Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended June 30,
2010
or
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from _______________ to
_________________________.
Commission file number:
000-16084
CITIZENS
& NORTHERN CORPORATION
(Exact
name of Registrant as specified in its charter)
PENNSYLVANIA
|
23-2451943
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
90-92 MAIN STREET,
WELLSBORO, PA 16901
(Address
of principal executive offices) (Zip code)
570-724-3411
(Registrant's
telephone number including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
Common
Stock ($1.00 par value)
|
12,129,707
Shares Outstanding on August 4,
2010
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
CITIZENS & NORTHERN
CORPORATION
|
|
|
|
Index
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Part
I. Financial Information
|
|
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Item
1. Financial Statements
|
|
|
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|
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Consolidated
Balance Sheet – June
30, 2010 and
December
31, 2009
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Page 3
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Consolidated
Statement of Operations - Three Months and
Six
Months Ended June 30, 2010 and 2009
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Page 4
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Consolidated
Statement of Cash Flows - Six Months
Ended
June 30, 2010 and 2009
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Page 5
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Consolidated
Statement of Changes in Stockholders’ Equity-
Six
Months Ended June 30, 2010 and 2009
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Page 6
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Notes
to Consolidated Financial Statements
|
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Pages
7 - 22
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|
Item
2. Management's Discussion and Analysis of
Financial
Condition
and Results of Operations
|
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Pages
23 - 41
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Item
3. Quantitative and Qualitative Disclosures About
Market
Risk
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Pages
41 - 44
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Item
4. Controls and Procedures
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Page
44
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Part
II. Other Information
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Pages
45 - 47
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Signatures
|
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Page
48
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Exhibit
10.1 Restricted Stock Agreement dated March 5, 2010
between
the Corporation and Charles H. Updegraff, Jr.
|
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Pages
49 - 51
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Exhibit
31.1. Rule 13a-14(a)/15d-14(a) Certification -
Chief
Executive Officer
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Page
52
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Exhibit
31.2. Rule 13a-14(a)/15d-14(a) Certification -
Chief
Financial Officer
|
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Page
53
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Exhibit
32. Section 1350 Certifications
|
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Page
54
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CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
PART 1 - FINANCIAL INFORMATION
|
|
|
ITEM 1. FINANCIAL STATEMENTS
|
|
|
Consolidated Balance Sheet
|
June 30,
|
December 31,
|
(In Thousands Except Share Data)
|
2010
|
2009
|
|
(Unaudited)
|
(Note)
|
ASSETS
|
|
|
Cash
and due from banks:
|
|
|
Noninterest-bearing
|
$15,807
|
$18,247
|
Interest-bearing
|
67,845
|
73,818
|
Total
cash and cash equivalents
|
83,652
|
92,065
|
Trading
securities
|
0
|
1,045
|
Available-for-sale
securities
|
426,246
|
396,288
|
Held-to-maturity
securities
|
0
|
300
|
Loans,
net of allowance for loan losses of $8,461,000 at June 30,
2010
|
|
|
and
$8,265,000 at December 31, 2009
|
715,363
|
713,338
|
Bank-owned
life insurance
|
23,029
|
22,798
|
Accrued
interest receivable
|
5,229
|
5,613
|
Bank
premises and equipment, net
|
23,401
|
24,316
|
Foreclosed
assets held for sale
|
863
|
873
|
Deferred
tax asset, net
|
20,390
|
22,037
|
Intangible
asset - Core deposit intangibles
|
414
|
502
|
Intangible
asset – Goodwill
|
11,942
|
11,942
|
Other assets
|
28,128
|
30,678
|
TOTAL ASSETS
|
$1,338,657
|
$1,321,795
|
|
|
|
LIABILITIES
|
|
|
Deposits:
|
|
|
Noninterest-bearing
|
$151,748
|
$137,470
|
Interest-bearing
|
816,792
|
789,319
|
Total
deposits
|
968,540
|
926,789
|
Dividends
payable
|
169
|
169
|
Short-term
borrowings
|
28,132
|
39,229
|
Long-term
borrowings
|
173,831
|
196,242
|
Accrued interest and other
liabilities
|
6,490
|
6,956
|
TOTAL LIABILITIES
|
1,177,162
|
1,169,385
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
Preferred
stock, $1,000 par value; authorized 30,000 shares; $1,000
liquidation
|
|
|
preference
per share; 26,440 shares issued at June 30, 2010 and
|
|
|
December
31, 2009
|
25,833
|
25,749
|
Common
stock, par value $1.00 per share; authorized 20,000,000 shares in 2010
and
|
|
|
2009;
issued 12,384,285 at June 30, 2010 and 12,374,481 at December 31,
2009
|
12,384
|
12,374
|
Paid-in
capital
|
66,888
|
66,833
|
Retained
earnings
|
59,546
|
53,027
|
Unamortized
stock compensation
|
(158)
|
(107)
|
Treasury
stock, at cost; 254,578 shares at June 30, 2010
|
|
|
and 262,780 shares at December 31,
2009
|
(4,431)
|
(4,575)
|
Sub-total
|
160,062
|
153,301
|
Accumulated
other comprehensive income (loss):
|
|
|
Unrealized
gains (losses) on available-for-sale securities
|
1,684
|
(522)
|
Defined benefit plans
|
(251)
|
(369)
|
Total accumulated other comprehensive income
(loss)
|
1,433
|
(891)
|
TOTAL STOCKHOLDERS' EQUITY
|
161,495
|
152,410
|
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY
|
$1,338,657
|
$1,321,795
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Note: The
balance sheet at December 31, 2009 has been derived from the audited financial
statements at that date but does not include all the information and notes
required by U.S. generally accepted accounting principles for complete financial
statements.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
CONSOLIDATED STATEMENT OF OPERATIONS
|
Three Months Ended
|
|
Fiscal Year To Date
|
(In Thousands, Except Per Share Data)
|
June 30,
|
June 30,
|
|
Six Months Ended June
30,
|
|
2010
|
2009
|
|
2010
|
2009
|
INTEREST INCOME
|
(Current)
|
(Prior Year)
|
|
(Current)
|
(Prior Year)
|
Interest
and fees on loans
|
$11,009
|
$11,356
|
|
$21,959
|
$22,713
|
Interest
on balances with depository institutions
|
38
|
3
|
|
76
|
4
|
Interest
on loans to political subdivisions
|
399
|
415
|
|
797
|
808
|
Interest
on federal funds sold
|
0
|
7
|
|
0
|
15
|
Interest
on trading securities
|
0
|
8
|
|
1
|
31
|
Income
from available-for-sale and held-to-maturity securities:
|
|
|
|
|
|
Taxable
|
2,699
|
4,268
|
|
5,784
|
8,922
|
Tax-exempt
|
1,184
|
1,124
|
|
2,365
|
2,060
|
Dividends
|
57
|
160
|
|
137
|
359
|
Total
interest and dividend income
|
15,386
|
17,341
|
|
31,119
|
34,912
|
INTEREST
EXPENSE
|
|
|
|
|
|
Interest
on deposits
|
3,058
|
3,699
|
|
6,215
|
7,680
|
Interest
on short-term borrowings
|
51
|
140
|
|
151
|
310
|
Interest
on long-term borrowings
|
1,927
|
2,325
|
|
3,930
|
4,780
|
Total
interest expense
|
5,036
|
6,164
|
|
10,296
|
12,770
|
Net
interest income
|
10,350
|
11,177
|
|
20,823
|
22,142
|
Provision
(credit) for loan losses
|
76
|
93
|
|
283
|
(80)
|
Net
interest income after provision (credit) for loan
losses
|
10,274
|
11,084
|
|
20,540
|
22,222
|
|
|
|
|
|
|
OTHER
INCOME
|
|
|
|
|
|
Trust
and financial management revenue
|
830
|
870
|
|
1,729
|
1,639
|
Service
charges on deposit accounts
|
1,190
|
1,150
|
|
2,283
|
2,197
|
Service
charges and fees
|
210
|
227
|
|
403
|
417
|
Insurance
commissions, fees and premiums
|
61
|
76
|
|
121
|
157
|
Increase
in cash surrender value of life insurance
|
119
|
126
|
|
231
|
277
|
Other
operating income
|
776
|
605
|
|
1,864
|
1,133
|
Sub-total
|
3,186
|
3,054
|
|
6,631
|
5,820
|
Total
other-than-temporary impairment losses on available-for-sale
securities
|
0
|
(17,974)
|
|
(381)
|
(42,955)
|
Portion
of (gain) loss recognized in other comprehensive loss (before
taxes)
|
(2)
|
(1,806)
|
|
(52)
|
6,495
|
Net
impairment losses recognized in earnings
|
(2)
|
(19,780)
|
|
(433)
|
(36,460)
|
Realized
gains on available-for-sale securities, net
|
321
|
785
|
|
810
|
786
|
Net
impairment losses recognized in earnings and realized
|
|
|
|
|
|
gains
on available-for-sale securities
|
319
|
(18,995)
|
|
377
|
(35,674)
|
Total
other income
|
3,505
|
(15,941)
|
|
7,008
|
(29,854)
|
OTHER
EXPENSES
|
|
|
|
|
|
Salaries
and wages
|
3,199
|
3,318
|
|
6,277
|
6,659
|
Pensions
and other employee benefits
|
983
|
1,075
|
|
1,922
|
2,319
|
Occupancy
expense, net
|
651
|
679
|
|
1,350
|
1,421
|
FDIC
assessments
|
415
|
956
|
|
819
|
1,258
|
Furniture
and equipment expense
|
542
|
702
|
|
1,110
|
1,376
|
Pennsylvania
shares tax
|
306
|
318
|
|
611
|
636
|
Other
operating expense
|
1,533
|
2,110
|
|
3,434
|
4,127
|
Total
other expenses
|
7,629
|
9,158
|
|
15,523
|
17,796
|
Income
(loss) before income tax provision
|
6,150
|
(14,015)
|
|
12,025
|
(25,428)
|
Income
tax provision
|
1,281
|
(5,284)
|
|
2,718
|
(9,672)
|
Net
income (loss)
|
4,869
|
(8,731)
|
|
9,307
|
(15,756)
|
U.S
Treasury preferred dividends
|
372
|
373
|
|
745
|
682
|
NET
INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS
|
$4,497
|
($9,104)
|
|
$8,562
|
($16,438)
|
|
|
|
|
|
|
PER
SHARE DATA:
|
|
|
|
|
|
Net
income (loss) per average common share - basic
|
$0.37
|
($1.01)
|
|
$0.71
|
($1.83)
|
Net
income (loss) per average common share - diluted
|
$0.37
|
($1.01)
|
|
$0.71
|
($1.83)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
(In Thousands) (Unaudited)
|
Six Months Ended June 30,
|
|
2010
|
2009
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net income
(loss)
|
$9,307
|
($15,756)
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
|
|
operating
activities:
|
|
|
Provision
(credit) for loan losses
|
283
|
(80)
|
Realized
(gains) losses on available-for-sale securities, net
|
(377)
|
35,674
|
Loss
on sale of foreclosed assets, net
|
36
|
10
|
Depreciation
expense
|
1,209
|
1,433
|
(Gain)
loss on disposition of premises and equipment
|
(449)
|
8
|
Accretion
and amortization on securities, net
|
1,273
|
20
|
Accretion
and amortization on loans, deposits and borrowings, net
|
(126)
|
(176)
|
Increase
in cash surrender value of life insurance
|
(231)
|
(277)
|
Stock-based
compensation
|
32
|
314
|
Amortization
of core deposit intangibles
|
88
|
161
|
Deferred
income taxes
|
440
|
(7,856)
|
Origination
of mortgage loans for sale
|
(12,830)
|
(6,669)
|
Proceeds
from sales of mortgage loans
|
13,310
|
5,688
|
Net
decrease in trading securities
|
1,045
|
116
|
Decrease
(increase) in accrued interest receivable and other assets
|
3,371
|
(6,422)
|
Decrease in accrued interest payable and other
liabilities
|
(253)
|
(245)
|
Net Cash Provided by Operating
Activities
|
16,128
|
5,943
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Proceeds
from maturity of held-to-maturity securities
|
300
|
4
|
Proceeds
from sales of available-for-sale securities
|
45,522
|
14,452
|
Proceeds
from calls and maturities of available-for-sale securities
|
85,954
|
31,779
|
Purchase
of available-for-sale securities
|
(159,082)
|
(61,178)
|
Purchase
of Federal Home Loan Bank of Pittsburgh stock
|
0
|
(4)
|
Net
(increase) decrease in loans
|
(3,202)
|
16,519
|
Purchase
of premises and equipment
|
(335)
|
(650)
|
Return
of principal on limited liability entity investments
|
23
|
26
|
Proceeds
from disposition of premises and equipment
|
100
|
0
|
Proceeds from sale of foreclosed
assets
|
408
|
320
|
Net Cash (Used in) Provided by Investing
Activities
|
(30,312)
|
1,268
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net
increase in deposits
|
41,746
|
21,874
|
Net
(decrease) in short-term borrowings
|
(11,097)
|
(9,157)
|
Repayments
of long-term borrowings
|
(22,300)
|
(15,151)
|
Issuance
of US Treasury preferred stock and warrant
|
0
|
26,409
|
Sale
of treasury stock
|
0
|
30
|
Tax
benefit from compensation plans
|
18
|
92
|
US
Treasury preferred dividends paid
|
(662)
|
(427)
|
Common dividends paid
|
(1,934)
|
(3,630)
|
Net Cash Provided by Financing
Activities
|
5,771
|
20,040
|
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(8,413)
|
27,251
|
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR
|
92,065
|
24,028
|
CASH AND CASH EQUIVALENTS, END OF
PERIOD
|
$83,652
|
$51,279
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
Assets
acquired through foreclosure of real estate loans
|
$434
|
$954
|
Interest
paid
|
$10,566
|
$13,049
|
Income
taxes paid
|
$176
|
$1,275
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
|
Six
Months Ended June 30, 2010 and 2009
|
|
|
|
(In
Thousands Except Per Share Data)
|
|
|
Accum.
Other
|
Unamortized
|
|
|
(Unaudited)
|
Preferred
|
Common
|
Paid-in
|
Retained
|
Comprehensive
|
Stock
|
Treasury
|
|
|
Stock
|
Stock
|
Capital
|
Earnings
|
Income
(Loss)
|
Compensation
|
Stock
|
Total
|
Six
Months Ended June 30, 2010:
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2010
|
$25,749
|
$12,374
|
$66,833
|
$53,027
|
($891)
|
($107)
|
($4,575)
|
$152,410
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
9,307
|
|
|
|
9,307
|
Unrealized
gain on securities, net
|
|
|
|
|
|
|
|
|
of
reclassification and tax
|
|
|
|
|
2,206
|
|
|
2,206
|
Other
comprehensive income related
|
|
|
|
|
|
|
|
|
to
defined benefit plans
|
|
|
|
|
118
|
|
|
118
|
Total
comprehensive income
|
|
|
|
|
|
|
|
11,631
|
Accretion
of discount associated with
|
|
|
|
|
|
|
|
|
U.S.
Treasury preferred stock
|
84
|
|
|
(84)
|
|
|
|
0
|
Cash
dividends - U.S. Treasury preferred
|
|
|
|
(661)
|
|
|
|
(661)
|
Cash
dividends declared on common
|
|
|
|
|
|
|
|
|
stock,
$.17 per share
|
|
|
|
(2,061)
|
|
|
|
(2,061)
|
Common
shares issued for dividend
|
|
|
|
|
|
|
|
|
reinvestment
plan
|
|
10
|
116
|
|
|
|
|
126
|
Restricted
stock granted
|
|
|
(59)
|
|
|
(100)
|
159
|
0
|
Forfeiture
of restricted stock
|
|
|
(2)
|
|
|
17
|
(15)
|
0
|
Stock-based
compensation expense
|
|
|
|
|
|
32
|
|
32
|
Tax
benefit from employee benefit plan
|
|
|
|
18
|
|
|
|
18
|
Balance,
June 30, 2010
|
$25,833
|
$12,384
|
$66,888
|
$59,546
|
$1,433
|
($158)
|
($4,431)
|
$161,495
|
Six
Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2009
|
$0
|
$9,284
|
$44,308
|
$97,757
|
($23,214)
|
($48)
|
($6,061)
|
$122,026
|
Comprehensive
(loss) income:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
(15,756)
|
|
|
|
(15,756)
|
Unrealized
gain on securities, net
|
|
|
|
|
|
|
|
|
of
reclassification and tax
|
|
|
|
|
7,938
|
|
|
7,938
|
Other
comprehensive loss related
|
|
|
|
|
|
|
|
|
to
defined benefit plans
|
|
|
|
|
(261)
|
|
|
(261)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
(8,079)
|
Reclassify
non-credit portion of other-
|
|
|
|
|
|
|
|
|
than-temporary
impairment losses
|
|
|
|
|
|
|
|
|
recognized
in prior period
|
|
|
|
2,378
|
(2,378)
|
|
|
0
|
Issuance
of U.S. Treasury preferred
|
25,588
|
|
821
|
|
|
|
|
26,409
|
Accretion
of discount associated with
|
|
|
|
|
|
|
|
|
U.S.
Treasury preferred stock
|
76
|
|
|
(76)
|
|
|
|
0
|
Cash
dividends - U.S. Treasury preferred
|
|
|
|
(606)
|
|
|
|
(606)
|
Cash
dividends declared on common
|
|
|
|
|
|
|
|
|
stock,
$.48 per share
|
|
|
|
(4,303)
|
|
|
|
(4,303)
|
Shares
issued for dividend
|
|
|
|
|
|
|
|
|
reinvestment
plan
|
|
|
46
|
|
|
|
629
|
675
|
Shares
issued from treasury related to
|
|
|
|
|
|
|
|
|
exercise
of stock options
|
|
|
(4)
|
|
|
|
34
|
30
|
Restricted
stock granted
|
|
|
10
|
|
|
(79)
|
69
|
0
|
Forfeiture
of restricted stock
|
|
|
(1)
|
|
|
3
|
(2)
|
0
|
Stock-based
compensation expense
|
|
|
273
|
|
|
41
|
|
314
|
Tax
benefit from employee benefit plan
|
|
|
|
92
|
|
|
|
92
|
Balance,
June 30, 2009
|
$25,664
|
$9,284
|
$45,453
|
$79,486
|
($17,915)
|
($83)
|
($5,331)
|
$136,558
|
The accompanying notes are an integral
part of these consolidated financial statements.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Notes
to Consolidated Financial Statements
1.
BASIS OF INTERIM PRESENTATION
The
consolidated financial information included herein, with the exception of the
consolidated balance sheet dated December 31, 2009, 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, 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 complete
financial statements. Certain 2009 information has been reclassified
for consistency with the 2010 presentation.
Operating
results reported for the three- and six-months ended June 30, 2010 might not be
indicative of the results for the year ending December 31, 2010. The Corporation
evaluates subsequent events through the date of filing with the Securities and
Exchange Commission.
This
document has not been reviewed or confirmed for accuracy or relevance by the
Federal Deposit Insurance Corporation or any other regulatory
agency.
2.
PER COMMON SHARE DATA
Basic net
income (loss) per average common share represents income (loss) available to
common shareholders divided by the weighted-average number of shares of common
stock outstanding. For all periods presented, all outstanding stock
options and the warrant (issued in January 2009) are anti-dilutive, and are
therefore excluded in determining diluted income (loss) per common
share.
|
Net Income
|
|
|
|
(Loss)
|
Weighted-
|
Earnings
|
|
Available
|
Average
|
(Loss)
|
|
to Common
|
Common
|
Per
|
|
Shareholders
|
Shares
|
Share
|
Six
Months Ended June 30, 2010
|
|
|
|
Earnings per common share – basic and
diluted
|
$ 8,562,000
|
12,119,358
|
$0.71
|
|
|
|
|
Six
Months Ended June 30, 2009
|
|
|
|
Earnings per common share – basic and
diluted
|
$ (16,438,000)
|
8,964,850
|
($1.83)
|
|
|
|
|
Quarter
Ended June 30, 2010
|
|
|
|
Earnings per common share – basic and
diluted
|
$ 4,497,000
|
12,125,072
|
$0.37
|
|
|
|
|
Quarter
Ended June 30, 2009
|
|
|
|
Earnings per common share – basic and
diluted
|
$ (9,104,000)
|
8,973,531
|
($1.01)
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
3.
COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) is the total of (1) net income (loss), and (2) all other changes
in equity from non-stockholder sources, which are referred to as other
comprehensive income. The components of comprehensive income (loss),
and the related tax effects, are as follows:
(In Thousands)
|
3 Months Ended
|
|
6 Months Ended
|
|
June 30,
|
|
June 30,
|
|
2010
|
2009
|
|
2010
|
2009
|
Net
income (loss)
|
$4,869
|
($8,731)
|
|
$9,307
|
($15,756)
|
|
|
|
|
|
|
Unrealized
gains (losses) on available-for-sale securities:
|
|
|
|
|
|
Unrealized
holding gains (losses) on available-for-sale securities
|
3,966
|
(9,517)
|
|
3,724
|
(23,647)
|
Reclassification adjustment for (gains) losses
realized in income
|
(319)
|
18,995
|
|
(377)
|
35,674
|
Other
comprehensive gain before income tax
|
3,647
|
9,478
|
|
3,347
|
12,027
|
Income tax related to other comprehensive
gain
|
1,245
|
3,222
|
|
1,141
|
4,089
|
Other comprehensive gain on available-for-sale
securities
|
2,402
|
6,256
|
|
2,206
|
7,938
|
|
|
|
|
|
|
Unfunded
pension and postretirement obligations:
|
|
|
|
|
|
Change
in items from defined benefit plans included in
|
|
|
|
|
|
accumulated
other comprehensive income (loss)
|
(14)
|
(209)
|
|
152
|
(462)
|
Amortization
of net transition obligation, prior service cost and net
|
|
|
|
|
|
actuarial loss included in net periodic benefit
cost
|
13
|
54
|
|
27
|
66
|
Other
comprehensive (loss) gain before income tax
|
(1)
|
(155)
|
|
179
|
(396)
|
Income tax related to other comprehensive (loss)
gain
|
0
|
(53)
|
|
61
|
(135)
|
Other comprehensive (loss) gain on unfunded
retirement obligations
|
(1)
|
(102)
|
|
118
|
(261)
|
|
|
|
|
|
|
Net other comprehensive
gain
|
2,401
|
6,154
|
|
2,324
|
7,677
|
|
|
|
|
|
|
Total comprehensive income
(loss)
|
$7,270
|
($2,577)
|
|
$11,631
|
($8,079)
|
The
Corporation recognized other comprehensive income of $52,000 before income tax
($34,000 after income tax) related to available-for-sale debt securities for
which a portion of an other-than-temporary impairment (OTTI) loss has been
recognized in earnings in the six months ended June 30, 2010, including other
comprehensive income of $2,000 before income tax ($1,000 after income tax) in
the second quarter 2010. In the six-month period ended June 30, 2009,
the Corporation recognized other comprehensive loss of $6,495,000 before income
tax ($4,287,000 after income tax) related to available-for-sale debt securities
for which a portion of an OTTI loss has been recognized in
earnings. In the second quarter 2009, the Corporation recognized
other comprehensive income of $1,806,000 before income tax, or $1,192,000 after
income tax, related to available-for-sale securities for which a portion of an
OTTI loss has been recognized in earnings.
The
components of accumulated other comprehensive income (loss), included in
stockholders’ equity, are as follows:
|
June
30,
|
Dec.
31,
|
|
2010
|
2009
|
Net
unrealized gain (loss) on available-for-sale securities
|
$2,580
|
($767)
|
Tax effect
|
(896)
|
245
|
Net-of-tax amount
|
1,684
|
(522)
|
|
|
|
Unrealized
loss on defined benefit plans
|
(380)
|
(559)
|
Tax effect
|
129
|
190
|
Net-of-tax amount
|
(251)
|
(369)
|
|
|
|
Total accumulated other comprehensive income
(loss)
|
$1,433
|
($891)
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
4.
FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The
Corporation measures certain assets at fair value on a recurring
basis. 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 ASC topic 820, “Fair Value Measurements and
Disclosures” (formerly Statement of Financial Accounting Standards No. 157)
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.
At June
30, 2010 and December 31, 2009, assets measured at fair value on a recurring
basis and the valuation methods used are as follows:
|
|
June 30, 2010
|
|
|
|
Market Values Based on:
|
|
|
Quoted Prices
|
Other
|
|
|
|
in Active
|
Observable
|
Unobservable
|
Total
|
|
Markets
|
Inputs
|
Inputs
|
Fair
|
(In Thousands)
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Value
|
|
|
|
|
|
AVAILABLE-FOR-SALE
SECURITIES:
|
|
|
|
|
Obligations
of other U.S. Government agencies
|
$5,031
|
$51,495
|
$0
|
$56,526
|
Obligations
of states and political subdivisions
|
1,193
|
108,619
|
0
|
109,812
|
Mortgage-backed
securities
|
0
|
145,782
|
0
|
145,782
|
Collateralized
mortgage obligations,
|
|
|
|
|
Issued
by U.S. Government agencies
|
19,681
|
73,646
|
0
|
93,327
|
Corporate
bonds
|
0
|
1,036
|
0
|
1,036
|
Trust
preferred securities issued by individual institutions
|
0
|
5,543
|
240
|
5,783
|
Collateralized
debt obligations:
|
|
|
|
|
Pooled
trust preferred securities - senior tranches
|
0
|
0
|
8,000
|
8,000
|
Other collateralized debt
obligations
|
0
|
690
|
0
|
690
|
Total
debt securities
|
25,905
|
386,811
|
8,240
|
420,956
|
Marketable equity
securities
|
5,290
|
0
|
0
|
5,290
|
Total available-for-sale
securities
|
$31,195
|
$386,811
|
$8,240
|
$426,246
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
|
|
December 31, 2009
|
|
|
|
Market Values Based on:
|
|
|
Quoted Prices
|
Other
|
|
|
|
in Active
|
Observable
|
Unobservable
|
Total
|
|
Markets
|
Inputs
|
Inputs
|
Fair
|
(In Thousands)
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Value
|
|
|
|
|
|
AVAILABLE-FOR-SALE
SECURITIES:
|
|
|
|
|
Obligations
of other U.S. Government agencies
|
$13,512
|
$35,481
|
$0
|
$48,993
|
Obligations
of states and political subdivisions
|
0
|
104,990
|
0
|
104,990
|
Mortgage-backed
securities
|
5,212
|
151,166
|
0
|
156,378
|
Collateralized
mortgage obligations:
|
|
|
|
|
Issued
by U.S. Government agencies
|
5,095
|
42,613
|
0
|
47,708
|
Private
label
|
0
|
15,494
|
0
|
15,494
|
Corporate
bonds
|
0
|
1,041
|
0
|
1,041
|
Trust
preferred securities issued by individual institutions
|
0
|
5,218
|
800
|
6,018
|
Collateralized
debt obligations:
|
|
|
|
|
Pooled
trust preferred securities - senior tranches
|
0
|
0
|
8,199
|
8,199
|
Pooled
trust preferred securities - mezzanine tranches
|
0
|
0
|
115
|
115
|
Other collateralized debt
obligations
|
0
|
690
|
0
|
690
|
Total
debt securities
|
23,819
|
356,693
|
9,114
|
389,626
|
Marketable equity
securities
|
6,662
|
0
|
0
|
6,662
|
Total
available-for-sale securities
|
30,481
|
356,693
|
9,114
|
396,288
|
|
|
|
|
|
TRADING
SECURITIES,
|
|
|
|
|
Obligations
of states and political subdivisions
|
0
|
1,045
|
0
|
1,045
|
|
|
|
|
|
Total
|
$30,481
|
$357,738
|
$9,114
|
$397,333
|
Management
determined there have been few trades of pooled trust-preferred securities since
the first half of 2008, except for a limited number of transactions that have
taken place as a result of bankruptcies, forced liquidations or similar
circumstances. Also, in management’s judgment, there were no
available quoted market prices in active markets for assets sufficiently similar
to the Corporation’s pooled trust-preferred securities to be reliable as
observable inputs. Accordingly, in the third quarter of 2008, the
Corporation changed its method of valuing pooled trust-preferred securities from
a Level 2 methodology that had been used in prior periods, based on price quotes
received from pricing services, to a Level 3 methodology, using discounted cash
flows.
At June
30, 2010, management calculated the fair value of the Corporation’s senior
tranche pooled trust-preferred security by applying a discount rate to the
estimated cash flows. Management used the cash flow estimates
determined using the process described in Note 5 for evaluating pooled
trust-preferred securities for other-than-temporary impairment
(OTTI). Management used a discount rate considered reflective of a
market participant’s expectations regarding the extent of credit and liquidity
risk inherent in the security. In establishing the discount rate,
management considered: (1) the implied discount rate as of the end of 2007,
prior to the market for trust-preferred securities becoming inactive; (2)
adjustment to the year-end 2007 discount rate for the change in the spread
between indicative market rates over corresponding risk-free rates in 2010; and
(3) an additional adjustment – an increase of 2% in the discount rate – for
liquidity risk. Management considered the additional 2% increase in
the discount rate necessary in order to give some consideration to price
estimates based on trades made under distressed conditions, as reported by
brokers and pricing services. Management’s estimate of cash flows and
the discount rate used to calculate the fair value of the pooled trust-preferred
security were based on sensitive assumptions, and market participants might use
substantially different assumptions, which could result in calculations of a
fair value that would be substantially different than the amount calculated by
management.
In the
fourth quarter 2009, the Corporation transferred a trust preferred security
issued by a financial institution (The South Financial Group, Inc.) to Level 3
from Level 2. This security was transferred to Level 3 because
management had been trying to sell the security since October 2009, but had not
been able to obtain a bid from a potential buyer nor otherwise been able to find
a price quote. In April 2010, management received an offer to
purchase a portion of the Corporation’s holding and sold a portion of the
security held. The Corporation received total proceeds of
$240,000. Management has valued the remaining portion of the security
at June 30, 2010 based on the price from the April 2010 sale.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Following
is a reconciliation of activity for available-for-sale securities measured at
fair value based on significant unobservable information:
|
3 Months Ended
|
Fiscal Year To Date
|
|
June 30,
|
June 30,
|
6 Months Ended June 30,
|
|
2010
|
2009
|
2010
|
2009
|
|
(Current)
|
(Prior Year)
|
(Current)
|
(Prior Year)
|
Balance, beginning of period
|
$8,552
|
$49,833
|
$9,114
|
$58,914
|
Transfers
|
0
|
0
|
0
|
0
|
Purchases,
issuances and settlements
|
(321)
|
(72)
|
(499)
|
41
|
Proceeds
from sales
|
(240)
|
0
|
(240)
|
0
|
Realized
losses, net
|
0
|
0
|
0
|
(335)
|
Unrealized
losses included in earnings
|
(2)
|
(19,176)
|
(423)
|
(30,281)
|
Unrealized
gains (losses) included in other
|
|
|
|
|
comprehensive income
|
251
|
6,885
|
288
|
9,131
|
Balance, end of period
|
$8,240
|
$37,470
|
$8,240
|
$37,470
|
Unrealized
losses included in earnings are from the Corporation’s other-than-temporary
impairment analysis of securities, as described in Note 5, and are included in
net impairment losses recognized in earnings in the consolidated statement of
operations.
Assets
measured at fair value on a nonrecurring basis include impaired commercial loans
and foreclosed real estate assets held for sale. All of the
Corporation’s impaired commercial loans for which a valuation allowance was
necessary at June 30, 2010 and December 31, 2009 were valued based on the
estimated amount of net proceeds from liquidation of real estate and other
collateral, or based on the estimated present value of cash flows to be
received. The Corporation considers the fair value of such impaired
commercial loans to be based on unobservable inputs (Level 3), and the balance
of impaired loans for which a valuation allowance was recorded, net of allowance
for loan losses, was $1,488,000 at June 30, 2010 and $1,564,000 at December 31,
2009. Similarly, the carrying values of foreclosed real estate assets
held for sale were based on unobservable inputs (Level 3), with a balance of
$863,000 at June 30, 2010 and $873,000 at December 31, 2009.
Certain
of the Corporation’s financial instruments are not measured at fair value in the
consolidated financial statements. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. Certain financial instruments and all nonfinancial
instruments are excluded from disclosure requirements. Therefore, the aggregate
fair value amounts presented may not represent the underlying fair value of the
Corporation.
The
Corporation used the following methods and assumptions in estimating fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS -
The carrying amounts of cash and short-term instruments approximate fair
values.
SECURITIES - Fair values for
securities, excluding restricted equity securities, are based on quoted market
prices or other methods as described above. The carrying value of restricted
equity securities approximates fair value based on applicable redemption
provisions.
LOANS - Fair values are
estimated for portfolios of loans with similar financial characteristics. Loans
are segregated by type such as commercial, commercial real estate, residential
mortgage and other consumer. Each loan category is further segmented into fixed
and adjustable rate interest terms and by performing and nonperforming
categories. The fair value of performing loans is calculated by discounting
contractual cash flows, adjusted for estimated prepayments based on historical
experience, using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loans. Fair value of nonperforming loans is
based on recent appraisals or estimates prepared by the Corporation’s lending
officers.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
DEPOSITS - The fair value of
deposits with no stated maturity, such as noninterest-bearing demand deposits,
savings, money market and interest checking accounts, is (by definition) equal
to the amount payable on demand at June 30, 2010 and December 31, 2009. The fair
value of all other deposit categories is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities. The fair value
estimates of deposits do not include the benefit that results from the low-cost
funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market, commonly referred to as the core deposit
intangible.
BORROWED FUNDS - The fair
value of borrowings is estimated using discounted cash flow analyses based on
rates currently available to the Corporation for similar types of borrowing
arrangements.
ACCRUED INTEREST - The
carrying amounts of accrued interest receivable and payable approximate fair
values.
The
estimated fair values, and related carrying amounts, of the Corporation’s
financial instruments are as follows:
(In Thousands)
|
June 30, 2010
|
December 31, 2009
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
Amount
|
Value
|
Amount
|
Value
|
Financial
assets:
|
|
|
|
|
Cash
and cash equivalents
|
$83,652
|
$83,652
|
$92,065
|
$92,065
|
Trading
securities
|
0
|
0
|
1,045
|
1,045
|
Available-for-sale
securities
|
426,246
|
426,246
|
396,288
|
396,288
|
Held-to-maturity
securities
|
0
|
0
|
300
|
302
|
Restricted
equity securities
|
8,965
|
8,965
|
8,970
|
8,970
|
Loans,
net
|
715,363
|
720,453
|
713,338
|
719,689
|
Accrued
interest receivable
|
5,229
|
5,229
|
5,613
|
5,613
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
Deposits
|
968,540
|
976,258
|
926,789
|
935,380
|
Short-term
borrowings
|
28,132
|
27,702
|
39,229
|
38,970
|
Long-term
borrowings
|
173,831
|
194,297
|
196,242
|
218,767
|
Accrued
interest payable
|
521
|
521
|
681
|
681
|
5.
SECURITIES
Amortized
cost and fair value of available-for-sale and held-to-maturity securities at
June 30, 2010 and December 31, 2009 are summarized as follows:
|
|
June 30, 2010
|
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Amortized
|
Holding
|
Holding
|
Fair
|
(In Thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
AVAILABLE-FOR-SALE
SECURITIES:
|
|
|
|
|
Obligations
of other U.S. Government agencies
|
$56,137
|
$389
|
$0
|
$56,526
|
Obligations
of states and political subdivisions
|
112,319
|
1,670
|
(4,177)
|
109,812
|
Mortgage-backed
securities
|
139,306
|
6,476
|
0
|
145,782
|
Collateralized
mortgage obligations,
|
|
|
|
|
Issued
by U.S. Government agencies
|
92,460
|
900
|
(33)
|
93,327
|
Corporate
bonds
|
1,000
|
36
|
0
|
1,036
|
Trust
preferred securities issued by individual institutions
|
6,468
|
0
|
(685)
|
5,783
|
Collateralized
debt obligations:
|
|
|
|
|
Pooled
trust preferred securities - senior tranches
|
11,047
|
0
|
(3,047)
|
8,000
|
Other collateralized debt
obligations
|
690
|
0
|
0
|
690
|
Total
debt securities
|
419,427
|
9,471
|
(7,942)
|
420,956
|
Marketable equity
securities
|
4,239
|
1,149
|
(98)
|
5,290
|
Total
|
$423,666
|
$10,620
|
($8,040)
|
$426,246
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
|
|
December 31, 2009
|
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Amortized
|
Holding
|
Holding
|
Fair
|
(In Thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
AVAILABLE-FOR-SALE
SECURITIES:
|
|
|
|
|
Obligations
of other U.S. Government agencies
|
$48,949
|
$131
|
($87)
|
$48,993
|
Obligations
of states and political subdivisions
|
109,109
|
1,487
|
(5,606)
|
104,990
|
Mortgage-backed
securities
|
150,700
|
5,700
|
(22)
|
156,378
|
Collateralized
mortgage obligations:
|
|
|
|
|
Issued
by U.S. Government agencies
|
47,083
|
898
|
(273)
|
47,708
|
Private
label
|
15,465
|
50
|
(21)
|
15,494
|
Corporate
bonds
|
1,000
|
41
|
0
|
1,041
|
Trust
preferred securities issued by individual institutions
|
7,043
|
0
|
(1,025)
|
6,018
|
Collateralized
debt obligations:
|
|
|
|
|
Pooled
trust preferred securities - senior tranches
|
11,383
|
0
|
(3,184)
|
8,199
|
Pooled
trust preferred securities - mezzanine tranches
|
266
|
0
|
(151)
|
115
|
Other collateralized debt
obligations
|
690
|
0
|
0
|
690
|
Total
debt securities
|
391,688
|
8,307
|
(10,369)
|
389,626
|
Marketable equity
securities
|
5,367
|
1,295
|
0
|
6,662
|
Total
|
$397,055
|
$9,602
|
($10,369)
|
$396,288
|
|
|
|
|
|
HELD-TO-MATURITY
SECURITIES,
|
|
|
|
|
Obligations
of the U.S. Treasury
|
$300
|
$2
|
$0
|
$302
|
The
following table presents gross unrealized losses and fair value of
available-for-sale investments aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position at June 30, 2010 and December 31, 2009.
June 30, 2010
|
Less Than 12 Months
|
12 Months or More
|
Total
|
(In Thousands)
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE
SECURITIES:
|
|
|
|
|
|
|
Obligations
of states and political subdivisions
|
$16,120
|
($331)
|
$37,345
|
($3,846)
|
$53,465
|
($4,177)
|
Collateralized
mortgage obligations,
|
|
|
|
|
|
|
Issued
by U.S. Government agencies
|
18,545
|
(33)
|
0
|
0
|
18,545
|
(33)
|
Trust
preferred securities issued by individual institutions
|
0
|
0
|
5,543
|
(685)
|
5,543
|
(685)
|
Collateralized
debt obligations,
|
|
|
|
|
|
|
Pooled trust preferred securities - senior
tranches
|
0
|
0
|
8,000
|
(3,047)
|
8,000
|
(3,047)
|
Total
debt securities
|
34,665
|
(364)
|
50,888
|
(7,578)
|
85,553
|
(7,942)
|
Marketable equity
securities
|
898
|
(98)
|
0
|
0
|
898
|
(98)
|
Total
temporarily impaired available-for-sale
|
|
|
|
|
|
|
securities
|
$35,563
|
($462)
|
$50,888
|
($7,578)
|
$86,451
|
($8,040)
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
|
Less Than 12 Months
|
12 Months or More
|
Total
|
(In Thousands)
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE
SECURITIES:
|
|
|
|
|
|
|
Obligations
of other U.S. Government agencies
|
$17,796
|
($87)
|
$0
|
$0
|
$17,796
|
($87)
|
Obligations
of states and political subdivisions
|
19,001
|
(422)
|
36,939
|
(5,184)
|
55,940
|
(5,606)
|
Mortgage-backed
securities
|
3,544
|
(21)
|
20
|
(1)
|
3,564
|
(22)
|
Collateralized
mortgage obligations:
|
|
|
|
|
|
|
Issued
by U.S. Government agencies
|
18,229
|
(273)
|
0
|
0
|
18,229
|
(273)
|
Private
label
|
0
|
0
|
3,219
|
(21)
|
3,219
|
(21)
|
Trust
preferred securities issued by individual institutions
|
0
|
0
|
5,218
|
(1,025)
|
5,218
|
(1,025)
|
Collateralized
debt obligations:
|
|
|
|
|
|
|
Pooled
trust preferred securities - senior tranches
|
0
|
0
|
8,199
|
(3,184)
|
8,199
|
(3,184)
|
Pooled trust preferred securities - mezzanine
tranches
|
0
|
0
|
115
|
(151)
|
115
|
(151)
|
Total
temporarily impaired available-for-sale
|
|
|
|
|
|
|
securities
|
$58,570
|
($803)
|
$53,710
|
($9,566)
|
$112,280
|
($10,369)
|
Management
evaluates securities for 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. The Corporation recognized net impairment losses in
earnings, as follows:
(In Thousands)
|
3 Months Ended
|
6 Months Ended
|
|
June 30,
|
June 30,
|
June 30,
|
June 30,
|
|
2010
|
2009
|
2010
|
2009
|
Trust
preferred securities issued by individual institutions
|
$0
|
$0
|
($320)
|
$0
|
Pooled
trust preferred securities - mezzanine tranches
|
(2)
|
(19,176)
|
(103)
|
(30,281)
|
Marketable equity securities (bank
stocks)
|
0
|
(604)
|
(10)
|
(6,179)
|
Net impairment losses recognized in
earnings
|
($2)
|
($19,780)
|
($433)
|
($36,460)
|
A summary
of information management considered in evaluating debt and equity securities
for OTTI at June 30, 2010 is provided below.
Debt
Securities
At June
30, 2010, 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. Except as reflected in the table above
and described below, based on the results of the assessment, management believes
impairment of these debt securities, including the municipal bonds with no
external ratings, at June 30, 2010 to be temporary.
The
credit rating agencies have withdrawn their ratings on numerous municipal bonds
held by the Corporation. At June 30, 2010, the total amortized cost basis of
municipal bonds with no external credit ratings totaled $27,016,000, with an
aggregate unrealized loss of $2,374,000. At the time of purchase,
each of these bonds was considered investment grade and had been rated by at
least one credit rating agency. The bonds for which the ratings were removed
were almost all insured by an entity that has reported significant financial
problems and declines in its regulatory capital ratios. However, the
insurance remains in effect on the bonds, and none of the affected municipal
bonds has failed to make a scheduled interest payment.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
The
following table provides information related to trust preferred securities
issued by individual institutions as of June 30, 2010:
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Moody's/
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
S&P/
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Realized
|
|
Fitch
|
|
|
|
|
Amortized
|
|
Fair
|
|
Gain
|
|
Credit
|
|
Credit
|
Name
of Issuer
|
|
Issuer's
Parent Company
|
|
Cost
|
|
Value
|
|
(Loss)
|
|
Losses
|
|
Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Astoria
Capital Trust I
|
|
Astoria
Financial Corporation
|
|
$5,228
|
|
$4,646
|
|
($582)
|
|
$0
|
|
Baa3/BB-/BB-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
First Mortgage Loan Trust
|
|
The
South Financial Group, Inc.
|
|
240
|
|
240
|
|
0
|
|
(1,769)
|
|
NR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patriot
Capital Trust I
|
|
Susquehanna
Bancshares, Inc.
|
|
1,000
|
|
897
|
|
(103)
|
|
0
|
|
NR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$6,468
|
|
$5,783
|
|
($685)
|
|
($1,769)
|
|
|
NR = not
rated.
Management
assesses each of the trust preferred securities issued by individual
institutions for the possibility of OTTI by reviewing financial information that
is publicly available. Neither Astoria Financial Corporation nor
Susquehanna Bancshares, Inc. has deferred or defaulted on payments associated
with the Corporation’s securities. In 2009, the Corporation recorded
OTTI of $3,209,000 on the Carolina First Mortgage Loan Trust security, and in
2010, The South Financial Group, Inc. deferred on payments on the
security. In April 2010, the Corporation sold half of its investment
in the security, and in the first quarter 2010 recorded OTTI of $320,000 to
further write down amortized cost based on the selling price of the April
transaction.
Pooled
trust-preferred securities are very long-term (usually 30-year maturity)
instruments with characteristics of both debt and equity, mainly issued by
banks. The Corporation’s investments in pooled trust-preferred
securities are each made up of companies with geographic and size
diversification. Almost all of the Corporation’s pooled
trust-preferred securities are composed of debt issued by banking companies,
with lesser amounts issued by insurance companies and real estate investment
trusts. Some of the issuers of trust-preferred securities that are
included in the Corporation’s pooled investments have elected to defer payment
of interest on these obligations (trust-preferred securities typically permit
deferral of quarterly interest payments for up to five years), and some issuers
have defaulted.
As of
each quarter-end in 2009 and 2010, management evaluated pooled trust-preferred
securities for OTTI by estimating the cash flows expected to be received from
each security, taking into account estimated levels of deferrals and defaults by
the underlying issuers. In determining cash flows, management assumed
all issuers currently deferring or in default would make no future payments, and
assigned estimated future default levels for the remaining issuers in each
security based on financial strength ratings assigned by a national ratings
service. Management calculated the present value of each security
based on the current book yield, adjusted for future changes in 3-month LIBOR
(which is the index rate on the Corporation’s adjustable-rate pooled
trust-preferred securities) based on the applicable forward curve.
In the
third quarter 2009, management made significant changes in assumptions regarding
future deferrals and defaults, in comparison to assumptions used in the previous
four quarters’ analyses. These changes had the effect of increasing
estimated future defaults, which resulted in lower levels of future cash flows
expected to be received, as compared to estimated future cash flows to be
received based on the assumptions used in previous
quarters. Management selected several of the trust preferred
offerings in which the Corporation holds securities, and analyzed the change in
deferral or default status, and the change in financial strength rating from the
national ratings service used in its quarterly analyses, over the period
starting in the third quarter 2008 (which was the first quarter in which the
Corporation performed the detailed cash flow analysis for each security) through
the second quarter 2009. Management believes the results of its
analysis of the securities selected to be similar to the results that would be
produced in an analysis of all of the Corporation’s pooled trust-preferred
securities. The analysis demonstrated that significant credit
deterioration had occurred over the previous four quarterly periods, as
evidenced in the data by average higher deferrals and defaults, and lower
financial strength ratings. In determining how to apply the results
of this analysis, management made two critical assumptions: (1) the
deteriorating trend will continue at approximately the same rate over the next
four quarters, and (2) every issuer (bank) that would be assumed to defer
payment within the next four quarters, based on the trend reflected in the data,
would eventually default with no recovery. At June 30, 2010,
management’s assumptions regarding future deferrals and defaults were consistent
with the revisions established in the third quarter 2009.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Management’s
estimates of cash flows used to evaluate other-than-temporary impairment of
pooled trust-preferred securities were based on sensitive assumptions regarding
the timing and amounts of defaults that may occur, and changes in those
assumptions could produce different conclusions for each security.
As of
June 30, 2010, the Corporation’s investment in a senior tranche security (the
senior tranche of MM Caps Funding I, Ltd., for which the Corporation also owns
an investment in the mezzanine tranche security) has an investment grade
rating. The senior tranche security, with an amortized cost of
$11,047,000, has been subjected to impairment analysis based on estimated cash
flows (using the process described above), and management has determined that
impairment was temporary as of June 30, 2010.
The
following table provides detailed information related to pooled trust preferred
securities – mezzanine tranches held as of June 30, 2010:
Pooled
Trust Preferred Securities -
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine
Tranches
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
OTTI
in
|
|
OTTI
in
|
|
|
|
|
|
|
|
|
|
|
3
Months
|
|
6
Months
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
Ended
|
|
|
|
|
Amortized
|
|
Fair
|
|
Unrealized
|
|
June
30,
|
|
June
30,
|
|
Cumulative
|
Description
|
|
Cost
|
|
Value
|
|
Gain
|
|
2010
|
|
2010
|
|
OTTI
|
MMCAPS
Funding I, Ltd.
|
|
$0
|
|
$0
|
|
$0
|
|
($2)
|
|
($2)
|
|
($5,833)
|
U.S.
Capital Funding II, Ltd. (B-1)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(40)
|
|
(1,992)
|
U.S.
Capital Funding II, Ltd. (B-2)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(61)
|
|
(2,973)
|
ALESCO
Preferred Funding VI, Ltd.
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(2,018)
|
ALESCO
Preferred Funding IX, Ltd.
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(2,988)
|
Preferred
Term Securities XVIII, Ltd.
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(7,293)
|
Preferred
Term Securities XXI, Ltd.
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(1,502)
|
Preferred
Term Securities XXIII, Ltd. (C-1)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(3,466)
|
Preferred
Term Securities XXIII, Ltd. (D-1)
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(5,024)
|
Tropic
CDO III, Ltd.
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
(6,970)
|
Total
|
|
$0
|
|
$0
|
|
$0
|
|
($2)
|
|
($103)
|
|
($40,059)
|
The table
that follows provides additional information related to the senior tranche and
mezzanine tranche pooled trust-preferred securities that had not been completely
written off prior to the second quarter 2010:
|
|
|
|
|
|
|
|
Expected
|
|
|
|
|
|
|
|
|
Actual
|
|
Additional
|
|
|
|
|
|
|
|
|
Deferrals
|
|
Net
Deferrals
|
|
|
|
|
|
|
|
|
and
|
|
and
|
|
Excess
|
|
|
Number
|
|
Moody's/
|
|
Defaults
|
|
Defaults
|
|
Subordination
|
|
|
of
Banks
|
|
Fitch
|
|
as
% of
|
|
as
% of
|
|
as
% of
|
|
|
Currently
|
|
Credit
|
|
Outstanding
|
|
Performing
|
|
Performing
|
Description
|
|
Performing
|
|
Ratings (1)
|
|
Collateral
|
|
Collateral
|
|
Collateral
|
MMCAPS
Funding I, Ltd. - Senior Tranche
|
|
21
|
|
A3/A
(2)
|
|
21.6%
|
|
47.1%
|
|
26.2%
|
MMCAPS
Funding I, Ltd. - Mezzanine
|
|
21
|
|
Ca/C
|
|
21.6%
|
|
47.1%
|
|
-13.2%
|
(1)
The table
above presents ratings information as of June 30, 2010.
(2) Fitch
has placed the Senior Tranche security on Negative Watch.
In the
table above, “Excess Subordination as % of Performing Collateral” (Excess
Subordination Ratio) was calculated as follows: (Total face
value of performing collateral – Face value of all outstanding note balances not
subordinate to our investment)/Total face value of performing
collateral.
The
Excess Subordination Ratio measures the extent to which there may be tranches
within each pooled trust preferred structure available to absorb credit losses
before the Corporation’s securities would be impacted. The positive
Excess Subordination Ratio for the senior tranche security signifies there is
some support from subordinate tranches available to absorb losses before the
Corporation’s investment would be impacted, while the negative Excess
Subordination Ratio for the mezzanine tranche security indicates there is no
support. A negative Excess Subordination Ratio is not definitive, in
isolation, for determining whether or not OTTI should be recorded for a pooled
trust preferred security. Other factors affect the timing and amount
of cash flows available for payments to the note holders (investors), including
the excess interest paid by the issuers (the issuers typically pay higher rates
of interest than are paid out to the note holders).
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
The
Corporation separates OTTI related to the trust-preferred securities into (a)
the amount of the total impairment related to credit loss, which is recognized
in the statement of earnings, and (b) the amount of the total impairment related
to all other factors, which is recognized in other comprehensive
income. The Corporation measures the credit loss component of OTTI
based on the difference between: (1) the present value of estimated cash flows,
at the book yield in effect prior to recognition of any OTTI, as of the most
recent balance sheet date, and (2) the present value of estimated cash flows as
of the previous quarter-end balance sheet date based on management’s cash flow
assumptions at that time.
The
Corporation’s pre-tax loss from pooled trust-preferred securities in the three
months ended June 30, 2010 amounted to $2,000, with a pre-tax gain included in
other comprehensive income of $2,000. Total OTTI from pooled trust-preferred
securities in the six months ended June 30, 2010 amounted to $51,000, including
a pre-tax loss reflected in earnings of $103,000, with a pre-tax other
comprehensive gain of $52,000 included in other comprehensive
income. In the three months ended June 30, 2009, total OTTI from
pooled trust-preferred securities amounted to $17,370,000, including a pre-tax
loss reflected in earnings of $19,176,000 and a pre-tax other comprehensive gain
of $1,806,000. In the six months ended June 30, 2009, total OTTI from pooled
trust-preferred securities was $36,776,000, including a pre-tax loss reflected
in earnings of $30,281,000 and a pre-tax other comprehensive loss of
$6,495,000.
A
roll-forward of the credit losses from securities for which a portion of OTTI
has been recognized in other comprehensive income is as follows:
(In
Thousands)
|
|
3
Months Ended
|
|
6
Months Ended
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Balance
of credit losses on debt securities for which a portion
|
|
|
|
|
|
|
|
|
of
OTTI was recognized in other comprehensive income,
|
|
|
|
|
|
|
|
|
beginning
of period (as measured effective January 1, 2009
|
|
|
|
|
|
|
|
|
upon
adoption of ASC Topic 320)
|
|
($5,831)
|
|
($13,467)
|
|
($10,695)
|
|
($2,362)
|
|
|
|
|
|
|
|
|
|
Additional
credit loss for which an OTTI was not previously
|
|
|
|
|
|
|
|
|
recognized
|
|
0
|
|
(5,197)
|
|
0
|
|
(23,020)
|
|
|
|
|
|
|
|
|
|
Reduction
for securities losses realized during the period
|
|
5,833
|
|
9,311
|
|
10,798
|
|
9,311
|
|
|
|
|
|
|
|
|
|
Additional
credit loss for which an OTTI was previously
|
|
|
|
|
|
|
|
|
recognized
when the Corporation does not intend to sell
|
|
|
|
|
|
|
|
|
the
security and it is not more likely than not the
Corporation
|
|
|
|
|
|
|
|
|
will
be required to sell the security before recovery of its
|
|
|
|
|
|
|
|
|
amortized
cost basis
|
|
(2)
|
|
(13,979)
|
|
(103)
|
|
(7,261)
|
|
|
|
|
|
|
|
|
|
Balance
of credit losses on debt securities for which a portion
|
|
|
|
|
|
|
|
|
of
OTTI was recognized in other comprehensive income,
|
|
|
|
|
|
|
|
|
end
of period
|
|
$0
|
|
($23,332)
|
|
$0
|
|
($23,332)
|
The line
item labeled “Reduction for securities losses realized during the period” in the
table immediately above includes OTTI write-downs associated with
securities the Corporation continues to hold, but which have been deemed
worthless.
Equity
Securities
The
Corporation’s marketable equity securities at June 30, 2010 and December 31,
2009 consisted exclusively of stocks of banking companies. The
Corporation recorded no OTTI on bank stocks in the second quarter 2010 but
recorded OTTI totaling $10,000 in the first six months of 2010. The
Corporation recorded OTTI totaling $604,000 for the second quarter 2009 and
$6,179,000 in the first six months of 2009. Management’s decision to
record OTTI losses on bank stocks was based on a combination of: (1) significant
market depreciation in market prices in the first quarter 2009 (with some
improvement subsequent to March 31, 2009), and (2) management’s intent to sell
some of the stocks to generate capital losses, which could be carried back and
offset against capital gains generated in previous years to realize tax
refunds.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Realized
gains from sales of bank stocks totaled $134,000 in the three months ended June
30, 2010 including $42,000 of realized gains from sales of stocks for which an
OTTI had been previously recognized. Realized gains from sales of bank stocks
totaled $483,000 in the six months ended June 30, 2010 including $326,000 of
realized gains from sales of stocks for which an OTTI had been previously
recognized. Realized gains from sales of bank stocks totaled $755,000 in the
three months ended June 30, 2009 including $261,000 of realized gains from sales
of stocks for which an OTTI had been previously recognized. Realized gains from
sales of bank stocks totaled $1,032,000 in the six months ended June 30, 2009
including $291,000 of realized gains from sales of stocks for which an OTTI had
been previously recognized. Management evaluated all impaired bank stocks held
at June 30, 2010 and determined that none of the Corporation’s holdings were
other than temporarily impaired.
C&N
Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh),
which is one of 12 regional Federal Home Loan Banks. As a member,
C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh in an
amount determined based on outstanding advances, unused borrowing capacity and
other factors. There is no active market for FHLB-Pittsburgh stock,
and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be
liquidated. At June 30, 2010 and December 31, 2009, C&N
Bank’s investment in FHLB-Pittsburgh stock, which was included in Other Assets
in the consolidated balance sheet, was $8,585,000. The Corporation
evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the
stock to not be impaired at June 30, 2010 and December 31, 2009. 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.
6.
DEFINED BENEFIT PLANS
The
Corporation sponsors a defined benefit health care plan that provides
postretirement medical benefits and life insurance to employees who meet certain
age and length of service requirements. This plan contains a cost-sharing
feature, which causes participants to pay for all future increases in costs
related to benefit coverage. Accordingly, actuarial assumptions
related to health care cost trend rates do not affect the liability balance at
June 30, 2010 and December 31, 2009, and will not affect the Corporation's
future expenses. The Corporation uses a December 31 measurement date for the
postretirement plan.
In 2007,
the Corporation assumed the Citizens Trust Company Retirement Plan, a defined
benefit pension plan for which benefit accruals and participation were frozen in
2002. Information related to the Citizens Trust Company Retirement
Plan has been included in the table that follows. The Corporation
uses a December 31 measurement date for this plan.
The
components of net periodic benefit costs from these defined benefit plans are as
follows:
Defined
Benefit Plans
|
|
|
|
|
|
(In
Thousands)
|
|
Pension
|
|
|
Postretirement
|
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
June
30,
|
|
|
June
30,
|
|
|
2010
|
|
2009
|
|
|
2010
|
|
2009
|
Service
cost
|
|
$0
|
|
$0
|
|
|
$34
|
|
$37
|
Interest
cost
|
|
34
|
|
0
|
|
|
45
|
|
47
|
Expected
return on plan assets
|
|
(33)
|
|
0
|
|
|
0
|
|
0
|
Amortization
of transition obligation
|
|
0
|
|
0
|
|
|
18
|
|
18
|
Amortization
of prior service cost
|
|
0
|
|
0
|
|
|
7
|
|
7
|
Recognized
net actuarial loss
|
|
2
|
|
0
|
|
|
0
|
|
0
|
Net
periodic benefit cost
|
|
$3
|
|
$0
|
|
|
$104
|
|
$109
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Defined
Benefit Plans
|
|
|
|
|
|
(In
Thousands)
|
|
Pension
|
|
|
Postretirement
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
June
30,
|
|
|
June
30,
|
|
|
2010
|
|
2009
|
|
|
2010
|
|
2009
|
Service
cost
|
|
$0
|
|
$0
|
|
|
$17
|
|
$18
|
Interest
cost
|
|
17
|
|
0
|
|
|
23
|
|
24
|
Expected
return on plan assets
|
|
(16)
|
|
0
|
|
|
0
|
|
0
|
Amortization
of transition obligation
|
|
0
|
|
0
|
|
|
9
|
|
9
|
Amortization
of prior service cost
|
|
0
|
|
0
|
|
|
3
|
|
4
|
Recognized
net actuarial loss
|
|
1
|
|
0
|
|
|
0
|
|
0
|
Net
periodic benefit cost
|
|
$2
|
|
$0
|
|
|
$52
|
|
$55
|
In the
first six months of 2010, the Corporation funded postretirement contributions
totaling $31,000, with estimated annual postretirement contributions of $62,000
expected in 2010 for the full year. Based upon the related actuarial
reports, the Corporation has no required contributions to the Citizens Trust
Company Retirement Plan for the 2010 plan year; however, the Corporation may
elect to make discretionary contributions later in 2010.
7.
STOCK-BASED COMPENSATION PLANS
In 2010,
the Corporation has made no awards of stock options. In the first
quarter 2009, the Corporation granted options to purchase a total of 79,162
shares of common stock through its Stock Incentive and Independent Directors
Stock Incentive Plans. The exercise price for the 2009 awards is
$19.88 per share, based on the market price as of the date of
grant.
The
Corporation records stock option expense based on estimated fair value
calculated using an option valuation model. In calculating the 2009
fair value, the Corporation utilized the Black-Scholes-Merton option-pricing
model. The calculated fair value of each option granted, and
significant assumptions used in the calculations, are as follows:
|
|
2010
|
|
2009
|
Fair
value of each option granted
|
|
Not
applicable (N/A)
|
|
$4.21
|
Volatility
|
|
N/A
|
|
28%
|
Expected
option lives
|
|
N/A
|
|
9
Years
|
Risk-free
interest rate
|
|
N/A
|
|
3.15%
|
Dividend
yield
|
|
N/A
|
|
3.94%
|
In
calculating the estimated fair value of 2009 stock option awards, management
based its estimates of volatility and dividend yield on the Corporation’s
experience over the immediately prior period of time consistent with the
estimated lives of the options. The risk-free interest rate was based
on the published yield of zero-coupon U.S. Treasury strips with an applicable
maturity as of the grant dates. The 9-year expected option life was
based on management’s estimates of the average term for all options issued under
both plans. Management assumed a 23% forfeiture rate for options
granted under the Stock Incentive Plan, and a 0% forfeiture rate for the
Directors Stock Incentive Plan. These estimated forfeiture rates were
determined based on the Corporation’s historical experience.
In the
first quarter 2010, the Corporation awarded 9,125 shares of restricted stock to
the Chief Executive Officer under the Stock Incentive Plan. This
award provides that vesting will occur upon the earliest of (i) the third
anniversary of the date of grant, (ii) death or disability or (iii) the
occurrence of a change in control of the Corporation. Also, vesting
may not occur prior to the Corporation’s redemption of preferred stock issued to
the U.S. Treasury under the TARP Capital Purchase Program. In the
first quarter 2009, the Corporation awarded a total of 3,890 shares of
restricted stock under the Stock Incentive and Independent Directors Stock
Incentive Plans. Compensation cost related to restricted stock is
recognized based on the market price of the stock at the grant date over the
vesting period. For restricted stock awards granted under the Stock
Incentive Plan in 2009 and 2008, the Corporation must meet an annual targeted
return on average equity (“ROAE”) performance ratio, as defined, in order for
participants to vest. The Corporation did not meet the ROAE target
for the 2009 plan year, and accordingly, the participants did not vest in the
applicable shares associated with 2009 and 2008 restricted stock
awards. The Corporation met the ROAE target for the 2008 plan year,
and accordingly, in January 2009, the participants vested in 1/3 of the
restricted shares awarded in 2008. Management has estimated
restricted stock expense in the first six months of 2010 based on assumptions
that the Corporation will redeem the TARP preferred stock within three years,
and that the ROAE target for 2010 will be met.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Total
stock-based compensation expense is as follows:
(In
Thousands)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Stock
options
|
|
$0
|
|
$103
|
|
$0
|
|
$273
|
Restricted
stock
|
|
19
|
|
21
|
|
32
|
|
41
|
|
|
|
|
|
|
|
|
|
Total
|
|
$19
|
|
$124
|
|
$32
|
|
$314
|
8.
INCOME TAXES
The
following temporary differences gave rise to the net deferred tax asset at June
30, 2010 and December 31, 2009:
(In
Thousands)
|
|
June
30,
|
|
Dec.
31,
|
|
|
2010
|
|
2009
|
Deferred
tax assets:
|
|
|
|
|
Unrealized
holding losses on securities
|
|
$0
|
|
($247)
|
Defined
benefit plans - FASB 158
|
|
(133)
|
|
(194)
|
Net
realized losses on securities
|
|
(15,741)
|
|
(16,052)
|
Allowance
for loan losses
|
|
(2,950)
|
|
(2,871)
|
Credit
for alternative minimum tax paid
|
|
(3,573)
|
|
(3,495)
|
Low
income housing tax credits
|
|
0
|
|
(685)
|
Other
deferred tax assets
|
|
(1,131)
|
|
(1,097)
|
|
|
(23,528)
|
|
(24,641)
|
Valuation
allowance
|
|
148
|
|
373
|
|
|
|
|
|
Total
deferred tax assets
|
|
(23,380)
|
|
(24,268)
|
Deferred
tax liabilities:
|
|
|
|
|
Unrealized
holding gains on securities
|
|
899
|
|
0
|
Bank
premises and equipment
|
|
1,706
|
|
1,798
|
Core
deposit intangibles
|
|
143
|
|
175
|
Other
deferred tax liabilities
|
|
242
|
|
258
|
Total
deferred tax liabilities
|
|
2,990
|
|
2,231
|
Deferred
tax asset, net
|
|
$(20,390)
|
|
$(22,037)
|
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. The deferred tax asset from realized losses on securities
resulted primarily from OTTI charges for financial statement purposes that are
not deductible for income tax reporting purposes through June 30, 2010. Of the
total deferred tax asset from realized losses on securities, a portion is from
securities that, if the Corporation were to sell them, would be classified as
capital losses for income tax reporting purposes. The valuation allowance of
$148,000 at June 30, 2010 and $373,000 at December 31, 2009 reflects the
estimated amount of tax benefits associated with capital assets that is
dependent upon realization of future capital gains.
The
Corporation has available, unused tax credits arising from investments in low
income and elderly housing projects. These tax credits may provide future
benefits and if unused, would expire in varying annual amounts from 2024 through
2029. The reduction in the deferred tax asset associated with low income housing
tax credits at June 30, 2010 to $0 from $685,000 at December 31, 2009 resulted
from estimated realization of the credits based on management’s calculation of
taxable income generated in the first six months of 2010. The amount of low
income housing income tax credits realized in 2010, if any, will depend on the
Corporation’s taxable income for the year ending December 31,
2010.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
The
provision (credit) for income tax for the 3-month and 6-month periods ended June
30, 2010 and 2009 is based on the Corporation’s estimate of the effective tax
rate expected to be applicable for the full year. The effective tax
rates are as follows:
(In
Thousands)
|
|
3
Months Ended
|
|
|
Fiscal
Year To Date
|
|
|
June
30,
|
|
June
30,
|
|
|
6
Months Ended June 30,
|
|
|
2010
|
|
2009
|
|
|
2010
|
|
2009
|
|
|
(Current)
|
|
(Prior
Year)
|
|
|
(Current)
|
|
(Prior
Year)
|
Income
(loss) before income tax provision
|
|
$6,150
|
|
($14,015)
|
|
|
$12,025
|
|
($25,428)
|
Income
tax provision
|
|
1,281
|
|
(5,284)
|
|
|
2,718
|
|
(9,672)
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
20.83%
|
|
37.70%
|
|
|
22.60%
|
|
38.04%
|
The
effective tax rate for each period presented differs from the statutory rate of
35% principally because of the effects of tax-exempt interest
income. Also, the effective tax rate for the 3-month and 6-month
periods ended June 30, 2010 reflects the $225,000 reduction in the valuation
allowance on deferred tax assets associated with capital assets in the second
quarter 2010, as referred to above.
The
Corporation has no unrecognized tax benefits, nor pending examination issues
related to tax positions taken in preparation of its income tax
returns. The Corporation is no longer subject to examination by the
Internal Revenue Service for years prior to 2006.
9.
PREFERRED STOCK AND WARRANT UNDER THE TARP CAPITAL PURCHASE PROGRAM
On
January 16, 2009, the Corporation issued 26,440 shares of Series A
Preferred Stock (“Preferred Stock”) and a Warrant to purchase up to 194,794
shares of common stock at an exercise price of $20.36 per share. The Corporation
sold the Preferred Stock and Warrant to the United States Department of the
Treasury (“Treasury”) under the TARP Capital Purchase Program (the “Program”)
for an aggregate price of $26,440,000. The Preferred Stock paid a
cumulative dividend rate of 5% per annum.
The
Warrant is exercisable and has a term of 10 years. The number of
common shares that could be acquired upon exercise was based on 15% of the total
proceeds, with the exercise price determined using the average market price of
the Corporation’s common stock for the 20 trading days immediately prior to
issuance. Treasury has agreed that it will not vote any of the shares
of common stock that it acquires upon exercise of the Warrant. This does not
apply to any other person who acquires from Treasury any portion of the Warrant,
or the shares of common stock underlying the Warrant.
In 2009,
the Corporation recorded issuance of the Preferred Stock and Warrant as
increases in stockholders’ equity. Proceeds from the transaction, net
of direct issuance costs of $31,000, were allocated between Preferred Stock and
the Warrant based on their respective fair values at the date of
issuance. The fair value of the Preferred Stock was estimated based
on dividend rates on recent preferred stock and other capital issuances by
banking companies, and the fair value of the Warrant was estimated using the
Black-Scholes-Merton option model. The amount allocated to the
Warrant (recorded as an increase in Paid in Capital) was $821,000, and the
amount initially allocated to Preferred Stock was $25,588,000. As a
result, the Preferred Stock’s initial carrying value was at a discount to the
liquidation value or stated value of $26,440,000. In accordance with
the SEC’s Staff Accounting Bulletin No. 68, “Increasing Rate Preferred
Stock,” the discount is considered an unstated dividend cost that shall be
accreted over the period preceding commencement of the perpetual dividend using
the effective interest method, by charging the imputed dividend cost against
retained earnings and increasing the carrying amount of the Preferred Stock by a
corresponding amount. The discount was therefore being accreted over five years,
resulting in an effective dividend rate (including stated dividends and the
accretion of the discount on Preferred Stock) of 5.80%. Total
dividends on Preferred Stock have been deducted from net income to arrive at net
income available to common shareholders in the Consolidated Statements of
Earnings. Dividends on Preferred Stock include quarterly dividends
paid, plus dividends accrued based on the stated value and the accretion of the
discount on Preferred Stock. The accretion of the discount on
Preferred Stock was $84,000 in the six-month period ended June 30, 2010 and
$76,000 in the six-month period ended June 30, 2009.
On August
4, 2010, the Corporation repurchased all of the Preferred Stock. The
total payment was $26,730,000, including accrued dividends through that date of
$290,000. As a result of the repurchase, the Corporation will record
accelerated discount accretion of $607,000, which will be deducted from net
income in determining net income available to common shareholders in the third
quarter. As a result of repurchasing the Preferred Stock, the
Corporation may initiate negotiations with the Treasury for repurchase of the
Warrant by August 19, 2010. Repurchase of the warrant, if completed,
will not impact net income available to common shareholders.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
10. CONTINGENCIES
In the
normal course of business, the Corporation may be subject to pending and
threatened lawsuits in which claims for monetary damages could be
asserted. In management’s opinion, the Corporation’s financial
position and results of operations would not be materially affected by the
outcome of such pending legal proceedings.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain
statements in this section and elsewhere in this quarterly report on Form 10-Q
are forward-looking statements. Citizens & Northern Corporation and its
wholly-owned subsidiaries (collectively, the Corporation) intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995. Forward-looking statements, which are not historical facts, are based on
certain assumptions and describe future plans, business objectives and
expectations, and are generally identifiable by the use of words such as,
"should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and
“goal”. These forward-looking statements are subject to risks and
uncertainties that are difficult to predict, may be beyond management’s control
and could cause results to differ materially from those expressed or implied by
such forward-looking statements. Factors which could have a material,
adverse impact on the operations and future prospects of the Corporation
include, but are not limited to, the following:
·
|
changes
in monetary and fiscal policies of the Federal Reserve Board and the U. S.
Government, particularly related to changes in interest
rates
|
·
|
changes
in general economic conditions
|
·
|
legislative
or regulatory changes
|
·
|
downturn
in demand for loan, deposit and other financial services in the
Corporation’s market area
|
·
|
increased
competition from other banks and non-bank providers of financial
services
|
·
|
technological
changes and increased technology-related
costs
|
·
|
changes
in accounting principles, or the application of generally accepted
accounting principles.
|
These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements.
REFERENCES
TO 2010 AND 2009
Unless
otherwise noted, all references to “2010” in the following discussion of
operating results are intended to mean the six months ended June 30, 2010, and
similarly, references to “2009” relate to the six months ended June 30,
2009.
EARNINGS
OVERVIEW
In the
second quarter 2010, positive net income available to common shareholders was
$4,497,000, or $0.37 per share – basic and diluted, up from $4,065,000, or $0.34
per share - basic and diluted in the first quarter 2010 and as compared to a net
loss of $9,104,000, or $1.01 per share in the second quarter
2009. Pre-tax realized gains from available-for-sale securities
totaled $319,000 in the second quarter 2010, and $58,000 in the first quarter
2010, while second quarter 2009 results were significantly impacted by pre-tax
realized losses from securities totaling $18,995,000.
For the
six months ended June 30, 2010, net income available to common shareholders was
$8,562,000, or $0.71 per share – basic and diluted. For the first six
months of 2009, C&N’s net loss of $16,438,000, or $1.83 per share, included
the effects of pre-tax realized losses from securities totaling
$35,674,000.
STATEMENT
REGARDING NON-GAAP FINANCIAL MEASUREMENT
This
report contains supplemental financial information determined by a method other
than in accordance with Accounting Principles Generally Accepted in the United
States of America (“GAAP”). Management uses this non-GAAP measure in
its analysis of the Corporation’s performance. This measure, Core
Earnings, excludes the effects of other-than-temporary impairment (“OTTI”)
losses on available-for-sale securities and realized gains on securities for
which OTTI has previously been recognized. Management believes the
presentation of this financial measure, which excludes the impact of the
specified items, provides useful supplemental information that is essential to a
proper understanding of the financial results of the Corporation. The
Core Earnings measure provides a method to assess operating performance
excluding some of the impact of market volatility related to investments in
securities. This disclosure should not be viewed as a substitute for results
determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP
performance measures that may be presented by other companies.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
RECONCILIATION
OF NON-GAAP MEASURE (UNAUDITED)
(In
thousands, except per-share data)
|
|
2nd
|
|
1st
|
|
2nd
|
|
6 Months Ended
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
June 30,
|
|
June 30,
|
|
|
2010
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Net
income (loss) available to common shareholders
|
|
$4,497
|
|
$4,065
|
|
($9,104)
|
|
$8,562
|
|
($16,438)
|
Other-than-temporary
impairment losses on available-for-sale securities
|
|
(2)
|
|
(431)
|
|
(19,780)
|
|
(433)
|
|
(36,460)
|
Realized
gains on assets previously written down
|
|
51
|
|
284
|
|
261
|
|
335
|
|
291
|
Other-than-temporary
impairment losses on available-for-sale securities, net of related
gains
|
|
49
|
|
(147)
|
|
(19,519)
|
|
(98)
|
|
(36,169)
|
Income
taxes (1)
|
|
208
|
|
50
|
|
6,636
|
|
258
|
|
12,298
|
Other-than-temporary
impairment losses, net
|
|
257
|
|
(97)
|
|
(12,883)
|
|
160
|
|
(23,871)
|
Core
earnings available to common shareholders
|
|
$4,240
|
|
$4,162
|
|
$3,779
|
|
$8,402
|
|
$7,433
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share – diluted
|
|
$0.37
|
|
$0.34
|
|
($1.01)
|
|
$0.71
|
|
($1.83)
|
Core
earnings per share – diluted
|
|
$0.35
|
|
$0.34
|
|
$0.42
|
|
$0.69
|
|
$0.83
|
Weighted
average shares outstanding – diluted
|
|
12,125,072
|
|
12,113,584
|
|
8,973,531
|
|
12,119,358
|
|
8,964,850
|
Weighted
average shares outstanding - diluted - used in core earnings per
share calculations
|
|
12,125,072
|
|
12,113,584
|
|
8,987,999
|
|
12,119,358
|
|
8,973,687
|
(1)
Income tax has been allocated to the non-core losses at 34%, adjusted for a
valuation allowance on deferred tax assets associated with losses
from securities classified as capital assets for federal income tax
reporting purposes. A valuation allowance of $886,000 was recorded in the
third quarter 2009, was reduced to $373,000 in the fourth quarter 2009 and
was further reduced to $148,000 in the second quarter 2010.
Core
earnings per share-diluted was $0.35 in the second quarter 2010, up $0.01 from
the immediately previous quarter, and $0.07 lower than second quarter 2009
results. For the first six months of 2010, core earnings per share –
diluted was $0.69, off from $0.83 for the first six months of
2009. Although the dollar amount of core earnings was higher in 2010
than in 2009 for each period presented above, the number of weighted average
common shares outstanding was higher in 2010, reflecting the effects of the
issuance of shares of common stock in a public offering in December 2009 that
raised capital of $21.4 million, net of offering costs. The higher
amount of Core Earnings in the first six months of 2010 as compared to the
corresponding period in 2009 reflected the net impact of several significant
factors, as follows:
|
·
|
Noninterest
expense was $2,773,000, or 15.6%, lower in
2010. Compensation-related expense was $779,000 lower in 2010,
including a net reduction in stock-based compensation of $283,000 and the
impact of a $215,000 reduction in health insurance costs associated with
settlement of the difference between estimated and actual claims from the
previous plan year. FDIC insurance assessments totaled $819,000
in the first six months of 2010, which was $439,000 lower than the
corresponding amount for the first six months of 2009. In the
second quarter 2009, the FDIC made a special assessment on all banks,
which included an assessment to C&N of $589,000. Furniture
and equipment-related expense fell $266,000 in the first six months of
2010 as compared to the prior year, mainly because most of the core
banking computer software and related hardware (purchased in 2004) has
become fully amortized. In the second quarter 2010, noninterest
expense also was reduced $245,000 as a result of a reduction in estimated
reserves associated with credit-related
insurance.
|
|
·
|
Noninterest
revenue was $811,000, or 13.9%, higher in 2010, including the impact of a
pre-tax gain of $448,000 from the exchange of property at one of the
banking locations in the first quarter 2010. Revenue from
mortgages originated and sold in the secondary market, along with related
servicing revenue, increased $161,000 in 2010, and revenue from debit
card-related interchange fees increased
$100,000.
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
|
·
|
The
net interest margin was $1,319,000, or 6.0%, lower in 2010, reflecting the
effects of a lower average return on securities, and a lower average
balance of loans outstanding.
|
|
·
|
The
provision for loan losses was $283,000 in the first six months of 2010, or
$363,000 higher than the net credit of $80,000 recorded in the first six
months of 2009.
|
TABLE
I - QUARTERLY FINANCIAL DATA
(In
Thousands)
|
|
June
30,
|
|
Mar.
31,
|
|
Dec
31,
|
|
Sept.
30,
|
|
June
30,
|
|
Mar.
31,
|
|
|
2010
|
|
2010
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
Interest
income
|
|
$15,386
|
|
$15,733
|
|
$16,256
|
|
$16,808
|
|
$17,341
|
|
$17,571
|
Interest
expense
|
|
5,036
|
|
5,260
|
|
5,670
|
|
6,016
|
|
6,164
|
|
6,606
|
Net
interest income
|
|
10,350
|
|
10,473
|
|
10,586
|
|
10,792
|
|
11,177
|
|
10,965
|
Provision
(credit) for loan losses
|
|
76
|
|
207
|
|
126
|
|
634
|
|
93
|
|
(173)
|
Net
interest income after provision for loan losses
|
|
10,274
|
|
10,266
|
|
10,460
|
|
10,158
|
|
11,084
|
|
11,138
|
Other
income
|
|
3,186
|
|
3,445
|
|
3,567
|
|
3,282
|
|
3,054
|
|
2,766
|
Net
gains (losses) on available-for-sale securities
|
|
319
|
|
58
|
|
(318)
|
|
(47,848)
|
|
(18,995)
|
|
(16,679)
|
Other
expenses
|
|
7,629
|
|
7,894
|
|
7,586
|
|
8,277
|
|
9,158
|
|
8,638
|
Income
(loss) before income tax provision
|
|
6,150
|
|
5,875
|
|
6,123
|
|
(42,685)
|
|
(14,015)
|
|
(11,413)
|
Income
tax provision (credit)
|
|
1,281
|
|
1,437
|
|
1,508
|
|
(14,491)
|
|
(5,284)
|
|
(4,388)
|
Net
income (loss)
|
|
4,869
|
|
4,438
|
|
4,615
|
|
(28,194)
|
|
(8,731)
|
|
(7,025)
|
US
Treasury preferred dividends
|
|
372
|
|
373
|
|
373
|
|
373
|
|
373
|
|
309
|
Net
income (loss) available to common shareholders
|
|
$4,497
|
|
$4,065
|
|
$4,242
|
|
($28,567)
|
|
($9,104)
|
|
($7,334)
|
Net
income (loss) per common share – basic
|
|
$0.37
|
|
$0.34
|
|
$0.42
|
|
($3.17)
|
|
($1.01)
|
|
($0.82)
|
Net
income (loss) per common share – diluted
|
|
$0.37
|
|
$0.34
|
|
$0.42
|
|
($3.17)
|
|
($1.01)
|
|
($0.82)
|
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
that the allowance for loan losses is adequate and reasonable. The Corporation’s
methodology for determining the allowance for loan losses is described in a
separate section later in Management’s Discussion and Analysis. Given
the very subjective nature of identifying and valuing loan losses, it is likely
that well-informed individuals could make materially different assumptions, and
could, therefore calculate a materially different allowance
value. While management uses available information to recognize
losses on loans, changes in economic conditions may necessitate revisions in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Corporation’s allowance for
loan losses. Such agencies may require the Corporation to recognize adjustments
to the allowance based on their judgments of information available to them at
the time of their examination.
Another
material estimate is the calculation of fair values of the Corporation’s debt
securities. For most of the Corporation’s debt securities, the
Corporation receives estimated fair values of debt securities from an
independent valuation service, or from brokers. In developing fair
values, the valuation service and the brokers use estimates of cash flows, based
on historical performance of similar instruments in similar interest rate
environments. Based on experience, management is aware that estimated
fair values of debt securities tend to vary among brokers and other valuation
services. Accordingly, when selling debt securities, management
typically obtains price quotes from more than one source.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
As
described in Note 4 to the consolidated financial statements, management
calculates the fair values of pooled trust-preferred securities by applying
discount rates to estimated cash flows for each security. Management
estimated the cash flows expected to be received from each security, taking into
account estimated levels of deferrals and defaults by the underlying issuers,
and used discount rates considered reflective of a market participant’s
expectations regarding the extent of credit and liquidity risk inherent in the
securities. Management’s estimates of cash flows and discount rates
used to calculate fair values of pooled trust-preferred securities were based on
sensitive assumptions, and use of different assumptions could result in
calculations of fair values that would be substantially different than the
amounts calculated by management.
As
described in Note 5 to the consolidated financial statements, management
evaluates securities for 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. Also, management’s estimates of cash flows
used to evaluate OTTI of pooled trust-preferred securities are based on
sensitive assumptions, and use of different assumptions could produce different
conclusions for each security.
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, 2010 and June 30, 2009. 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.
Six-Month
Periods Ended June 30, 2010 and 2009
For the
six-month periods, the fully taxable equivalent net interest income was
$22,339,000 in 2010, $1,166,000 (5.0%) lower than in 2009. As shown
in Table IV, net changes in volume had the effect of decreasing net interest
income $692,000 in 2010 compared to 2009, and interest rate changes had the
effect of decreasing net interest income $474,000. The most significant
components of the volume change in net interest income in 2010 were: a decrease
in interest income of $1,332,000 attributable to a reduction in the balance of
taxable available-for-sale securities and a decrease in interest expense of
$777,000 attributable to a reduction in the balance of long-term borrowed funds.
The most significant components of the rate change in net interest income in
2010 were: an decrease in interest income of $2,018,000 attributable to lower
rates earned on taxable available-for-sale securities and a decrease in interest
expense of $1,863,000 due to lower rates paid on interest-bearing deposits. As
presented in Table III, the “Interest Rate Spread” (excess of average rate of
return on earning assets over average cost of funds on interest-bearing
liabilities) was 3.43% in 2010, as compared to 3.44% in 2009.
INTEREST
INCOME AND EARNING ASSETS
Interest
income totaled $32,635,000 in 2010, a decrease of 10.0% from
2009. Income from available-for-sale securities decreased $2,884,000
(23.4%), while interest and fees from loans decreased $759,000, or
3.2%. As indicated in Table III, total average available-for-sale
securities (at amortized cost) in 2010 decreased to $424,286,000, a decrease of
$39,984,000, or 8.6% from 2009. During 2009 and 2010, the Corporation
increased the size of its tax-exempt municipal security portfolio, while
shrinking the taxable available-for-sale securities portfolio. The Corporation’s
yield on taxable securities fell in 2009 and 2010 primarily because of low
market interest rates, including the effects of management’s decision to limit
purchases of taxable securities to investments that mature or are expected to
repay a substantial portion of principal within approximately four years or
less. In addition to the impact of falling rates, the Corporation’s
yield on taxable securities was also negatively affected in 2010 by
higher-than-expected prepayments on mortgage-backed securities; these
prepayments were caused by procedural changes by the U.S. Government agencies
that issued the securities. The average rate of return on available-for-sale
securities was 4.48% for 2010 and 5.34% in 2009.
The
average balance of gross loans decreased 1.8% to $719,731,000 in 2010 from
$732,992,000 in 2009. Due to the challenging economic environment and
the Corporation’s decision to sell a portion of its newly originated residential
mortgages on the secondary market, the Corporation has experienced contraction
in the balance of its mortgage and consumer loan portfolios, with slight growth
in average commercial loan balances. The Corporation’s yield on loans fell as
rates on new loans as well as existing, variable-rate loans have decreased. The
average rate of return on loans was 6.48% in 2010 and 6.57% in
2009.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
The
average balance of interest-bearing due from banks increased to $66,605,000 in
2010 from $8,052,000 in 2009. In the last half of 2009 and the first half of
2010, this has consisted primarily of balances held by the Federal Reserve. In
the first half of 2009, more overnight funds were invested in Federal funds sold
to other banks, which decreased to an average balance of $78,000 in 2010 from
$18,029,000 in 2009. Although the rates of return on balances with the Federal
Reserve are low, the Corporation has maintained relatively high levels of liquid
assets in 2009 and 2010 (as opposed to increasing long-term, available-for-sale
securities at higher yields) in order to maximize flexibility for dealing with
possible fluctuations in cash requirements, and due to management’s concern
about the possibility of substantial increases in interest rates within the next
few years. Also, in the second quarter 2010, management maintained a portion of
the balance with the Federal Reserve in anticipation of repurchasing the TARP
Preferred Stock and Warrant.
INTEREST
EXPENSE AND INTEREST-BEARING LIABILITIES
For the
six-month period, interest expense fell $2,474,000, or 19.4%, to $10,296,000 in
2010 from $12,770,000 in 2009. Table III shows that the overall cost of funds on
interest-bearing liabilities fell to 2.01% in 2010 from 2.53% in
2009.
Total
average deposits (interest-bearing and noninterest-bearing) increased 8.6%, to
$945,797,000 in 2010 from $871,139,000 in 2009. This increase has come mainly in
interest checking, individual retirement accounts, and demand deposits.
Consistent with substantial reductions in short-term global interest rates, the
average rates incurred on deposit accounts have decreased significantly in 2010
as compared to 2009. As shown in Table IV, decreases in rates reduced interest
expense on deposits by $1,863,000.
Total
average borrowed funds decreased $45,528,000 to $225,785,000 in 2010 from
$271,313,000 in 2009. During 2009 and early 2010, the Corporation has paid off
long-term borrowings as they matured using the cash flow received from loans,
mortgage-backed securities, and growth in deposit balances. The average rate on
borrowed funds was 3.64% in 2010, down from 3.78% in 2009. This change primarily
reflects lower rates being paid on customer repurchase agreements, which make up
most of the Corporation’s short-term borrowed funds.
Three-Month
Periods Ended June 30, 2010 and 2009
Except as
noted below, significant changes in the three-month results are consistent with
the discussion of the six-month results provided in the previous
section.
For the
three-month periods, the fully taxable equivalent net interest income was
$11,112,000 in 2010, $796,000 (6.7%) lower than in 2009. As shown in Table IV,
net changes in volume had the effect of decreasing net interest income $221,000
in 2010 compared to 2009, and interest rate changes had the effect of increasing
net interest income $575,000. As presented in Table III, the “Interest Rate
Spread” was 3.35% in 2010, as compared to 3.51% in 2009.
Interest
income totaled $16,148,000 in 2010, a decrease of 10.6% from 2009. Income from
available-for-sale securities decreased $1,569,000, while interest and fees from
loans decreased $365,000, or 3.1%. As indicated in Table III, total average
available-for-sale securities (at amortized cost) in 2010 decreased to
$433,645,000, a decrease of $30,944,000, or 6.7% from 2009. The average rate of
return on available-for-sale securities was 4.17% for 2010 and 5.26% in 2009.
For the three-month period, the average balance of gross loans decreased 1.6% to
$719,204,000 in 2010 from $730,493,000 in 2009. The average rate of return on
loans was 6.47% in 2010 and 6.59% in 2009. The average balance of
interest-bearing due from banks, mainly from balances held by the Federal
Reserve, increased to $66,326,000 in 2010 from $8,139,000 in 2009, while the
average balance of Federal funds sold fell to $96,000 in 2010 from $16,840,000
in 2009.
For the
three-month period, interest expense fell $1,128,000, or 18.3%, to $5,036,000 in
2010 from $6,164,000 in 2009. Total average deposits (interest-bearing and
noninterest-bearing) increased 9.2%, to $960,211,000 in 2010 from $879,508,000
in 2009. Total average borrowed funds decreased $44,913,000 to $218,322,000 in
2010 from $263,235,000 in 2009.
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)
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$2,756
|
|
$4,422
|
|
($1,666)
|
|
$5,919
|
|
$9,269
|
|
($3,350)
|
Tax-exempt
|
|
1,753
|
|
1,656
|
|
97
|
|
3,497
|
|
3,031
|
|
466
|
Total
available-for-sale securities
|
|
4,509
|
|
6,078
|
|
(1,569)
|
|
9,416
|
|
12,300
|
|
(2,884)
|
Held-to-maturity
securities,
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
0
|
|
6
|
|
(6)
|
|
2
|
|
12
|
|
(10)
|
Trading
securities
|
|
0
|
|
12
|
|
(12)
|
|
2
|
|
46
|
|
(44)
|
Interest-bearing
due from banks
|
|
38
|
|
3
|
|
35
|
|
76
|
|
4
|
|
72
|
Federal
funds sold
|
|
0
|
|
7
|
|
(7)
|
|
0
|
|
15
|
|
(15)
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
11,009
|
|
11,356
|
|
(347)
|
|
21,959
|
|
22,713
|
|
(754)
|
Tax-exempt
|
|
592
|
|
610
|
|
(18)
|
|
1,180
|
|
1,185
|
|
(5)
|
Total
loans
|
|
11,601
|
|
11,966
|
|
(365)
|
|
23,139
|
|
23,898
|
|
(759)
|
Total
Interest Income
|
|
16,148
|
|
18,072
|
|
(1,924)
|
|
32,635
|
|
36,275
|
|
(3,640)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
227
|
|
219
|
|
8
|
|
434
|
|
424
|
|
10
|
Money
market
|
|
231
|
|
518
|
|
(287)
|
|
480
|
|
1,222
|
|
(742)
|
Savings
|
|
47
|
|
86
|
|
(39)
|
|
91
|
|
170
|
|
(79)
|
Certificates
of deposit
|
|
1,299
|
|
1,686
|
|
(387)
|
|
2,725
|
|
3,542
|
|
(817)
|
Individual
Retirement Accounts
|
|
1,252
|
|
1,188
|
|
64
|
|
2,482
|
|
2,319
|
|
163
|
Other
time deposits
|
|
2
|
|
2
|
|
0
|
|
3
|
|
3
|
|
0
|
Total
interest-bearing deposits
|
|
3,058
|
|
3,699
|
|
(641)
|
|
6,215
|
|
7,680
|
|
(1,465)
|
Borrowed
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
51
|
|
140
|
|
(89)
|
|
151
|
|
310
|
|
(159)
|
Long-term
|
|
1,927
|
|
2,325
|
|
(398)
|
|
3,930
|
|
4,780
|
|
(850)
|
Total
borrowed funds
|
|
1,978
|
|
2,465
|
|
(487)
|
|
4,081
|
|
5,090
|
|
(1,009)
|
Total
Interest Expense
|
|
5,036
|
|
6,164
|
|
(1,128)
|
|
10,296
|
|
12,770
|
|
(2,474)
|
Net
Interest Income
|
|
$11,112
|
|
$11,908
|
|
($796)
|
|
$22,339
|
|
$23,505
|
|
($1,166)
|
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 34%.
CITIZENS & NORTHERN CORPORATION –
FORM 10-Q
Table
IIl - 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
|
|
|
6/30/2010
|
|
Return/
|
|
6/30/2009
|
|
Return/
|
|
6/30/2010
|
|
Return/
|
|
6/30/2009
|
|
Return/
|
|
|
Average
|
|
Cost
of
|
|
Average
|
|
Cost
of
|
|
Average
|
|
Cost
of
|
|
Average
|
|
Cost
of
|
|
|
Balance
|
|
Funds
%
|
|
Balance
|
|
Funds
%
|
|
Balance
|
|
Funds
%
|
|
Balance
|
|
Funds
%
|
EARNING
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at
amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$324,555
|
|
3.41%
|
|
$368,233
|
|
4.83%
|
|
$315,809
|
|
3.78%
|
|
$375,496
|
|
4.98%
|
Tax-exempt
|
|
109,090
|
|
6.45%
|
|
96,356
|
|
6.91%
|
|
108,477
|
|
6.50%
|
|
88,774
|
|
6.89%
|
Total
available-for-sale securities
|
|
433,645
|
|
4.17%
|
|
464,589
|
|
5.26%
|
|
424,286
|
|
4.48%
|
|
464,270
|
|
5.34%
|
Held-to-maturity
securities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
0
|
|
0.00%
|
|
405
|
|
5.96%
|
|
76
|
|
5.27%
|
|
405
|
|
5.98%
|
Trading
securities
|
|
0
|
|
0.00%
|
|
744
|
|
6.49%
|
|
58
|
|
6.99%
|
|
1,424
|
|
6.51%
|
Interest-bearing
due from banks
|
|
66,326
|
|
0.23%
|
|
8,139
|
|
0.15%
|
|
66,605
|
|
0.23%
|
|
8,052
|
|
0.10%
|
Federal
funds sold
|
|
96
|
|
0.00%
|
|
16,840
|
|
0.17%
|
|
78
|
|
0.00%
|
|
18,029
|
|
0.17%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
682,956
|
|
6.47%
|
|
690,685
|
|
6.61%
|
|
683,425
|
|
6.48%
|
|
693,940
|
|
6.60%
|
Tax-exempt
|
|
36,248
|
|
6.55%
|
|
39,808
|
|
6.16%
|
|
36,306
|
|
6.55%
|
|
39,052
|
|
6.12%
|
Total
loans
|
|
719,204
|
|
6.47%
|
|
730,493
|
|
6.59%
|
|
719,731
|
|
6.48%
|
|
732,992
|
|
6.57%
|
Total
Earning Assets
|
|
1,219,271
|
|
5.31%
|
|
1,221,210
|
|
5.95%
|
|
1,210,834
|
|
5.44%
|
|
1,225,172
|
|
5.97%
|
Cash
|
|
17,807
|
|
|
|
17,272
|
|
|
|
17,367
|
|
|
|
16,763
|
|
|
Unrealized
gain/loss on securities
|
|
906
|
|
|
|
(34,131)
|
|
|
|
354
|
|
|
|
(35,998)
|
|
|
Allowance
for loan losses
|
|
(8,523)
|
|
|
|
(7,737)
|
|
|
|
(8,467)
|
|
|
|
(7,838)
|
|
|
Bank
premises and equipment
|
|
23,699
|
|
|
|
25,412
|
|
|
|
23,930
|
|
|
|
25,615
|
|
|
Intangible
Asset - Core Deposit Intangible
|
|
438
|
|
|
|
711
|
|
|
|
461
|
|
|
|
753
|
|
|
Intangible
Asset - Goodwill
|
|
11,942
|
|
|
|
11,942
|
|
|
|
11,942
|
|
|
|
11,965
|
|
|
Other
assets
|
|
78,503
|
|
|
|
62,366
|
|
|
|
78,846
|
|
|
|
60,103
|
|
|
Total
Assets
|
|
$1,344,043
|
|
|
|
$1,297,045
|
|
|
|
$1,335,267
|
|
|
|
$1,296,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$144,439
|
|
0.63%
|
|
$101,040
|
|
0.87%
|
|
$135,826
|
|
0.64%
|
|
$97,105
|
|
0.88%
|
Money
market
|
|
203,567
|
|
0.46%
|
|
202,818
|
|
1.03%
|
|
200,313
|
|
0.48%
|
|
199,859
|
|
1.23%
|
Savings
|
|
75,720
|
|
0.25%
|
|
69,455
|
|
0.50%
|
|
73,662
|
|
0.25%
|
|
69,019
|
|
0.50%
|
Certificates
of deposit
|
|
226,352
|
|
2.30%
|
|
223,083
|
|
3.04%
|
|
231,622
|
|
2.37%
|
|
227,537
|
|
3.14%
|
Individual
Retirement Accounts
|
|
163,156
|
|
3.08%
|
|
153,214
|
|
3.12%
|
|
162,147
|
|
3.09%
|
|
150,379
|
|
3.11%
|
Other
time deposits
|
|
1,380
|
|
0.58%
|
|
1,410
|
|
0.57%
|
|
1,186
|
|
0.51%
|
|
1,215
|
|
0.50%
|
Total
interest-bearing deposits
|
|
814,614
|
|
1.51%
|
|
751,020
|
|
1.98%
|
|
804,756
|
|
1.56%
|
|
745,114
|
|
2.08%
|
Borrowed
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
30,478
|
|
0.67%
|
|
40,158
|
|
1.40%
|
|
33,815
|
|
0.90%
|
|
41,445
|
|
1.51%
|
Long-term
|
|
187,844
|
|
4.11%
|
|
223,077
|
|
4.19%
|
|
191,970
|
|
4.13%
|
|
229,868
|
|
4.19%
|
Total
borrowed funds
|
|
218,322
|
|
3.63%
|
|
263,235
|
|
3.77%
|
|
225,785
|
|
3.64%
|
|
271,313
|
|
3.78%
|
Total
Interest-bearing Liabilities
|
|
1,032,936
|
|
1.96%
|
|
1,014,255
|
|
2.44%
|
|
1,030,541
|
|
2.01%
|
|
1,016,427
|
|
2.53%
|
Demand
deposits
|
|
145,597
|
|
|
|
128,488
|
|
|
|
141,041
|
|
|
|
126,025
|
|
|
Other
liabilities
|
|
7,244
|
|
|
|
8,947
|
|
|
|
7,354
|
|
|
|
7,869
|
|
|
Total
Liabilities
|
|
1,185,777
|
|
|
|
1,151,690
|
|
|
|
1,178,936
|
|
|
|
1,150,321
|
|
|
Stockholders'
equity, excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive income/loss
|
|
157,946
|
|
|
|
168,327
|
|
|
|
156,430
|
|
|
|
170,253
|
|
|
Other
comprehensive income/loss
|
|
320
|
|
|
|
(22,972)
|
|
|
|
(99)
|
|
|
|
(24,039)
|
|
|
Total
Stockholders' Equity
|
|
158,266
|
|
|
|
145,355
|
|
|
|
156,331
|
|
|
|
146,214
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$1,344,043
|
|
|
|
$1,297,045
|
|
|
|
$1,335,267
|
|
|
|
$1,296,535
|
|
|
Interest
Rate Spread
|
|
|
|
3.35%
|
|
|
|
3.51%
|
|
|
|
3.43%
|
|
|
|
3.44%
|
Net
Interest Income/Earning Assets
|
|
|
|
3.66%
|
|
|
|
3.92%
|
|
|
|
3.72%
|
|
|
|
3.87%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deposits (Interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Demand)
|
|
$960,211
|
|
|
|
$879,508
|
|
|
|
$945,797
|
|
|
|
$871,139
|
|
|
(1) Rates
of return on tax-exempt securities and loans are presented on a fully
taxable-equivalent basis.
(2)
Nonaccrual loans have been included with loans for the purpose of analyzing net
interest earnings.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
TABLE
IV - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)
|
|
3 Months Ended 6/30/10 vs. 6/30/09
|
|
|
6 Months Ended 6/30/10 vs. 6/30/09
|
|
|
|
Change in
|
|
|
Change in
|
|
|
Total
|
|
|
Change in
|
|
|
Change in
|
|
|
Total
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
EARNING
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
($463)
|
|
|
($1,203)
|
|
|
($1,666)
|
|
|
($1,332)
|
|
|
($2,018)
|
|
|
($3,350)
|
|
Tax-exempt
|
|
|
208 |
|
|
|
(111) |
|
|
|
97 |
|
|
|
643 |
|
|
|
(177) |
|
|
|
466 |
|
Total
available-for-sale securities
|
|
|
(255) |
|
|
|
(1,314) |
|
|
|
(1,569) |
|
|
|
(689) |
|
|
|
(2,195) |
|
|
|
(2,884) |
|
Held-to-maturity
securities,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(6) |
|
|
|
0 |
|
|
|
(6) |
|
|
|
(9) |
|
|
|
(1) |
|
|
|
(10) |
|
Trading
securities
|
|
|
(12) |
|
|
|
0 |
|
|
|
(12)
|
|
|
|
(46) |
|
|
|
2 |
|
|
|
(44) |
|
Interest-bearing
due from banks
|
|
|
34 |
|
|
|
1 |
|
|
|
35 |
|
|
|
58 |
|
|
|
14 |
|
|
|
72 |
|
Federal
funds sold
|
|
|
(4) |
|
|
|
(3) |
|
|
|
(7) |
|
|
|
(8) |
|
|
|
(7) |
|
|
|
(15) |
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(126) |
|
|
|
(221) |
|
|
|
(347) |
|
|
|
(341) |
|
|
|
(413) |
|
|
|
(754) |
|
Tax-exempt
|
|
|
(56) |
|
|
|
38 |
|
|
|
(18) |
|
|
|
(86) |
|
|
|
81 |
|
|
|
(5) |
|
Total
loans
|
|
|
(182) |
|
|
|
(183) |
|
|
|
(365) |
|
|
|
(427) |
|
|
|
(332) |
|
|
|
(759) |
|
Total
Interest Income
|
|
|
(425) |
|
|
|
(1,499) |
|
|
|
(1,924) |
|
|
|
(1,121) |
|
|
|
(2,519) |
|
|
|
(3,640) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
|
79 |
|
|
|
(71) |
|
|
|
8 |
|
|
|
142 |
|
|
|
(132) |
|
|
|
10 |
|
Money
market
|
|
|
2 |
|
|
|
(289) |
|
|
|
(287) |
|
|
|
3 |
|
|
|
(745) |
|
|
|
(742) |
|
Savings
|
|
|
6 |
|
|
|
(45) |
|
|
|
(39) |
|
|
|
10 |
|
|
|
(89) |
|
|
|
(79) |
|
Certificates
of deposit
|
|
|
25 |
|
|
|
(412) |
|
|
|
(387) |
|
|
|
63 |
|
|
|
(880) |
|
|
|
(817) |
|
Individual
Retirement Accounts
|
|
|
76 |
|
|
|
(12) |
|
|
|
64 |
|
|
|
180 |
|
|
|
(17) |
|
|
|
163 |
|
Total
interest-bearing deposits
|
|
|
188 |
|
|
|
(829) |
|
|
|
(641) |
|
|
|
398 |
|
|
|
(1,863) |
|
|
|
(1,465) |
|
Borrowed
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
(30)
|
|
|
|
(59) |
|
|
|
(89) |
|
|
|
(50) |
|
|
|
(109) |
|
|
|
(159) |
|
Long-term
|
|
|
(362) |
|
|
|
(36) |
|
|
|
(398) |
|
|
|
(777) |
|
|
|
(73) |
|
|
|
(850) |
|
Total
borrowed funds
|
|
|
(392) |
|
|
|
(95) |
|
|
|
(487) |
|
|
|
(827) |
|
|
|
(182) |
|
|
|
(1,009) |
|
Total
Interest Expense
|
|
|
(204) |
|
|
|
(924) |
|
|
|
(1,128) |
|
|
|
(429) |
|
|
|
(2,045) |
|
|
|
(2,474) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
($221)
|
|
|
($575)
|
|
|
($796)
|
|
|
($692)
|
|
|
($474)
|
|
|
($1,166)
|
|
(1)
Changes in income on tax-exempt securities and loans are presented on a fully
taxable-equivalent basis, using the Corporation’s marginal federal income tax
rate of 34%.
(2) The
change in interest due to both volume and rates has been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amount of
the change in each.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
TABLE V - COMPARISON OF NON-INTEREST INCOME
|
|
(In Thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit
accounts
|
|
$1,190
|
|
|
$1,150
|
|
|
$2,283
|
|
|
$2,197
|
|
Service charges and
fees
|
|
|
210 |
|
|
|
227 |
|
|
|
403 |
|
|
|
417 |
|
Trust and financial management
revenue
|
|
|
830 |
|
|
|
870 |
|
|
|
1,729 |
|
|
|
1,639 |
|
Insurance commissions, fees and
premiums
|
|
|
61 |
|
|
|
76 |
|
|
|
121 |
|
|
|
157 |
|
Increase in cash surrender value
of life insurance
|
|
|
119 |
|
|
|
126 |
|
|
|
231 |
|
|
|
277 |
|
Other operating
income
|
|
|
776 |
|
|
|
605 |
|
|
|
1,864 |
|
|
|
1,133 |
|
Total other operating income,
before realized gains (losses) on available-for-sale securities,
net
|
|
$3,186
|
|
|
$3,054
|
|
|
$6,631
|
|
|
$5,820
|
|
SIX
MONTHS ENDED JUNE 30, 2010 AND 2009:
Table V
excludes realized losses on available-for-sale securities, which are discussed
in the “Earnings Overview” section of Management’s Discussion and
Analysis. Total non-interest income shown in Table V increased
$811,000 or 13.9%, in 2010 compared to 2009. Items of significance
are as follows:
|
·
|
Service
charges on deposit accounts increased $86,000, or 3.9%, in 2010 as
compared to 2009. Overdraft fee revenues associated with an
overdraft privilege program implemented in early 2008 increased
$159,000.
|
|
·
|
Trust
and financial management revenue increased $90,000, or 5.5%, in 2010 as
compared to 2009. The value of assets under management is
currently $558,344,000 at June 30, 2010, an increase of 1.0% over similar
values 12 months ago. Fluctuations in the value of assets under
management during this period have been mainly associated with
fluctuations in the market values of equity securities. In
2010, new accounts have added $13,158,000 to the value of assets under
management.
|
|
·
|
Other
operating income increased $731,000, or 64.5%, in 2010 as compared to
2009. In 2010, the category includes a gain of $448,000 from
the sale of a parcel adjacent to one of the bank operating locations. The
sale proceeds include $390,000 associated with long-term privileges within
a municipal parking facility currently under construction. The
category also includes gains from disposition of mortgages held for sale
of $218,000, which represents an increase of $154,000 over the first six
months of 2009.
|
THREE
MONTHS ENDED JUNE 30, 2010 AND 2009:
Total
non-interest income shown in Table V increased $132,000 or 4.3% in 2010 compared
to 2009. Items of significance are as follows:
|
·
|
Service
charges on deposit accounts increased $40,000, or 3.5%, in 2010 as
compared to 2009. Overdraft fee revenues associated with an
overdraft privilege program implemented in early 2008 increased
$55,000.
|
|
·
|
Other
operating income increased $171,000, or 28.3%, in 2010 as compared to
2009. Gains from disposition of mortgages held for sale totaled
$143,000 in 2010, which represents an increase of $102,000 over the
comparable three months of
2009.
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
TABLE VI- COMPARISON OF NON-INTEREST EXPENSE
|
|
(In Thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and wages
|
|
$3,199
|
|
|
$3,318
|
|
|
$6,277
|
|
|
$6,659
|
|
Pensions
and other employee benefits
|
|
|
983 |
|
|
|
1,075 |
|
|
|
1,922 |
|
|
|
2,319 |
|
Occupancy
expense, net
|
|
|
651 |
|
|
|
679 |
|
|
|
1,350 |
|
|
|
1,421 |
|
Furniture
and equipment expense
|
|
|
542 |
|
|
|
702 |
|
|
|
1,110 |
|
|
|
1,376 |
|
FDIC
Assessments
|
|
|
415 |
|
|
|
956 |
|
|
|
819 |
|
|
|
1,258 |
|
Pennsylvania
shares tax
|
|
|
306 |
|
|
|
318 |
|
|
|
611 |
|
|
|
636 |
|
Other
operating expense
|
|
|
1,533 |
|
|
|
2,110 |
|
|
|
3,434 |
|
|
|
4,127 |
|
Total
Other Expense
|
|
$7,629
|
|
|
$9,158
|
|
|
$15,523
|
|
|
$17,796
|
|
SIX
MONTHS ENDED JUNE 30, 2010 AND 2009:
Total
non-interest expense in Table VI decreased $2,273,000 or 12.8% in 2010 from
2009. Significant changes in 2010 as compared to 2009 include the
following:
|
·
|
Salaries
and wages decreased $382,000, or 5.7%. No stock options were
awarded in 2010, and accordingly, there was no officers’ incentive stock
option expense incurred in 2010, as compared to officers’ stock option
expense of $205,000 in 2009. Also, base salary costs have been
reduced in 2010 due to net reductions in hourly staff schedules and
elimination of one senior executive position. Further, in 2009,
severance costs totaling $51,000 were
incurred.
|
|
·
|
Pensions
and other employee benefits decreased $397,000, or
17.1%. Within this category, group health insurance expense was
$221,000 lower primarily due to favorable rate adjustments based on 2009
claims experience. In addition, employer contributions expense
associated with the Savings & Retirement Plan (a 401(k) plan) and
Employee Stock Ownership Plan was $63,000 lower in 2010 than in 2009. The
reduced level of required contributions is consistent with the reduced
salaries and wages discussed above.
|
|
·
|
Occupancy
expense decrease of $71,000 (5.0%) is primarily due to reduced seasonal
fuel and snow removal costs incurred in
2010.
|
|
·
|
Furniture
and equipment expense decreased $266,000 (19.3%), and is primarily related
to decreases in depreciation related to the core operating
systems.
|
|
·
|
FDIC
Insurance costs decreased $439,000 to $819,000 for the first six months of
2010. The 2010 FDIC insurance costs reflect the impact of
higher rates and higher levels of insured deposits. In 2009,
FDIC insurance costs included a special assessment of $589,000 in the
second quarter.
|
|
·
|
Other
operating expense decreased $693,000 or 16.8%. The category
includes a variety of expenses, with the most significant increases and
decreases in some of the individual expenses, as
follows:
|
|
o
|
There
was no stock option expense in 2010 from the Independent Directors Stock
Incentive Plan. In 2009, such costs were
$68,000.
|
|
o
|
Expenses
related to foreclosed properties decreased in 2010 by $122,000 compared to
2009, primarily from lower expenses associated with one large commercial
property.
|
|
o
|
Amortization
of core deposit intangibles decreased
$74,000.
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
|
o
|
Certain
operating costs, which are substantially discretionary, are lower in 2010
than in 2009. Advertising and certain public relations costs
decreased $109,000 in 2010. Education and training costs
decreased $47,000 in 2010 compared to
2009.
|
|
o
|
Bucktail
Life Insurance Company’s estimated GAAP policy reserves were reduced,
which reduced expense by $194,000 compared to
2009.
|
THREE
MONTHS ENDED JUNE 30, 2010 AND 2009:
Total
non-interest income shown in Table VI decreased $1,529,000 or 16.7% in 2010
compared to 2009. Items of significance are as follows:
|
·
|
Salaries
and wages decreased $119,000, or 3.6%. There was no officers’
incentive stock option expense incurred in 2010, as compared to officers’
stock option expense of $103,000 in
2009.
|
|
·
|
Pensions
and other employee benefits decreased $92,000, or
8.6%. Decreases in required retirement plan and post-retirement
plan costs represent $84,000 of the decrease in
2010.
|
|
·
|
Furniture
and equipment expense decreased $160,000 (22.8%), and is primarily related
to decreases in depreciation related to the core operating
systems.
|
|
·
|
FDIC
Insurance costs decreased $541,000 to $415,000 for the second quarter of
2010. The 2010 FDIC insurance costs reflect the impact of
higher rates and higher levels of insured deposits. In 2009,
FDIC insurance costs included a special assessment of $589,000 in the
second quarter.
|
|
·
|
Other
operating expense decreased $577,000 or 27.3%. The category
includes a variety of expenses, with the most significant increases and
decreases in some of the individual expenses, as
follows:
|
|
o
|
Expenses
related to foreclosed properties decreased in 2010 by $18,000 compared to
2009, primarily from lower expenses associated with one large commercial
property. In addition, collection costs in 2010 decreased $50,000 due to
recoveries of costs charged to expense in prior periods, primarily
associated with several commercial
properties.
|
|
o
|
Amortization
of core deposit intangibles decreased
$37,000.
|
|
o
|
Discretionary
operating costs for advertising and certain public relations costs
decreased $81,000 in the current 2010 period. Education and
training costs decreased $44,000 in 2010 compared to
2009.
|
|
o
|
Bucktail
Life Insurance Company’s estimated GAAP policy reserves were reduced in
the second quarter 2010, which reduced expense by $244,000 compared to
2009.
|
FINANCIAL
CONDITION
Significant
changes in the average balances of the Corporation’s earning assets and
interest-bearing liabilities are described in the “Net Interest Margin” section
of Management’s Discussion and Analysis. Other significant balance
sheet items, including the allowance for loan losses and stockholders’ equity,
are discussed in separate sections of Management’s Discussion and
Analysis.
Total
capital purchases for 2010 are estimated at approximately $1.6
million. Management does not expect capital expenditures to have a
material, detrimental effect on the Corporation’s financial condition in
2010.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
PROVISION
AND ALLOWANCE FOR LOAN LOSSES
The
allowance for loan losses is maintained at a level which, in management’s
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management’s evaluation of the
collectability of the loan portfolio. In evaluating collectability,
management considers a number of factors, including the status of specific
impaired loans, trends in historical loss experience, delinquency trends, credit
concentrations, and economic conditions within the Corporation’s market
area. Allowances for impaired loans are determined based on
collateral values or the present value of estimated cash flows. The allowance is
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
There are
two major components of the allowance – (1) “FASB Accounting Standards
Codification” (the “ASC”) topic 310 (formerly SFAS 114) allowances – on larger
loans, mainly commercial purpose, determined on a loan-by-loan basis; and (2)
ASC topic 450 (formerly SFAS 5) allowances – estimates of losses incurred on the
remainder of the portfolio, determined based on collective evaluation of
impairment for various categories of loans. FASB ASC 450 allowances
include a portion based on historical net charge-off experience, and a portion
based on evaluation of qualitative factors.
Each
quarter, management performs a detailed assessment of the allowance and
provision for loan losses. A management committee referred to as the Watch List
Committee performs this assessment. Quarterly, the Watch List
Committee and the applicable Lenders discuss each loan relationship under
review, and reach a consensus on the appropriate FASB ASC 310 estimated loss
amount for the quarter. The Watch List Committee’s focus is on
ensuring that all pertinent facts have been considered, and that the FASB ASC
310 loss amounts are reasonable. The assessment process includes
review of certain loans reported on the “Watch List.” All loans,
which Lenders or the Credit Administration staff has assigned a risk rating of
Special Mention, Substandard, Doubtful or Loss, are included in the Watch
List. The scope of loans evaluated individually for impairment (FASB
ASC 310 evaluation) include all loan relationships greater than $200,000 for
C&N Bank loans, and $50,000 for First State Bank, for which there is at
least one extension of credit graded Special Mention, Substandard, Doubtful or
Loss. Also, loan relationships less than $200,000 in the aggregate,
but with an estimated loss of $100,000 or more, are individually evaluated for
impairment.
Since
2007, the Corporation’s Risk Management personnel performed annual, independent
credit reviews of large credit relationships. In prior years, outside
consulting firms were retained to perform such functions. Management
gives substantial consideration to the classifications and recommendations of
the credit reviewers in determining the allowance for loan losses.
The FASB
ASC 450 component of the allowance includes estimates of losses incurred on
loans that have not been individually evaluated for
impairment. Management uses loan categories included in the Call
Report (a quarterly report filed by FDIC-insured banks) to identify categories
of loans with similar risk characteristics, and multiplies the loan balances for
each category as of each quarter-end by two different factors to determine the
FASB ASC 450 allowance amounts. These two factors are
based on: (1) historical net charge-off experience, and (2) qualitative
factors. The sum of the allowance amounts calculated for each risk
category, including both the amount based on historical net charge-off
experience and the amount based on evaluation of qualitative factors, is equal
to the total FASB ASC 450 component of the allowance.
The
historical net charge-off portion of the FASB ASC 450 allowance component is
calculated by the Accounting Department as of the end of the applicable
quarter. For each loan classification category used in the Call
Report, the Accounting Department multiplies the outstanding balance as of the
quarter-end (excluding loans individually evaluated for impairment) by the ratio
of net charge-offs to average quarterly loan balances for the previous three
calendar years.
Management
also calculates the effects of specific qualitative factors criteria to
determine a percentage increase or decrease in the FASB ASC 450 allowance, in
relation to the historical net charge-off percentage. The qualitative
factors analysis involves assessment of changes in factors affecting the
portfolio, to provide for estimated differences between losses currently
inherent in the portfolio and the amounts determined based on recent historical
loss rates and from identification of losses on specific individual
loans. A management committee referred to as the Qualitative Factors
Committee meets quarterly, near the end of the final month of each
quarter. The Qualitative Factors Committee discusses several
qualitative factors, including economic conditions, lending policies, changes in
the portfolio, risk profile of the portfolio, competition and regulatory
requirements, and other factors, with consideration given to how the factors
affect three distinct parts of the loan portfolio: Commercial, Mortgage and
Consumer. During or soon after completion of the meeting, each member
of the Committee prepares an update to his or her recommended percentage
adjustment for each qualitative factor, and average qualitative factor
adjustments are calculated for Commercial, Mortgage and Consumer
loans. The Accounting Department multiplies the outstanding balance
as of the quarter-end (excluding loans individually
evaluated for impairment) by the applicable qualitative factor percentages, to
determine the portion of the FASB ASC 450 allowance attributable to qualitative
factors. Average qualitative factors used in calculating the FASB ASC
450 portion of the allowance did not change significantly (by more than a few
basis points) for any category over the course of the past year and the first
six months of 2010.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
The
allocation of the allowance for loan losses table (Table VIII) includes the FASB
ASC 310 component of the allowance on the line item called “Impaired
Loans.” FASB ASC 450 estimated losses, including both the
portion determined based on historical net charge-off results, as well as the
portion based on management’s assessment of qualitative factors, are allocated
in Table VIII to the applicable categories of commercial, consumer mortgage and
consumer loans. The increase in the valuation allowance on impaired loans to
$1,581,000 at June 30, 2010 from $1,126,000 at December 31, 2009 is primarily
attributed to changes in the assessment of four commercial relationships by the
Watch List Committee.
The
allowance for loan losses was $8,461,000 at June 30, 2010 up slightly from
$8,265,000 at December 31, 2009. As shown in Table VII, net
charge-offs in 2010 of $87,000 were down compared to the annual net charge-offs
of $272,000 in 2009, and well below the historical levels of the last five
years. Also, Table VII shows the provision for loan losses of
$283,000 for the first six months of 2010, which on an annualized basis is
favorable by comparison to the average annual amount over the previous five
years of $963,000. The credit provision in the first six months of 2009 was
primarily due to a reduction in the portion of the allowance based on
qualitative factors during that period. The total amount of the
provision for loan losses for each period is determined based on the amount
required to maintain an appropriate allowance in light of all of the factors
described above.
Table IX
presents information related to past due and impaired loans. As of
June 30, 2010, total impaired loans were $6,943,000, up from $5,947,000 at
December 31, 2009, and reasonably comparable to the annual average level of
$6,811,000 for the last five years. Nonaccrual loans decreased to
$8,071,000 at June 30, 2010 from $9,092,000 at December 31, 2009, while total
loans past due 90 days or more and still in accrual status increased to
$1,937,000 at June 30, 2010 from $31,000 at December 31,
2009. Interest continues to be accrued on loans 90 days or more past
due that management deems to be well secured and in the process of collection,
and for which no loss is anticipated. Over the period 2005-2009 and
the first six months of 2010, 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 category fluctuations within Table
IX. 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, 2010. 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
VII through X present historical data related to the allowance for loan
losses.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
TABLE VII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
6 Months
|
|
|
6 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Balance,
beginning of year
|
|
$8,265
|
|
|
$7,857
|
|
|
$7,857
|
|
|
$8,859
|
|
|
$8,201
|
|
|
$8,361
|
|
|
$6,787
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
155 |
|
|
|
6 |
|
|
|
149 |
|
|
|
1,457 |
|
|
|
196 |
|
|
|
611 |
|
|
|
264 |
|
Installment
loans
|
|
|
91 |
|
|
|
176 |
|
|
|
293 |
|
|
|
254 |
|
|
|
216 |
|
|
|
259 |
|
|
|
224 |
|
Credit
cards and related plans
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5 |
|
|
|
5 |
|
|
|
22 |
|
|
|
198 |
|
Commercial
and other loans
|
|
|
24 |
|
|
|
11 |
|
|
|
36 |
|
|
|
323 |
|
|
|
127 |
|
|
|
200 |
|
|
|
298 |
|
Total
charge-offs
|
|
|
270 |
|
|
|
193 |
|
|
|
478 |
|
|
|
2,039 |
|
|
|
544 |
|
|
|
1,092 |
|
|
|
984 |
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans
|
|
|
21 |
|
|
|
0 |
|
|
|
8 |
|
|
|
20 |
|
|
|
8 |
|
|
|
27 |
|
|
|
14 |
|
Installment
loans
|
|
|
51 |
|
|
|
75 |
|
|
|
104 |
|
|
|
83 |
|
|
|
41 |
|
|
|
65 |
|
|
|
61 |
|
Credit
cards and related plans
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4 |
|
|
|
9 |
|
|
|
25 |
|
|
|
30 |
|
Commercial
and other loans
|
|
|
111 |
|
|
|
22 |
|
|
|
94 |
|
|
|
21 |
|
|
|
28 |
|
|
|
143 |
|
|
|
50 |
|
Total
recoveries
|
|
|
183 |
|
|
|
97 |
|
|
|
206 |
|
|
|
128 |
|
|
|
86 |
|
|
|
260 |
|
|
|
155 |
|
Net
charge-offs
|
|
|
87 |
|
|
|
96 |
|
|
|
272 |
|
|
|
1,911 |
|
|
|
458 |
|
|
|
832 |
|
|
|
829 |
|
Allowance
for loan losses recorded in acquisitions
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
587 |
|
|
|
0 |
|
|
|
377 |
|
Provision
(credit) for loan losses
|
|
|
283 |
|
|
|
(80) |
|
|
|
680 |
|
|
|
909 |
|
|
|
529 |
|
|
|
672 |
|
|
|
2,026 |
|
Balance,
end of period
|
|
$8,461
|
|
|
$7,681
|
|
|
$8,265
|
|
|
$7,857
|
|
|
$8,859
|
|
|
$8,201
|
|
|
$8,361
|
|
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Commercial
|
|
$ 2,635
|
|
|
$ 2,677
|
|
|
$ 2,654
|
|
|
$ 1,870
|
|
|
$ 2,372
|
|
|
$ 2,705
|
|
Consumer
mortgage
|
|
|
3,636 |
|
|
|
3,859 |
|
|
|
3,920 |
|
|
|
4,201 |
|
|
|
3,556 |
|
|
|
2,806 |
|
Impaired
loans
|
|
|
1,581 |
|
|
|
1,126 |
|
|
|
456 |
|
|
|
2,255 |
|
|
|
1,726 |
|
|
|
2,374 |
|
Consumer
|
|
|
256 |
|
|
|
281 |
|
|
|
399 |
|
|
|
533 |
|
|
|
523 |
|
|
|
476 |
|
Unallocated
|
|
|
353 |
|
|
|
322 |
|
|
|
428 |
|
|
|
- |
|
|
|
24 |
|
|
|
- |
|
Total
Allowance
|
|
$ 8,461
|
|
|
$ 8,265
|
|
|
$ 7,857
|
|
|
$ 8,859
|
|
|
$ 8,201
|
|
|
$ 8,361
|
|
TABLE IX - PAST DUE AND IMPAIRED LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Impaired
loans without a valuation allowance
|
|
$3,874
|
|
|
$3,257
|
|
|
$3,435
|
|
|
$857
|
|
|
$2,674
|
|
|
$910
|
|
Impaired
loans with a valuation allowance
|
|
|
3,069 |
|
|
|
2,690 |
|
|
|
2,230 |
|
|
|
5,361 |
|
|
|
5,337 |
|
|
|
7,306 |
|
Total
impaired loans
|
|
$6,943
|
|
|
$5,947
|
|
|
$5,665
|
|
|
$6,218
|
|
|
$8,011
|
|
|
$8,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance related to impaired loans
|
|
$1,581
|
|
|
$1,126
|
|
|
$456
|
|
|
$2,255
|
|
|
$1,726
|
|
|
$2,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonaccrual loans
|
|
$8,071
|
|
|
$9,092
|
|
|
$7,200
|
|
|
$6,955
|
|
|
$8,506
|
|
|
$6,365
|
|
Total
loans past due 90 days or more and still accruing
|
|
$1,937
|
|
|
$31
|
|
|
$1,305
|
|
|
$1,200
|
|
|
$1,559
|
|
|
$1,369
|
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
TABLE X - SUMMARY OF LOANS BY TYPE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
June 30,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate - residential mortgage
|
|
$417,428
|
|
|
$420,365
|
|
|
$433,377
|
|
|
$441,692
|
|
|
$387,410
|
|
|
$361,857
|
|
Real
estate - commercial mortgage
|
|
|
159,297 |
|
|
|
163,483 |
|
|
|
165,979 |
|
|
|
144,742 |
|
|
|
178,260 |
|
|
|
153,661 |
|
Real
estate - construction
|
|
|
32,733 |
|
|
|
26,716 |
|
|
|
24,992 |
|
|
|
22,497 |
|
|
|
10,365 |
|
|
|
5,552 |
|
Consumer
|
|
|
16,738 |
|
|
|
19,202 |
|
|
|
26,732 |
|
|
|
37,193 |
|
|
|
35,992 |
|
|
|
31,559 |
|
Agricultural
|
|
|
3,986 |
|
|
|
3,848 |
|
|
|
4,495 |
|
|
|
3,553 |
|
|
|
2,705 |
|
|
|
2,340 |
|
Commercial
|
|
|
57,100 |
|
|
|
49,753 |
|
|
|
48,295 |
|
|
|
52,241 |
|
|
|
39,135 |
|
|
|
69,396 |
|
Other
|
|
|
319 |
|
|
|
638 |
|
|
|
884 |
|
|
|
1,010 |
|
|
|
1,227 |
|
|
|
1,871 |
|
Political
subdivisions
|
|
|
36,223 |
|
|
|
37,598 |
|
|
|
38,790 |
|
|
|
33,013 |
|
|
|
32,407 |
|
|
|
27,063 |
|
Total
|
|
|
723,824 |
|
|
|
721,603 |
|
|
|
743,544 |
|
|
|
735,941 |
|
|
|
687,501 |
|
|
|
653,299 |
|
Less:
allowance for loan losses
|
|
|
(8,461) |
|
|
|
(8,265) |
|
|
|
(7,857) |
|
|
|
(8,859) |
|
|
|
(8,201) |
|
|
|
(8,361) |
|
Loans,
net
|
|
$715,363
|
|
|
$713,338
|
|
|
$735,687
|
|
|
$727,082
|
|
|
$679,300
|
|
|
$644,938
|
|
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, 2010, the Corporation maintained overnight
interest-bearing deposits with the Federal Reserve Bank of Philadelphia and
other correspondent banks totaling $67,845,000.
The
Corporation maintains overnight borrowing facilities with several correspondent
banks that provide a source of day-to-day liquidity. Also, the
Corporation maintains borrowing facilities with the Federal Home Loan Bank of
Pittsburgh, secured by various mortgage loans.
The
Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s
Discount Window. Management intends to use this line of credit as a contingency
funding source. As collateral for the line, the Corporation has pledged
available-for-sale securities with a carrying value of $30,475,000 at June 30,
2010.
The
Corporation’s outstanding, available, and total credit facilities are presented
in the following table.
TABLE
XI – CREDIT FACILITIES
|
|
Outstanding
|
|
Available
|
|
Total Credit
|
|
(In Thousands)
|
|
June 30,
|
|
Dec. 31,
|
|
June 30,
|
|
Dec. 31,
|
|
June 30,
|
|
Dec. 31,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Federal Home Loan Bank of Pittsburgh
|
|
$81,302
|
|
$133,602
|
|
$265,705
|
|
$210,954
|
|
$347,007
|
|
$344,556
|
|
Federal
Reserve Bank Discount Window
|
|
0 |
|
0 |
|
28,947 |
|
25,802 |
|
28,947 |
|
25,802 |
|
Other
correspondent banks
|
|
0 |
|
0 |
|
29,148 |
|
29,722 |
|
29,148 |
|
29,722 |
|
Total
credit facilities
|
|
$81,302
|
|
$133,602
|
|
$323,800
|
|
$266,478
|
|
$405,102
|
|
$400,080
|
|
At June
30, 2010, the Corporation’s outstanding credit facilities with the Federal Home
Loan Bank of Pittsburgh consisted of long-term borrowings. No letters of credit
were outstanding.
Additionally,
the Corporation uses repurchase agreements placed with brokers to borrow funds
secured by investment assets, and 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 non-pledged
investment securities to meet its obligations. At June 30, 2010, the carrying
value of non-pledged available-for-sale securities was $64,983,000.
Management
believes the Corporation is well-positioned to meet its short-term and long-term
obligations.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
STOCKHOLDERS’
EQUITY AND CAPITAL ADEQUACY
The
Corporation and the subsidiary banks (Citizens & Northern Bank and First
State Bank) are subject to various regulatory capital requirements administered
by the federal banking agencies. Details concerning the Corporation’s
and the subsidiary banks’ capital ratios at June 30, 2010 and December 31, 2009
are presented below. Management believes, as of June 30, 2010 and
December 31, 2009, that the Corporation and subsidiary banks meet all capital
adequacy requirements to which they are subject.
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Capitalized Under
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
|
Requirement
|
|
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
|
|
Ratio
|
|
June
30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$141,187
|
|
|
|
19.12 |
% |
|
$59,089
|
|
|
≥8%
|
|
n/a
|
|
|
n/a
|
|
C&N
Bank
|
|
125,554 |
|
|
|
17.50 |
% |
|
57,385 |
|
|
≥8%
|
|
$71,732
|
|
|
≥10%
|
|
First
State Bank
|
|
4,614 |
|
|
|
24.80 |
% |
|
1,489 |
|
|
≥8%
|
|
1,861 |
|
|
≥10%
|
|
Tier
1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
132,253 |
|
|
|
17.91 |
% |
|
29,545 |
|
|
≥4%
|
|
n/a
|
|
|
n/a
|
|
C&N
Bank
|
|
117,215 |
|
|
|
16.34 |
% |
|
28,693 |
|
|
≥4%
|
|
43,039 |
|
|
≥6%
|
|
First
State Bank
|
|
4,459 |
|
|
|
23.96 |
% |
|
744 |
|
|
≥4%
|
|
1,116 |
|
|
≥6%
|
|
Tier
1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
132,253 |
|
|
|
10.09 |
% |
|
52,442 |
|
|
≥4%
|
|
n/a
|
|
|
n/a
|
|
C&N
Bank
|
|
117,215 |
|
|
|
9.27 |
% |
|
50,572 |
|
|
≥4%
|
|
63,215 |
|
|
≥5%
|
|
First
State Bank
|
|
4,459 |
|
|
|
9.00 |
% |
|
1,981 |
|
|
≥4%
|
|
2,476 |
|
|
≥5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$133,311
|
|
|
|
17.89 |
% |
|
$59,628
|
|
|
≥8%
|
|
n/a
|
|
|
n/a
|
|
C&N
Bank
|
|
117,320 |
|
|
|
16.22 |
% |
|
57,869 |
|
|
≥8%
|
|
$72,337
|
|
|
≥10%
|
|
First
State Bank
|
|
4,545 |
|
|
|
24.73 |
% |
|
1,470 |
|
|
≥8%
|
|
1,838 |
|
|
≥10%
|
|
Tier
1 capital to risk-weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
124,463 |
|
|
|
16.70 |
% |
|
29,814 |
|
|
≥4%
|
|
n/a
|
|
|
n/a
|
|
C&N
Bank
|
|
109,112 |
|
|
|
15.08 |
% |
|
28,935 |
|
|
≥4%
|
|
43,402 |
|
|
≥6%
|
|
First
State Bank
|
|
4,395 |
|
|
|
23.92 |
% |
|
735 |
|
|
≥4%
|
|
1,103 |
|
|
≥6%
|
|
Tier
1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
124,463 |
|
|
|
9.86 |
% |
|
50,513 |
|
|
≥4%
|
|
n/a
|
|
|
n/a
|
|
C&N
Bank
|
|
109,112 |
|
|
|
9.02 |
% |
|
48,393 |
|
|
≥4%
|
|
60,491 |
|
|
≥5%
|
|
First
State Bank
|
|
4,395 |
|
|
|
9.33 |
% |
|
1,885 |
|
|
≥4%
|
|
2,356 |
|
|
≥5%
|
|
In January 2009, the Corporation
issued Preferred Stock and a Warrant to purchase up to 194,794 shares of
common stock at an exercise price of $20.36 per share to the United States Department of the Treasury
under the TARP Program. The Corporation sold the Preferred
Stock and Warrant for an aggregate price of $26,440,000. The Preferred Stock paid a cumulative
dividend rate of 5% per annum. On August 4, 2010, the
Corporation repurchased all of the Preferred Stock. The total payment
was $26,730,000, including accrued dividends through that date of
$290,000. As a result of the repurchase, the Corporation will record
accelerated discount accretion of $607,000, which will be deducted from net
income in determining net income available to common shareholders in the third
quarter. As a result of repurchasing the Preferred Stock, the
Corporation may initiate negotiations with the Treasury for repurchase of the
Warrant by August 19, 2010. Repurchase of the warrant, if completed,
will reduce stockholders’ equity but will not impact net income available to
common shareholders.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
The
capital ratios reflected in the tables above include the benefit of the TARP
Preferred Stock and Warrant as components of Tier 1 and total
capital. Tier 1 and total capital for both the Corporation and
C&N Bank will be reduced in the third quarter as a result of repurchasing
the Preferred Stock, and if completed, the Warrant. Including the
effects of the third quarter 2010 reductions in capital from the TARP
repurchase, management expects the Corporation and the subsidiary banks to
maintain capital levels that exceed the regulatory standards for
well-capitalized institutions for the next 12 months and for the foreseeable
future. Planned capital expenditures are not expected to have a
significantly detrimental effect on capital ratios.
Future
dividend payments will depend upon maintenance of a strong financial condition,
future earnings and capital and regulatory requirements. The
Corporation and the subsidiary banks are subject to restrictions on the amount
of dividends that may be paid without approval of banking regulatory
authorities. Under guidance issued in 2009 by the Federal Reserve,
until further notice the Corporation must consult the Federal Reserve before
declaring dividends.
Regulatory approval has been requested
for the merger of First State Bank with C&N Bank, which would result in the
two New York State branches becoming branches of C&N
Bank. Management expects the merger of First State Bank into C&N
Bank to be approved and completed in the third quarter
2010. Management expects the merger to be slightly beneficial to
C&N Bank’s regulatory capital ratios, and that it will have not have a
significant impact on the Corporation’s consolidated financial condition or
results of operations.
The
Corporation’s total stockholders’ equity is affected by fluctuations in the fair
values of available-for-sale securities. The difference between
amortized cost and fair value of available-for-sale 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 or losses on
available-for-sale securities, net of deferred income tax, amounted to
$1,684,000 at June 30, 2010 and ($522,000) at December 31,
2009. Changes in accumulated other comprehensive income are excluded
from earnings and directly increase or decrease stockholders’
equity. If available-for-sale securities are deemed to be
other-than-temporarily impaired, unrealized losses are recorded as a charge
against earnings, and amortized cost for the affected securities is
reduced. Note 5 to the consolidated financial statements provides
additional information concerning management’s evaluation of available-for-sale
securities for other-than-temporary impairment at June 30, 2010.
Stockholders’
equity is also affected by the underfunded or overfunded status of defined
benefit pension and postretirement plans. The balance in Accumulated
Other Comprehensive (Loss) Income related to underfunded defined benefit plans,
net of deferred income tax, was ($251,000) at June 30, 2010 and ($369,000) at
December 31, 2009.
INCOME
TAXES
The
effective income tax rate was 22.60% of pre-tax income for the six months ended
June 30, 2010 and 20.83% of pre-tax income for the second quarter
2010. In 2009, the credit for income tax was 38.04% of the pre-tax
loss for the first six months, and 37.70% for the second quarter. A
large portion of the 2009 credit for income tax was deferred, and related to
securities write-downs that were not currently deductible for income tax
reporting purposes. The provision (credit) for income tax for the
6-month periods ended June 30, 2010 and 2009 is based on the Corporation’s
estimate of the effective tax rate expected to be applicable for the full
year. The Corporation’s effective tax rates differ from the statutory
rate of 35% principally because of the effects of tax-exempt interest
income. Also, the effective tax rate for the 3-month and 6-month
periods ended June 30, 2010 includes the benefit of a $225,000 reduction in the
valuation allowance on deferred tax assets associated with capital assets in the
second quarter 2010, as referred to in the following paragraph.
The
Corporation recognizes deferred tax assets and liabilities based on differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. At June 30, 2010, the net deferred tax asset was $20,390,000, down
from the balance at December 31, 2009 of $22,037,000. The net
deferred tax asset balance at June 30, 2010 attributable to realized securities
losses was $15,741,000, exclusive of a valuation allowance of
$148,000. 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. Of the total deferred tax asset from realized losses on
securities, a portion is from securities that, if the Corporation were to sell
them, would be classified as capital losses for income tax reporting
purposes. The valuation allowance at June 30, 2010 reflects the
excess of the tax benefit that would be generated from selling all of the
capital assets, over the amount that could be realized from available carryback
and offset against capital gains generated in 2007 and
2008. Realization of the remaining $148,000 of tax benefits
associated with capital assets is dependent upon realization
of future capital gains. After adjustment for the valuation allowance
on capital assets, management believes the recorded net deferred tax asset at
June 30, 2010 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.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Additional
information related to income taxes is presented in Note 8 to the consolidated
financial statements.
INFLATION
The
Corporation is significantly affected by the Federal Reserve Board’s efforts to
control inflation through changes in short-term interest rates. Beginning in
September 2007, in response to concerns about weakness in the U.S. economy, the
Federal Reserve lowered the fed funds target rate numerous times; in December
2008, it took the unusual step of establishing a target range of 0% to 0.25%,
which it has maintained through the first six months of 2010. Also,
the Federal Reserve has injected massive amounts of liquidity into the nation’s
monetary system through a variety of programs.
Despite
the current low short-term rate environment and liquidity injections, inflation
statistics indicate that the overall rate of inflation is minimal. Recent data
indicate that the national economy and financial system have stabilized, and the
Federal Reserve has been slowly scaling back the emergency liquidity programs
put in place during 2008 and 2009. Although management cannot predict future
changes in the rates of inflation, management monitors the impact of economic
trends, including any indicators of inflationary pressures, in managing interest
rate and other financial risks.
RECENT
ACCOUNTING PRONOUNCEMENTS
Since
January 1, 2010, the FASB has issued additional FASB 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.
In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820) – Improving Disclosures about Fair Value
Measurements. ASU 2010-06 revises two disclosure requirements
concerning fair value measurements and clarifies two others. It
requires separate presentation of significant transfers into and out of Levels 1
and 2 of the fair value hierarchy and disclosure of the reasons for such
transfers. It will also require the presentation of purchases, sales,
issuances and settlements within Level 3 on a gross basis rather than a net
basis. The amendments also clarify that disclosures should be
disaggregated by class of asset or liability and that disclosures about inputs
and valuation techniques should be provided for both recurring and non-recurring
fair value measurements. The Corporation’s disclosures about fair
value measurements are presented in Note 4 to the consolidated financial
statements. These new disclosure requirements were adopted by the
Corporation during the current period, with the exception of the requirement
concerning gross presentation of Level 3 activity, which is effective for fiscal
years beginning after December 15, 2010. With respect to the
portions of this ASU that were adopted during the current period, the adoption
of this standard did not have a significant impact on the Corporation’s
financial position, results of operations or disclosures. Management
does not believe that the adoption of the remaining portion of this ASU will
have a significant impact on the Corporation’s ongoing financial position,
results of operation or disclosures.
The FASB
issued ASU 2010-10, Consolidation (Topic 810): Amendments for Certain Investment
Funds. The amendments in the ASU defer the effective date of certain
amendments to the consolidation requirements of Topic 810, Consolidation,
resulting from the issuance of FASB Accounting Standard No. 167, Amendments to
FASB Interpretation 46(R). Specifically, the amendments to the consolidation
requirements of Topic 810 resulting from the issuance of Statement 167 are
deferred for a reporting entity’s interest in an entity:
|
·
|
That
has all the attributes of an investment company;
or
|
|
·
|
For
which it is industry practice to apply measurement principles for
financial reporting purposes that are consistent with those followed by
investment companies.
|
ASU
2010-10 does not defer the disclosure requirements in the Statement 167
amendments to Topic 810. The amendments in this ASU are effective for the
Corporation’s 2010 annual reporting period, and for all interim periods within
the first annual reporting period. The provisions of this ASU have no material
impact on the Corporation’s consolidated financial statements.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
FASB ASU
2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related to
Embedded Credit Derivatives clarifies the type of embedded credit derivative
that is exempt from embedded derivative bifurcation requirements. Specifically,
only one form of embedded credit derivative qualifies for the exemption - one
that is related only to the subordination of one financial instrument to
another. As a result, entities that have contracts containing an embedded credit
derivative feature in a form other than such subordination may need to
separately account for the embedded credit derivative feature. The
amendments of ASU 2010-11 are effective for each reporting entity at the
beginning of its first fiscal quarter beginning after June 15, 2010. Currently,
the provisions of this ASU have no material impact on the Corporation’s
consolidated financial statements.
In April
2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a
Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a
Single Asset, which codifies the consensus
reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is
Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the
Codification provide that modifications of loans that are accounted for within a
pool under Subtopic 310-30 do not result in the removal of those loans from the
pool even if the modification of those loans would otherwise be considered a
troubled debt restructuring. An entity will continue to be required to consider
whether the pool of assets in which the loan is included is impaired if expected
cash flows for the pool change. ASU 2010-18 does not affect the accounting for
loans under the scope of Subtopic 310-30 that are not accounted for within
pools. Loans accounted for individually under Subtopic 310-30 continue to be
subject to the troubled debt restructuring accounting provisions within Subtopic
310-40.
ASU
2010-18 is effective prospectively for modifications of loans accounted for
within pools under Subtopic 310-30 occurring in the first interim or annual
period ending on or after July 15, 2010. Early application is permitted. Upon
initial adoption of ASU 2010-18, an entity may make a one-time election to
terminate accounting for loans as a pool under Subtopic 310-30. This election
may be applied on a pool-by-pool basis and does not preclude an entity from
applying pool accounting to subsequent acquisitions of loans with credit
deterioration. Management
does not believe that the adoption of this ASU will have a significant impact on
the Corporation’s ongoing financial position, results of operation or
disclosures.
Issued in
July 2010,
ASU 2010-20, Receivables (Topic 310): Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses, is expected by the FASB to help investors assess the credit risk
of a company’s receivables portfolio and the adequacy of its allowance for
credit losses held against the portfolios by expanding credit risk
disclosures. The ASU requires more information about the credit quality of
financing receivables in the disclosures to financial statements, such as aging
information and credit quality indicators. Both new and existing
disclosures must be disaggregated by portfolio segment or class. The
disaggregation of information is based on how a company develops its allowance
for credit losses and how it manages its credit exposure.
The
amendments in this Update apply to all public and nonpublic entities with
financing receivables. Financing receivables include loans and trade
accounts receivable. However, short-term trade accounts receivable,
receivables measured at fair value or lower of cost or fair value, and debt
securities are exempt from these disclosure amendments. For
public companies, the amendments that require disclosures as of the end of a
reporting period are effective for periods ending on or after December
15, 2010. The amendments that require disclosures about activity that
occurs during a reporting period are effective for periods beginning on or after
December 15, 2010. Management believes adoption of this ASU will
result in additional detailed disclosures concerning the allowance for loan
losses, effective with the December 31, 2010 financial statements.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET
RISK
Market
risk is the risk of loss arising from adverse changes in market rates and prices
of the Corporation’s financial instruments. In addition to the
effects of interest rates, the market prices of the Corporation’s debt
securities within the available-for-sale securities portfolio are affected by
fluctuations in the risk premiums (amounts of spread over risk-free rates)
demanded by investors.
Management
cannot control changes in market prices of securities based on fluctuations in
the risk premiums demanded by investors, nor can management control the volume
of deferrals or defaults by other entities on trust-preferred securities.
However, management attempts to limit the risk that economic conditions would
force the Corporation to sell securities for realized losses by maintaining a
strong capital position (discussed in the “Stockholders’ Equity and Capital
Adequacy” section of Management’s Discussion and Analysis) and ample sources of
liquidity (discussed in the “Liquidity” section of Management’s Discussion and
Analysis).
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
The
Corporation’s two major categories of market risk are interest rate risk and
equity securities risk, which are discussed in the following
sections.
INTEREST
RATE RISK
Business
risk arising from changes in interest rates is an inherent factor in operating a
bank. The Corporation’s assets are predominantly long-term, fixed rate loans and
debt securities. Funding for these assets comes principally from shorter-term
deposits and borrowed funds. Accordingly, there is an inherent risk of lower
future earnings or decline in fair value of the Corporation’s financial
instruments when interest rates change.
The
Corporation uses a simulation model to calculate the potential effects of
interest rate fluctuations on net interest income and the market value of
portfolio equity. For purposes of these calculations, the market value of
portfolio equity includes the fair values of financial instruments, such as
securities, loans, deposits and borrowed funds, and the book values of
nonfinancial assets and liabilities, such as premises and equipment and accrued
expenses. The model measures and projects potential changes in net interest
income, and calculates the discounted present value of anticipated cash flows of
financial instruments, assuming an immediate increase or decrease in interest
rates. Management ordinarily runs a variety of scenarios within a range of plus
or minus 50-300 basis points of current rates.
The
Corporation’s Board of Directors has established policy guidelines for
acceptable levels of interest rate risk, based on an immediate increase or
decrease in interest rates. The policy provides limits at +/- 100, 200 and 300
basis points from current rates for fluctuations in net interest income from the
baseline (flat rates) one-year scenario. The policy also limits acceptable
market value variances from the baseline values based on current
rates.
Table
XII, which follows this discussion, is based on the results of the simulation
model as of April 30, 2010 and November 30, 2009. The 2009 figures include a pro
forma adjustment to increase equity by $21,410,000, which represents the
proceeds received from the Corporation’s sale of common stock in December 2009
net of issuance costs. The table also includes pro forma adjustments to reflect
the Corporation’s December 2009 purchases of several investment
securities. The securities purchased totaled approximately
$22,382,000 and included obligations of U.S. Government agencies and a
collateralized mortgage obligation issued by a U.S. Government
agency.
As
indicated in the table, the Corporation is liability sensitive, and therefore
net interest income and market value generally increase when interest rates fall
and decrease when interest rates rise. The table shows that as of April 30, 2010
and November 30, 2009, the changes in net interest income and changes in market
value were within the policy limits in all scenarios.
In
December 2007, the Corporation entered into repurchase agreements (borrowings)
totaling $80 million to fund the purchase of investment securities. The
borrowings include embedded caps providing that, if 3-month LIBOR were to exceed
5.15%, the interest rate payable on the repurchase agreements would fall, down
to a minimum of 0%, based on parameters included in the repurchase
agreements. The embedded cap on one of the $40 million borrowings
expires in December 2010, and the embedded cap on the other $40 million
borrowing expires in December 2012. Three-month LIBOR has not
exceeded 5.15% since the embedded caps were acquired; therefore, they have not
affected interest expense to date. The 3-month LIBOR was 0.32% at April 30, 2010
and 0.26% at November 30, 2009. Since the embedded caps are effective
only when 3-month LIBOR exceeds 5.15%, the Corporation would be unable to
realize an interest expense reduction in any of the scenarios shown in Table XII
at April 2010 or November 2009.
The model
makes estimates, at each level of interest rate change, regarding cash flows
from principal repayments on loans and mortgage-backed securities and call
activity on other investment securities. Actual results could vary significantly
from these estimates, which could result in significant differences in the
calculations of projected changes in net interest margin and market value of
portfolio equity. Also, the model does not make estimates related to changes in
the composition of the deposit portfolio that could occur due to rate
competition, and the table does not necessarily reflect changes that management
would make to realign the portfolio as a result of changes in interest
rates.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
TABLE
XII - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
April
30, 2010 Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
Period
Ending April 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Interest
|
|
|
Net
Interest
|
|
|
NII
|
|
|
NII
|
|
Basis
Point Change in Rates
|
|
Income
|
|
|
Expense
|
|
|
Income
(NII)
|
|
|
%
Change
|
|
|
Risk
Limit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
$68,884
|
|
|
$32,425
|
|
|
$36,459
|
|
|
|
-11.7 |
% |
|
|
20.0 |
% |
+200
|
|
|
66,275 |
|
|
|
27,465 |
|
|
|
38,810 |
|
|
|
-6.1 |
% |
|
|
15.0 |
% |
+100
|
|
|
63,487 |
|
|
|
22,831 |
|
|
|
40,656 |
|
|
|
-1.6 |
% |
|
|
10.0 |
% |
0
|
|
|
60,143 |
|
|
|
18,831 |
|
|
|
41,312 |
|
|
|
0.0 |
% |
|
|
0.0 |
% |
-100
|
|
|
57,028 |
|
|
|
17,793 |
|
|
|
39,235 |
|
|
|
-5.0 |
% |
|
|
10.0 |
% |
-200
|
|
|
54,852 |
|
|
|
17,345 |
|
|
|
37,507 |
|
|
|
-9.2 |
% |
|
|
15.0 |
% |
-300
|
|
|
53,825 |
|
|
|
17,273 |
|
|
|
36,552 |
|
|
|
-11.5 |
% |
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Value of Portfolio Equity
|
|
|
|
|
|
|
|
|
|
|
|
at
April 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present
|
|
|
Present
|
|
|
Present
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Basis
Point Change in Rates
|
|
Equity
|
|
|
%
Change
|
|
|
Risk
Limit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
$103,160
|
|
|
|
-31.2 |
% |
|
|
45.0 |
% |
|
|
|
|
|
|
|
|
+200
|
|
|
120,793 |
|
|
|
-19.4 |
% |
|
|
35.0 |
% |
|
|
|
|
|
|
|
|
+100
|
|
|
137,434 |
|
|
|
-8.3 |
% |
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
0
|
|
|
149,898 |
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
-100
|
|
|
155,466 |
|
|
|
3.7 |
% |
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
-200
|
|
|
167,758 |
|
|
|
11.9 |
% |
|
|
35.0 |
% |
|
|
|
|
|
|
|
|
-300
|
|
|
190,818 |
|
|
|
27.3 |
% |
|
|
45.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
30, 2009 Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
Period
Ending November 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Interest
|
|
|
Net
Interest
|
|
|
NII
|
|
|
NII
|
|
Basis
Point Change in Rates
|
|
Income
|
|
|
Expense
|
|
|
Income
(NII)
|
|
|
%
Change
|
|
|
Risk
Limit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
$70,171
|
|
|
$34,669
|
|
|
$35,502
|
|
|
|
-12.0 |
% |
|
|
20.0 |
% |
+200
|
|
|
67,254 |
|
|
|
29,536 |
|
|
|
37,718 |
|
|
|
-6.5 |
% |
|
|
15.0 |
% |
+100
|
|
|
64,419 |
|
|
|
24,412 |
|
|
|
40,007 |
|
|
|
-0.8 |
% |
|
|
10.0 |
% |
0
|
|
|
61,041 |
|
|
|
20,700 |
|
|
|
40,341 |
|
|
|
0.0 |
% |
|
|
0.0 |
% |
-100
|
|
|
57,581 |
|
|
|
19,579 |
|
|
|
38,002 |
|
|
|
-5.8 |
% |
|
|
10.0 |
% |
-200
|
|
|
55,240 |
|
|
|
19,215 |
|
|
|
36,025 |
|
|
|
-10.7 |
% |
|
|
15.0 |
% |
-300
|
|
|
54,360 |
|
|
|
19,008 |
|
|
|
35,352 |
|
|
|
-12.4 |
% |
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Value of Portfolio Equity
|
|
|
|
|
|
|
|
|
|
|
|
at
November 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present
|
|
|
Present
|
|
|
Present
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Basis
Point Change in Rates
|
|
Equity
|
|
|
%
Change
|
|
|
Risk
Limit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
$98,045
|
|
|
|
-28.8 |
% |
|
|
45.0 |
% |
|
|
|
|
|
|
|
|
+200
|
|
|
116,071 |
|
|
|
-15.8 |
% |
|
|
35.0 |
% |
|
|
|
|
|
|
|
|
+100
|
|
|
131,202 |
|
|
|
-4.8 |
% |
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
0
|
|
|
137,770 |
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
-100
|
|
|
137,307 |
|
|
|
-0.3 |
% |
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
-200
|
|
|
146,347 |
|
|
|
6.2 |
% |
|
|
35.0 |
% |
|
|
|
|
|
|
|
|
-300
|
|
|
172,390 |
|
|
|
25.1 |
% |
|
|
45.0 |
% |
|
|
|
|
|
|
|
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
EQUITY
SECURITIES RISK
The
Corporation’s equity securities portfolio consists of investments in stock of
banks and bank holding companies. Investments in bank stocks are subject to risk
factors that affect the banking industry in general, including credit risk,
competition from non-bank entities, interest rate risk and other factors, which
could result in a decline in market prices. Also, losses could occur in
individual stocks held by the Corporation because of specific circumstances
related to each bank. As discussed further in Note 5 of the consolidated
financial statements, the Corporation recognized no OTTI charges on bank stocks
during the second quarter 2010 but has recognized OTTI charges on bank stocks
totaling $10,000 in the
first six months of 2010.
Equity
securities held as of June 30, 2010 and December 31, 2009 are presented in Table
XIII. Table XIII presents quantitative data concerning the effects of a decline
in fair value of the Corporation’s equity securities of 10% or
20%. The data in Table XIII does not reflect the effects of any
appreciation in value that may occur, nor does it present the Corporation’s
maximum exposure to loss on equity securities, which would be 100% of their fair
value as of June 30, 2010.
TABLE
XIII - EQUITY SECURITIES RISK
|
|
|
|
|
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
Hypothetical
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
10%
|
|
|
20%
|
|
|
|
|
|
|
|
Decline
In
|
|
|
Decline
In
|
|
|
|
|
|
Fair
|
|
Market
|
|
|
Market
|
|
At
June 30, 2010
|
Cost
|
|
|
Value
|
|
Value
|
|
|
Value
|
|
Banks
and bank holding companies
|
$4,239
|
|
|
$5,290
|
|
($529)
|
|
|
($1,058)
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
10%
|
|
|
20%
|
|
|
|
|
|
|
|
Decline
In
|
|
|
Decline
In
|
|
|
|
|
|
Fair
|
|
Market
|
|
|
Market
|
|
At
December 31, 2009
|
Cost
|
|
|
Value
|
|
Value
|
|
|
Value
|
|
Banks
and bank holding companies
|
$5,367
|
|
|
$6,662
|
|
($666)
|
|
|
($1,332)
|
|
ITEM 4. CONTROLS AND
PROCEDURES
The
Corporation’s management, under the supervision of and with the participation of
the Corporation’s Chief Executive Officer and Chief Financial Officer, has
carried out an evaluation of the design and effectiveness of the Corporation’s
disclosure controls and procedures as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period
covered by this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, the Corporation’s disclosure controls and procedures are
effective to ensure that all material information required to be disclosed in
reports the Corporation files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.
There
were no significant changes in the Corporation’s internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or that are reasonably likely to affect, our internal
control over financial reporting.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
PART
II – OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
The
Corporation and the subsidiary banks 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.
Except as
described herein, there have been no material changes from the risk factors
previously disclosed in Item 1A of the Corporation’s Form 10-K filed March 1,
2010.
Participation in the TARP Capital
Purchase Program - On August 4, 2010, the Corporation repurchased all of
the Preferred Stock issued to the United States Department of the Treasury under
the TARP Capital Purchase Program. As a result of repurchasing all of
the Preferred Stock, the Corporation is no longer subject to limitations and
requirements of the TARP Program, including certain limits on executive
compensation, the amounts of dividends that could be paid on common stock
without prior consent of the Treasury and on repurchases of common stock without
prior consent of the Treasury.
Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Act”) - On July 21, 2010, President Obama
signed the Act into law. The Act contains numerous and wide-ranging
changes to the structure of the U.S. financial system. Portions of
the Act are effective at different times, and many of the provisions require
follow-on, more detailed rulemaking by regulators. Consequently, the
Act’s impact on the financial system in general and the Corporation in
particular cannot be predicted at this time. Some of the Act’s
provisions management believes may impact the Corporation’s financial condition
and results of operations over the next few years are as follows:
|
·
|
requires
the establishment of minimum leverage and risk-based capital requirements
applicable to bank holding companies that are not less than
those currently applicable to insured depository institutions (currently
5%, 6% and 10% to be “well capitalized”, and 4%, 4% and 8% to be
“adequately capitalized”)
|
|
·
|
alters
the FDIC’s base for determining deposit insurance assessments by requiring
the assessments be determined based on “average consolidated
total assets” less the institution’s “average tangible equity,” rather
than on a bank’s deposits
|
|
·
|
increases
the FDIC’s minimum reserve ratio for the deposit insurance fund from 1.15%
to 1.35% of estimated deposits with no upward limit. The FDIC
is required to “offset the effect” of the increased minimum reserve ratio
on institutions with less than $10 billion in total consolidated
assets. The intent appears to be to require the FDIC to impose
higher premiums on larger banks in order to get from the old minimum of
1.15% to the new 1.35%, but given the current reserve ratio of negative
0.38%, all institutions can expect assessments to remain significant for
the foreseeable future. The Act allows the FDIC until September
30, 2020 to reach 1.35%.
|
|
·
|
eliminates
the prohibition against paying interest on commercial checking accounts,
effective one year after enactment
|
|
·
|
requires
the Federal Reserve, within nine months of enactment, to
prescribe regulations to establish standards for determining that
interchange transaction fees meet the new statutory standard of reasonable
and proportional to the cost, which may lead to reductions in the
Corporation’s non-interest revenue from interchange
fees
|
The Act
has other significant features, some of which are as follows: (i) makes
permanent the 2008 increase in the maximum deposit insurance amount to $250,000,
and extends until December 31, 2012 full deposit insurance coverage for
qualifying noninterest-bearing transaction accounts, (ii) within the Act is the
Mortgage Reform and Anti-Predatory Lending Act, a broad piece of legislation
intended to curtail abusive residential mortgage lending practices that
contributed to the mortgage/housing crisis, (iii) requires the formation of the
Bureau of Consumer Financial Protection as a new, independent bureau within the
Federal Reserve, with very broad rulemaking and supervisory authority with
respect to federal consumer financial laws, (iv) establishes the Financial
Stability Oversight Council, to serve as an early warning system identifying
risks in firms and market activities, to enhance oversight of the financial
system as a whole and to harmonize prudential standards across financial
regulatory agencies, and (v) establishes several requirements related to
executive compensation and corporate governance.
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
c.
Issuer
Purchases of Equity Securities
None
Item
3.
|
Defaults
Upon Senior Securities
|
None
Item
4.
|
Removed
and Reserved
|
Item
5.
|
Other
Information
|
None
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Item
6. Exhibits
2. Plan of acquisition, reorganization, arrangement,
|
|
Not
applicable
|
liquidation or succession
|
|
|
|
|
|
3. (i) Articles of Incorporation
|
|
Incorporated
by reference to Exhibit 3.1 of
|
|
|
the
Corporation's Form 8-K filed
|
|
|
September
21, 2009
|
|
|
|
3. (ii) By-laws
|
|
Incorporated
by reference to Exhibit 3.2 of the
|
|
|
Corporation's
Form 8-K filed September 21, 2009
|
|
|
|
4. Instruments defining the rights of security
holders,
|
|
|
including indentures
|
|
|
4.1
Certificate of Designation establishing the Series A
|
|
Incorporated
by reference to Exhibit 3.1 of the
|
Preferred Stock
|
|
Corporation's
Form 8-K filed September 21, 2009
|
|
|
|
4.3
Form of Warrant to Purchase Common Stock
|
|
Incorporated
by reference to Exhibit 4.2 of the
|
|
|
Corporation's
Form 8-K filed January 22, 2009
|
|
|
|
10. Material contracts:
|
|
|
10.1 Restricted Stock Agreement dated March 5, 2010
|
|
Filed
herewith
|
between the Corporation and Charles H. Updegraff,
Jr.
|
|
|
|
|
|
11. Statement re: computation of per share earnings
|
|
Information
concerning the computation of
|
|
|
earnings
per share is provided in Note 2
|
|
|
to
the Consolidated Financial Statements,
|
|
|
which
is included in Part I, Item 1 of Form 10-Q
|
|
|
|
15. Letter re: unaudited interim financial information
|
|
Not
applicable
|
|
|
|
18. Letter re: change in accounting principles
|
|
Not
applicable
|
|
|
|
19. Report furnished to security holders
|
|
Not
applicable
|
|
|
|
22. Published report regarding matters submitted to
|
|
|
vote of security holders
|
|
Not
applicable
|
|
|
|
23. Consents of experts and counsel
|
|
Not
applicable
|
|
|
|
24. Power of attorney
|
|
Not
applicable
|
|
|
|
31. Rule 13a-14(a)/15d-14(a) certifications:
|
|
|
31.1 Certification of Chief Executive
Officer
|
|
Filed
herewith
|
31.2 Certification of Chief Financial
Officer
|
|
Filed
herewith
|
|
|
|
32. Section 1350 certifications
|
|
Filed
herewith
|
|
|
|
99. Additional exhibits
|
|
Not
applicable
|
|
|
|
100. XBRL-related documents
|
|
Not
applicable
|
CITIZENS
& NORTHERN CORPORATION – FORM 10-Q
Signatures
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
CITIZENS
& NORTHERN CORPORATION
|
|
|
|
August
6, 2010
|
|
By:
|
Charles
H. Updegraff, Jr.
|
Date
|
|
|
President
and Chief Executive Officer
|
|
|
|
August
6, 2010
|
|
By:
|
Mark
A. Hughes
|
Date
|
|
|
Treasurer
and Chief Financial
Officer
|