities, net | |
Income Tax effect | | Income tax provision | |
Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax:
| | | | | | | | | |
(In Thousands) |
| Unrealized |
| Accumulated |
|
| | ||
| | Gains | | Unfunded | | Other | |||
|
| (Losses) |
| Retirement |
| Comprehensive | |||
|
| on Securities |
| Obligations |
| Income (Loss) | |||
Six Months Ended June 30, 2020 |
| |
|
| |
|
| |
|
Balance, beginning of period | | $ | 3,511 | | $ | 180 | | $ | 3,691 |
Other comprehensive income during six months ended June 30, 2020 | |
| 7,961 | |
| 59 | |
| 8,020 |
Balance, end of period | | $ | 11,472 | | $ | 239 | | $ | 11,711 |
| | | | | | | | | |
Six Months Ended June 30, 2019 | |
|
| |
|
| |
|
|
Balance, beginning of period | | $ | (4,307) | | $ | 137 | | $ | (4,170) |
Other comprehensive income during six months ended June 30, 2019 | |
| 7,445 | |
| 157 | |
| 7,602 |
Balance, end of period | | $ | 3,138 | | $ | 294 | | $ | 3,432 |
14
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| | | | | | | | | |
(In Thousands) |
| Unrealized |
|
| |
| Accumulated | ||
| | Gains | | Unfunded | | Other | |||
| | (Losses) | | Retirement | | Comprehensive | |||
| | on Securities | | Obligations | | Income (Loss) | |||
Three Months Ended June 30, 2020 |
| |
|
| |
|
| |
|
Balance, beginning of period | | $ | 9,230 | | $ | 244 | | $ | 9,474 |
Other comprehensive income (loss) during three months ended June 30, 2020 | |
| 2,242 | |
| (5) | |
| 2,237 |
Balance, end of period | | $ | 11,472 | | $ | 239 | | $ | 11,711 |
| | | | | | | | | |
Three Months Ended June 30, 2019 | |
|
| |
|
| |
|
|
Balance, beginning of period | | $ | (941) | | $ | 300 | | $ | (641) |
Other comprehensive income (loss) during three months ended June 30, 2019 | |
| 4,079 | |
| (6) | |
| 4,073 |
Balance, end of period | | $ | 3,138 | | $ | 294 | | $ | 3,432 |
5. CASH AND DUE FROM BANKS
Cash and due from banks at June 30, 2020 and December 31, 2019 include the following:
| | | | | | |
(In thousands) |
| June 30, |
| Dec. 31, | ||
| | 2020 | | 2019 | ||
Cash and cash equivalents | | $ | 73,812 | | $ | 31,122 |
Certificates of deposit | |
| 3,830 | |
| 4,080 |
Total cash and due from banks | | $ | 77,642 | | $ | 35,202 |
Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.
Historically, C&N Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had 0 required reserves at June 30, 2020. Required reserves were $20,148,000 at December 31, 2019.
15
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
6. SECURITIES
Amortized cost and fair value of available-for-sale debt securities at June 30, 2020 and December 31, 2019 are summarized as follows:
| | | | | | | | | | | | |
(In Thousands) |
| June 30, 2020 | ||||||||||
| | | | | Gross | | Gross | | | | ||
| | | | | Unrealized | | Unrealized | | | | ||
|
| Amortized |
| Holding |
| Holding |
| Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Value | ||||
| | | | | | | | | | | | |
Obligations of U.S. Government agencies | | $ | 10,706 | | $ | 967 | | $ | 0 | | $ | 11,673 |
Obligations of states and political subdivisions: | |
|
| |
|
| |
|
| |
|
|
Tax-exempt | |
| 86,897 | |
| 4,786 | |
| (40) | |
| 91,643 |
Taxable | |
| 38,022 | |
| 1,810 | |
| (48) | |
| 39,784 |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | |
|
| |
|
| |
|
| |
|
|
Residential pass-through securities | |
| 49,852 | |
| 1,668 | |
| 0 | |
| 51,520 |
Residential collateralized mortgage obligations | |
| 87,527 | |
| 1,951 | |
| (43) | |
| 89,435 |
Commercial mortgage-backed securities | |
| 44,664 | |
| 3,469 | |
| 0 | |
| 48,133 |
Total available-for-sale debt securities | | $ | 317,668 | | $ | 14,651 | | $ | (131) | | $ | 332,188 |
| | | | | | | | | | | | |
(In Thousands) |
| December 31, 2019 | ||||||||||
| | | | | Gross | | Gross | | | | ||
|
| |
| Unrealized | | Unrealized | | | | |||
|
| Amortized |
| Holding |
| Holding |
| Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Value | ||||
| | | | | | | | | | | | |
Obligations of U.S. Government agencies | | $ | 16,380 | | $ | 620 | | $ | 0 | | $ | 17,000 |
Obligations of states and political subdivisions: | |
|
| |
|
| |
|
| |
|
|
Tax-exempt | |
| 68,787 | |
| 2,011 | |
| (38) | |
| 70,760 |
Taxable | |
| 35,446 | |
| 927 | |
| (70) | |
| 36,303 |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | |
|
| |
|
| |
|
| |
|
|
Residential pass-through securities | |
| 58,875 | |
| 472 | |
| (137) | |
| 59,210 |
Residential collateralized mortgage obligations | |
| 115,025 | |
| 308 | |
| (610) | |
| 114,723 |
Commercial mortgage-backed securities | |
| 47,765 | |
| 1,069 | |
| (107) | |
| 48,727 |
Total available-for-sale debt securities | | $ | 342,278 | | $ | 5,407 | | $ | (962) | | $ | 346,723 |
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 June 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | |
June 30, 2020 |
| Less Than 12 Months |
| 12 Months or More |
| Total | ||||||||||||
(In Thousands) | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
Obligations of states and political subdivisions: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Tax-exempt | | $ | 3,743 | | $ | (40) | | $ | 0 | | $ | 0 | | $ | 3,743 | | $ | (40) |
Taxable | |
| 1,476 | |
| (48) | |
| 0 | |
| 0 | |
| 1,476 | |
| (48) |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Residential collateralized mortgage obligations | |
| 8,809 | |
| (43) | |
| 0 | |
| 0 | |
| 8,809 | |
| (43) |
Total temporary impaired available for sale debt securities | | $ | 14,028 | | $ | (131) | | $ | 0 | | $ | 0 | | $ | 14,028 | | $ | (131) |
16
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| | | | | | | | | | | | | | | | | | |
December 31, 2019 |
| Less Than 12 Months |
| 12 Months or More |
| Total | ||||||||||||
(In Thousands) | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | ||||||
|
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
Obligations of states and political subdivisions: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Tax-exempt | | $ | 6,429 | | $ | (38) | | $ | 0 | | $ | 0 | | $ | 6,429 | | $ | (38) |
Taxable | |
| 5,624 | |
| (68) | |
| 161 | |
| (2) | |
| 5,785 | |
| (70) |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies | |
| | |
| | |
| | |
| | |
| | |
| |
Residential pass-through securities | |
| 9,771 | |
| (35) | |
| 14,787 | |
| (102) | |
| 24,558 | |
| (137) |
Residential collateralized mortgage obligations | |
| 31,409 | |
| (195) | |
| 30,535 | |
| (415) | |
| 61,944 | |
| (610) |
Commercial mortgage-backed securities | |
| 0 | |
| 0 | |
| 8,507 | |
| (107) | |
| 8,507 | |
| (107) |
Total temporarily impaired available-for-sale debt securities | | $ | 53,233 | | $ | (336) | | $ | 53,990 | | $ | (626) | | $ | 107,223 | | $ | (962) |
Gross realized gains and losses from available-for-sale debt securities were as follows:
| | | | | | | | | | | | |
(In Thousands) | | 3 Months Ended | | 6 Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Gross realized gains from sales | | $ | 0 | | $ | 7 | | $ | 52 | | $ | 7 |
Gross realized losses from sales | |
| 0 | |
| 0 | |
| (52) | |
| 0 |
Net realized gains | | $ | 0 | | $ | 7 | | $ | 0 | | $ | 7 |
The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of June 30, 2020. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | |
(In Thousands) | | June 30, 2020 | ||||
| | Amortized | | Fair | ||
|
| Cost |
| Value | ||
Due in one year or less | | $ | 7,369 | | $ | 7,414 |
Due from one year through five years | |
| 33,740 | |
| 35,119 |
Due from five years through ten years | |
| 38,294 | |
| 40,729 |
Due after ten years | |
| 56,222 | |
| 59,838 |
Sub-total | |
| 135,625 | |
| 143,100 |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | |
|
| |
|
|
Residential pass-through securities | |
| 49,852 | |
| 51,520 |
Residential collateralized mortgage obligations | |
| 87,527 | |
| 89,435 |
Commercial mortgage-backed securities | |
| 44,664 | |
| 48,133 |
Total | | $ | 317,668 | | $ | 332,188 |
The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.
Investment securities carried at $196,620,000 at June 30, 2020 and $215,270,000 at December 31, 2019 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 9 for information concerning securities pledged to secure borrowing arrangements.
17
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery.
A summary of information management considered in evaluating debt and equity securities for other-than-temporary impairment (“OTTI”) at June 30, 2020 is provided below.
Debt Securities
At June 30, 2020 and December 31, 2019, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of debt securities at June 30, 2020 and December 31, 2019 to be temporary.
Equity Securities
C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheets, was $8,671,000 at June 30, 2020 and $10,131,000 at December 31, 2019. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at June 30, 2020 and December 31, 2019. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.
The Corporation’s marketable equity security, with a carrying value of $1,003,000 at June 30, 2020 and $979,000 at December 31, 2019, consisted exclusively of one mutual fund. There was an unrealized gain on the mutual fund of $3,000 at June 30, 2020 and an unrealized loss of $21,000 at December 31, 2019. Changes in the unrealized gains or losses on this security are included in other noninterest income in the consolidated statements of income.
18
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
7. LOANS
The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at June 30, 2020 and December 31, 2019 are summarized by segment, and by classes within each segment, as follows:
Summary of Loans by Type
(In Thousands)
| | | | | | |
|
| June 30, |
| Dec. 31, | ||
| | 2020 | | 2019 | ||
Residential mortgage: |
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 493,214 | | $ | 510,641 |
Residential mortgage loans - junior liens | |
| 25,632 | |
| 27,503 |
Home equity lines of credit | |
| 31,826 | |
| 33,638 |
1-4 Family residential construction | |
| 15,621 | |
| 14,798 |
Total residential mortgage | |
| 566,293 | |
| 586,580 |
Commercial: | |
|
| |
|
|
Commercial loans secured by real estate | |
| 293,304 | |
| 301,227 |
Commercial and industrial | |
| 120,202 | |
| 126,374 |
Small Business Administration - Paycheck Protection Program | | | 97,103 | | | 0 |
Political subdivisions | |
| 43,134 | |
| 53,570 |
Commercial construction and land | |
| 40,348 | |
| 33,555 |
Loans secured by farmland | |
| 11,433 | |
| 12,251 |
Multi-family (5 or more) residential | |
| 32,699 | |
| 31,070 |
Agricultural loans | |
| 3,874 | |
| 4,319 |
Other commercial loans | |
| 16,579 | |
| 16,535 |
Total commercial | |
| 658,676 | |
| 578,901 |
Consumer | |
| 16,444 | |
| 16,741 |
Total | |
| 1,241,413 | |
| 1,182,222 |
Less: allowance for loan losses | |
| (11,026) | |
| (9,836) |
Loans, net | | $ | 1,230,387 | | $ | 1,172,386 |
In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $5,519,000 at June 30, 2020 and $2,482,000 at December 31, 2019.
19
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument. The loans acquired from Monument were recorded at an initial fair value of $259,295,000. The gross amortized cost of loans acquired from Monument on April 1, 2019 was reduced $1,807,000 based on movements in interest rates (market rate adjustment) and was also reduced $1,914,000 based on a credit fair value adjustment on non-impaired loans and by $318,000 based on a credit fair value adjustment on impaired loans. In the last three quarters of 2019 and first six months of 2020, the Corporation recognized accretion of a portion of the market rate adjustment and credit adjustment on non-impaired loans, and a partial recovery of purchased credit impaired (PCI) loans. For the three-month and six-month periods ended June 30, 2020 and 2019, adjustments to the initial market rate and credit fair value adjustments were recognized as follows:
| | | | | | | | | | | | |
(In Thousands) |
| | |
| | |
| | |
| | |
| | 3 Months Ended | | 6 Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||
| | 2020 | | 2019 | | 2020 | | 2019 | ||||
Market Rate Adjustment |
| |
|
| |
|
| |
|
| |
|
Adjustments to gross amortized cost of loans at beginning of period | | $ | (1,268) | | $ | 0 | | $ | (1,415) | | $ | 0 |
Market rate adjustment recorded in acquisition | | | 0 | | | (1,807) | | | 0 | | | (1,807) |
Accretion recognized in interest income | | | 165 | | | 149 | | | 312 | | | 149 |
Adjustments to gross amortized cost of loans at end of period | | $ | (1,103) | | $ | (1,658) | | $ | (1,103) | | $ | (1,658) |
Credit Adjustment on Non-impaired Loans | | | | | | | | | | | | |
Adjustments to gross amortized cost of loans at beginning of period | | $ | (1,011) | | $ | 0 | | $ | (1,216) | | $ | 0 |
Credit adjustment recorded in acquisition | | | 0 | | | (1,914) | | | 0 | | | (1,914) |
Accretion recognized in interest income | |
| 133 | |
| 261 | |
| 338 | |
| 261 |
Adjustments to gross amortized cost of loans at end of period | | $ | (878) | | $ | (1,653) | | $ | (878) | | $ | (1,653) |
PCI loans acquired from Monument were valued at $441,000 at April 1, 2019, which was $318,000 lower than the total outstanding balance of the loans. The fair values of all of the PCI loans were determined based on the estimated realizable value of underlying real estate collateral, net of estimated selling cost. In the first six months of 2020, the Corporation recorded interest income of $113,000 from the excess of proceeds received on the pay-off of PCI loans over their carrying amounts. A summary of PCI loans held at June 30, 2020 and December 31, 2019 is as follows:
| | | | | | |
(In Thousands) | | June 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
Outstanding balance | | $ | 407 | | $ | 759 |
Carrying amount | |
| 305 | |
| 441 |
The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in northcentral Pennsylvania, the southern tier of New York State and southeastern Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either June 30, 2020 or December 31, 2019.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (SBA) and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.
20
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The maximum term of PPP loans is five years, though most of the Corporation’s PPP loans have two-year terms, and the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Consistent with current SBA guidance, if a borrower uses an agent in the loan process, the Corporation would pay a percentage of the SBA fees to the agent. Fees on PPP loans, net of origination costs, will be recognized in interest income as a yield adjustment over the term of the loans.
The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. As of June 30, 2020, the recorded investment in PPP loans was $97,103,000, including contractual principal balances of $100,120,000, reduced by net deferred origination fees of $3,017,000. Net deferred origination fees on PPP loans are recognized in interest income as a yield adjustment (accretion over the term of the loans). Accretion of $337,000 from fees received on PPP loans was included in interest and fees on (taxable) loans in the consolidated statements of income in the three-month and six-month periods ended June 30, 2020.
Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.
In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.
To work with clients impacted by COVID-19, the Corporation is offering short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. These efforts have been designed to assist borrowers as they deal with the current crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES ACT and guidance from the joint interagency statement described in the preceding paragraphs, the modified loans have not been reported as past due, nonaccrual or as TDRs at June 30, 2020. Most of the modifications under the program became effective In March or April 2020 and provided a deferral of interest or principal and interest for 90 days. Accordingly, most of the loans for which deferrals were granted returned to full payment status in June or July 2020. There have been 706 loans for which deferrals have been granted through June 30, 2020 with an aggregate recorded investment of approximately $202 million at the time of deferral. The quantity and
21
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
balances of modifications outstanding under the program at June 30, 2020 and July 31, 2020 (excluding loans acquired pursuant to the Covenant acquisition on July 1, 2020) are as follows:
| | | | | | | | | | |
| | Deferrals Remaining | | Deferrals Remaining | ||||||
| | As of June 30, 2020 | | As of July 31, 2020 | ||||||
(Dollars in Thousands) | | Number | | | | | Number | | | |
| | of | | Recorded | | of | | Recorded | ||
|
| Loans |
| Investment |
| Loans |
| Investment | ||
COVID-19-related loan modifications: |
|
|
| |
|
|
|
| |
|
Residential mortgage |
| 307 | | $ | 40,930 | | 54 | | $ | 7,130 |
Consumer |
| 36 | |
| 364 | | — | | | — |
Commercial |
| 198 | |
| 117,424 | | 24 | | | 22,488 |
Total |
| 541 | | $ | 158,718 | | 78 | | $ | 29,618 |
The ultimate effect of COVID-19 on the local or broader economy is not known. In the first six months of 2020, the Corporation increased the allowance for loan losses $646,000, including $244,000 in the second quarter, based on an increase in qualitative factors related to potential deterioration in economic conditions. Further, in June 2020, the Corporation’s credit administration and commercial lending staffs performed a review of commercial credits with “Pass” ratings in an effort to reduce the risk of failing to identify loans that should be evaluated for risk rating downgrade or a specific allowance. Updated risk ratings and specific allowances based on that review have been included in the June 30, 2020 information presented below. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.
The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of June 30, 2020, and December 31, 2019, management determined that no allowance for credit losses related to unfunded loan commitments was required.
Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and six-month periods ended June 30, 2020 and 2019 were as follows:
22
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| | | | | | | | | | | | | | | |
Three Months Ended June 30, 2020 | | March 31, |
|
| |
|
| |
|
| |
| June 30, | ||
(In Thousands) |
| 2020 Balance |
| Charge-offs |
| Recoveries |
| Provision (Credit) |
| 2020 Balance | |||||
Allowance for Loan Losses: |
| |
| | |
| | |
| | |
| | |
|
Residential mortgage: |
| |
| | |
| | |
| | |
| | |
|
Residential mortgage loans - first liens | | $ | 3,572 | | $ | 0 | | $ | 1 | | $ | (42) | | $ | 3,531 |
Residential mortgage loans - junior liens | |
| 414 | |
| 0 | |
| 0 | |
| (49) | |
| 365 |
Home equity lines of credit | |
| 278 | |
| 0 | |
| 1 | |
| 8 | |
| 287 |
1-4 Family residential construction | |
| 119 | |
| 0 | |
| 0 | |
| 18 | |
| 137 |
Total residential mortgage | |
| 4,383 | |
| 0 | |
| 2 | |
| (65) | |
| 4,320 |
Commercial: | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial loans secured by real estate | |
| 1,932 | |
| 0 | |
| 0 | |
| 494 | |
| 2,426 |
Commercial and industrial | |
| 2,645 | |
| 0 | |
| 0 | |
| (149) | |
| 2,496 |
Commercial construction and land | |
| 970 | |
| (107) | |
| 0 | |
| (443) | |
| 420 |
Loans secured by farmland | |
| 144 | |
| 0 | |
| 0 | |
| 2 | |
| 146 |
Multi-family (5 or more) residential | |
| 199 | |
| 0 | |
| 0 | |
| (36) | |
| 163 |
Agricultural loans | |
| 39 | |
| 0 | |
| 0 | |
| 1 | |
| 40 |
Other commercial loans | |
| 160 | |
| 0 | |
| 0 | |
| 7 | |
| 167 |
Total commercial | |
| 6,089 | |
| (107) | |
| 0 | |
| (124) | |
| 5,858 |
Consumer | |
| 273 | |
| (39) | |
| 16 | |
| 13 | |
| 263 |
Unallocated | |
| 585 | |
| 0 | |
| 0 | |
| 0 | |
| 585 |
Total Allowance for Loan Losses | | $ | 11,330 | | $ | (146) | | $ | 18 | | $ | (176) | | $ | 11,026 |
| | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | | March 31, |
|
| |
|
| |
|
| |
| June 30, | ||
(In Thousands) |
| 2019 Balance |
| Charge-offs |
| Recoveries |
| Provision (Credit) |
| 2019 Balance | |||||
Allowance for Loan Losses: |
| |
| | |
| | |
| | |
| | |
|
Residential mortgage: |
| |
| | |
| | |
| | |
| | |
|
Residential mortgage loans - first liens | | $ | 3,178 | | $ | (33) | | $ | 1 | | $ | (16) | | $ | 3,130 |
Residential mortgage loans - junior liens | |
| 329 | |
| 0 | |
| 0 | |
| 4 | |
| 333 |
Home equity lines of credit | |
| 286 | |
| 0 | |
| 1 | |
| (7) | |
| 280 |
1-4 Family residential construction | |
| 198 | |
| 0 | |
| 0 | |
| 22 | |
| 220 |
Total residential mortgage | |
| 3,991 | |
| (33) | |
| 2 | |
| 3 | |
| 3,963 |
Commercial: | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial loans secured by real estate | |
| 1,887 | |
| 0 | |
| 0 | |
| (310) | |
| 1,577 |
Commercial and industrial | |
| 1,069 | |
| (6) | |
| 1 | |
| 182 | |
| 1,246 |
Commercial construction and land | |
| 114 | |
| 0 | |
| 0 | |
| 38 | |
| 152 |
Loans secured by farmland | |
| 98 | |
| 0 | |
| 0 | |
| 4 | |
| 102 |
Multi-family (5 or more) residential | |
| 112 | |
| 0 | |
| 0 | |
| 38 | |
| 150 |
Agricultural loans | |
| 43 | |
| 0 | |
| 0 | |
| (1) | |
| 42 |
Other commercial loans | |
| 121 | |
| 0 | |
| 0 | |
| (2) | |
| 119 |
Total commercial | |
| 3,444 | |
| (6) | |
| 1 | |
| (51) | |
| 3,388 |
Consumer | |
| 236 | |
| (29) | |
| 13 | |
| 44 | |
| 264 |
Unallocated | |
| 585 | |
| 0 | |
| 0 | |
| 0 | |
| 585 |
Total Allowance for Loan Losses | | $ | 8,256 | | $ | (68) | | $ | 16 | | $ | (4) | | $ | 8,200 |
23
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| | | | | | | | | | | | | | | |
|
| Dec. 31, |
| | |
| | |
| | |
| June 30, | ||
Six Months Ended June 30, 2020 | | 2019 | | | | | | | | Provision | | 2020 | |||
(In Thousands) | | Balance | | Charge-offs | | Recoveries | | (Credit) | | Balance | |||||
Allowance for Loan Losses: | |
| | |
| | |
| | |
| | |
| |
Residential mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 3,405 | | $ | 0 | | $ | 2 | | $ | 124 | | $ | 3,531 |
Residential mortgage loans - junior liens | |
| 384 | |
| 0 | |
| 1 | |
| (20) | |
| 365 |
Home equity lines of credit | |
| 276 | |
| 0 | |
| 2 | |
| 9 | |
| 287 |
1-4 Family residential construction | |
| 117 | |
| 0 | |
| 0 | |
| 20 | |
| 137 |
Total residential mortgage | |
| 4,182 | |
| 0 | |
| 5 | |
| 133 | |
| 4,320 |
Commercial: | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial loans secured by real estate | |
| 1,921 | |
| 0 | |
| 0 | |
| 505 | |
| 2,426 |
Commercial and industrial | |
| 1,391 | |
| (17) | |
| 0 | |
| 1,122 | |
| 2,496 |
Commercial construction and land | |
| 966 | |
| (107) | |
| 0 | |
| (439) | |
| 420 |
Loans secured by farmland | |
| 158 | |
| 0 | |
| 0 | |
| (12) | |
| 146 |
Multi-family (5 or more) residential | |
| 156 | |
| 0 | |
| 0 | |
| 7 | |
| 163 |
Agricultural loans | |
| 41 | |
| 0 | |
| 0 | |
| (1) | |
| 40 |
Other commercial loans | |
| 155 | |
| 0 | |
| 0 | |
| 12 | |
| 167 |
Total commercial | |
| 4,788 | |
| (124) | |
| 0 | |
| 1,194 | |
| 5,858 |
Consumer | |
| 281 | |
| (70) | |
| 27 | |
| 25 | |
| 263 |
Unallocated | |
| 585 | |
| 0 | |
| 0 | |
| 0 | |
| 585 |
Total Allowance for Loan Losses | | $ | 9,836 | | $ | (194) | | $ | 32 | | $ | 1,352 | | $ | 11,026 |
| | | | | | | | | | | | | | | |
|
| Dec. 31, |
| | |
| | |
| | |
| June 30, | ||
Six Months Ended June 30, 2019 | | 2018 | | | | | | | | Provision | | 2019 | |||
(In Thousands) | | Balance | | Charge-offs | | Recoveries | | (Credit) | | Balance | |||||
Allowance for Loan Losses: | |
| | |
| | |
| | |
| | |
| |
Residential mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 3,156 | | $ | (83) | | $ | 2 | | $ | 55 | | $ | 3,130 |
Residential mortgage loans - junior liens | |
| 325 | |
| (24) | |
| 0 | |
| 32 | |
| 333 |
Home equity lines of credit | |
| 302 | |
| 0 | |
| 4 | |
| (26) | |
| 280 |
1-4 Family residential construction | |
| 203 | |
| 0 | |
| 0 | |
| 17 | |
| 220 |
Total residential mortgage | |
| 3,986 | |
| (107) | |
| 6 | |
| 78 | |
| 3,963 |
Commercial: | |
| | |
| | |
| | |
| | |
| |
Commercial loans secured by real estate | |
| 2,538 | |
| 0 | |
| 0 | |
| (961) | |
| 1,577 |
Commercial and industrial | |
| 1,553 | |
| (6) | |
| 3 | |
| (304) | |
| 1,246 |
Commercial construction and land | |
| 110 | |
| 0 | |
| 0 | |
| 42 | |
| 152 |
Loans secured by farmland | |
| 102 | |
| 0 | |
| 0 | |
| 0 | |
| 102 |
Multi-family (5 or more) residential | |
| 114 | |
| 0 | |
| 0 | |
| 36 | |
| 150 |
Agricultural loans | |
| 46 | |
| 0 | |
| 0 | |
| (4) | |
| 42 |
Other commercial loans | |
| 128 | |
| 0 | |
| 0 | |
| (9) | |
| 119 |
Total commercial | |
| 4,591 | |
| (6) | |
| 3 | |
| (1,200) | |
| 3,388 |
Consumer | |
| 233 | |
| (66) | |
| 22 | |
| 75 | |
| 264 |
Unallocated | |
| 499 | |
| 0 | |
| 0 | |
| 86 | |
| 585 |
Total Allowance for Loan Losses | | $ | 9,309 | | $ | (179) | | $ | 31 | | $ | (961) | | $ | 8,200 |
24
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
In the evaluation of the loan portfolio, management determines two major components for the allowance for loan losses – (1) a specific component based on an assessment of certain larger relationships, mainly commercial purpose loans, on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio, except for performing loans purchased from Monument, based on a collective evaluation of pools of loans with similar risk characteristics. The general component is assigned to each pool of loans based on both historical net charge-off experience, and an evaluation of certain qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the above methodologies for estimating specific and general losses in the portfolio.
Performing loans acquired from Monument are presented net of a discount for credit losses of $878,000 at June 30, 2020 and $1,216,000 at December 31, 2019. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. At June 30, 2020, it was determined that 5 purchased loans to 2 borrowers with recorded investments totaling $6,075,000 were found to be impaired. Specific allowances totaling $350,000 were recorded on these loans at June 30, 2020, based on the excess of the recorded investments in the loans over the estimated value of the related real estate collateral, net of selling costs. Purchased performing loans were excluded from the loan pools for which the general component of the allowance for loan losses was calculated.
The credit for loan losses of $176,000 in the second quarter 2020 included the benefit of repayment of a commercial construction loan for less than the full principal balance, resulting in a charge-off of $107,000 as compared to a specific allowance on the loan of $674,000 at March 31, 2020.
For the first six months of 2020, the provision for loan losses was $1,352,000, an increase in expense of $2,313,000 as compared to the credit for loan losses of $961,000 recorded in the first six months of 2019. In 2020, the provision includes the effects of recording a specific allowance of $1,193,000 on a commercial loan in the first quarter, partially offset by the benefit from the previously described repayment of the commercial construction loan in the second quarter. In total, the provision for the first six months of 2020 included a net charge of $1,067,000 related to specific loans (net increase in specific allowances on loans of $905,000 and net charge-offs of $162,000); a charge of $646,000 attributable to increases in qualitative factors; a credit of $272,000 from the impact of a reduction in outstanding loans, excluding PPP loans; and a credit of $89,000 in the net charge-off experience factors used to estimate the allowance. NaN provision for loan losses was recognized on PPP loans because the SBA guarantees the loans, subject to compliance with program requirements. The credit for loan losses in the first six months of 2019 included a benefit from eliminating specific allowances on commercial loans that were no longer considered impaired.
In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” column in the table that follows.
25
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of June 30, 2020 and December 31, 2019:
June 30, 2020
(In Thousands)
| | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| Purchased |
| | | |
| | | | | Special | | | | | | | | Credit | | | | ||
| | Pass | | Mention | | Substandard | | Doubtful | | Impaired | | Total | ||||||
Residential Mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Residential Mortgage loans - first liens | | $ | 480,338 | | $ | 2,977 | | $ | 9,822 | | $ | 0 | | $ | 77 | | $ | 493,214 |
Residential Mortgage loans - junior liens | |
| 24,990 | |
| 130 | |
| 512 | |
| 0 | |
| 0 | |
| 25,632 |
Home Equity lines of credit | |
| 31,115 | |
| 59 | |
| 652 | |
| 0 | |
| 0 | |
| 31,826 |
1-4 Family residential construction | |
| 15,621 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 15,621 |
Total residential mortgage | |
| 552,064 | |
| 3,166 | |
| 10,986 | |
| 0 | |
| 77 | |
| 566,293 |
Commercial: | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial loans secured by real estate | |
| 276,776 | |
| 6,536 | |
| 9,764 | |
| 0 | |
| 228 | |
| 293,304 |
Commercial and Industrial | |
| 107,788 | |
| 6,225 | |
| 2,689 | |
| 3,500 | |
| 0 | |
| 120,202 |
Small Business Administration - Paycheck | | | | | | | | | | | | | | | | | | |
Protection Program | | | 97,103 | | | 0 | | | 0 | | | 0 | | | 0 | | | 97,103 |
Political subdivisions | |
| 43,134 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 43,134 |
Commercial construction and land | |
| 40,082 | |
| 198 | |
| 68 | |
| 0 | |
| 0 | |
| 40,348 |
Loans secured by farmland | |
| 9,819 | |
| 728 | |
| 886 | |
| 0 | |
| 0 | |
| 11,433 |
Multi-family (5 or more) residential | |
| 29,364 | |
| 2,434 | |
| 901 | |
| 0 | |
| 0 | |
| 32,699 |
Agricultural loans | |
| 3,261 | |
| 0 | |
| 613 | |
| 0 | |
| 0 | |
| 3,874 |
Other commercial loans | |
| 16,579 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | | �� | 16,579 |
Total commercial | |
| 623,906 | |
| 16,121 | |
| 14,921 | |
| 3,500 | |
| 228 | |
| 658,676 |
Consumer | |
| 16,345 | |
| 0 | |
| 99 | |
| 0 | |
| 0 | |
| 16,444 |
Totals | | $ | 1,192,315 | | $ | 19,287 | | $ | 26,006 | | $ | 3,500 | | $ | 305 | | $ | 1,241,413 |
26
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
December 31, 2019
(In Thousands)
| | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| Purchased |
| | | |
| | | | | Special | | | | | | | | Credit | | | | ||
| | Pass | | Mention | | Substandard | | Doubtful | | Impaired | | Total | ||||||
Residential Mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Residential Mortgage loans - first liens | | $ | 500,963 | | $ | 193 | | $ | 9,324 | | $ | 84 | | $ | 77 | | $ | 510,641 |
Residential Mortgage loans - junior liens | |
| 26,953 | |
| 79 | |
| 471 | |
| 0 | |
| 0 | |
| 27,503 |
Home Equity lines of credit | |
| 33,170 | |
| 59 | |
| 409 | |
| 0 | |
| 0 | |
| 33,638 |
1-4 Family residential construction | |
| 14,798 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 14,798 |
Total residential mortgage | |
| 575,884 | |
| 331 | |
| 10,204 | |
| 84 | |
| 77 | |
| 586,580 |
Commercial: | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial loans secured by real estate | |
| 294,397 | |
| 4,773 | |
| 1,693 | |
| 0 | |
| 364 | |
| 301,227 |
Commercial and Industrial | |
| 114,293 | |
| 9,538 | |
| 2,543 | |
| 0 | |
| 0 | |
| 126,374 |
Political subdivisions | |
| 53,570 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 53,570 |
Commercial construction and land | |
| 32,224 | |
| 0 | |
| 1,331 | |
| 0 | |
| 0 | |
| 33,555 |
Loans secured by farmland | |
| 6,528 | |
| 4,681 | |
| 1,042 | |
| 0 | |
| 0 | |
| 12,251 |
Multi-family (5 or more) residential | |
| 30,160 | |
| 0 | |
| 910 | |
| 0 | |
| 0 | |
| 31,070 |
Agricultural loans | |
| 3,343 | |
| 335 | |
| 641 | |
| 0 | |
| 0 | |
| 4,319 |
Other commercial loans | |
| 16,416 | |
| 0 | |
| 119 | |
| 0 | |
| 0 | |
| 16,535 |
Total commercial | |
| 550,931 | |
| 19,327 | |
| 8,279 | |
| 0 | |
| 364 | |
| 578,901 |
Consumer | |
| 16,720 | |
| 0 | |
| 21 | |
| 0 | |
| 0 | |
| 16,741 |
Totals | | $ | 1,143,535 | | $ | 19,658 | | $ | 18,504 | | $ | 84 | | $ | 441 | | $ | 1,182,222 |
The general component of the allowance for loan losses covers pools of loans including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such a loan: (1) is subject to a restructuring agreement, or (2) has an outstanding balance of $400,000 or more and a credit grade of Special Mention, Substandard or Doubtful. The pools of loans are evaluated for loss exposure based upon average historical net charge-off rates for each loan class, adjusted for qualitative factors (described in the following paragraphs). The time period used in determining the average historical net charge-off rate for each loan class is based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio. At June 30, 2020 and December 31, 2019, a five-year average net charge-off rate was used for commercial loans secured by real estate and for multi-family residential loans, while a three-year average net charge-off rate was used for all other loan classes.
Qualitative risk factors are evaluated for the impact on each of the three segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. The adjustment for qualitative factors is applied as an increase or decrease to the average net charge-off rate for each loan class within each segment.
The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors.
27
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Loans are classified as impaired, when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans, by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.
The scope of loans reviewed individually each quarter to determine if they are impaired include all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Loans that are individually reviewed, but which are determined to not be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance. The loans that have been individually reviewed, but which have been determined to not be impaired, are included in the “Collectively Evaluated” column in the table summarizing the allowance and associated loan balances as of June 30, 2020 and December 31, 2019. All loans classified as troubled debt restructurings (discussed in more detail below) and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment.
28
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of June 30, 2020 and December 31, 2019.
June 30, 2020
(In Thousands)
| | | | | | | | | | | | | | | | | | | | | |
|
| Loans: | | Allowance for Loan Losses: | |||||||||||||||||
| | | | | | | | Purchased | | | | | | | | | | | | | |
| | Individually | | Collectively | | Performing | | | | | Individually | | Collectively | |
| | |||||
|
| Evaluated |
| Evaluated |
| Loans |
| Totals |
| Evaluated |
| Evaluated |
| Totals | |||||||
Residential mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 1,358 | | $ | 391,116 | | $ | 100,740 | | $ | 493,214 | | $ | 10 | | $ | 3,521 | | $ | 3,531 |
Residential mortgage loans - junior liens | |
| 355 | |
| 23,422 | |
| 1,855 | |
| 25,632 | |
| 154 | |
| 211 | |
| 365 |
Home equity lines of credit | |
| 0 | |
| 30,540 | |
| 1,286 | |
| 31,826 | |
| 0 | |
| 287 | |
| 287 |
1-4 Family residential construction | |
| 0 | |
| 15,621 | |
| 0 | |
| 15,621 | |
| 0 | |
| 137 | |
| 137 |
Total residential mortgage | |
| 1,713 | |
| 460,699 | |
| 103,881 | |
| 566,293 | |
| 164 | |
| 4,156 | |
| 4,320 |
Commercial: | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial loans secured by real estate | |
| 7,501 | |
| 186,066 | |
| 99,737 | |
| 293,304 | |
| 494 | |
| 1,932 | |
| 2,426 |
Commercial and industrial | |
| 4,645 | |
| 112,891 | |
| 2,666 | |
| 120,202 | |
| 1,264 | |
| 1,232 | |
| 2,496 |
Small Business Administration - Paycheck | | | | | | | | | | | | | | | | | | | | | |
Protection Program | |
| 0 | |
| 97,103 | |
| 0 | |
| 97,103 | |
| 0 | |
| 0 | |
| 0 |
Political subdivisions | |
| 0 | |
| 43,134 | |
| 0 | |
| 43,134 | |
| 0 | |
| 0 | |
| 0 |
Commercial construction and land | |
| 0 | |
| 40,348 | |
| 0 | |
| 40,348 | |
| 0 | |
| 420 | |
| 420 |
Loans secured by farmland | |
| 421 | |
| 10,758 | |
| 254 | |
| 11,433 | |
| 34 | |
| 112 | |
| 146 |
Multi-family (5 or more) residential | |
| 0 | |
| 11,195 | |
| 21,504 | |
| 32,699 | |
| 0 | |
| 163 | |
| 163 |
Agricultural loans | |
| 0 | |
| 3,874 | |
| 0 | |
| 3,874 | |
| 0 | |
| 40 | |
| 40 |
Other commercial loans | |
| 0 | |
| 16,031 | |
| 548 | |
| 16,579 | |
| 0 | |
| 167 | |
| 167 |
Total commercial | |
| 12,567 | |
| 521,400 | |
| 124,709 | |
| 658,676 | |
| 1,792 | |
| 4,066 | |
| 5,858 |
Consumer | |
| 0 | |
| 16,444 | |
| 0 | |
| 16,444 | |
| 0 | |
| 263 | |
| 263 |
Unallocated | |
| | |
| | |
| | |
| | |
| | |
| | |
| 585 |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 14,280 | | $ | 998,543 | | $ | 228,590 | | $ | 1,241,413 | | $ | 1,956 | | $ | 8,485 | | $ | 11,026 |
29
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
December 31, 2019
(In Thousands)
| | | | | | | | | | | | | | | | | | | | | |
|
| Loans: | | Allowance for Loan Losses: | |||||||||||||||||
| | | | | | | | Purchased | | | | | | | | | | | | | |
| | Individually | | Collectively | | Performing | | | | | Individually | | Collectively | |
| | |||||
|
| Evaluated |
| Evaluated |
| Loans |
| Totals |
| Evaluated |
| Evaluated |
| Totals | |||||||
Residential mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 1,023 | | $ | 405,186 | | $ | 104,432 | | $ | 510,641 | | $ | 0 | | $ | 3,405 | | $ | 3,405 |
Residential mortgage loans - junior liens | |
| 368 | |
| 24,730 | |
| 2,405 | |
| 27,503 | |
| 176 | |
| 208 | |
| 384 |
Home equity lines of credit | |
| 0 | |
| 32,147 | |
| 1,491 | |
| 33,638 | |
| 0 | |
| 276 | |
| 276 |
1-4 Family residential construction | |
| 0 | |
| 14,640 | |
| 158 | |
| 14,798 | |
| 0 | |
| 117 | |
| 117 |
Total residential mortgage | |
| 1,391 | |
| 476,703 | |
| 108,486 | |
| 586,580 | |
| 176 | |
| 4,006 | |
| 4,182 |
Commercial: | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Commercial loans secured by real estate | |
| 684 | |
| 198,532 | |
| 102,011 | |
| 301,227 | |
| 0 | |
| 1,921 | |
| 1,921 |
Commercial and industrial | |
| 1,467 | |
| 122,313 | |
| 2,594 | |
| 126,374 | |
| 149 | |
| 1,242 | |
| 1,391 |
Political subdivisions | |
| 0 | |
| 53,570 | |
| 0 | |
| 53,570 | |
| 0 | |
| 0 | |
| 0 |
Commercial construction and land | |
| 1,261 | |
| 29,710 | |
| 2,584 | |
| 33,555 | |
| 678 | |
| 288 | |
| 966 |
Loans secured by farmland | |
| 607 | |
| 11,386 | |
| 258 | |
| 12,251 | |
| 48 | |
| 110 | |
| 158 |
Multi-family (5 or more) residential | |
| 0 | |
| 10,617 | |
| 20,453 | |
| 31,070 | |
| 0 | |
| 156 | |
| 156 |
Agricultural loans | |
| 76 | |
| 4,243 | |
| 0 | |
| 4,319 | |
| 0 | |
| 41 | |
| 41 |
Other commercial loans | |
| 0 | |
| 15,947 | |
| 588 | |
| 16,535 | |
| 0 | |
| 155 | |
| 155 |
Total commercial | |
| 4,095 | |
| 446,318 | |
| 128,488 | |
| 578,901 | |
| 875 | |
| 3,913 | |
| 4,788 |
Consumer | |
| 0 | |
| 16,741 | |
| 0 | |
| 16,741 | |
| 0 | |
| 281 | |
| 281 |
Unallocated | |
| 585 | |
| | |
| | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 5,486 | | $ | 939,762 | | $ | 236,974 | | $ | 1,182,222 | | $ | 1,051 | | $ | 8,200 | | $ | 9,836 |
30
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Summary information related to impaired loans at June 30, 2020 and December 31, 2019 is provided in the table immediately below. Purchased credit impaired loans of $305,000 at June 30, 2020 and $441,000 at December 31, 2019 are excluded from the table.
| | | | | | | | | | | | | | | | | | |
(In Thousands) | | June 30, 2020 | | December 31, 2019 | ||||||||||||||
| | Unpaid | | | | | | | | Unpaid | | | | | | | ||
| | Principal | | Recorded | | Related | | Principal | | Recorded | | Related | ||||||
|
| Balance |
| Investment |
| Allowance |
| Balance |
| Investment |
| Allowance | ||||||
With no related allowance recorded: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 179 | | $ | 152 | | $ | 0 | | $ | 645 | | $ | 617 | | $ | 0 |
Residential mortgage loans - junior liens | |
| 41 | |
| 41 | |
| 0 | |
| 42 | |
| 42 | |
| 0 |
Commercial loans secured by real estate | |
| 747 | |
| 747 | |
| 0 | |
| 684 | |
| 684 | |
| 0 |
Commercial and industrial | |
| 1,065 | |
| 1,065 | |
| 0 | |
| 563 | |
| 563 | |
| 0 |
Loans secured by farmland | |
| 86 | |
| 86 | |
| 0 | |
| 129 | |
| 129 | |
| 0 |
Agricultural loans | |
| 0 | |
| 0 | |
| 0 | |
| 76 | |
| 76 | |
| 0 |
Total with no related allowance recorded | |
| 2,118 | |
| 2,091 | |
| 0 | |
| 2,139 | |
| 2,111 | |
| 0 |
| | | | | | | | | | | | | | | | | | |
With a related allowance recorded: | |
| | |
| | |
| | |
|
| |
|
| |
|
|
Residential mortgage loans - first liens | |
| 1,206 | |
| 1,206 | |
| 10 | |
| 406 | |
| 406 | |
| 0 |
Residential mortgage loans - junior liens | |
| 314 | |
| 314 | |
| 154 | |
| 326 | |
| 326 | |
| 176 |
Commercial loans secured by real estate | | | 6,754 | | | 6,754 | | | 494 | | | 0 | | | 0 | | | 0 |
Commercial and industrial | |
| 3,580 | |
| 3,580 | |
| 1,264 | |
| 904 | |
| 904 | |
| 149 |
Construction and other land loans | |
| 0 | |
| 0 | |
| 0 | |
| 1,261 | |
| 1,261 | |
| 678 |
Loans secured by farmland | |
| 335 | |
| 335 | |
| 34 | |
| 478 | |
| 478 | |
| 48 |
Total with a related allowance recorded | |
| 12,189 | |
| 12,189 | |
| 1,956 | |
| 3,375 | |
| 3,375 | |
| 1,051 |
Total | | $ | 14,307 | | $ | 14,280 | | $ | 1,956 | | $ | 5,514 | | $ | 5,486 | | $ | 1,051 |
In the table immediately above, loans to two borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. Each of these loans is collateralized by one property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property. The total allowance related to these two borrowers was $154,000 at June 30, 2020 and $176,000 at December 31, 2019.
31
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The average balance of impaired loans, excluding purchased credit impaired loans, and interest income recognized on these impaired loans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | | | | | | | | | | | | | Interest Income Recognized on | ||||||||||
| | Average Investment in Impaired Loans | | Impaired Loans on a Cash Basis | ||||||||||||||||||||
| | 3 Months Ended | | 6 Months Ended | | 3 Months Ended | | 6 Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2020 | | 2019 | | 2020 |
| 2019 | | 2020 | | 2019 |
| 2020 |
| 2019 | ||||||||
Residential mortgage: |
| | | | | | | |
|
| |
| | | | | | |
| |
|
| |
|
Residential mortgage loans - first lien | | $ | 1,398 | | $ | 970 | | $ | 1,315 | | $ | 977 | | $ | 35 | | $ | 8 | | $ | 43 | | $ | 18 |
Residential mortgage loans - junior lien | | | 391 | | | 289 | |
| 387 | |
| 290 | | | 13 | | | 0 | |
| 13 | |
| 2 |
Home equity lines of credit | | | 65 | | | 0 | |
| 65 | |
| 0 | | | 1 | | | 0 | |
| 2 | |
| 0 |
Total residential mortgage | | | 1,854 | | | 1,259 | |
| 1,767 | |
| 1,267 | | | 49 | | | 8 | |
| 58 | |
| 20 |
Commercial: | | | | | | | |
| | |
| | | | | | | | |
| | |
| |
Commercial loans secured by real estate | | | 3,771 | | | 1,722 | |
| 2,079 | |
| 2,582 | | | 12 | | | 7 | |
| 16 | |
| 17 |
Commercial and industrial | | | 4,460 | | | 1,241 | |
| 3,666 | |
| 1,546 | | | 19 | | | 8 | |
| 20 | |
| 34 |
Commercial construction and land | | | 678 | | | 0 | |
| 993 | |
| 0 | | | 1 | | | 0 | |
| 13 | |
| 0 |
Loans secured by farmland | | | 422 | | | 1,533 | |
| 469 | |
| 1,471 | | | 7 | | | 18 | |
| 24 | |
| 19 |
Agricultural loans | | | 76 | | | 626 | |
| 76 | |
| 639 | | | 2 | | | 12 | |
| 2 | |
| 24 |
Other commercial loans | | | 25 | | | 0 | |
| 37 | |
| 0 | | | 0 | | | 0 | |
| 1 | |
| 0 |
Total commercial | | | 9,432 | | | 5,122 | |
| 7,320 | |
| 6,238 | | | 41 | | | 45 | |
| 76 | |
| 94 |
Consumer | | | 0 | | | 0 | |
| 0 | |
| 6 | | | 0 | | | 0 | |
| 0 | |
| 0 |
Total | | $ | 11,286 | | $ | 6,381 | | $ | 9,087 | | $ | 7,511 | | $ | 90 | | $ | 53 | | $ | 134 | | $ | 114 |
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.
32
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The breakdown by portfolio segment and class of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:
| | | | | | | | | | | | |
(In Thousands) | | June 30,2020 | | December 31,2019 | ||||||||
| | Past Due | | | | | Past Due | | | | ||
| | 90+ Days and | | | | | 90+ Days and | | | | ||
|
| Accruing |
| Nonaccrual |
| Accruing |
| Nonaccrual | ||||
Residential mortgage: |
| |
|
| |
|
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 1,545 | | $ | 5,888 | | $ | 878 | | $ | 4,679 |
Residential mortgage loans - junior liens | |
| 59 | |
| 344 | |
| 53 | |
| 326 |
Home equity lines of credit | |
| 243 | |
| 273 | |
| 71 | |
| 73 |
1-4 Family residential construction | |
| 0 | |
| 39 | |
| 0 | |
| 0 |
Total residential mortgage | |
| 1,847 | |
| 6,544 | |
| 1,002 | |
| 5,078 |
Commercial: | |
| | |
| | |
|
| |
|
|
Commercial loans secured by real estate | |
| 558 | |
| 7,482 | |
| 107 | |
| 1,148 |
Commercial and industrial | |
| 135 | |
| 4,227 | |
| 15 | |
| 1,051 |
Commercial construction and land | |
| 0 | |
| 50 | |
| 0 | |
| 1,311 |
Loans secured by farmland | |
| 188 | |
| 421 | |
| 43 | |
| 565 |
Other commercial | |
| 0 | |
| 0 | |
| 0 | |
| 49 |
Total commercial | |
| 881 | |
| 12,180 | |
| 165 | |
| 4,124 |
Consumer | |
| 84 | |
| 39 | |
| 40 | |
| 16 |
| | | | | | | | | | | | |
Totals | | $ | 2,812 | | $ | 18,763 | | $ | 1,207 | | $ | 9,218 |
The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual.
33
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The table below presents a summary of the contractual aging of loans as of June 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | As of June 30, 2020 | | As of December 31, 2019 | ||||||||||||||||||||
|
| Current & |
| | |
| | |
| | |
| Current & |
| | |
| | |
| | | ||
| | Past Due | | Past Due | | Past Due | | | | | Past Due | | Past Due | | Past Due | | | | ||||||
| | Less than | | 30-89 | | 90+ | | | | | Less than | | 30-89 | | 90+ | | | | ||||||
| | 30 Days | | Days | | Days | | Total | | 30 Days | | Days | | Days | | Total | ||||||||
Residential mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 484,129 | | $ | 5,111 | | $ | 3,974 | | $ | 493,214 | | $ | 499,024 | | $ | 7,839 | | $ | 3,778 | | $ | 510,641 |
Residential mortgage loans - junior liens | |
| 25,482 | |
| 4 | |
| 146 | |
| 25,632 | |
| 27,041 | |
| 83 | |
| 379 | |
| 27,503 |
Home equity lines of credit | |
| 31,246 | |
| 337 | |
| 243 | |
| 31,826 | |
| 33,115 | |
| 452 | |
| 71 | |
| 33,638 |
1-4 Family residential construction | |
| 15,621 | |
| 0 | |
| 0 | |
| 15,621 | |
| 14,758 | |
| 40 | |
| 0 | |
| 14,798 |
Total residential mortgage | |
| 556,478 | |
| 5,452 | |
| 4,363 | |
| 566,293 | |
| 573,938 | |
| 8,414 | |
| 4,228 | |
| 586,580 |
| |
| | |
| | |
| | |
| | |
|
| |
|
| |
|
| |
|
|
Commercial: | |
| | |
| | |
| | |
| | |
|
| |
|
| |
|
| |
|
|
Commercial loans secured by real estate | |
| 291,728 | |
| 245 | |
| 1,331 | |
| 293,304 | |
| 299,640 | |
| 737 | |
| 850 | |
| 301,227 |
Commercial and industrial | |
| 116,429 | |
| 67 | |
| 3,706 | |
| 120,202 | |
| 126,221 | |
| 16 | |
| 137 | |
| 126,374 |
Small Business Administration - | | | | | | | | | | | | | | | | | | | | | | | | |
Paycheck Protection Program | | | 97,103 | | | 0 | | | 0 | | | 97,103 | | | 0 | | | 0 | | | 0 | | | 0 |
Political subdivisions | |
| 43,134 | |
| 0 | |
| 0 | |
| 43,134 | |
| 53,570 | |
| 0 | |
| 0 | |
| 53,570 |
Commercial construction and land | |
| 39,947 | |
| 351 | |
| 50 | |
| 40,348 | |
| 33,505 | |
| 0 | |
| 50 | |
| 33,555 |
Loans secured by farmland | |
| 11,159 | |
| 52 | |
| 222 | |
| 11,433 | |
| 11,455 | |
| 666 | |
| 130 | |
| 12,251 |
Multi-family (5 or more) residential | |
| 32,699 | |
| 0 | |
| 0 | |
| 32,699 | |
| 31,070 | |
| 0 | |
| 0 | |
| 31,070 |
Agricultural loans | |
| 3,800 | |
| 74 | |
| 0 | |
| 3,874 | |
| 4,318 | |
| 1 | |
| 0 | |
| 4,319 |
Other commercial loans | |
| 16,553 | |
| 26 | |
| 0 | |
| 16,579 | |
| 16,535 | |
| 0 | |
| 0 | |
| 16,535 |
Total commercial | |
| 652,552 | |
| 815 | |
| 5,309 | |
| 658,676 | |
| 576,314 | |
| 1,420 | |
| 1,167 | |
| 578,901 |
Consumer | |
| 16,205 | |
| 124 | |
| 115 | |
| 16,444 | |
| 16,496 | |
| 189 | |
| 56 | |
| 16,741 |
Totals | | $ | 1,225,235 | | $ | 6,391 | | $ | 9,787 | | $ | 1,241,413 | | $ | 1,166,748 | | $ | 10,023 | | $ | 5,451 | | $ | 1,182,222 |
34
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at June 30, 2020 and December 31, 2019 is as follows:
| | | | | | | | | | | | |
(In Thousands) | | Current & | | | | | | | |
| | |
| | Past Due | | Past Due | | Past Due | |
| | |||
| | Less than | | 30-89 | | 90+ | |
| | |||
|
| 30 Days |
| Days |
| Days |
| Total | ||||
June 30, 2020 Nonaccrual Totals | | $ | 10,521 | | $ | 1,267 | | $ | 6,975 | | $ | 18,763 |
December 31, 2019 Nonaccrual Totals | | $ | 3,840 | | $ | 1,134 | | $ | 4,244 | | $ | 9,218 |
Loans whose terms are modified are classified as 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 June 30, 2020 and December 31, 2019 is as follows:
| | | | | | | | | | | | | | | |
(In Thousands) | | Current & | | | | | | | |
| | |
| | |
| | Past Due | | Past Due | | Past Due | |
| | |
| | |||
| | Less than | | 30-89 | | 90+ | |
| | |
| | |||
|
| 30 Days |
| Days |
| Days |
| Nonaccrual |
| Total | |||||
June 30, 2020 Totals | | $ | 172 | | $ | 93 | | $ | 338 | | $ | 452 | | $ | 1,055 |
December 31, 2019 Totals | | $ | 889 | | $ | 0 | | $ | 0 | | $ | 1,737 | | $ | 2,626 |
At June 30, 2020 and December 31, 2019, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.
TDRs that occurred during the three-month and six-month periods ended June 30, 2020 and 2019 are as follows:
| | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | ||||||
| | June 30, 2020 | | June 30, 2019 | ||||||
| | | | Post- | | | | Post- | ||
| | Number | | Modification | | Number | | Modification | ||
| | of | | Recorded | | of | | Recorded | ||
(Balances in Thousands) | | Loans | | Investment | | Loans | | Investment | ||
Commercial and industrial, | | | | | | | | | | |
Interest only payments for a nine-month period |
| 1 |
| $ | 240 |
| 0 |
| $ | 0 |
| | | | | | | | | | |
(Balances in Thousands) | | Six Months Ended | | Six Months Ended | ||||||
| | June 30, 2020 | | June 30, 2019 | ||||||
|
| |
| Post- |
| |
| Post- | ||
| | Number | | Modification | | Number | | Modification | ||
| | of | | Recorded | | of | | Recorded | ||
| | Loans | | Investment | | Loans | | Investment | ||
Residential mortgage - first liens, |
|
|
| |
|
|
|
| |
|
Reduced monthly payments and extended maturity date |
| 0 | | $ | 0 |
| 1 | | $ | 271 |
Residential mortgage - junior liens: |
|
| |
|
|
|
| |
|
|
Reduced monthly payments and extended maturity date |
| 0 | |
| 0 |
| 1 | |
| 18 |
New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted |
| 1 | |
| 30 |
| 0 | |
| 0 |
Commercial and industrial: |
|
| |
|
|
|
| |
|
|
Reduced monthly payments and extended maturity date |
| 0 | |
| 0 |
| 8 | |
| 177 |
Interest only payments for a nine-month period | | 1 | | | 240 | | 0 | | | 0 |
Agricultural loans, |
|
| |
|
|
|
| |
|
|
Reduced monthly payments and extended maturity date |
| 0 | |
| 0 |
| 1 | |
| 84 |
Total |
| 2 | | $ | 270 |
| 11 | | $ | 550 |
35
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
All of the loans for which TDRs were granted in the table above in the six-month period ended June 30, 2019 are associated with one relationship.
In the three-month and six-month periods ended June 30, 2020 and 2019, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months.
The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in foreclosed assets held for sale in the unaudited consolidated balance sheets) is as follows:
| | | | | | |
(In Thousands) |
| June 30, |
| Dec. 31, | ||
| | 2020 | | 2019 | ||
Foreclosed residential real estate | | $ | 118 | | $ | 292 |
The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:
| | | | | | |
(In Thousands) |
| June 30, |
| Dec. 31, | ||
| | 2020 | | 2019 | ||
Residential real estate in process of foreclosure | | $ | 1,502 | | $ | 1,717 |
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Information related to core deposit intangibles, net are as follows:
| | | | | | |
(In Thousands) |
| June 30, |
| December 31, | ||
| | 2020 | | 2019 | ||
Gross amount | | $ | 3,495 | | $ | 3,495 |
Accumulated amortization | |
| (2,372) | |
| (2,248) |
Net | | $ | 1,123 | | $ | 1,247 |
Amortization expense related to core deposit intangibles is included in other noninterest expense in the consolidated statements of income, as follows:
| | | | | | | | | | | | |
(In Thousands) | | 3 Months Ended | | 6 Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Amortization expense | | $ | 62 |
| $ | 73 |
| $ | 124 |
| $ | 75 |
Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At June 30, 2020 and December 31, 2019, the carrying value of goodwill is $28,388,000.
Goodwill is tested at least annually at December 31 for impairment, or more often if events or circumstances indicate there may be impairment. In 2020, the COVID-19 pandemic led to government-imposed emergency restrictions that substantially limited the operation of non-essential businesses and the activities of individuals. These restrictions had significant adverse effects on macroeconomic conditions. After a period when the virus appeared to have subsided in Pennsylvania and throughout many parts of the US, the number of cases and mortality levels have increased in recent weeks. Broader US stock market valuations decreased significantly in the latter part of the first quarter and early second quarter 2020 but more recently have bounced back to levels consistent with pre-COVID-19 conditions. Bank stock valuations have lagged, reflecting market concerns about potential credit losses and the effects of a substantial drop in interest rates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In light of the adverse circumstances resulting from COVID-19, management determined it necessary to evaluate goodwill for impairment at June 30, 2020.
36
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The average closing price (trading price) of the Corporation’s common stock was $20.24 per share for the month of June 2020, down from an average closing price of $26.05 in the fourth quarter 2019. The average closing price for the last 10 trading days of the second quarter 2020 (June 17 through June 30, 2020) was $20.14 per share. In comparison, the book value per share of the Corporation’s common stock at June 30, 2020 was $18.53 per share. In testing goodwill for impairment as of June 30, 2020, the Corporation by-passed performing a qualitative assessment and performed a quantitative assessment based on comparison of the Corporation’s market capitalization to its stockholders’ equity, resulting in the determination that the fair value of its reporting unit, its community banking operation, exceeded its carrying value. Accordingly, there was 0 goodwill impairment at June 30, 2020.
9. BORROWED FUNDS AND SUBORDINATED DEBT
Short-term borrowings (initial maturity within one year) include the following:
| | | | | | |
(In Thousands) |
| June 30, |
| Dec. 31, | ||
| | 2020 | | 2019 | ||
FHLB-Pittsburgh borrowings | | $ | 12,200 | | $ | 84,292 |
Customer repurchase agreements | |
| 2,204 | |
| 1,928 |
Total short-term borrowings | | $ | 14,404 | | $ | 86,220 |
Short-term borrowings from FHLB-Pittsburgh are as follows:
| | | | | | |
(In Thousands) |
| June 30, |
| Dec. 31, | ||
| | 2020 | | 2019 | ||
Overnight borrowing | | $ | 0 | | $ | 64,000 |
Other short-term advances | |
| 12,200 | |
| 20,292 |
Total short-term FHLB-Pittsburgh borrowings | | $ | 12,200 | | $ | 84,292 |
At June 30, 2020, other short-term advances included 5 advances totaling $12,200,000 with a weighted-average interest rate of 1.59%.
The Corporation had available credit with other correspondent banks totaling $45,000,000 at June 30, 2020 and December 31, 2019. These lines of credit are primarily unsecured. NaN amounts were outstanding at June 30, 2020 or December 31, 2019.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At June 30, 2020, the Corporation had available credit in the amount of $14,605,000 on this line with no outstanding advances. At December 31, 2019, the Corporation had available credit in the amount of $14,244,000 on this line with 0 outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $15,092,000 at June 30, 2020 and $14,728,000 at December 31, 2019.
The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10% at June 30, 2020 and December 31, 2019. The carrying value of the underlying securities was $2,240,000 at June 30, 2020 and $1,951,000 at December 31, 2019.
37
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $759,623,000 at June 30, 2020 and $778,877,000 at December 31, 2019. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were $8,671,000 at June 30, 2020 and $10,131,000 at December 31, 2019. In addition to the short-term and long-term borrowings shown in these tables, there was a $400,000 letter of credit from FHLB-Pittsburgh outstanding at June 30, 2020. The Corporation’s total credit facility with FHLB-Pittsburgh was $571,597,000 at June 30, 2020, including an unused (available) amount of $486,093,000. At December 31, 2019, the Corporation’s total credit facility with FHLB-Pittsburgh was $552,546,000, including an unused (available) amount of $416,127,000.
LONG-TERM BORROWINGS
Long-term borrowings from FHLB-Pittsburgh are as follows:
| | | | | | |
(In Thousands) |
| June 30, |
| Dec. 31, | ||
| | 2020 | | 2019 | ||
Loans matured in 2020 with a weighted-average rate of 2.71% | | $ | 0 | | $ | 5,069 |
Loans maturing in 2021 with a weighted-average rate of 1.63% | | | 20,000 | | | 6,000 |
Loans maturing in 2022 with a weighted-average rate of 1.90% | | | 22,355 | | | 20,000 |
Loans maturing in 2023 with a weighted-average rate of 1.63% | | | 22,500 | | | 20,500 |
Loans maturing in 2024 with a weighted-average rate of 1.27% | | | 7,536 | | | 0 |
Loan maturing in 2025 with a rate of 4.91% | |
| 513 | |
| 558 |
Total long-term FHLB-Pittsburgh borrowings | | $ | 72,904 | | $ | 52,127 |
At June 30, 2020 and December 31, 2019, the Corporation has outstanding subordinated debt agreements with par values totaling $6,500,000, maturing April 1, 2027, which may be redeemed at par beginning April 1, 2022. The agreements have fixed annual interest rates of 6.50%. At June 30, 2020 and December 31, 2019, the carrying value of the subordinated debt on the consolidated balance sheets is $6,500,000.
10. STOCK-BASED COMPENSATION PLANS
The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. In the first quarter 2020, the Corporation awarded 48,284 shares of restricted stock under the Stock Incentive Plan and 7,580 shares of restricted stock under the Independent Directors Stock Incentive Plan. The 2020 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and include 30,381 time-based awards with a total fair value of $801,000 at the date of grant and 17,903 performance-based awards with a total fair value of $343,000 at date of grant. The 2020 restricted stock issued under the Independent Directors Stock Incentive Plan are time-based awards, vesting over one year, with a total fair value of $200,000 at the date of grant.
Compensation cost related to restricted stock is recognized based on the fair value of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. Total annual stock-based compensation for the year ending December 31, 2020 is estimated to total $893,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $230,000 in the second quarter 2020 and $202,000 in the second quarter 2019. Total stock-based compensation expense attributable to restricted stock awards amounted to $424,000 in the six-month period ended June 30, 2020 and $431,000 in the six-month period ended June 30, 2019.
11. CONTINGENCIES
In the normal course of business, the Corporation may be subject to pending and threatened lawsuits in which claims for monetary damages could be asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of such pending legal proceedings.
38
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
12. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB 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.
At June 30, 2020 and December 31, 2019, assets measured at fair value and the valuation methods used are as follows:
| | | | | | | | | | | | |
| | June 30, 2020 | ||||||||||
|
| Quoted |
| | |
| | |
| | | |
| | Prices | | Other | | | | | | | ||
| | in Active | | Observable | | Unobservable | | Total | ||||
| | Markets | | Inputs | | Inputs | | Fair | ||||
(In Thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Value | ||||
Recurring fair value measurements |
| |
|
| |
|
| |
|
| |
|
AVAILABLE-FOR-SALE DEBT SECURITIES: |
| |
|
| |
|
| |
|
| |
|
Obligations of U.S. Government agencies | | $ | 0 | | $ | 11,673 | | $ | 0 | | $ | 11,673 |
Obligations of states and political subdivisions: | |
|
| |
|
| |
|
| |
| |
Tax-exempt | |
| 0 | |
| 91,643 | |
| 0 | |
| 91,643 |
Taxable | |
| 0 | |
| 39,784 | |
| 0 | |
| 39,784 |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | |
|
| |
|
| |
|
| |
|
|
Residential pass-through securities | |
| 0 | |
| 51,520 | |
| 0 | |
| 51,520 |
Residential collateralized mortgage obligations | |
| 0 | |
| 89,435 | |
| 0 | |
| 89,435 |
Commercial mortgage-backed securities | |
| 0 | |
| 48,133 | |
| 0 | |
| 48,133 |
Total available for sale debt Securities | |
| 0 | |
| 332,188 | |
| 0 | |
| 332,188 |
Marketable equity security | |
| 1,003 | |
| 0 | |
| 0 | |
| 1,003 |
Servicing rights | |
| 0 | |
| 0 | |
| 1,284 | |
| 1,284 |
Total recurring fair value measurements | | $ | 1,003 | | $ | 332,188 | | $ | 1,284 | | $ | 334,475 |
| | | | | | | | | | | | |
Nonrecurring fair value measurements | |
|
| |
|
| |
|
| |
|
|
Impaired loans with a valuation allowance | | $ | 0 | | $ | 0 | | $ | 12,189 | | $ | 12,189 |
Valuation allowance | |
| 0 | |
| 0 | |
| (1,956) | |
| (1,956) |
Impaired loans, net | |
| 0 | |
| 0 | |
| 10,233 | |
| 10,233 |
Foreclosed assets held for sale | |
| 0 | |
| 0 | |
| 1,593 | |
| 1,593 |
Total nonrecurring fair value measurements | | $ | 0 | | $ | 0 | | $ | 11,826 | | $ | 11,826 |
39
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||
|
| Quoted |
| | |
| | |
| | | |
| | Prices | | Other | | | | | | | ||
| | in Active | | Observable | | Unobservable | | Total | ||||
| | Markets | | Inputs | | Inputs | | Fair | ||||
(In Thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Value | ||||
Recurring fair value measurements |
| |
|
| |
|
| |
|
| |
|
AVAILABLE-FOR-SALE DEBT SECURITIES: |
| |
|
| |
|
| |
|
| |
|
Obligations of U.S. Government agencies | | $ | 0 | | $ | 17,000 | | $ | 0 | | $ | 17,000 |
Obligations of states and political subdivisions: | |
|
| |
|
| |
|
| |
|
|
Tax-exempt | |
| 0 | |
| 70,760 | |
| 0 | |
| 70,760 |
Taxable | |
| 0 | |
| 36,303 | |
| 0 | |
| 36,303 |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | |
|
| |
|
| |
|
| |
|
|
Residential pass-through securities | |
| 0 | |
| 59,210 | |
| 0 | |
| 59,210 |
Residential collateralized mortgage obligations | |
| 0 | |
| 114,723 | |
| 0 | |
| 114,723 |
Commercial mortgage-backed securities | |
| 0 | |
| 48,727 | |
| 0 | |
| 48,727 |
Total available-for-sale debt securities | |
| 0 | |
| 346,723 | |
| 0 | |
| 346,723 |
Marketable equity security | |
| 979 | |
| 0 | |
| 0 | |
| 979 |
Servicing rights | |
| 0 | |
| 0 | |
| 1,277 | |
| 1,277 |
Total recurring fair value measurements | | $ | 979 | | $ | 346,723 | | $ | 1,277 | | $ | 348,979 |
| | | | | | | | | | | | |
Nonrecurring fair value measurements | |
|
| |
|
| |
|
| |
|
|
Impaired loans with a valuation allowance | | $ | 0 | | $ | 0 | | $ | 3,375 | | $ | 3,375 |
Valuation allowance | |
| 0 | |
| 0 | |
| (1,051) | |
| (1,051) |
Impaired loans, net | |
| 0 | |
| 0 | |
| 2,324 | |
| 2,324 |
Foreclosed assets held for sale | |
| 0 | |
| 0 | |
| 2,886 | |
| 2,886 |
Total nonrecurring fair value measurements | | $ | 0 | | $ | 0 | | $ | 5,210 | | $ | 5,210 |
Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.
40
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
At June 30, 2020 and December 31, 2019, quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:
| | | | | | | | | | | | |
|
| Fair Value at |
|
|
|
|
| |
|
|
| |
| | 6/30/20 | | Valuation | | Unobservable | | | | | Method or Value As of | |
Asset | | (In Thousands) | | Technique | | Input(s) | | | | | 6/30/20 | |
Servicing rights | | $ | 1,284 |
| Discounted cash flow |
| Discount rate |
| | 12.50 | % | Rate used through modeling period |
| |
| |
| | | Loan prepayment speeds | | | 285.00 | % | Weighted-average PSA |
| |
| |
| | | Servicing fees | | | 0.25 | % | of loan balances |
| |
| | | | | | | | 4.00 | % | of payments are late |
| |
| | | | | | | | 5.00 | % | late fees assessed |
| | | | | | | | | $ | 1.94 | | Miscellaneous fees per account per month |
| |
| | | |
| Servicing costs | | $ | 6.00 | | Monthly servicing cost per account |
| | | | | | | | | $ | 24.00 | | Additional monthly servicing cost per loan on loans more than 30 days delinquent |
| |
| | | | | | | | 1.50 | % | of loans more than 30 days delinquent |
| |
| | |
| | | | | 3.00 | % | annual increase in servicing costs |
| | | | | | | | | | | | |
|
| Fair Value at |
|
|
|
|
| |
|
|
| |
| | 12/31/19 | | Valuation | | Unobservable | | | | | Method or Value As of | |
Asset | | (In Thousands) | | Technique | | Input(s) | | | | | 12/31/19 | |
Servicing rights | | $ | 1,277 |
| Discounted cash flow |
| Discount rate |
| | 12.50 | % | Rate used through modeling period |
| |
| |
| | | Loan prepayment speeds | | | 183.00 | % | Weighted-average PSA |
| |
| |
| | | Servicing fees | | | 0.25 | % | of loan balances |
| |
| | | | | | | | 4.00 | % | of payments are late |
| | | | | | | | | | 5.00 | % | late fees assessed |
| | | | | | | | | $ | 1.94 |
| Miscellaneous fees per account per month |
| | | | | |
| Servicing costs | | $ | 6.00 | | Monthly servicing cost per account |
| | | | | | | | | $ | 24.00 | | Additional monthly servicing cost per loan on loans more than 30 days delinquent |
| | | | | | | | | | 1.50 | % | of loans more than 30 days delinquent |
| |
| | |
| | | | | 3.00 | % | annual increase in servicing costs |
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 | | Six Months Ended | ||||||||
|
| June 30, 2020 |
| June 30, 2019 |
| June 30, 2020 |
| June 30, 2019 | ||||
Servicing rights balance, beginning of period | | $ | 1,226 | | $ | 1,347 | | $ | 1,277 | | $ | 1,404 |
Originations of servicing rights | |
| 328 | |
| 46 | |
| 403 | |
| 66 |
Unrealized losses included in earnings | |
| (270) | |
| (71) | |
| (396) | |
| (148) |
Servicing rights balance, end of period | | $ | 1,284 | | $ | 1,322 | | $ | 1,284 | | $ | 1,322 |
Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using
41
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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.
42
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
At June 30, 2020 and December 31, 2019, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:
| | | | | | | | | | | | | | | | |
(In Thousands, Except |
| | |
|
| |
|
| |
|
|
|
|
| Weighted |
|
Percentages) | | | | | Valuation | |
| | |
| |
| | Average |
| |
| | Balance at | | Allowance at | | Fair Value at | | Valuation | | Unobservable | | Discount at |
| |||
Asset | | 6/30/20 | | 6/30/20 | | 6/30/20 | | Technique | | Inputs | | 6/30/20 | ||||
| | | | | | | | | | | | | | | | |
Impaired loans: |
| |
|
| |
|
| |
|
|
|
|
|
|
| |
Residential mortgage loans - |
| |
|
| |
|
| |
|
|
|
|
|
|
| |
first and junior liens | | $ | 1,520 | | $ | 164 | | $ | 1,355 |
| Sales comparison |
| Discount to appraised value |
| 31 | % |
Commercial: | |
|
| |
| | |
| |
|
|
|
|
| | |
Commercial loans secured by real estate | |
| 6,754 | |
| 494 | |
| 6,261 |
| Sales comparison |
| Discount to appraised value |
| 38 | % |
Commercial and industrial | |
| 3,580 | |
| 1,264 | |
| 2,316 |
| Liquidation of assets |
| Discount to appraised value |
| 35 | % |
Loans secured by farmland | |
| 335 | |
| 34 | |
| 302 |
| Sales comparison |
| Discount to appraised value |
| 42 | % |
Total impaired loans | | $ | 12,189 | | $ | 1,956 | | $ | 10,234 |
|
|
|
|
|
| |
Foreclosed assets held for sale - | |
|
| |
|
| |
|
|
|
|
|
|
|
| |
real estate: | |
|
| |
|
| |
|
|
|
|
|
|
|
| |
Residential (1-4 family) | | $ | 118 | | $ | 0 | | $ | 118 |
| Sales comparison |
| Discount to appraised value |
| 55 | % |
Land | |
| 70 | |
| 0 | |
| 70 |
| Sales comparison |
| Discount to appraised value |
| 53 | % |
Commercial real estate | |
| 1,405 | |
| 0 | |
| 1,405 |
| Sales comparison |
| Discount to appraised value |
| 38 | % |
Total foreclosed assets held for sale | | $ | 1,593 | | $ | 0 | | $ | 1,593 |
|
|
|
|
|
| |
43
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| | | | | | | | | | | | | | | | |
(In Thousands, Except |
| | |
|
| |
|
| |
|
|
|
|
| Weighted |
|
Percentages) | | Valuation | | | | |
| | |
| |
| | Average |
| |
| | Balance at | | Allowance at | | Fair Value at | | Valuation | | Unobservable | | Discount at |
| |||
Asset | | 12/31/19 | | 12/31/19 | | 12/31/19 | | Technique | | Inputs | | 12/31/19 |
| |||
| | | | | | | | | | | | | | | | |
Impaired loans: |
| |
|
| |
|
| |
|
|
|
|
|
|
| |
Residential mortgage loans - |
| |
|
| |
|
| |
|
|
|
|
|
|
| |
first and junior liens | | $ | 732 | | $ | 176 | | $ | 556 |
| Sales comparison |
| Discount to appraised value |
| 30 | % |
Commercial: | |
|
| |
|
| |
|
|
|
|
| �� |
|
| |
Commercial and industrial | |
| 106 | |
| 89 | |
| 17 |
| Sales comparison |
| Discount to appraised value |
| 69 | % |
Commercial and industrial | |
| 798 | |
| 60 | |
| 738 |
| Liquidation of accounts receivable |
| Discount to borrower's financial statement value |
| 15 | % |
Commercial construction and land | |
| 1,261 | |
| 678 | |
| 583 |
| Sales comparison |
| Discount to appraised value |
| 47 | % |
Loans secured by farmland | |
| 478 | |
| 48 | |
| 430 |
| Sales comparison |
| Discount to appraised value |
| 46 | % |
Total impaired loans | | $ | 3,375 | | $ | 1,051 | | $ | 2,324 |
|
|
|
|
|
| |
Foreclosed assets held for sale - | |
|
| |
|
| |
|
|
|
|
|
|
|
| |
real estate: | |
|
| |
|
| |
|
|
|
|
|
|
|
| |
Residential (1-4 family) | | $ | 292 | | $ | 0 | | $ | 292 |
| Sales comparison |
| Discount to appraised value |
| 46 | % |
Land | |
| 70 | |
| 0 | |
| 70 |
| Sales comparison |
| Discount to appraised value |
| 53 | % |
Commercial real estate | |
| 2,524 | |
| 0 | |
| 2,524 |
| Sales comparison |
| Discount to appraised value |
| 39 | % |
Total foreclosed assets held for sale | | $ | 2,886 | | $ | 0 | | $ | 2,886 |
|
|
|
|
|
| |
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.
44
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:
| | | | | | | | | | | | | | |
(In Thousands) | | Fair Value | | June 30, 2020 | | December 31, 2019 | ||||||||
| | Hierarchy | | Carrying | | Fair | | Carrying | | Fair | ||||
|
| Level |
| Amount |
| Value |
| Amount |
| Value | ||||
Financial assets: |
|
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents |
| Level 1 | | $ | 73,812 | | $ | 73,812 | | $ | 31,122 | | $ | 31,122 |
Certificates of deposit |
| Level 2 | |
| 3,830 | |
| 4,078 | |
| 4,080 | |
| 4,227 |
Restricted equity securities (included in Other Assets) |
| Level 2 | |
| 8,861 | |
| 8,861 | |
| 10,321 | |
| 10,321 |
Loans, net |
| Level 3 | |
| 1,230,387 | |
| 1,236,040 | |
| 1,172,386 | |
| 1,181,000 |
Accrued interest receivable |
| Level 2 | |
| 6,326 | |
| 6,326 | |
| 5,001 | |
| 5,001 |
| | | | | | | | | | | | | | |
Financial liabilities: |
|
| |
|
| |
|
| |
|
| |
|
|
Deposits with no stated maturity |
| Level 2 | |
| 1,039,401 | |
| 1,039,401 | |
| 877,965 | |
| 877,965 |
Time deposits |
| Level 2 | |
| 341,777 | |
| 344,959 | |
| 374,695 | |
| 376,738 |
Short-term borrowings |
| Level 2 | |
| 14,404 | |
| 14,271 | |
| 86,220 | |
| 86,166 |
Long-term borrowings |
| Level 2 | |
| 72,904 | |
| 74,545 | |
| 52,127 | |
| 52,040 |
Accrued interest payable |
| Level 2 | |
| 312 | |
| 312 | |
| 311 | |
| 311 |
The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
45
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
● | the effect of the novel coronavirus (COVID-19) and related events |
● | changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates |
● | changes in general economic conditions |
● | legislative or regulatory changes |
● | downturn in demand for loan, deposit and other financial services in the Corporation’s market area |
● | increased competition from other banks and non-bank providers of financial services |
● | technological changes and increased technology-related costs |
● | changes in accounting principles, or the application of generally accepted accounting principles |
● | failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions. |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
CORONAVIRUS (COVID-19) OUTBREAK
The Corporation’s Pandemic Committee has been very active since March 2020, providing frequent communication with employees and clients by telephone, video conference, email and digital tools, while substantially limiting business travel. Since the pandemic began, the Committee instituted measures to protect the health of employees and clients, including temporarily operating branch locations on a drive-through only basis and transitioning a significant portion of the Corporation’s employees to remote work. Currently all branches are open for walk-in traffic though some branches are running on reduced hours. Many employees who were working from home have returned to the offices where social distancing allows. No furloughs or layoffs of employees have been made to date.
Emergency restrictions on the activities of businesses and individuals have resulted in significant adverse economic effects and a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In the first six months of 2020, the Corporation increased the allowance for loan losses $646,000 based on an increase in qualitative factors related to potential deterioration in economic conditions. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.
46
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.
In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.
47
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
To work with clients impacted by COVID-19, the Corporation is offering short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. These efforts have been designed to assist borrowers as they deal with the current crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES ACT and guidance from the joint interagency statement described in the preceding paragraphs, the modified loans have not been reported as past due, nonaccrual or as TDRs at June 30, 2020. Most of the modifications under the program became effective In March or April 2020 and provided a deferral of interest or principal and interest for 90 days. Most of the modifications under the program became effective In March or April 2020 and provided a deferral of interest or principal and interest for 90 days. Accordingly, most of the loans for which deferrals were granted returned to full payment status in June or July 2020. Through June 30, 2020, 706 loans with a total outstanding balance at the time of modification of $202,062,000 have been modified under this program with 541 loans with outstanding balances of $158,718,000 remaining on deferral at June 30, 2020. As shown in Note 7 to the unaudited consolidated financial statements, 198 of the loans remaining on deferral at June 30, 2020 with outstanding balances $117,424,000 were commercial loans. By July 31, 2020, the number of loans on deferral (excluding loans acquired pursuant to the Covenant acquisition on July 1, 2020) had dropped to 78 with total outstanding balances of $29,618,000, including commercial loans of $22,488,000. A breakdown of these commercial loans by industry is as follows:
| | | | | | | | | | |
| | Deferrals Remaining | | Deferrals Remaining | ||||||
| | As of June 30,2020 | | As of July 31,2020 | ||||||
(Dollars in Thousands) | | Number | | | | Number | | | ||
| | of | | Recorded | | of | | Recorded | ||
Commercial Loans Modified - Summary | | Loans | | Investment | | Loans | | Investment | ||
Lessors of nonresidential buildings (except miniwarehouses) |
| 36 |
| $ | 34,649 |
| 4 |
| $ | 2,352 |
Accommodation and food services - hotels |
| 14 | |
| 29,496 |
| 4 | |
| 11,342 |
Residential property managers |
| 7 | |
| 8,108 |
| 1 | |
| 100 |
Lessors of residential buildings & dwellings |
| 14 | |
| 8,021 |
| 3 | |
| 3,227 |
Real estate rental and leasing - other |
| 3 | |
| 4,644 |
| 0 | |
| 0 |
Accommodation and food services - other |
| 18 | |
| 4,500 |
| 1 | |
| 104 |
Commercial printing (except screen and books) |
| 1 | |
| 3,460 |
| 0 | |
| 0 |
Transportation and warehousing |
| 10 | |
| 3,371 |
| 0 | |
| 0 |
Manufacturing |
| 4 | |
| 3,199 |
| 0 | |
| 0 |
Retail trade |
| 6 | |
| 3,027 |
| 2 | |
| 2,689 |
Powder metallurgy part manufacturing |
| 7 | |
| 2,788 |
| 0 | |
| 0 |
Arts, entertainment, and recreation |
| 6 | |
| 2,491 |
| 0 | |
| 0 |
Other services (except public administration) |
| 11 | |
| 2,048 |
| 2 | |
| 1,037 |
Finance and insurance |
| 2 | |
| 1,859 |
| 1 | |
| 1,197 |
Health care and social assistance |
| 7 | |
| 1,472 |
| 1 | |
| 17 |
Agriculture, forestry, fishing and hunting |
| 24 | |
| 1,457 |
| 2 | |
| 57 |
Construction |
| 14 | |
| 1,329 |
| 1 | |
| 214 |
Educational services |
| 5 | |
| 623 |
| 1 | |
| 105 |
Information |
| 1 | |
| 593 |
| 0 | |
| 0 |
Mining |
| 4 | |
| 146 |
| 0 | |
| 0 |
Administrative and support and waste management and remediation services |
| 3 | |
| 91 |
| 1 | |
| 47 |
Public administration |
| 1 | |
| 52 |
| 0 | |
| 0 |
|
| 198 | | $ | 117,424 |
| 24 | | $ | 22,488 |
48
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation began accepting and processing applications for loans under the Paycheck Protection Program (“PPP”) through the Small Business Administration (SBA) and Treasury Department on April 3, 2020. Under the PPP, the Corporation provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.
The maximum term of PPP loans is five years, though most of the Corporation’s PPP loans have two-year terms, and the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Consistent with current SBA guidance, if a borrower uses an agent in the loan process, the Corporation would pay a percentage of the SBA fees to the agent. Fees on PPP loans, net of origination costs, will be recognized in interest income as a yield adjustment over the term of the loans.
As of June 30, 2020, the recorded investment in PPP loans was $97,103,000, including contractual principal balances of $100,120,000, reduced by net deferred origination fees of $3,017,000. Net deferred origination fees on PPP loans are recognized in interest income as a yield adjustment (accretion over the term of the loans). Accretion of $337,000 from fees received on PPP loans was included in interest and fees on (taxable) loans in the consolidated statements of income in the three-month and six-month periods ended June 30, 2020.
Capital Strength
While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, C&N Bank, entered the crisis from a position of strength. This is especially apparent in the capital ratios, which are at levels that demonstrate the capacity to absorb the acquisition of Covenant Financial, Inc. as well as significant losses if they arise while continuing to meet the requirements to be considered well capitalized.
C&N Bank’s leverage ratio (Tier 1 capital to average assets) at June 30, 2020 of 10.63% is more than double the well-capitalized threshold of 5%, an excess capital amount of $93.4 million. Similarly, the total capital to risk-weighted assets ratio at June 30, 2020 is 17.20%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $78.6 million.
Additional details regarding the Corporation’s and C&N Bank’s regulatory capital position are provided in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
PENDING AND COMPLETED BUSINESS COMBINATIONS
Acquisition of Covenant Financial, Inc.
In December 2019, the Corporation announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”). In July 2020, the Corporation and Covenant announced the completion of the merger as of July 1, 2020. Covenant was the holding company for Covenant Bank, which operated banking offices in Bucks and Chester Counties of PA. Under the terms of the Agreement and Plan of Merger, Covenant merged into the Corporation, and Covenant Bank merged into C&N Bank. In the transaction, Covenant shareholders elected to receive either 0.6212 shares of Corporation common stock or $16.50 in cash for each share of Covenant common stock owned, subject to proration to ensure that, overall, 25% of the Covenant shares were converted into cash and 75% of the Covenant shares were converted into Corporation stock. The election and proration process commenced in June 2020 and was completed in early July 2020. Holders of Covenant common stock prior to the consummation of the merger own approximately 12.9% of the Corporation’s common stock outstanding following the merger.
49
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Based on the average of the high and low trading price of the Corporation’s common stock of $20.32 per share on July 1, 2020, the total purchase consideration is valued at approximately $63.3 million. As of June 30, 2020, Covenant reported total assets of $608 million, including gross loans of $472 million, total deposits of $480 million and total stockholders’ equity of $44 million. As of the date the Corporation’s June 30, 2020 financial statements are issued, some of the information required to be disclosed under U.S. GAAP was not available since, given the short period between the July 1, 2020 merger date and the financial statement issuance, the calculation of the fair value of all material Covenant assets acquired and liabilities assumed had not yet been completed.
Merger-related expenses related to the planned acquisition of Covenant totaled $983,000 in the second quarter 2020 and $1,124,000 in the six-month period ended June 30, 2020. Merger-related expenses include severance and similar expenses as well as initial expenses related to conversion of Covenant’s core customer data into the Corporation’s core system and legal and other professional expenses. Management estimates total pre-tax merger-related expenses associated with the Covenant transaction will be approximately $8.0 million, including remaining expenses of approximately $6.6 million. Most of the expenses are expected to be incurred in the third quarter 2020.
Business Combination – Acquisition of Monument Bancorp, Inc.
On April 1, 2019, the Corporation completed its acquisition of 100% of the common stock of Monument Bancorp, Inc.(“Monument.”) Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Pursuant to the merger, Monument was merged into the Corporation and Monument Bank was merged into C&N Bank.
Total purchase consideration was $42.7 million, including cash paid to former Monument shareholders totaling $9.6 million and 1,279,825 shares of Corporation common stock issued with a value of $33.1 million, net of costs directly related to stock issuance of $181,000.
In connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with no realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately no realized gain or loss. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets or liabilities in 2020.
Merger-related expenses, including legal and professional expenses and conversion of Monument’s customer accounting data into the Corporation’s core system, were $3,301,000 in the second quarter 2019 and $3,612,000 in the six-month period ended June 30, 2019.
EARNINGS OVERVIEW
Net income was $0.39 per diluted share in the second quarter 2020, as compared to $0.30 per share in the first quarter 2020 and $0.27 in the second quarter 2019. For the six months ended June 30, 2020, net income per diluted share was $0.70 as compared to $0.67 per share for the first six months of 2019. Earnings for the second quarter 2020 and June 30, 2020 year-to-date and the comparative periods in 2019 were impacted by nonrecurring merger-related expenses related to the Monument transaction in 2019 and the Covenant transaction in 2020 described earlier.
50
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The following table provides a reconciliation of the Corporation’s second quarter and June 30, 2020 year-to-date unaudited earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses and realized gains and losses on securities. Management believes disclosure of unaudited second quarter and six-months ended June 30, 2020 and 2019 earnings results, adjusted to exclude the impact of these items, provides useful information for comparative purposes.
RECONCILIATION OF NET INCOME AND DILUTED EARNINGS PER SHARE TO NON-U.S. GAAP MEASURE
| | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | 2nd Quarter 2020 | | 2nd Quarter 2019 | ||||||||||||||||||||
| | Income | | Diluted | | Income | | Diluted | | | | | | | | | | | | | ||||
(Dollars In Thousands, Except Per Share Data) | | Before | | Income | | Earnings | | Before | | Income | | Earnings | | | | | | | ||||||
(Unaudited) | | Income | | Tax | | per | | Income | | Tax | | per | | | | | | | ||||||
| | Tax | | Provision | | Net | | Common | | Tax | | Provision | | Net | | Common | ||||||||
| | Provision | | (1) | | Income | | Share | | Provision | | (1) | | Income | | Share | ||||||||
Results as Presented Under U.S. GAAP | | $ | 6,693 | | $ | 1,255 | | $ | 5,438 | | $ | 0.39 | | $ | 4,342 | | $ | 693 | | $ | 3,649 | | $ | 0.27 |
Add: Merger-Related Expenses | |
| 983 | |
| 200 | |
| 783 | |
| 3,301 | |
| 673 | |
| 2,628 | |
|
| |
|
|
Net Gains on Available-for-Sale Debt | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Securities | |
| 0 | |
| 0 | |
| 0 | |
| | |
| (7) | |
| (1) | |
| (6) | |
|
|
Adjusted Earnings, Excluding Effect of Merger- | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Related Expenses and Net Gains on Available- | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
for Sale Debt Securities (Non-U.S. GAAP) | | $ | 7,676 | | $ | 1,455 | | $ | 6,221 | | $ | 0.45 | | $ | 7,636 | | $ | 1,365 | | $ | 6,271 | | $ | 0.46 |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| 6 Months Ended June 30, 2020 |
| 6 Months Ended June 30, 2019 | ||||||||||||||||||||
| | Income | | Diluted | | Income | | Diluted | | | | | | | | | | | | | ||||
| | Before | | Income | | Earnings | | Before | | Income | | Earnings | | | | | | | ||||||
| | Income | | Tax | | per | | Income | | Tax | | per | | | | | | | ||||||
| | Tax | | Provision | | Net | | Common | | Tax | | Provision | | Net | | Common | ||||||||
| | Provision | | (1) | | Income | | Share | | Provision | | (1) | | Income | | Share | ||||||||
Results as Presented Under U.S. GAAP | | $ | 11,675 | | $ | 2,071 | | $ | 9,604 | | $ | 0.70 | | $ | 10,413 | | $ | 1,674 | | $ | 8,739 | | $ | 0.67 |
Add: Merger-Related Expenses | |
| 1,124 | |
| 229 | |
| 895 | |
| 3,612 | |
| 739 | |
| 2,873 | |
|
| |
|
|
Net Gains on Available-for-Sale Debt | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Securities | |
| 0 | |
| 0 | |
| 0 | |
| | |
| (7) | |
| (1) | |
| (6) | |
|
|
Adjusted Earnings, Excluding Effect of Merger- | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Related Expenses and Net Gains on Available- | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
for Sale Debt Securities (Non-U.S. GAAP) | | $ | 12,799 | | $ | 2,300 | | $ | 10,499 | | $ | 0.76 | | $ | 14,018 | | $ | 2,412 | | $ | 11,606 | | $ | 0.89 |
(1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision of merger-related expenses is adjusted for the estimated nondeductible portion of the expenses.
51
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Additional highlights related to the Corporation’s second quarter and June 30, 2020 year-to-date unaudited earnings results as compared to the first quarter 2020 and comparative periods of 2019 are presented below.
Second Quarter 2020 as Compared to Second Quarter 2019
Second quarter 2020 net income was $5,438,000, and excluding the impact of merger-related expenses, adjusted (non-U.S. GAAP) earnings were $6,221,000. In comparison, second quarter 2019 net income was $3,649,000, and excluding merger-related expenses and net securities gains, adjusted (non-U.S. GAAP) earnings were $6,271,000. Other significant variances were as follows:
● | The credit for loan losses (reduction in expense) was $176,000 in the second quarter 2020 as compared to a credit of $4,000 in the second quarter 2019. The credit for loan losses in the second quarter 2020 included the benefit of repayment of a loan for less than the full principal balance, resulting in a charge-off of $107,000 on a commercial loan for which an allowance for loan losses had been recorded at March 31, 2020. In total, the credit for loan losses in the second quarter 2020 included a net credit of $255,000 from the impact of a reduction in outstanding loans, excluding PPP loans; a net credit of $143,000 related to specific loans (net decrease in specific allowances on loans of $271,000 partially offset by net charge-offs of $128,000); a credit of $22,000 in the net charge-off factors used to estimate the allowance; and a charge of $244,000 attributable to increases in qualitative factors. In comparison, the net credit for loan losses in the second quarter 2019 included a reduction from changes in historical loss factors of $322,000 and a reduction of $149,000 related to specific allowances on loans, partially offset by an increases attributable to loan growth of $382,000 and an increase from qualitative factors of $85,000. |
● | Second quarter 2020 net interest income of $14,246,000 was slightly higher than the second quarter 2019 total of $14,205,000. The net interest margin of 3.65% in the second quarter 2020 was down from 3.89% in the second quarter 2019. The average yield on earning assets of 4.22% in the second quarter 2020 was down 0.46% from the second quarter 2019, while the average rate paid on interest-bearing liabilities of 0.83% was lower by 0.29% from the second quarter 2019 level. Average outstanding loans in the second quarter 2020 of $1.231 billion were up $126.2 million (11.4%) from the corresponding second quarter 2019 amount. The average balance of PPP loans was $77.8 million in the second quarter 2020, as C&N participated in the PPP from its inception in early April 2020. Excluding PPP loans, average outstanding loans were 4.4% higher in the second quarter 2020 as compared to the second quarter 2019. Average total deposits of $1.349 billion in the second quarter 2020 were up $79.9 million from the second quarter 2019, with much of the growth attributable to PPP activity. |
● | Total noninterest income for the second quarter 2020 was up $679,000 from the second quarter 2019 total. Significant variances included the following: |
o | Net gains from sales of loans of $1,564,000 for the second quarter 2020 were up $1,343,000 from the total for the second quarter 2019. The increase reflects an increase in volume of mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates. |
o | Service charges on deposit accounts of $831,000 in the second quarter 2020 were down $446,000 from the second quarter 2019 amount, as the volume of consumer and business overdraft activity fell. |
o | Net revenue from loan servicing fees decreased $193,000, as net fees were negative $158,000 (a decrease in revenue) in the second quarter 2020 as compared to net revenue of $35,000 in the second quarter 2019. The fair value of mortgage servicing rights decreased $270,000 in the second quarter 2020, as compared to a decrease of $71,000 in the second quarter 2019, reflecting market assumptions that prepayments will increase due to lower interest rates. |
52
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
● | Noninterest expense, excluding merger-related expenses, increased $852,000 in the second quarter 2020 over the second quarter 2019 amount. Significant variances included the following: |
o | Pensions and other employee benefits expense increased $394,000, mainly due to increased health care expenses from C&N’s partially self-insured plan. |
o | Professional fees expense increased $133,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis. |
o | Salaries and wages expense increased $88,000 (1.7%), reflecting the net impact of several factors, including: an increase in number of personnel to 337 full-time equivalent (FTEs) from 332 at June 30, 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; and a slight reduction in incentive compensation expense. |
o | Data processing expenses increased $78,000(8.1%), including the impact of increases in software licensing costs associated with lending, trust and other functions. |
o | Pennsylvania shares tax expense increased $76,000 (21.9%), reflecting the impact of an increase in C&N Bank’s stockholder’s equity. |
Six Months Ended June 30, 2020 as Compared to Six Months Ended June 30, 2019
Net income for the six-month period ended June 30, 2020 was $9,604,000, or $0.70 per diluted share, while net income for the first six months of 2019 was $8,739,000, or $0.67 per share. Excluding the impact of merger-related expenses and net securities gains, adjusted (non-U.S. GAAP) earnings for the first six months of 2020 would be $10,499,000 or $0.76 per share as compared to similarly adjusted earnings of $11,606,000 or $0.89 per share for the first six months of 2019. Other significant variances were as follows:
● | For the first six months of 2020, the provision for loan losses was $1,352,000, an increase in expense of $2,313,000 as compared to the credit for loan losses of $961,000 recorded in the first six months of 2019. In 2020, the provision includes the effects of recording a specific allowance of $1,193,000 on a commercial loan in the first quarter, partially offset by the benefit from recording a charge-off of $107,000 in the second quarter 2020 on a commercial loan for which the previously-established allowance had been $674,000. In total, the provision for the first six months of 2020 included a net charge of $1,067,000 related to specific loans (net increase in specific allowances on loans of $905,000 and net charge-offs of $162,000); a charge of $646,000 attributable to increases in qualitative factors; a credit of $272,000 from the impact of a reduction in outstanding loans, excluding PPP loans; and a credit of $89,000 in the net charge-off experience factors used to estimate the allowance. The credit for loan losses in the first six months of 2019 included a benefit from eliminating specific allowances on commercial loans that were no longer considered impaired. |
● | Net interest income was up $2,608,000 (10.1%) for the first six months of 2020 over the same period in 2019, reflecting the benefits of growth related to the Monument acquisition. The net interest margin was 3.73% for the first six months of 2020, down from 3.96% in 2019. The average yield on earning assets was 0.21% lower in 2020 as compared to 2019, while the average rate paid on interest-bearing liabilities was 0.01% lower in comparing the same periods. Average outstanding loans of $1.2 billion for the first six months of 2020 were up $234.7 million (24.3%) from the corresponding total for the first six months of 2019, reflecting the impact of the Monument acquisition which closed April 1, 2019 as well as significant loan growth in the last three quarters of 2019. Average total deposits of $1.304 billion for the first six months of 2020 were up $158.8 million from the 2019 total, reflecting the impact of the Monument acquisition, PPP-related activity and other factors. |
53
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
● | Total noninterest income, excluding realized securities gains, for the first six months of 2020 was up $1,554,000 from the total for the first six months of 2019. Significant variances included the following: |
o | Net gains from sales of loans totaled $1,879,000 in the first six months of 2020, an increase of $1,571,000 over the total for the first six months of 2019. As noted above, the increase reflects an increase in volume of mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates. |
o | Other noninterest income totaled $1,418,000, an increase of $451,000 over 2019. Income from realization of tax credits was $351,000 higher in the first six months of 2020 as compared to 2019. Also, dividend income from Federal Home Loan Bank stock was up $99,000, reflecting a higher average balance of stock held due to increased borrowings. |
o | Interchange revenue from debit card transactions totaled $1,449,000 for the first six months of 2020, an increase of $107,000 (8.0%), reflecting an increase in transaction volumes. |
o | Trust and financial management revenue of $3,044,000 was $101,000 (3.4%) higher in the first six months of 2020 as compared to 2019, reflecting the impact of fees from new business growth in 2019. |
o | Service charges on deposit accounts of $2,081,000 in the first six months of 2020 were down $446,000 (17.6%) from the total for the first six months of 2019, as the volume of consumer and business overdraft activity fell significantly in the second quarter 2020. |
o | Net revenue from loan servicing fees decreased $235,000, as net fees were negative $172,000 (a decrease in revenue) in the first six months of 2020 as compared to net revenue of $63,000 in the first six months of 2019. The fair value of mortgage servicing rights decreased $396,000 in the first six months of 2020, as compared to a decrease of $148,000 in the first six months of 2019. |
● | Noninterest expense, excluding merger-related expenses, increased $3,068,000 for the six months ended June 30, 2020 over the total for the first six months of 2019. Significant variances included the following: |
o | Total salaries and wages and benefits expenses increased $1,749,000, reflecting: inclusion of the former Monument operations for six months in 2020 as compared to three months in 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; a slight reduction in incentive compensation expense; and an increase in health care expense due to higher claims on C&N’s partially self-insured plan. |
o | Data processing expenses increased $293,000, including the impact of increases in software licensing costs associated with lending, trust and other functions. |
o | Professional fees expense increased $290,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis. |
o | Other noninterest expense increased $254,000. Within this category, significant variances included the following: |
● | Donations expense increased $427,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program. |
● | Other operational losses increased $337,000, including an estimated accrual of $300,000 for penalties related to certain information returns. |
54
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
● | Expenses related to other real estate properties decreased $244,000 and collection expenses decreased $215,000. The reduction in both of these expense categories resulted from the completion in the first quarter 2020 of a complex commercial workout situation for which a significant amount of expenses were incurred in 2019. |
● | FDIC assessments expense decreased $81,000, as a significant portion of the assessed amounts for the first two quarters of 2020 were offset by credits based on the funding level of the insurance fund. |
More detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of MD&A.
TABLE I – QUARTERLY FINANCIAL DATA
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended: | | | | | | | | | | |||||||
(Dollars In Thousands, Except Per Share Data) | | June 30, | | March 31, | | Dec. 31, | | Sept. 30, | | June 30, | | March 31, | ||||||
(Unaudited) |
| 2020 |
| 2020 |
| 2019 |
| 2019 |
| 2019 |
| 2019 | ||||||
Interest income | | $ | 16,513 | | $ | 17,037 | | $ | 17,290 | | $ | 17,277 | | $ | 17,139 | | $ | 13,065 |
Interest expense | |
| 2,267 | |
| 2,755 | |
| 2,999 | |
| 3,000 | |
| 2,934 | |
| 1,350 |
Net interest income | |
| 14,246 | |
| 14,282 | |
| 14,291 | |
| 14,277 | |
| 14,205 | |
| 11,715 |
(Credit) provision for loan losses | |
| (176) | |
| 1,528 | |
| 652 | |
| 1,158 | |
| (4) | |
| (957) |
Net interest income after (credit) provision for | |
| | |
| | |
| | |
| | |
| | |
| |
loan losses | |
| 14,422 | |
| 12,754 | |
| 13,639 | |
| 13,119 | |
| 14,209 | |
| 12,672 |
Noninterest income | |
| 5,528 | |
| 5,281 | |
| 5,066 | |
| 4,963 | |
| 4,849 | |
| 4,406 |
Net gains on securities | |
| 0 | |
| 0 | |
| 3 | |
| 13 | |
| 7 | |
| 0 |
Merger-related expenses | |
| 983 | |
| 141 | |
| 281 | |
| 206 | |
| 3,301 | |
| 311 |
Other noninterest expenses | |
| 12,274 | |
| 12,912 | |
| 11,834 | |
| 11,486 | |
| 11,422 | |
| 10,696 |
Income before income tax provision | |
| 6,693 | |
| 4,982 | |
| 6,593 | |
| 6,403 | |
| 4,342 | |
| 6,071 |
Income tax provision | |
| 1,255 | |
| 816 | |
| 1,135 | |
| 1,096 | |
| 693 | |
| 981 |
Net income | | $ | 5,438 | | $ | 4,166 | | $ | 5,458 | | $ | 5,307 | | $ | 3,649 | | $ | 5,090 |
Net income attributable to common shares | | $ | 5,405 | | $ | 4,146 | | $ | 5,431 | | $ | 5,281 | | $ | 3,630 | | $ | 5,063 |
Basic earnings per common share | | $ | 0.39 | | $ | 0.30 | | $ | 0.40 | | $ | 0.39 | | $ | 0.27 | | $ | 0.41 |
Diluted earnings per common share | | $ | 0.39 | | $ | 0.30 | | $ | 0.40 | | $ | 0.39 | | $ | 0.27 | | $ | 0.41 |
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes the allowance for loan losses is adequate and reasonable. Analytical information related to the Corporation’s aggregate loans and the related allowance for loan losses is summarized by loan segment and classes of loans in Note 7 to the unaudited consolidated financial statements. Additional discussion of the Corporation’s allowance for loan losses is provided in a separate section later in MD&A. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
55
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
As described in Note 6 to the unaudited consolidated financial statements, management evaluates securities for other-than-temporary impairment (OTTI). In making that evaluation, consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery. Management’s assessments of the likelihood and potential for recovery in value of securities are subjective and based on sensitive assumptions.
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month and six-month periods ended June 30, 2020 and 2019. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.
Three-Month Periods Ended June 30, 2020 and 2019
For the three-month periods, fully taxable equivalent net interest income was $14,483,000 in 2020, which was $14,000 (0.1%) higher than in 2019. Interest income was $653,000 lower in 2020 as compared to 2019, while interest expense was lower by $667,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.65% in 2020 as compared to 3.89% in 2019, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.39% in 2020 from 3.56% in 2019. The average yield on earning assets of 4.22% was 0.46% lower in 2020 as compared to 2019, while the average rate on interest-bearing liabilities decreased 0.29% between periods.
Accretion and amortization of purchase accounting-related adjustments from marking financial instruments to fair value had a positive effect on net interest income in the second quarter 2020 of $285,000, including an increase in income on loans of $299,000 partially offset by increases in interest expense on time deposits of $14,000. The net positive impact to the second quarter 2020 net interest margin from accretion and amortization of purchase accounting adjustments was 0.08%. In comparison, the net positive impact to the second quarter 2019 net interest margin from purchase accounting adjustments was 0.06%.
56
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $16,750,000 in 2020, a decrease of $653,000 (3.8%) from 2019. Interest and fees from loans receivable decreased $76,000, or 0.5%, in 2020 as compared to 2019. Table IV shows the decrease in interest on loans includes $1,163,000 attributable to a decrease in average rate, offset by an increase of $1,087,000 related to an increase in average volume. The average balance of loans receivable increased $126,198,000 (11.4%) to $1,231,441,000 in 2020 from $1,105,243,000 in 2019. The average balance of PPP loans originated in the second quarter of 2020 was $77,832,000. Excluding PPP loans, average loans in the second quarter 2020 exceeded the second quarter 2019 by $48,366,000, or 4.4%, reflecting the effects of significant loan growth in the third and fourth quarters of 2019. The average yield on loans in the second quarter of 2020 was 4.79%, down from 5.35% in the second quarter 2019, as rates on variable rate loans and rates on recent new loan originations have decreased due to decreases in market interest rates that occurred in the latter part of 2019 and first quarter of 2020. The average yield on loans in the second quarter 2020 was also affected by the comparatively low average yield on PPP loans of 2.79%.
Interest income from available-for-sale debt securities decreased $478,000 (19.2%) in 2020 from 2019. Total average available-for-sale debt securities (at amortized cost) in 2020 decreased to $326,069,000 from $362,969,000 in 2019. The average yield on available-for-sale debt securities was 2.48% for 2020, down from 2.75% in 2019. The decrease in average yield on available-for-sale debt securities is mainly the result of higher-yielding tax-exempt municipal bonds being called or maturing throughout 2019, increased amortization of premiums on mortgage-backed securities due to accelerated prepayments of principal caused by falling interest rates and recently purchased securities with lower market yields.
For the three-month period, income from interest-bearing due from banks totaled $41,000 in 2020, a decrease of $108,000 (72.5%) from $149,000 in 2019. Although the average balance increased $15,401,000, the average yield on interest-bearing due from banks dropped to 0.44% in 2020 from 2.67% in 2019, consistent with the decrease in market rates.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
For the three-month periods, interest expense decreased $667,000 to $2,267,000 in 2020 from $2,934,000 in 2019. Interest expense on deposits decreased $579,000, as the average rate on interest-bearing deposits decreased to 0.72% in 2020 from 0.97% in 2019. The decrease in average rates on deposits includes decreases of 0.28% on time deposits, 0.27% on interest checking accounts, 0.08% on money market accounts and 0.05% on saving accounts.
Total average deposits (interest-bearing and noninterest-bearing) amounted to $1,349,093,000 in 2020, an increase of $79,875,000 (6.3%) from 2019. The increase in average deposits included increases in noninterest-bearing demand deposits of $52,173,000, interest checking of $41,446,000, money market of $16,349,000 and savings of $10,011,000. Increases in demand and other nonmaturity deposits resulted from funding provided for PPP loans, stimulus deposits from the federal government and customers’ seeking “safe havens” in the form of FDIC-insured deposits during the COVID-19 pandemic. These volume increases were partially offset by a decrease in average time deposits of $40,104,000, as the Corporation has experienced some run-off of higher-cost time deposits.
Interest expense on total borrowed funds decreased $88,000 in 2020 as compared to 2019. The average balance of total borrowed funds increased to $99,261,000 in the second quarter 2020 from $79,446,000 in the second quarter 2019, while the average rate on borrowed funds decreased to 1.96% in the second quarter 2020 from 2.88% in the second quarter 2019.
Interest expense on short-term borrowings decreased $164,000 to $64,000 in 2020 from $228,000 in 2019. The average balance of short-term borrowings decreased to $19,884,000 in 2020 from $37,279,000 in 2019. The average rate on short-term borrowings decreased to 1.30% in 2020 from 2.45% in 2019, reflecting the impact of lower short-term market rates in 2020.
57
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Interest expense on long-term borrowings increased $85,000 to $313,000 in 2020 from $228,000 in 2019. The average balance of long-term borrowings was $72,917,000 in 2020, up from an average balance of $35,167,000 in 2019. Borrowings are classified as long-term within the Tables based on their term at origination. The average balance of long-term borrowings in 2020 and 2019 consisted mainly of FHLB advances with terms longer than 12 months at origination. The average rate on long-term borrowings was 1.73% in 2020 compared to 2.60% in the second quarter of 2019.
Six-Month Periods Ended June 30, 2020 and 2019
For the six-month periods, fully taxable equivalent net interest income was $28,989,000 in 2020, $2,504,000 (9.5%) higher than in 2019. Interest income was $3,242,000 higher in 2020 as compared to 2019, while interest expense was higher by $738,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.73% in 2020 as compared to 3.96% in 2019, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.46% in 2020, down from 3.66% in 2019. The overall growth in net interest income, despite margin compression, resulted mainly from the infusion of loans, deposits and borrowings from Monument.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $34,011,000 in 2020, an increase of $3,242,000 (10.5%) from 2019. Interest and fees on loans receivable increased $4,302,000, or 16.9%, to $29,714,000 in 2020 from $25,412,000 in 2019. Table IV shows the increase in interest on loans includes an increase of $5,717,000 attributable to volume and a decrease of $1,415,000 related to average rate. The average balance of loans receivable increased $234,691,000 (24.3%) to $1,199,963,000 in 2020 from $965,272,000 in 2019. The increase in average balance reflects the Corporation’s purchase of Monument on April 1, 2019 and the effects of significant loan growth over the last three quarters of 2019. The fully taxable equivalent yield on loans in 2020 was 4.98% compared to 5.31% in 2019 as current rates on variable rate loans and rates on recent new loan originations have decreased, consistent with decreases in market interest rates over the past six months. The reduction in fully taxable equivalent yield on loans was also affected by PPP loans with an average balance of $38,916,000 at an average rate of 2.79% in 2020, with no comparative amounts in 2019.
Interest income on available-for-sale debt securities totaled $4,144,000 in 2020, a decrease of $928,000 from the total for 2019. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $330,538,000 in 2020, a decrease of $31,914,000 (8.8%) from 2019. The average yield on available-for-sale debt securities decreased to 2.52% in 2020 from 2.82% in 2019.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $738,000 to $5,022,000 in 2020 from $4,284,000 in 2019. Table III shows that the overall cost of funds on interest-bearing liabilities decreased slightly to 0.92% in 2020 from 0.93% in 2019.
Interest expense on deposits increased $523,000 in 2020 over 2019. Total average deposit balances (interest-bearing and noninterest-bearing) increased 13.9%, to $1,304,669,000 in 2020 from $1,145,831,000 in 2019. The increase in average balance on deposits was across all categories, reflecting the impact of the Monument acquisition on April 1, 2019 as well as the effects in 2020 of PPP-related funding, stimulus funding and customers seeking FDIC-insured funding during the COVID-19 pandemic. The average rate on interest-bearing deposits increased slightly to 0.80% in 2020 from 0.79% in 2019.
Interest expense on borrowed funds increased $215,000 in 2020 as compared to 2019. Total average borrowed funds increased $42,239,000 to $107,354,000 in 2020 from $65,115,000 in 2019. The increase in average borrowed funds includes the impact of borrowings originated to fund loan growth in the last three quarters of 2019. The average rate on total borrowed funds was 2.03% in 2020 compared to 2.69% in 2019. The decrease in the average rate on borrowed funds in 2020 reflects the impact of decreases in market rates over the course of 2020.
58
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | Six Months Ended | | | | ||||||||
| | June 30, | | Increase/ | | June 30, | | Increase/ | ||||||||||
(In Thousands) |
| 2020 |
| 2019 |
| (Decrease) |
| 2020 |
| 2019 |
| (Decrease) | ||||||
INTEREST INCOME | | | | | | | | | | | | | | | | | | |
Interest-bearing due from banks | | $ | 41 | | $ | 149 | | $ | (108) | | $ | 122 | | $ | 265 | | $ | (143) |
Available-for-sale debt securities: | |
| | |
| | |
| | |
| | |
| | |
| |
Taxable | |
| 1,380 | |
| 1,826 | |
| (446) | |
| 2,968 | |
| 3,660 | |
| (692) |
Tax-exempt | |
| 631 | |
| 663 | | �� | (32) | |
| 1,176 | |
| 1,412 | |
| (236) |
Total available-for-sale debt securities | |
| 2,011 | |
| 2,489 | |
| (478) | |
| 4,144 | |
| 5,072 | |
| (928) |
Loans receivable: | |
| | |
| | |
| | |
| | |
| | |
| |
Taxable | |
| 13,586 | |
| 14,098 | |
| (512) | |
| 28,047 | |
| 24,046 | |
| 4,001 |
Paycheck Protection Program (Taxable) | | | 540 | | | 0 | | | 540 | | | 540 | | | 0 | | | 540 |
Tax-exempt | |
| 552 | |
| 656 | |
| (104) | |
| 1,127 | |
| 1,366 | |
| (239) |
Total loans receivable | |
| 14,678 | |
| 14,754 | |
| (76) | |
| 29,714 | |
| 25,412 | |
| 4,302 |
Other earning assets | |
| 20 | |
| 11 | |
| 9 | |
| 31 | |
| 20 | |
| 11 |
Total Interest Income | |
| 16,750 | |
| 17,403 | |
| (653) | |
| 34,011 | |
| 30,769 | |
| 3,242 |
| | | | | | | | | | | | | | | | | | |
INTEREST EXPENSE | |
| | |
| | |
| | |
| | |
| | |
| |
Interest-bearing deposits: | |
| | |
| | |
| | |
| | |
| | |
| |
Interest checking | |
| 202 | |
| 319 | |
| (117) | |
| 445 | |
| 546 | |
| (101) |
Money market | |
| 232 | |
| 252 | |
| (20) | |
| 495 | |
| 430 | |
| 65 |
Savings | |
| 54 | |
| 74 | |
| (20) | |
| 118 | |
| 113 | |
| 5 |
Time deposits | |
| 1,296 | |
| 1,718 | |
| (422) | |
| 2,881 | |
| 2,327 | |
| 554 |
Total interest-bearing deposits | |
| 1,784 | |
| 2,363 | |
| (579) | |
| 3,939 | |
| 3,416 | |
| 523 |
Borrowed funds: | |
| | |
| | |
| | |
| | |
| | |
| |
Short-term | |
| 64 | |
| 228 | |
| (164) | |
| 262 | |
| 307 | |
| (45) |
Long-term | |
| 313 | |
| 228 | |
| 85 | |
| 608 | |
| 446 | |
| 162 |
Subordinated debt | |
| 106 | |
| 115 | |
| (9) | |
| 213 | |
| 115 | |
| 98 |
Total borrowed funds | |
| 483 | |
| 571 | |
| (88) | |
| 1,083 | |
| 868 | |
| 215 |
Total Interest Expense | |
| 2,267 | |
| 2,934 | |
| (667) | |
| 5,022 | |
| 4,284 | |
| 738 |
| | | | | | | | | | | | | | | | | | |
Net Interest Income | | $ | 14,483 | | $ | 14,469 | | $ | 14 | | $ | 28,989 | | $ | 26,485 | | $ | 2,504 |
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%
59
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Table III - Analysis of Average Daily Balances and Rates
| | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Thousands) | | 3 Months | | | | 3 Months | | |
| | 6 Months | | | | 6 Months | | |
| ||||
| | Ended | | Rate of | | Ended | | Rate of |
| | Ended | | Rate of | | Ended | | Rate of |
| ||||
| | 6/30/2020 | | Return/ | | 6/30/2019 | | Return/ |
| | 6/30/2020 | | Return/ | | 6/30/2019 | | Return/ |
| ||||
| | Average | | Cost of | | Average | | Cost of |
| | Average | | Cost of | | Average | | Cost of |
| ||||
|
| Balance |
| Funds % |
| Balance |
| Funds % |
|
| Balance |
| Funds % |
| Balance |
| Funds % |
| ||||
EARNING ASSETS |
| |
|
|
|
| |
|
|
| |
| |
|
|
|
| |
|
|
| |
Interest-bearing due from banks |
| | 37,799 |
| 0.44 | % | | 22,398 |
| 2.67 | % |
| | 28,600 |
| 0.86 | % | | 21,358 |
| 2.50 | % |
Available-for-sale debt securities, |
| | |
| |
| | |
| | |
| | |
| |
| | |
|
| |
at amortized cost: |
| | |
| |
| | |
| | |
| | |
| |
| | |
|
| |
Taxable | | $ | 244,019 |
| 2.27 | % | $ | 289,041 |
| 2.53 | % | | $ | 254,588 |
| 2.34 | % | $ | 285,443 |
| 2.59 | % |
Tax-exempt | |
| 82,050 |
| 3.09 | % |
| 73,928 |
| 3.60 | % | |
| 75,950 |
| 3.11 | % |
| 77,009 |
| 3.70 | % |
Total available-for-sale debt securities | |
| 326,069 |
| 2.48 | % |
| 362,969 |
| 2.75 | % | |
| 330,538 |
| 2.52 | % |
| 362,452 |
| 2.82 | % |
Loans receivable: | |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
Taxable | |
| 1,094,432 |
| 4.99 | % |
| 1,035,672 |
| 5.46 | % | |
| 1,101,275 |
| 5.12 | % |
| 894,208 |
| 5.42 | % |
Paycheck Protection Program (Taxable) | | | 77,832 | | 2.79 | % | | 0 | | 0.00 | % | | | 38,916 | | 2.79 | % | | 0 | | 0.00 | % |
Tax-exempt | |
| 59,177 |
| 3.75 | % |
| 69,571 |
| 3.78 | % | |
| 59,772 |
| 3.79 | % |
| 71,064 |
| 3.88 | % |
Total loans receivable | |
| 1,231,441 |
| 4.79 | % |
| 1,105,243 |
| 5.35 | % | |
| 1,199,963 |
| 4.98 | % |
| 965,272 |
| 5.31 | % |
Other earning assets | |
| 2,206 |
| 3.65 | % |
| 1,423 |
| 3.10 | % | |
| 1,833 |
| 3.40 | % |
| 1,257 |
| 3.21 | % |
Total Earning Assets | |
| 1,597,515 |
| 4.22 | % |
| 1,492,033 |
| 4.68 | % | |
| 1,560,934 |
| 4.38 | % |
| 1,350,339 |
| 4.59 | % |
Cash | |
| 18,960 |
|
| |
| 20,325 |
|
| | |
| 18,501 |
|
| |
| 18,629 |
|
| |
Unrealized gain/loss on securities | |
| 12,574 |
|
| |
| (101) |
|
| | |
| 10,375 |
|
| |
| (2,352) |
|
| |
Allowance for loan losses | |
| (11,471) |
|
| |
| (8,378) |
|
| | |
| (10,743) |
|
| |
| (8,856) |
|
| |
Bank premises and equipment | |
| 18,230 |
|
| |
| 16,214 |
|
| | |
| 17,981 |
|
| |
| 15,367 |
|
| |
Intangible Assets | |
| 29,543 |
|
| |
| 30,040 |
|
| | |
| 29,575 |
|
| |
| 21,045 |
|
| |
Other assets | |
| 49,502 |
|
| |
| 49,935 |
|
| | |
| 49,386 |
|
| |
| 46,573 |
|
| |
Total Assets | | $ | 1,714,853 |
|
| | $ | 1,600,068 |
|
| | | $ | 1,676,009 |
|
| | $ | 1,440,745 |
|
| |
| |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
INTEREST-BEARING LIABILITIES | |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
Interest-bearing deposits: | |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
Interest checking | | $ | 260,177 |
| 0.31 | % | $ | 218,731 |
| 0.58 | % | | $ | 243,623 |
| 0.37 | % | $ | 208,872 |
| 0.53 | % |
Money market | |
| 215,441 |
| 0.43 | % |
| 199,092 |
| 0.51 | % | |
| 208,066 |
| 0.48 | % |
| 188,042 |
| 0.46 | % |
Savings | |
| 183,933 |
| 0.12 | % |
| 173,922 |
| 0.17 | % | |
| 176,452 |
| 0.13 | % |
| 165,354 |
| 0.14 | % |
Time deposits | |
| 343,257 |
| 1.52 | % |
| 383,361 |
| 1.80 | % | |
| 362,439 |
| 1.60 | % |
| 305,769 |
| 1.53 | % |
Total interest-bearing deposits | |
| 1,002,808 |
| 0.72 | % |
| 975,106 |
| 0.97 | % | |
| 990,580 |
| 0.80 | % |
| 868,037 |
| 0.79 | % |
Borrowed funds: | |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
Short-term | |
| 19,844 |
| 1.30 | % |
| 37,279 |
| 2.45 | % | |
| 32,363 |
| 1.63 | % |
| 26,666 |
| 2.32 | % |
Long-term | |
| 72,917 |
| 1.73 | % |
| 35,167 |
| 2.60 | % | |
| 68,491 |
| 1.79 | % |
| 34,929 |
| 2.57 | % |
Subordinated debt | |
| 6,500 |
| 6.56 | % |
| 7,000 |
| 6.59 | % | |
| 6,500 |
| 6.59 | % |
| 3,520 |
| 6.59 | % |
Total borrowed funds | |
| 99,261 |
| 1.96 | % |
| 79,446 |
| 2.88 | % | |
| 107,354 |
| 2.03 | % |
| 65,115 |
| 2.69 | % |
Total Interest-bearing Liabilities | |
| 1,102,069 |
| 0.83 | % |
| 1,054,552 |
| 1.12 | % | |
| 1,097,934 |
| 0.92 | % |
| 933,152 |
| 0.93 | % |
Demand deposits | |
| 346,285 |
|
| |
| 294,112 |
|
| | |
| 314,089 |
|
| |
| 277,794 |
|
| |
Other liabilities | |
| 15,891 |
|
| |
| 15,454 |
|
| | |
| 14,981 |
|
| |
| 13,210 |
|
| |
Total Liabilities | |
| 1,464,245 |
|
| |
| 1,364,118 |
|
| | |
| 1,427,004 |
|
| |
| 1,224,156 |
|
| |
Stockholders' equity, excluding | |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
other comprehensive income/loss | |
| 240,434 |
|
| |
| 235,733 |
|
| | |
| 240,576 |
|
| |
| 218,175 |
|
| |
Accumulated other comprehensive income/loss | |
| 10,174 |
|
| |
| 217 |
|
| | |
| 8,429 |
|
| |
| (1,586) |
|
| |
Total Stockholders' Equity | |
| 250,608 |
|
| |
| 235,950 |
|
| | |
| 249,005 |
|
| |
| 216,589 |
|
| |
Total Liabilities and Stockholders' Equity | | $ | 1,714,853 |
|
| | $ | 1,600,068 |
|
| | | $ | 1,676,009 |
|
| | $ | 1,440,745 |
|
| |
Interest Rate Spread | |
|
|
| 3.39 | % |
|
|
| 3.56 | % | |
|
|
| 3.46 | % |
|
|
| 3.66 | % |
Net Interest Income/Earning Assets | |
|
|
| 3.65 | % |
|
|
| 3.89 | % | |
|
|
| 3.73 | % |
|
|
| 3.96 | % |
| |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
Total Deposits (Interest-bearing | |
|
|
|
| |
|
|
|
| | |
|
|
|
| |
|
|
|
| |
and Demand) | | $ | 1,349,093 |
|
| | $ | 1,269,218 |
|
| | | $ | 1,304,669 |
|
| | $ | 1,145,831 |
|
| |
(1) | 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%. |
(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. |
60
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES
| | | | | | | | | | | | | | | | | | |
(In Thousands) | | 3 Months Ended 6/30/20 vs. 6/30/19 |
| 6 Months Ended 6/30/20 vs. 6/30/19 | ||||||||||||||
| | Change in | | Change in | | Total |
| Change in | | Change in | | Total | ||||||
|
| Volume |
| Rate |
| Change |
| Volume |
| Rate |
| Change | ||||||
EARNING ASSETS |
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
Interest-bearing due from banks | | $ | 75 | | $ | (183) | | $ | (108) | | $ | 70 | | $ | (213) | | $ | (143) |
Available-for-sale debt securities: | |
| | |
| | |
| | |
| | |
| | |
| |
Taxable | |
| (273) | |
| (173) | |
| (446) | |
| (372) | |
| (320) | |
| (692) |
Tax-exempt | |
| 69 | |
| (101) | |
| (32) | |
| (18) | |
| (218) | |
| (236) |
Total available-for-sale debt securities | |
| (204) | |
| (274) | |
| (478) | |
| (390) | |
| (538) | |
| (928) |
Loans receivable: | |
|
| |
|
| |
| | |
| | |
| | |
| |
Taxable | |
| 645 | |
| (1,157) | |
| (512) | |
| 5,387 | |
| (1,386) | |
| 4,001 |
Paycheck Protection Program (Taxable) | | | 540 | | | 0 | | | 540 | | | 540 | | | 0 | | | 540 |
Tax-exempt | |
| (98) | |
| (6) | |
| (104) | |
| (210) | |
| (29) | |
| (239) |
Total loans receivable | |
| 1,087 | |
| (1,163) | |
| (76) | |
| 5,717 | |
| (1,415) | |
| 4,302 |
Other earning assets | |
| 7 | |
| 2 | |
| 9 | |
| 10 | |
| 1 | |
| 11 |
Total Interest Income | |
| 965 | |
| (1,618) | |
| (653) | |
| 5,407 | |
| (2,165) | |
| 3,242 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
INTEREST-BEARING LIABILITIES | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Interest-bearing deposits: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Interest checking | |
| 50 | |
| (167) | |
| (117) | |
| 82 | |
| (183) | |
| (101) |
Money market | |
| 21 | |
| (41) | |
| (20) | |
| 48 | |
| 17 | |
| 65 |
Savings | |
| 5 | |
| (25) | |
| (20) | |
| 8 | |
| (3) | |
| 5 |
Time deposits | |
| (95) | |
| (327) | |
| (422) | |
| 452 | |
| 102 | |
| 554 |
Total interest-bearing deposits | |
| (19) | |
| (560) | |
| (579) | |
| 590 | |
| (67) | |
| 523 |
Borrowed funds: | |
| | |
| | |
| | |
| | |
| | |
| |
Short-term | |
| (71) | |
| (93) | |
| (164) | |
| 58 | |
| (103) | |
| (45) |
Long-term | |
| 182 | |
| (97) | |
| 85 | |
| 331 | |
| (169) | |
| 162 |
Subordinated debt | |
| (9) | |
| 0 | |
| (9) | |
| 98 | |
| 0 | |
| 98 |
Total borrowed funds | |
| 102 | |
| (190) | |
| (88) | |
| 487 | |
| (272) | |
| 215 |
Total Interest Expense | |
| 83 | |
| (750) | |
| (667) | |
| 1,077 | |
| (339) | |
| 738 |
| |
| | |
| | |
| | |
| | |
| | |
| |
Net Interest Income | | $ | 882 | | $ | (868) | | $ | 14 | | $ | 4,330 | | $ | (1,826) | | $ | 2,504 |
(1) | Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s federal income tax rate of 21%. |
(2) | The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. |
61
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
NONINTEREST INCOME
TABLE V – COMPARISON OF NONINTEREST INCOME
| | | | | | | | | | | | |
(Dollars in Thousands) | | 3 Months Ended | | | | | |
| ||||
| | June 30, | | | $ | | % |
| ||||
|
| 2020 | | 2019 |
| | Change | | Change |
| ||
Trust and financial management revenue | | $ | 1,565 | | $ | 1,583 | | $ | (18) | | -1.1 | % |
Brokerage revenue | |
| 343 | | | 361 | | | (18) | | -5.0 | % |
Insurance commissions, fees and premiums | |
| 52 | | | 48 | | | 4 | | 8.3 | % |
Service charges on deposit accounts | |
| 831 | | | 1,277 | | | (446) | | -34.9 | % |
Service charges and fees | |
| 84 | | | 89 | | | (5) | | -5.6 | % |
Interchange revenue from debit card transactions | |
| 718 | | | 699 | | | 19 | | 2.7 | % |
Net gains from sales of loans | |
| 1,564 | | | 221 | | | 1,343 | | 607.7 | % |
Loan servicing fees, net | |
| (158) | | | 35 | | | (193) | | -551.4 | % |
Increase in cash surrender value of life insurance | |
| 98 | | | 99 | | | (1) | | -1.0 | % |
Other noninterest income | |
| 431 | | | 437 | | | (6) | | -1.4 | % |
Total noninterest income, excluding realized gains on securities, net | | $ | 5,528 | | $ | 4,849 | | $ | 679 | | 14.0 | % |
Total noninterest income shown in Table V in the second quarter 2020 was up $679,000 from the second quarter 2019 total. Significant variances included the following:
● | Net gains from sales of loans of $1,564,000 for the second quarter 2020 were up $1,343,000 from the total for the second quarter 2019. The increase reflects an increase in volume of residential mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates. Proceeds from sales of residential mortgage loans totaled $51.0 million in the second quarter 2020 as compared to $6.6 million in the second quarter 2019. |
● | Service charges on deposit accounts of $831,000 in the second quarter 2020 were down $446,000 from the second quarter 2019 amount, as the volume of consumer and business overdraft activity fell. |
● | Net revenue from loan servicing fees decreased $193,000. The fair value of mortgage servicing rights decreased $270,000 in the second quarter 2020, as compared to a decrease of $71,000 in the second quarter 2019, reflecting market assumptions that prepayments will increase due to lower interest rates. |
TABLE VI – COMPARISON OF NONINTEREST INCOME
| | | | | | | | | | | | |
(Dollars in Thousands) | | 6 Months Ended | | | | | |
| ||||
| | June 30, | | | $ | | % |
| ||||
|
| 2020 |
| 2019 |
| | Change | | Change |
| ||
Trust and financial management revenue | | $ | 3,044 | | $ | 2,943 | | $ | 101 | | 3.4 | % |
Brokerage revenue | |
| 676 | |
| 668 | | | 8 | | 1.2 | % |
Insurance commissions, fees and premiums | |
| 85 | |
| 78 | | | 7 | | 9.0 | % |
Service charges on deposit accounts | |
| 2,081 | |
| 2,527 | | | (446) | | -17.6 | % |
Service charges and fees | |
| 147 | |
| 168 | | | (21) | | -12.5 | % |
Interchange revenue from debit card transactions | |
| 1,449 | |
| 1,342 | | | 107 | | 8.0 | % |
Net gains from sales of loans | |
| 1,879 | |
| 308 | | | 1,571 | | 510.1 | % |
Loan servicing fees, net | |
| (172) | |
| 63 | | | (235) | | -373.0 | % |
Increase in cash surrender value of life insurance | |
| 202 | |
| 191 | | | 11 | | 5.8 | % |
Other noninterest income | |
| 1,418 | |
| 967 | | | 451 | | 46.6 | % |
Total noninterest income, excluding realized gains on securities, net | | $ | 10,809 | | $ | 9,255 | | $ | 1,554 | | 16.8 | % |
62
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Total noninterest income, excluding realized gains on securities, net, shown in Table VI increased $1,554,000 for the first six months of 2020 compared to 2019. Significant variances included the following:
● | Net gains from sales of loans totaled $1,879,000 in the first six months of 2020, an increase of $1,571,000 over the total for the first six months of 2019. As noted above, the increase reflects an increase in volume of residential mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates. Proceeds from sales of residential mortgage loans of $61.8 million in the first six months of 2020 were 6.8 times the comparative 2019 amount of $9.1 million. |
● | Other noninterest income totaled $1,418,000, an increase of $451,000 over 2019. Income from realization of tax credits was $351,000 higher in the first six months of 2020 as compared to 2019. Also, dividend income from Federal Home Loan Bank stock was up $99,000, reflecting a higher average balance of stock held due to increased borrowings. |
● | Interchange revenue from debit card transactions totaled $1,449,000 for the first six months of 2020, an increase of $107,000 (8.0%), reflecting an increase in transaction volumes. |
● | Trust and financial management revenue of $3,044,000 was $101,000 (3.4%) higher in the first six months of 2020 as compared to 2019, reflecting the impact of fees from new business growth in 2019. |
● | Service charges on deposit accounts of $2,081,000 in the first six months of 2020 were down $446,000 (17.6%) from the total for the first six months of 2019, as the volume of consumer and business overdraft activity fell significantly in the second quarter 2020. |
● | Net revenue from loan servicing fees decreased $235,000. The fair value of mortgage servicing rights decreased $396,000 in the first six months of 2020, as compared to a decrease of $148,000 in the first six months of 2019. |
NONINTEREST EXPENSE
TABLE VII - COMPARISON OF NONINTEREST EXPENSE
| | | | | | | | | | | | |
(Dollars in Thousands) | | 3 Months Ended | | | | | |
| ||||
| | June 30, | | $ | | % |
| |||||
|
| 2020 |
| 2019 |
| Change |
| Change | | |||
Salaries and wages |
| $ | 5,364 |
| $ | 5,276 |
| $ | 88 |
| 1.7 | % |
Pensions and other employee benefits | |
| 1,619 | |
| 1,225 | |
| 394 |
| 32.2 | % |
Occupancy expense, net | |
| 664 | |
| 665 | |
| (1) |
| -0.2 | % |
Furniture and equipment expense | |
| 311 | |
| 333 | |
| (22) |
| -6.6 | % |
Data processing expenses | |
| 1,040 | |
| 962 | |
| 78 |
| 8.1 | % |
Automated teller machine and interchange expense | |
| 275 | |
| 277 | |
| (2) |
| -0.7 | % |
Pennsylvania shares tax | |
| 423 | |
| 347 | |
| 76 |
| 21.9 | % |
Professional fees | |
| 464 | |
| 331 | |
| 133 |
| 40.2 | % |
Telecommunications | |
| 213 | |
| 176 | |
| 37 |
| 21.0 | % |
Directors' fees | | | 178 | | | 141 | | | 37 | | 26.2 | % |
Other noninterest expense | | | 1,723 | | | 1,689 | | | 34 | | 2.0 | % |
Total noninterest expense, excluding merger-related expenses | | | 12,274 | | | 11,422 | | | 852 | | 7.5 | % |
Merger-related expenses | | | 983 | | | 3,301 | | | (2,318) | | -70.2 | % |
Total noninterest expense | | $ | 13,257 | | $ | 14,723 | | $ | (1,466) |
| -10.0 | % |
63
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
As shown in Table VII, total noninterest expense, excluding merger-related expenses, increased $852,000 (7.5%) for the three months ended June 30, 2020 over the total for the three months ended June 30, 2019. The most significant variances include the following:
● | Pensions and other employee benefits expense increased $394,000, mainly due to increased health care expenses from the Corporation’s partially self-insured plan. |
● | Professional fees expense increased $133,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis. |
● | Salaries and wages expense increased $88,000 (1.7%), reflecting the net impact of several factors, including: an increase in number of personnel to 337 full-time equivalent (FTEs) from 332 at June 30, 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; and a slight reduction in incentive compensation expense. |
● | Data processing expenses increased $78,000 (8.1%), including the impact of increases in software licensing costs associated with lending, trust and other functions. |
● | Pennsylvania shares tax expense increased $76,000 (21.9%), reflecting the impact of an increase in C&N Bank’s stockholder’s equity. |
TABLE VIII - COMPARISON OF NONINTEREST EXPENSE
| | | | | | | | | | | | |
(Dollars in Thousands) | | 6 Months Ended | | | | | |
| ||||
| | June 30, | | $ | | % |
| |||||
| | 2020 | | 2019 | | Change | | Change |
| |||
Salaries and wages |
| $ | 10,704 |
| $ | 9,769 |
| $ | 935 |
| 9.6 | % |
Pensions and other employee benefits | |
| 3,657 | |
| 2,843 | |
| 814 |
| 28.6 | % |
Occupancy expense, net | |
| 1,409 | |
| 1,322 | |
| 87 |
| 6.6 | % |
Furniture and equipment expense | |
| 669 | |
| 634 | |
| 35 |
| 5.5 | % |
Data processing expenses | |
| 2,058 | |
| 1,765 | |
| 293 |
| 16.6 | % |
Automated teller machine and interchange expense | |
| 572 | |
| 466 | |
| 106 |
| 22.7 | % |
Pennsylvania shares tax | |
| 845 | |
| 694 | |
| 151 |
| 21.8 | % |
Professional fees | |
| 843 | |
| 553 | |
| 290 |
| 52.4 | % |
Telecommunications | |
| 419 | |
| 340 | |
| 79 |
| 23.2 | % |
Directors' fees | |
| 348 | |
| 324 | |
| 24 |
| 7.4 | % |
Other noninterest expense | |
| 3,662 | |
| 3,408 | |
| 254 |
| 7.5 | % |
Total noninterest expense, excluding merger- | |
|
| |
|
| |
|
|
|
| |
related expenses | |
| 25,186 | |
| 22,118 | |
| 3,068 |
| 13.9 | % |
Merger-related expenses | |
| 1,124 | |
| 3,612 | |
| (2,488) |
| -68.9 | % |
Total noninterest expense | | $ | 26,310 | | $ | 25,730 | | $ | 580 |
| 2.3 | % |
As shown in Table VIII, total noninterest expense, excluding merger-related expenses, increased $3,068,000 (13.9%) for the six months ended June 30, 2020 over the total for the first six months of 2019. The most significant variances include the following:
● | Total salaries and wages and benefits expenses increased $1,749,000, reflecting: inclusion of the former Monument operations for six months in 2020 as compared to three months in 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; a slight reduction in incentive compensation expense; and an increase in health care expense due to higher claims on C&N’s partially self-insured plan. |
64
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
● | Data processing expenses increased $293,000, including the impact of increases in software licensing costs associated with lending, trust and other functions. |
● | Professional fees expense increased $290,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis. |
● | Other noninterest expense increased $254,000. Within this category, significant variances included the following: |
o | Donations expense increased $427,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program. |
o | Other operational losses increased $337,000, including an estimated accrual of $300,000 for penalties related to certain information returns. |
o | Expenses related to other real estate properties decreased $244,000 and collection expenses decreased $215,000. The reduction in both of these expense categories resulted from the completion in the first quarter 2020 of a complex commercial workout situation for which a significant amount of expenses were incurred in 2019. |
o | FDIC assessments expense decreased $81,000, as a significant portion of the assessed amounts for the first two quarters of 2020 were offset by credits based on the funding level of the insurance fund. |
INCOME TAXES
The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first six months of 2020 was $2,071,000, which was $397,000 higher than the provision for the first six months of 2019 of $1,674,000. The effective tax rate (tax provision as a percentage of pre-tax income) was 17.7% in the first six months of 2020 compared to 16.1% in the first six months of 2019. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first six months of 2020 and 2019 principally because of the effects of tax-exempt interest income. The higher effective tax rate in the first six months of 2020 as compared to 2019 resulted mainly from a reduction in tax-exempt interest income and nondeductible penalties.
65
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at June 30, 2020 and December 31, 2019 represents the following temporary difference components:
| | | | | | |
|
| June 30, |
| December 31, | ||
(In Thousands) | | 2020 | | 2019 | ||
Deferred tax assets: |
| |
|
| |
|
Allowance for loan losses | | $ | 2,353 | | $ | 2,080 |
Purchase accounting adjustments on loans | |
| 497 | |
| 640 |
Operating leases liability | |
| 333 | |
| 344 |
Other deferred tax assets | |
| 1,816 | |
| 2,173 |
Total deferred tax assets | |
| 4,999 | |
| 5,237 |
| |
|
| |
|
|
Deferred tax liabilities: | |
|
| |
|
|
Unrealized holding gains on securities | |
| 3,048 | |
| 934 |
Defined benefit plans - ASC 835 | |
| 64 | |
| 49 |
Bank premises and equipment | |
| 977 | |
| 763 |
Core deposit intangibles | |
| 245 | |
| 272 |
Right-of-use assets from operating leases | |
| 333 | |
| 344 |
Other deferred tax liabilities | |
| 239 | |
| 257 |
Total deferred tax liabilities | |
| 4,906 | |
| 2,619 |
Deferred tax asset, net | | $ | 93 | | $ | 2,618 |
At June 30, 2020, the net deferred tax asset was $93,000, down from $2,618,000 at December 31, 2019. The most significant change in temporary difference components was a net increase of $2,114,000 in the deferred tax liability resulting from appreciation in available-for-sale debt securities attributable to lower interest rates.
The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income.
Management believes the recorded net deferred tax asset at June 30, 2020 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.
FINANCIAL CONDITION
This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in MD&A. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the “Net Interest Income” section of MD&A. Other significant balance sheet items, including the allowance for loan losses and stockholders’ equity, are discussed in separate sections of MD&A. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding standby letters of credit at June 30, 2020. Management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition in 2020.
66
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Net loans outstanding (excluding mortgage loans held for sale) were $1,230,387,000 at June 30, 2020, up 4.9% from $1,172,386,000 at December 31, 2019 and up $121.9 million or 11.0% from $1,108,483,000 at June 30, 2019. As presented in Table XII, total outstanding commercial loans were $79.8 million higher at June 30, 2020 from December 31, 2019, including an increase in PPP loans of $97.1 million. Residential mortgage loans were $20.3 million lower at June 30, 2020 as compared to December 31, 2019, reflecting large amounts of refinancing activity occurring due to lower interest rates. While residential mortgage loans outstanding (on-balance sheet) decreased in the first six months of 2020, the volume of residential mortgage loans originated and sold increased dramatically, resulting in an increase of $1.6 million in revenue from sales of residential mortgage loans.
While the Corporation’s lending activities are primarily concentrated in its market area, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $63,057,000 at June 30, 2020, down from $64,633,000 at December 31, 2019 and $66,289,000 at June 30, 2019. At June 30, 2020, the balance of participation loans outstanding includes a total of $46,346,000 to businesses located outside of the Corporation’s market area. Also, included within participation loans outstanding are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans outstanding totaled $10,184,000 at June 30, 2020 and $9,947,000 at December 31, 2019.
Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Prior to the April 2019 merger, Monument Bank had participated in the MPF Original program. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through June 30, 2020, the Corporation’s activity under the MPF Direct Program was minimal.
For loan sales originated and sold under these 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
June 30, 2020, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,744,000, and the corresponding total outstanding balance repurchased at December 31, 2019 was $1,770,000.
67
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
At June 30, 2020, outstanding balances of loans sold and serviced through these programs totaled $210,778,000, including loans sold through the MPF Xtra program of $119,393,000 and loans sold through the Original program of $91,385,000. In addition, the outstanding balance of loans sold under the MPF Original program by Monument totaled $17,568,000. The loans sold by Monument are not serviced by the Corporation; however, the Corporation has assumed the credit enhancement obligation on these loans (as discussed in the next paragraph). At December 31, 2019, outstanding balances of loans sold and serviced through these programs totaled $178,446,000, including loans sold through the MPF Xtra program of $104,707,000 and loans sold through the Original program of $73,739,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of June 30, 2020 and December 31, 2019.
For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At June 30, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $5,266,000, and the Corporation has recorded a related allowance for credit losses of $283,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets. At December 31, 2019, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,618,000, and the related allowance for credit losses was $333,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction of the investment in loans. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses.
While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
The allowance for loan losses was $11,026,000 at June 30, 2020, up from $9,836,000 at December 31, 2019. Table X shows total specific allowances on impaired loans increased $905,000 to $1,956,000 at June 30, 2020 from $1,051,000 at December 31, 2019. This net increase included the impact of a specific allowance of $1,193,000 on a commercial loan with an outstanding balance of $3,500,000 being recorded in the first quarter 2020. At June 30, 2020, the specific allowance remained at $1,193,000. The increase in specific allowances on impaired loans at June 30, 2020 also included allowances totaling $504,000 related to three commercial loan relationships with an aggregate recorded investment of $7,576,000 that management identified as impaired in the second quarter 2020. The impact of these increases was partially offset by elimination of an allowance of $674,000 at December 31, 2019 on a commercial loan that was repaid for less than the full principal balance, resulting in a $107,000 charge-off in the second quarter 2020. In addition, there was a commercial loan with an outstanding balance of $798,000 and a specific allowance of $60,000 at December 31, 2019 that was no longer considered impaired at June 30, 2020 due to improved circumstances with the underlying business.
68
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Loans acquired from Monument that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $441,000 at April 1, 2019 and $305,000 at June 30, 2020. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $878,000 at June 30, 2020 and $1,216,000 at December 31, 2019. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. At June 30, 2020, it was determined that five purchased loans to two borrowers with recorded investments totaling $6,075,000 (included in the total of $7,576,000 of loans identified as impaired in the second quarter 2020 noted above) were found to be impaired. Specific allowances totaling $350,000 were recorded on these loans at June 30, 2020, based on the excess of the recorded investments in the loans over the estimated value of the related real estate collateral, net of selling costs. Purchased performing loans with an aggregate recorded investment of $228,590,000 at June 30, 2020 were excluded from the loan pools for which the general component of the allowance for loan losses was calculated.
The (credit) provision for loan losses by segment in the three-month and six-month periods ended June 30, 2020 and 2019 are as follows:
| | | | | | | | | | | | |
(In Thousands) | | 3 Months Ended | | 6 Months Ended | ||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Residential mortgage | | $ | (65) | | $ | 3 | | $ | 133 | | $ | 78 |
Commercial | |
| (124) | |
| (51) | |
| 1,194 | |
| (1,200) |
Consumer | |
| 13 | |
| 44 | |
| 25 | |
| 75 |
Unallocated | |
| 0 | |
| 0 | |
| 0 | |
| 86 |
| |
|
| |
|
| |
|
| |
|
|
Total | | $ | (176) | | $ | (4) | | $ | 1,352 | | $ | (961) |
69
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The (credit) provision for loan losses is further detailed as follows:
| | | | | | | | | | | | |
| | 3 Months | | 3 Months | | 6 Months | | 6 Months | ||||
Residential mortgage segment | | Ended | | Ended | | Ended | | Ended | ||||
(In thousands) | | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2020 | | 2019 | | 2020 |
| 2019 | ||||
(Decrease) increase in total specific allowance on |
| | | | | | | |
|
| |
|
impaired loans, adjusted for the effect of net |
| | | | | | | |
|
| |
|
charge-offs | | $ | (32) | | $ | 31 | | $ | (17) | | $ | 99 |
| | | | | | | |
|
| |
|
|
(Decrease) increase in collectively determined | | | | | | | |
|
| |
|
|
portion of the allowance attributable to: | | | | | | | |
|
| |
|
|
Loan (reduction) growth | | | (126) | | | 54 | |
| (140) | |
| 56 |
Changes in historical loss experience factors | | | (42) | | | 2 | |
| (82) | |
| 7 |
Changes in qualitative factors | | | 135 | | | (84) | |
| 372 | |
| (84) |
Total (credit) provision for loan losses - | | | | | | | |
|
| |
|
|
Residential mortgage segment | | $ | (65) | | $ | 3 | | $ | 133 | | $ | 78 |
| | | | | | | | | | | | |
| | 3 Months | | 3 Months | | 6 Months | | 6 Months | ||||
Commercial segment | | Ended | | Ended | | Ended | | Ended | ||||
(In thousands) | | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2020 | | 2019 | | 2020 |
| 2019 | ||||
(Decrease) increase in total specific allowance on |
| | | | | | | |
|
| |
|
impaired loans, adjusted for the effect of net |
| | | | | | | |
|
| |
|
charge-offs | | $ | (134) | | $ | (196) | | $ | 1,041 | | $ | (1,303) |
| | | | | | | |
|
| |
|
|
(Decrease) increase in collectively determined | | | | | | | |
|
| |
|
|
portion of the allowance attributable to: | | | | | | | |
|
| |
|
|
Loan (reduction) growth | | | (117) | | | 310 | |
| (110) | |
| 324 |
Changes in historical loss experience factors | | | 14 | | | (314) | |
| (7) | |
| (312) |
Changes in qualitative factors | | | 113 | | | 149 | |
| 270 | |
| 91 |
Total (credit) provision for loan losses - | | | | | | | |
|
| |
|
|
Commercial segment | | $ | (124) | | $ | (51) | | $ | 1,194 | | $ | (1,200) |
| | | | | | | | | | | | |
| | 3 Months | | 3 Months | | 6 Months | | 6 Months | ||||
Consumer segment | | Ended | | Ended | | Ended | | Ended | ||||
(In thousands) | | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2020 | | 2019 | | 2020 |
| 2019 | ||||
Increase in total specific allowance on |
| | | | | | | |
|
| |
|
impaired loans, adjusted for the effect of net |
| | | | | | | |
|
| |
|
charge-offs | | $ | 23 | | $ | 16 | | $ | 43 | | $ | 44 |
| | | | | | | |
|
| |
|
|
(Decrease) increase in collectively determined | | | | | | | |
|
| |
|
|
portion of the allowance attributable to: | | | | | | | |
|
| |
|
|
Loan (reduction) growth | | | (12) | | | 18 | |
| (22) | |
| 18 |
Changes in historical loss experience factors | | | 6 | | | (10) | |
| 0 | |
| 0 |
Changes in qualitative factors | | | (4) | | | 20 | |
| 4 | |
| 13 |
Total provision for loan losses - | | | | | | | |
|
| |
|
|
Consumer segment | | $ | 13 | | $ | 44 | | $ | 25 | | $ | 75 |
70
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| | | | | | | | | | | | |
| | 3 Months | | 3 Months | | 6 Months | | 6 Months | ||||
Total - All segments | | Ended | | Ended | | Ended | | Ended | ||||
(In thousands) | | June 30, | | June 30, | | June 30, | | June 30, | ||||
|
| 2020 | | 2019 | | 2020 | | 2019 | ||||
(Decrease) increase in total specific allowance on |
| | | | | | | |
|
| |
|
impaired loans, adjusted for the effect of net |
| | | | | | | |
|
| |
|
charge-offs | | $ | (143) | | $ | (149) | | $ | 1,067 | | $ | (1,160) |
| | | | | | | |
|
| |
|
|
Increase (decrease) in collectively determined | | | | | | | |
|
| |
|
|
portion of the allowance attributable to: | | | | | | | |
|
| |
|
|
Loan (reduction) growth | | | (255) | | | 382 | |
| (272) | |
| 398 |
Changes in historical loss experience factors | | | (22) | | | (322) | |
| (89) | |
| (305) |
Changes in qualitative factors | | | 244 | | | 85 | |
| 646 | |
| 20 |
Sub-total | | | (176) | | | (4) | |
| 1,352 | |
| (1,047) |
Unallocated | | | 0 | | | 0 | |
| 0 | |
| 86 |
Total (credit) provision for loan losses - | | | | | | | |
|
| |
|
|
All segments | | $ | (176) | | $ | (4) | | $ | 1,352 | | $ | (961) |
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 (reduction) growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase or decrease in loans outstanding (excluding loans specifically evaluated for impairment) for the period.
The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment).
Table 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 1.74% at June 30, 2020, up from 0.88% at December 31, 2019, and nonperforming assets as a percentage of total assets was 1.33% at June 30, 2020, up from 0.80% at December 31, 2019. At June 30, 2020, these ratios were affected by the net impact of classification as nonperforming of the commercial loans with specific allowances referred to above.
Table XI presents data at June 30, 2020 and at the end of each of the years ended December 31, 2015 through 2019. Table XI shows that total nonperforming loans as a percentage of loans of 1.74% at June 30, 2020, though up from December 31, 2019, was lower than the corresponding year-end ratio from 2015 through 2018. Similarly, the June 30, 2020 ratio of total nonperforming assets as a percentage of assets of 1.33% was lower than the corresponding ratio from 2016 through 2018 and slightly higher than the level at December 31, 2015 of 1.31%.
Total impaired loans of $14,280,000 at June 30, 2020 are up $8,794,000 from the corresponding amount at December 31, 2019 of $5,486,000. The increase in impaired loans includes the net impact of classification as impaired of the commercial loans referred to above in the discussion of specific allowances.
71
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Total nonperforming assets of $23,168,000 at June 30, 2020 are $9,857,000 higher than the corresponding amount at December 31, 2019, summarized as follows:
Over the period 2015-2019 and the first six months of 2020, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans and may significantly impact the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of June 30, 2020. Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.
Tables IX through XII present historical data related to loans and the allowance for loan losses.
72
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars In Thousands) | | | | | | | | | | | | | | | | | | |
| ||||
| | June 30, | | June 30, | | | Years Ended December 31, | | |||||||||||||||
|
| 2020 |
| 2019 |
|
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| |||||||
Balance, beginning of year | | $ | 9,836 | | $ | 9,309 | | | $ | 9,309 | | $ | 8,856 | | $ | 8,473 | | $ | 7,889 | | $ | 7,336 | |
Charge-offs: | |
| | |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
Residential mortgage | |
| 0 | |
| (107) | | |
| (190) | |
| (158) | |
| (197) | |
| (73) | |
| (217) | |
Commercial | |
| (124) | |
| (6) | | |
| (6) | |
| (165) | |
| (132) | |
| (597) | |
| (251) | |
Consumer | |
| (70) | |
| (66) | | |
| (183) | |
| (174) | |
| (150) | |
| (87) | |
| (94) | |
Total charge-offs | |
| (194) | |
| (179) | | |
| (379) | |
| (497) | |
| (479) | |
| (757) | |
| (562) | |
Recoveries: | |
| | |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
Residential mortgage | |
| 5 | |
| 6 | | |
| 12 | |
| 8 | |
| 19 | |
| 3 | |
| 1 | |
Commercial | |
| 0 | |
| 3 | | |
| 6 | |
| 317 | |
| 4 | |
| 35 | |
| 214 | |
Consumer | |
| 27 | |
| 22 | | |
| 39 | |
| 41 | |
| 38 | |
| 82 | |
| 55 | |
Total recoveries | |
| 32 | |
| 31 | | |
| 57 | |
| 366 | |
| 61 | |
| 120 | |
| 270 | |
Net charge-offs | |
| (162) | |
| (148) | | |
| (322) | |
| (131) | |
| (418) | |
| (637) | |
| (292) | |
Provision (credit) for loan losses | |
| 1,352 | |
| (961) | | |
| 849 | |
| 584 | |
| 801 | |
| 1,221 | |
| 845 | |
Balance, end of period | | $ | 11,026 | | $ | 8,200 | | | $ | 9,836 | | $ | 9,309 | | $ | 8,856 | | $ | 8,473 | | $ | 7,889 | |
Net charge-offs as a % of | |
| | |
|
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
average loans | |
| 0.01 | % |
| 0.02 | % | |
| 0.03 | % |
| 0.02 | % |
| 0.05 | % |
| 0.09 | % |
| 0.04 | % |
TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
| | | | | | | | | | | | | | | | | | |
(In Thousands) | | June 30, | | As of December 31, | ||||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | ||||||
ASC 310 - Impaired loans | | $ | 1,956 | | $ | 1,051 | | $ | 1,605 | | $ | 1,279 | | $ | 674 | | $ | 820 |
ASC 450 - Collective segments: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial | |
| 4,066 | |
| 3,913 | |
| 3,102 | |
| 3,078 | |
| 3,373 | |
| 3,103 |
Residential mortgage | |
| 4,156 | |
| 4,006 | |
| 3,870 | |
| 3,841 | |
| 3,890 | |
| 3,417 |
Consumer | |
| 263 | |
| 281 | |
| 233 | |
| 159 | |
| 138 | |
| 122 |
Unallocated | |
| 585 | |
| 585 | |
| 499 | |
| 499 | |
| 398 | |
| 427 |
Total Allowance | | $ | 11,026 | | $ | 9,836 | | $ | 9,309 | | $ | 8,856 | | $ | 8,473 | | $ | 7,889 |
73
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
| | | | | | | | | | | | | | | | | | | |
(Dollars In Thousands) | | June 30, | | As of December 31, |
| ||||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| ||||||
Impaired loans with a valuation allowance | | $ | 12,189 | | $ | 3,375 | | $ | 4,851 | | $ | 4,100 | | $ | 3,372 | | $ | 1,933 | |
Impaired loans without a valuation allowance | |
| 2,091 | |
| 2,111 | |
| 4,923 | |
| 5,411 | |
| 7,488 | |
| 8,041 | |
Total impaired loans | | $ | 14,280 | | $ | 5,486 | | $ | 9,774 | | $ | 9,511 | | $ | 10,860 | | $ | 9,974 | |
Total loans past due 30-89 days and still accruing | | $ | 5,124 | | $ | 8,889 | | $ | 7,142 | | $ | 9,449 | | $ | 7,735 | | $ | 7,057 | |
Nonperforming assets: | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
Total nonaccrual loans | | $ | 18,763 | | $ | 9,218 | | $ | 13,113 | | $ | 13,404 | | $ | 8,736 | | $ | 11,517 | |
Total loans past due 90 days or more and still accruing | |
| 2,812 | |
| 1,207 | |
| 2,906 | |
| 3,724 | |
| 6,838 | |
| 3,229 | |
Total nonperforming loans | |
| 21,575 | |
| 10,425 | |
| 16,019 | |
| 17,128 | |
| 15,574 | |
| 14,746 | |
Foreclosed assets held for sale (real estate) | |
| 1,593 | |
| 2,886 | |
| 1,703 | |
| 1,598 | |
| 2,180 | |
| 1,260 | |
Total nonperforming assets | | $ | 23,168 | | $ | 13,311 | | $ | 17,722 | | $ | 18,726 | | $ | 17,754 | | $ | 16,006 | |
Loans subject to troubled debt restructurings (TDRs): | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
Performing | | $ | 265 | | $ | 889 | | $ | 655 | | $ | 636 | | $ | 5,803 | | $ | 1,186 | |
Nonperforming | |
| 790 | |
| 1,737 | |
| 2,884 | |
| 3,027 | |
| 2,874 | |
| 5,178 | |
Total TDRs | | $ | 1,055 | | $ | 2,626 | | $ | 3,539 | | $ | 3,663 | | $ | 8,677 | | $ | 6,364 | |
| | | | | | | | | | | | | | | | | | | |
Total nonperforming loans as a % of loans | |
| 1.74 | % |
| 0.88 | % |
| 1.94 | % |
| 2.10 | % |
| 2.07 | % |
| 2.09 | % |
Total nonperforming assets as a % of assets | |
| 1.33 | % |
| 0.80 | % |
| 1.37 | % |
| 1.47 | % |
| 1.43 | % |
| 1.31 | % |
Allowance for loan losses as a % of total loans | |
| 0.89 | % |
| 0.83 | % |
| 1.12 | % |
| 1.09 | % |
| 1.13 | % |
| 1.12 | % |
Allowance for loan losses as a % of nonperforming loans | |
| 51.11 | % |
| 94.35 | % |
| 58.11 | % |
| 51.70 | % |
| 54.40 | % |
| 53.50 | % |
74
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE XII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
| | | | | | | | | | | | | | | | | | |
(In Thousands) | | June | | December 31, | ||||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | ||||||
Residential mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Residential mortgage loans - first liens | | $ | 493,214 | | $ | 510,641 | | $ | 372,339 | | $ | 359,987 | | $ | 334,102 | | $ | 304,783 |
Residential mortgage loans - junior liens | |
| 25,632 | |
| 27,503 | |
| 25,450 | |
| 25,325 | |
| 23,706 | |
| 21,146 |
Home equity lines of credit | |
| 31,826 | |
| 33,638 | |
| 34,319 | |
| 35,758 | |
| 38,057 | |
| 39,040 |
1-4 Family residential construction | |
| 15,621 | |
| 14,798 | |
| 24,698 | |
| 26,216 | |
| 24,908 | |
| 21,121 |
Total residential mortgage | |
| 566,293 | |
| 586,580 | |
| 456,806 | |
| 447,286 | |
| 420,773 | |
| 386,090 |
Commercial: | |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial loans secured by real estate | |
| 293,304 | |
| 301,227 | |
| 162,611 | |
| 159,266 | |
| 150,468 | |
| 154,779 |
Commercial and industrial | |
| 120,202 | |
| 126,374 | |
| 91,856 | |
| 88,276 | |
| 83,854 | |
| 75,196 |
Small Business Administration - Paycheck | | | | | | | | | | | | | | | | | | |
Protection Program | | | 97,103 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
Political subdivisions | |
| 43,134 | |
| 53,570 | |
| 53,263 | |
| 59,287 | |
| 38,068 | |
| 40,007 |
Commercial construction and land | |
| 40,348 | |
| 33,555 | |
| 11,962 | |
| 14,527 | |
| 14,287 | |
| 5,122 |
Loans secured by farmland | |
| 11,433 | |
| 12,251 | |
| 7,146 | |
| 7,255 | |
| 7,294 | |
| 7,019 |
Multi-family (5 or more) residential | |
| 32,699 | |
| 31,070 | |
| 7,180 | |
| 7,713 | |
| 7,896 | |
| 9,188 |
Agricultural loans | |
| 3,874 | |
| 4,319 | |
| 5,659 | |
| 6,178 | |
| 3,998 | |
| 4,671 |
Other commercial loans | |
| 16,579 | |
| 16,535 | |
| 13,950 | |
| 10,986 | |
| 11,475 | |
| 12,152 |
Total commercial | |
| 658,676 | |
| 578,901 | |
| 353,627 | |
| 353,488 | |
| 317,340 | |
| 308,134 |
Consumer | |
| 16,444 | |
| 16,741 | |
| 17,130 | |
| 14,939 | |
| 13,722 | |
| 10,656 |
Total | |
| 1,241,413 | |
| 1,182,222 | |
| 827,563 | |
| 815,713 | |
| 751,835 | |
| 704,880 |
Less: allowance for loan losses | |
| (11,026) | |
| (9,836) | |
| (9,309) | |
| (8,856) | |
| (8,473) | |
| (7,889) |
Loans, net | | $ | 1,230,387 | | $ | 1,172,386 | | $ | 818,254 | | $ | 806,857 | | $ | 743,362 | | $ | 696,991 |
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At June 30, 2020, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $49,736,000.
The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $15,092,000 at June 30, 2020.
75
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation’s outstanding, available, and total credit facilities at June 30, 2020 and December 31, 2019 are as follows:
| | | | | | | | | | | | | | | | | | |
| | Outstanding | | Available | | Total Credit | ||||||||||||
(In Thousands) |
| June 30, |
| Dec. 31, |
| June 30, |
| Dec. 31, |
| June 30, |
| Dec. 31, | ||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | ||||||
Federal Home Loan Bank of Pittsburgh | | $ | 85,504 | | $ | 136,424 | | $ | 486,093 | | $ | 416,122 | | $ | 571,597 | | $ | 552,546 |
Federal Reserve Bank Discount Window | |
| 0 | |
| 0 | |
| 14,605 | |
| 14,244 | |
| 14,605 | |
| 14,244 |
Other correspondent banks | |
| 0 | |
| 0 | |
| 45,000 | |
| 45,000 | |
| 45,000 | |
| 45,000 |
Total credit facilities | | $ | 85,504 | | $ | 136,424 | | $ | 545,698 | | $ | 475,366 | | $ | 631,202 | | $ | 611,790 |
At June 30, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $12,200,000, long-term borrowings of $72,904,000 and a letter of credit of $400,000. At December 31, 2019, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $64,000,000, short-term borrowings of $20,297,000 and long-term borrowings with a total amount of $52,127,000. Additional information regarding borrowed funds is included in Note 9 to the unaudited consolidated financial statements.
Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At June 30, 2020, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $164,652,000.
Management believes the Corporation is well-positioned to meet its short-term and long-term obligations, including the impact of additional lending opportunities and other potential cash requirements arising from the Covenant merger.
STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY
Details concerning capital ratios at June 30, 2020 and December 31, 2019 are presented below. As a small bank holding company, the Corporation is not subject to consolidated capital requirements at June 30, 2020; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. Management believes, as of June 30, 2020, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at June 30, 2020 and December 31, 2019 exceed the Corporation’s Board policy threshold levels.
76
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
In October 2019, the Federal Reserve Board, FDIC and Office of the Comptroller of the Currency finalized a rule that provides qualifying community banking organizations an option to calculate a simple leverage ratio, rather than multiple measures of capital adequacy. In 2020, C&N Bank has not elected the community bank leverage ratio (“CBLR”) framework. The decision to continue to measure capital adequacy using previously existing risk-based and leverage capital requirements reflects concerns that reliance on the leverage ratio as a single measurement could, in certain circumstances, limit the ability to grow or encourage taking excessive risk. C&N Bank could elect the CBLR framework in the future.
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in Thousands) | | | | | | | | | | | | | | | Minimum To Be | | | | | |
| ||
| | | | | | | | | | | Minimum To Maintain | | Well | | |
| |||||||
| | | | | | | Minimum | | Capital Conservation | | Capitalized Under | | Minimum To Meet |
| |||||||||
| | | | | | | Capital | | Buffer at Reporting | | Prompt Corrective | | the Corporation's |
| |||||||||
| | Actual | | Requirement | | Date | | Action Provisions | | Policy Thresholds |
| ||||||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||
June 30, 2020: | |
| | |
| |
| |
| |
| |
| |
| |
| |
| | |
|
|
Total capital to risk-weighted assets: | |
| | |
| |
| |
| |
| |
| |
| |
| |
| | |
|
|
Consolidated | | $ | 232,614 | | 21.32 | % | N/A | | N/A | | N/A | | N/A | | N/A | | N/A | | $ | 114,568 | | ≥10.5 | % |
C&N Bank |
| | 187,731 |
| 17.20 | % | 87,323 |
| ≥8 | % | 114,611 |
| ≥10.5 | % | 109,153 |
| ≥10 | % | | 114,611 |
| ≥10.5 | % |
Tier 1 capital to risk-weighted assets: |
| | |
| |
|
|
| |
|
|
|
|
|
|
|
|
| | |
|
| |
Consolidated |
| | 214,805 |
| 19.69 | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| | 92,746 |
| ≥8.5 | % |
C&N Bank |
| | 176,422 |
| 16.16 | % | 65,492 |
| ≥6 | % | 92,780 |
| ≥8.5 | % | 87,323 |
| ≥8 | % | | 92,780 |
| ≥8.5 | % |
Common equity tier 1 capital to risk-weighted assets: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
|
|
| |
Consolidated |
| | 214,805 |
| 19.69 | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| | 76,379 |
| ≥7 | % |
C&N Bank |
| | 176,422 |
| 16.16 | % | 49,119 |
| ≥4.5 | % | 76,407 |
| ≥7.0 | % | 70,950 |
| ≥6.5 | % | | 76,407 |
| ≥7 | % |
Tier 1 capital to average assets: |
| | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
|
| |
Consolidated |
| | 214,805 |
| 12.82 | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| | 134,034 |
| ≥8 | % |
C&N Bank |
| | 176,422 |
| 10.63 | % | 66,381 |
| ≥4 | % | N/A |
| N/A |
| 82,976 |
| ≥5 | % | | 132,762 |
| ≥8 | % |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
December 31, 2019: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
Total capital to risk-weighted assets: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
Consolidated | | $ | 228,057 |
| 20.70 | % | N/A |
| N/A | | N/A |
| N/A |
| N/A |
| N/A | | $ | 115,689 |
| ≥10.5 | % |
C&N Bank | |
| 205,863 |
| 18.75 | % | 87,817 |
| ≥8 | % | 115,260 |
| ≥10.5 | % | 109,771 |
| ≥10 | % |
| 115,260 |
| ≥10.5 | % |
Tier 1 capital to risk-weighted assets: | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| |
Consolidated | |
| 211,388 |
| 19.19 | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A | |
| 93,653 |
| ≥8.5 | % |
C&N Bank | |
| 195,694 |
| 17.83 | % | 65,863 |
| ≥6 | % | 93,306 |
| ≥8.5 | % | 87,817 |
| ≥8 | % |
| 93,306 |
| ≥8.5 | % |
Common equity tier 1 capital to risk-weighted assets: | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| |
Consolidated | |
| 211,388 |
| 19.19 | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A | |
| 77,126 |
| ≥7 | % |
C&N Bank | |
| 195,694 |
| 17.83 | % | 49,397 |
| ≥4.5 | % | 76,840 |
| ≥7.0 | % | 71,351 |
| ≥6.5 | % |
| 76,840 |
| ≥7 | % |
Tier 1 capital to average assets: | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| |
Consolidated | |
| 211,388 |
| 13.10 | % | N/A |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A | |
| 129,126 |
| ≥8 | % |
C&N Bank | |
| 195,694 |
| 12.24 | % | 63,940 |
| ≥4 | % | N/A |
| N/A |
| 79,925 |
| ≥5 | % |
| 127,879 |
| ≥8 | % |
While it is difficult to estimate the future impact of COVID-19, the Corporation’s and C&N Bank’s capital ratios at June 30, 2020 are at levels that demonstrate the capacity to absorb the acquisition of Covenant as well as significant losses if they arise while continuing to meet the requirements to be considered well capitalized.
Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. As described in more detail below, C&N Bank is subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile.
77
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At June 30, 2020, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
| | | |
Minimum common equity tier 1 capital ratio |
| 4.5 | % |
Minimum common equity tier 1 capital ratio plus capital conservation buffer |
| 7.0 | % |
Minimum tier 1 capital ratio |
| 6.0 | % |
Minimum tier 1 capital ratio plus capital conservation buffer |
| 8.5 | % |
Minimum total capital ratio |
| 8.0 | % |
Minimum total capital ratio plus capital conservation buffer |
| 10.5 | % |
A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
| | | |
Capital Conservation Buffer |
| Maximum Payout |
|
(as a % of risk-weighted assets) | | (as a % of eligible retained income) |
|
Greater than 2.5% | | No payout limitation applies | |
≤2.5% and >1.875% | | 60 | % |
≤1.875% and >1.25% | | 40 | % |
≤1.25% and >0.625% | | 20 | % |
≤0.625% | | 0 | % |
At June 30, 2020, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 9.20%.
The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income (Loss) within stockholders’ equity. The balance in Accumulated Other Comprehensive Income (Loss) related to unrealized gains (losses) on available-for-sale debt securities, net of deferred income tax, amounted to $11,472,000 at June 30, 2020 and $3,511,000 at December 31, 2019. Changes in accumulated other comprehensive income (loss) are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at June 30, 2020.
Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income related to defined benefit plans, net of deferred income tax, was $239,000 at June 30, 2020 and $180,000 at December 31, 2019.
78
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
COMPREHENSIVE INCOME
Comprehensive Income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as Other Comprehensive Income. Changes in the components of Accumulated Other Comprehensive Income (Loss) are included in Other Comprehensive Income, and for the Corporation, consist of changes in unrealized gains or losses on available-for-sale debt securities and changes in underfunded or overfunded defined benefit plans. Fluctuations in interest rates significantly affect fair values of available-for-sale debt securities, and accordingly have an effect on Other Comprehensive Income (Loss) in each period.
Comprehensive Income totaled $7,675,000 for the second quarter 2020 as compared to $7,722,000 in the second quarter 2019. For the three months ended June 30, 2020, Comprehensive Income included: (1) Net Income of $5,438,000, which was $1,789,000 higher than in the second quarter 2019; (2) Other Comprehensive Income from available-for-sale debt securities of $2,242,000 as compared to Other Comprehensive Income of $4,079,000 in the second quarter 2019; and (3) Other Comprehensive Loss from defined benefit plans of ($5,000) as compared to ($6,000) for the second quarter 2019.
For the six months ended June 30, 2020, Comprehensive Income totaled $17,624,000 as compared to $16,341,000 in the first six months of 2019. For the six months ended June 30, 2020, Comprehensive Income included: (1) Net Income of $9,604,000, which was $865,000 higher than net income for the first six months of 2019; (2) Other Comprehensive Income from available-for-sale debt securities of $7,961,000 as compared to Other Comprehensive Income of $7,445,000 from net unrealized gains on available-for-sale debt securities in the first six months of 2019; and (3) Other Comprehensive Income from defined benefit plans of $59,000 for the six months ended June 30, 2020 as compared to Other Comprehensive Income of $157,000 for the first six months of 2019.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation’s management, under the supervision of and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensure that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and C&N Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material, adverse effect on the Corporation’s financial condition or results of operations.
Item 1A. Risk Factors
Except for the risk factor described immediately below, there have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed February 20, 2020.
Coronavirus Outbreak - In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. Since first being reported in China, the coronavirus has spread to additional countries including the United States.
79
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
In response, many state and local governments, including the Commonwealth of Pennsylvania, have instituted emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. It has been widely reported that these restrictions have resulted in significant adverse effects for many different types of businesses, particularly those in the travel, hospitality and food and beverage industries, among many others, and has resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect interest income and, therefore, earnings. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus outbreak, and there is no guarantee that the Corporation’s efforts to address the adverse impacts of the coronavirus will be effective. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others.
The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation’s business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation’s financial reporting and internal controls; declines in the demand for loans and other banking services and products; declines in demand resulting from adverse impacts of the disease on businesses deemed to be “non-essential” by governments; branch or office closures and business interruptions; and efforts to integrate the businesses of the Corporation and Covenant (acquired July 1, 2020).
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table sets forth a summary of the purchases by the Corporation of its common stock during the second quarter 2020.
| | | | | | | | | |
|
| |
| | |
| Total Number of |
| Maximum |
| | | | | | | Shares | | Number of |
| | | | | | | Purchased | | Shares that May |
| | | | | | | as Part of | | Yet |
| | | | | | | Publicly | | be Purchased |
| | Total Number | | Average | | Announced | | Under | |
| | of Shares | | Price Paid | | Plans | | the Plans or | |
Period | | Purchased | | per Share | | or Programs | | Programs | |
April 1 - 30, 2020 |
| 0 | | $ | 0 |
| 0 |
| 600,000 |
May 1 - 31, 2020 |
| 0 | | $ | 0 |
| 0 |
| 600,000 |
June 1 - 30, 2020 |
| 0 | | $ | 0 |
| 0 |
| 600,000 |
80
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Note to Table: Effective April 21, 2016, the Corporation’s Board of Directors approved a treasury stock repurchase program. Under this stock repurchase program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation’s common stock. The Board of Directors’ April 21, 2016 authorization provides that: (1) the 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
81
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Item 6. Exhibits
2. | Plan of acquisition, reorganization, arrangement, liquidation or succession: |
|
|
|
|
| |
2.1 |
| Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018 | |
|
|
| |
2.2 |
| Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed December 18, 2019 | |
|
| ||
3. |
| Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed September 21, 2009 | |
|
|
| |
3. |
| Incorporated by reference to Exhibit 3.1(ii) of The Corporation’s Form S-4/A filed April 20, 2020 | |
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4. | Instruments defining the rights of Security holders, including Indentures |
| Not applicable |
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10. | Material Contracts: |
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| | | |
10.1 | Employment Agreement dated May 18, 2020 between the Corporation and Janice E. Ward | | Filed herewith |
| | | |
10.2 | Change in Control Agreement dated June 27, 2020 between the Corporation and Janice E. Ward | | Filed herewith |
| | | |
10.3 | Indemnification Agreement dated June 27, 2020 between the Corporation and Janice E. Ward | | Filed herewith |
| | | |
10.4 | Indemnification Agreement dated July 1, 2020 between the Corporation and Stephen Dorwart | | Filed herewith |
| | | |
10.5 | Indemnification Agreement dated July 1, 2020 between the Corporation and Robert Loughery | | Filed herewith |
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15. | Letter re: unaudited interim information |
| Not applicable |
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| |
18. | Letter re: change in accounting principles |
| Not applicable |
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22. | Published report regarding matters submitted to vote of security holders |
| Not applicable |
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23. | Consents of experts and counsel |
| Not applicable |
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24. | Power of attorney |
| Not applicable |
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31. | Rule 13a-14(a)/15d-14(a) certifications: |
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| | | |
31.1 |
| Filed herewith | |
| | | |
31.2 |
| Filed herewith |
82
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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32. |
| Filed herewith | |
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99. | Additional exhibits |
| Not applicable |
| |
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100. | XBRL-related documents |
| Not applicable |
| |
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101. | Interactive data file |
| Filed herewith |
| |
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104. | Cover page interactive data file |
| Filed herewith |
83
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| CITIZENS & NORTHERN CORPORATION |
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August 6, 2020 |
| By: /s/ J. Bradley Scovill |
Date |
| President and Chief Executive Officer |
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August 6, 2020 |
| By: /s/ Mark A. Hughes |
Date |
| Treasurer and Chief Financial Officer |
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84