XNAS:CZNC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:CZNC (): Fair Value Estimate
Premium
XNAS:CZNC (): Consider Buying
Premium
XNAS:CZNC (): Consider Selling
Premium
XNAS:CZNC (): Fair Value Uncertainty
Premium
XNAS:CZNC (): Economic Moat
Premium
XNAS:CZNC (): Stewardship
Premium
 

 

 

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, 2012

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

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

 

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) 12,236,327 Shares Outstanding on August 2, 2012

 

 
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CITIZENS & NORTHERN CORPORATION

Index

 

Part I.  Financial Information    
     
Item 1.  Financial Statements    
     
Consolidated Balance Sheets (Unaudited) – June 30, 2012 and December 31, 2011   Page    3
     
Consolidated Statements of Operations (Unaudited) – Three Months and Six Months Ended June 30, 2012 and 2011   Page    4
     
Consolidated Statements of Comprehensive Income  (Unaudited) – Three Months and Six Months Ended June 30, 2012 and 2011   Page    5
     
Consolidated Statements of Cash Flows (Unaudited) –  Six Months Ended June 30, 2012 and 2011   Page    6
     
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Six Months Ended June 30, 2012 and 2011   Page    7
     
Notes to Unaudited Consolidated Financial Statements   Pages 8 – 35
     
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations   Pages 36 – 55
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk   Pages 55 – 58
     
Item 4.  Controls and Procedures   Page  58
     
Part II.  Other Information   Pages  59 – 60
     
Signatures  
     
Exhibit 31.1.  Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer  
     
Exhibit 31.2.  Rule 13a-14(a)/15d-14(a) Certification - Chief Financial Officer  
     
Exhibit 32.  Section 1350 Certifications  

 

2
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

PART 1. FINANCIAL INFORMATION        
ITEM 1. FINANCIAL STATEMENTS        
CONSOLIDATED BALANCE SHEETS (Unaudited)        
(In Thousands Except Share Data)  June 30,   December 31, 
   2012   2011 
ASSETS          
Cash and due from banks:          
Noninterest-bearing  $19,815   $17,618 
Interest-bearing   49,343    42,957 
Total cash and due from banks   69,158    60,575 
Available-for-sale securities, at fair value   478,368    481,685 
Loans held for sale   3,190    939 
           
Loans receivable   704,434    708,315 
Allowance for loan losses   (7,657)   (7,705)
Loans, net   696,777    700,610 
Bank-owned life insurance   21,125    20,889 
Accrued interest receivable   4,556    4,797 
Bank premises and equipment, net   19,090    19,028 
Foreclosed assets held for sale   904    1,235 
Deferred tax asset, net   3,962    6,173 
Intangible asset - Core deposit intangibles   175    212 
Intangible asset – Goodwill   11,942    11,942 
Other assets   18,280    15,650 
TOTAL ASSETS  $1,327,527   $1,323,735 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $199,089   $193,595 
Interest-bearing   830,367    824,611 
Total deposits   1,029,456    1,018,206 
Short-term borrowings   4,242    4,950 
Long-term borrowings   110,038    125,363 
Accrued interest and other liabilities   7,729    7,831 
TOTAL LIABILITIES  $1,151,465    1,156,350 
           
STOCKHOLDERS' EQUITY          
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued at June 30, 2012 and December 31, 2011   0    0 
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2012 and 2011; issued 12,489,836 at June 30, 2012 and 12,460,920 at December 31, 2011   12,490    12,461 
Paid-in capital   67,817    67,568 
Retained earnings   88,956    82,302 
Treasury stock, at cost; 254,519 shares at June 30, 2012 and 305,391 shares at December 31, 2011   (4,255)   (5,106)
Sub-total   165,008    157,225 
Accumulated other comprehensive income:          
Unrealized gains on available-for-sale securities   11,519    10,791 
Defined benefit plans   (465)   (631)
Total accumulated other comprehensive income   11,054    10,160 
TOTAL STOCKHOLDERS' EQUITY   176,062    167,385 
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY  $1,327,527   $1,323,735 

 

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

 

3
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CONSOLIDATED STATEMENTS OF OPERATIONS  3 Months Ended   Fiscal Year To Date 
(In Thousands, Except Per Share Data) (Unaudited)  June 30,   June 30,   6 Months Ended June 30, 
   2012   2011   2012   2011 
INTEREST INCOME                    
Interest and fees on loans  $10,265   $10,854   $20,640   $21,722 
Interest on balances with depository institutions   31    16    59    32 
Interest on loans to political subdivisions   375    372    752    747 
Income from available-for-sale and held-to-maturity securities:                    
Taxable   2,520    2,849    5,178    5,542 
Tax-exempt   1,265    1,291    2,528    2,575 
Dividends   73    61    148    123 
Total interest and dividend income   14,529    15,443    29,305    30,741 
INTEREST EXPENSE                    
Interest on deposits   1,271    2,267    2,621    4,835 
Interest on short-term borrowings   1    8    4    14 
Interest on long-term borrowings   1,129    1,353    2,278    2,795 
Total interest expense   2,401    3,628    4,903    7,644 
Net interest income   12,128    11,815    24,402    23,097 
Provision (credit) for loan losses   367    31    185    (161)
Net interest income after provision (credit) for loan losses   11,761    11,784    24,217    23,258 
OTHER INCOME                    
Service charges on deposit accounts   1,256    1,225    2,417    2,356 
Service charges and fees   235    207    455    425 
Trust and financial management revenue   960    946    1,889    1,823 
Interchange revenue from debit card transactions   488    485    983    937 
Net gains from sale of loans   373    155    638    414 
Increase in cash surrender value of life insurance   117    132    236    254 
Insurance commissions, fees and premiums   73    58    107    126 
Impairment loss on limited partnership investment   0    0    0    (948)
Other operating income   593    465    1,129    841 
Sub-total   4,095    3,673    7,854    6,228 
Total other-than-temporary impairment losses on available-for-sale securities   0    0    (67)   0 
Portion of (gain) loss recognized in other comprehensive loss (before taxes)   0    0    0    0 
Net impairment losses recognized in earnings   0    0    (67)   0 
Realized gains on available-for-sale securities, net   203    163    268    2,002 
Net realized gains on available-for-sale securities   203    163    201    2,002 
Total other income   4,298    3,836    8,055    8,230 
OTHER EXPENSES                    
Salaries and wages   3,586    3,469    7,161    6,870 
Pensions and other employee benefits   1,090    1,018    2,456    2,324 
Occupancy expense, net   628    665    1,264    1,397 
Furniture and equipment expense   461    453    943    937 
FDIC Assessments   157    189    303    514 
Pennsylvania shares tax   340    320    672    639 
Other operating expense   2,018    1,680    3,998    3,376 
Total other expenses   8,280    7,794    16,797    16,057 
Income before income tax provision   7,779    7,826    15,475    15,431 
Income tax provision   2,094    2,129    4,203    4,193 
NET INCOME  $5,685   $5,697   $11,272   $11,238 
NET INCOME PER SHARE - BASIC  $0.46   $0.47   $0.92   $0.92 
NET INCOME PER SHARE - DILUTED  $0.46   $0.47   $0.92   $0.92 

 

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

 

4
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands) (Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Net income  $5,685   $5,697   $11,272   $11,238 
                     
Unrealized gains on available-for-sale securities:                    
Unrealized holding gains on available-for-sale securities   1,227    5,949    1,571    12,074 
Reclassification adjustment for gains realized in income   (203)   (163)   (201)   (2,002)
Other comprehensive gain on available-for-sale securities   1,024    5,786    1,370    10,072 
                     
Unfunded pension and postretirement obligations:                    
Change in items from defined benefit plans included in accumulated other comprehensive income   0    (3)   200    (122)
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost   20    14    40    27 
Other comprehensive gain (loss) on unfunded retirement obligations   20    11    240    (95)
                     
Other comprehensive income before income tax   1,044    5,797    1,610    9,977 
Income tax related to other comprehensive income   (364)   (1,969)   (716)   (3,390)
                     
Net other comprehensive income   680    3,828    894    6,587 
                     
Total comprehensive income  $6,365   $9,525   $12,166   $17,825 

 

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

 

5
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

CONSOLIDATED STATEMENTS OF CASH FLOWS  Six Months Ended June 30, 
(In Thousands) (Unaudited)  2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $11,272   $11,238 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision (credit) for loan losses   185    (161)
Realized gains on available-for-sale securities, net   (201)   (2,002)
Gain on disposition of premises and equipment   (270)   0 
Loss on sale of foreclosed assets, net   80    43 
Depreciation expense   964    1,058 
Accretion and amortization on securities, net   416    753 
Accretion and amortization on loans, deposits and borrowings, net   (26)   (18)
Amortization of mortgage servicing rights   44    29 
Impairment loss on limited partnership interest   0    948 
Increase in cash surrender value of life insurance   (236)   (254)
Stock-based compensation   411    351 
Amortization of core deposit intangibles   37    57 
Deferred income taxes   1,495    2,562 
Gains on sales of mortgage loans, net   (638)   (414)
Origination of mortgage loans for sale   (22,121)   (8,453)
Proceeds from sales of mortgage loans   20,379    13,807 
(Increase) decrease in accrued interest receivable and other assets   (2,517)   2,750 
(Decrease) increase in accrued interest payable and other liabilities   (308)   507 
Net Cash Provided by Operating Activities   8,966    22,801 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of certificates of deposit   (960)   0 
Proceeds from sales of available-for-sale securities   11,781    16,615 
Proceeds from calls and maturities of available-for-sale securities   56,423    54,054 
Purchase of available-for-sale securities   (63,502)   (79,627)
Redemption of Federal Home Loan Bank of Pittsburgh stock   648    796 
Net decrease in loans   3,159    14,424 
Purchase of premises and equipment   (1,028)   (266)
Proceeds from disposition of premises and equipment   454    0 
Purchase of investment in limited liability entity   (534)   (200)
Return of principal on limited liability entity investments   47    70 
Proceeds from sale of foreclosed assets   858    230 
Net Cash Provided by Investing Activities   7,346    6,096 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net increase (decrease) in deposits   11,244    (8,996)
Net (decrease) increase in short-term borrowings   (708)   1,930 
Repayments of long-term borrowings   (15,325)   (15,313)
Purchase of treasury stock   0    (571)
Sale of treasury stock   155    16 
Tax benefit from compensation plans   30    31 
Common dividends paid   (4,085)   (2,903)
Net Cash Used in Financing Activities   (8,689)   (25,806)
INCREASE IN CASH  AND CASH EQUIVALENTS   7,623    3,091 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR   56,815    46,301 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $64,438   $49,392 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Assets acquired through foreclosure of real estate loans  $521   $1,401 
Accrued purchase of available-for-sale securities  $230   $0 
Interest paid  $5,117   $7,694 
Income taxes paid  $3,050   $400 

 

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

 

6
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Consolidated Statements of Changes in Stockholders' Equity

Six Months Ended June 30, 2012 and 2011

(In Thousands Except Share and Per Share Data)                      Accum. Other         
(Unaudited)  Common   Treasury   Common   Paid-in   Retained   Comprehensive   Treasury     
   Shares   Shares   Stock   Capital   Earnings   Income (Loss)   Stock   Total 
Six Months Ended June 30, 2012:                                        
Balance, December 31, 2011   12,460,920    305,391   $12,461   $67,568   $82,302   $10,160   $(5,106)  $167,385 
Net income                       11,272              11,272 
Other comprehensive income, net                            894         894 
Cash dividends declared on common stock, $.38 per share                       (4,640)             (4,640)
Shares issued for dividend reinvestment Plan   28,916         29    526                   555 
Shares issued from treasury related to exercise of stock options        (10,352)        (19)             174    155 
Restricted stock granted        (42,552)        (711)             711    0 
Forfeiture of restricted stock        2,032         34              (34)   0 
Stock-based compensation expense                  411                   411 
Tax benefit of stock options                  8                   8 
Tax benefit from employee benefit plan                       22              22 
Balance, June 30, 2012   12,489,836    254,519   $12,490   $67,817   $88,956   $11,054   $(4,255)  $176,062 
                                         
Six Months Ended June 30, 2011:                                        
Balance, December 31, 2010   12,408,212    254,614   $12,408   $66,648   $65,920   ($1,601)  $(4,431)  $138,944 
Net income                       11,238              11,238 
Other comprehensive income, net                            6,587         6,587 
Cash dividends declared on common stock, $.27 per share                       (3,287)             (3,287)
Shares issued for dividend reinvestment plan   24,556         25    359                   384 
Treasury stock purchased        40,302                        (571)   (571)
Shares issued from treasury related to exercise of stock options        (1,108)        (3)             19    16 
Restricted stock granted        (15,622)        (272)             272    0 
Forfeiture of restricted stock        189         3              (3)   0 
Stock-based compensation expense                  351                   351 
Tax benefit from employee benefit plan                       31              31 
Balance, June 30, 2011   12,432,768    278,375   $12,433   $67,086   $73,902   $4,986   $(4,714)  $153,693 

 

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

 

7
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

 

Notes to Unaudited Consolidated Financial Statements

 

1. BASIS OF INTERIM PRESENTATION

 

The consolidated financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2011, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain 2011 information has been reclassified for consistency with the 2012 presentation.

 

Operating results reported for the three-month and six-month periods ended June 30, 2012 might not be indicative of the results for the year ending December 31, 2012. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

 

2. PER COMMON SHARE DATA

 

Net income per share is based on the weighted-average number of shares of common stock outstanding. The following data show the amounts used in computing basic and diluted net income per share. As shown in the table that follows, diluted earnings per share is computed using weighted average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation's common stock during the period.

       Weighted-     
       Average   Earnings 
   Net   Common   Per 
   Income   Shares   Share 
Six Months Ended June 30, 2012               
Earnings per share – basic  $11,272,000    12,216,339   $0.92 
Dilutive effect of potential common stock arising from stock options:               
Exercise of outstanding stock options        204,836      
Hypothetical share repurchase at $19.35        (177,872)     
Earnings per share – diluted  $11,272,000    12,243,303   $0.92 
                
Six Months Ended June 30, 2011               
Earnings per share – basic  $11,238,000    12,176,027   $0.92 
Dilutive effect of potential common stock arising from stock options:               
Exercise of outstanding stock options        93,266      
Hypothetical share repurchase at $15.58        (90,140)     
Earnings per share – diluted  $11,238,000    12,179,153   $0.92 
                
Quarter Ended June 30, 2012               
Earnings per share – basic  $5,685,000    12,225,808   $0.46 
Dilutive effect of potential common stock arising from stock options:               
Exercise of outstanding stock options        137,591      
Hypothetical share repurchase at $18.26        (120,566)     
Earnings per share – diluted  $5,685,000    12,242,833   $0.46 

 

8
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

       Weighted-     
       Average   Earnings 
   Net   Common   Per 
   Income   Shares   Share 
Quarter Ended June 30, 2011               
Earnings per share – basic  $5,697,000    12,177,110   $0.47 
Dilutive effect of potential common stock arising from stock options:               
Exercise of outstanding stock options        92,449      
Hypothetical share repurchase at $15.58        (89,360)     
Earnings per share – diluted  $5,697,000    12,180,199   $0.47 

 

Stock options that were anti-dilutive were excluded from net income per share calculations. Weighted-average common shares available from anti-dilutive instruments totaled 147,509 shares in the six-month period ended June 30, 2012, 225,245 shares in the six-month period ended June 30, 2011, 210,875 shares in the second quarter 2012 and 224,063 shares in the second quarter 2011.

 

3. COMPREHENSIVE INCOME

 

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

   Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Six Months Ended June 30, 2012               
Unrealized gains on available-for-sale securities:               
Unrealized holding gains on available-for-sale securities  $1,571   $(712)  $859 
Reclassification adjustment for gains realized in income   (201)   70    (131)
Other comprehensive gain on available-for-sale securities   1,370    (642)   728 
                
Unfunded pension and postretirement obligations:               
Change in items from defined benefit plans included in accumulated other comprehensive income   200    (61)   139 
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost   40    (13)   27 
Other comprehensive gain on unfunded retirement obligations   240    (74)   166 
                
Total other comprehensive income  $1,610   $(716)  $894 

 

9
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

   Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Six Months Ended June 30, 2011               
Unrealized gains on available-for-sale securities:               
Unrealized holding gains on available-for-sale securities  $12,074   $(4,103)  $7,971 
Reclassification adjustment for gains realized in income   (2,002)   681    (1,321)
Other comprehensive gain on available-for-sale securities   10,072    (3,422)   6,650 
                
Unfunded pension and postretirement obligations:               
Change in items from defined benefit plans included in accumulated other comprehensive income   (122)   41    (81)
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost   27    (9)   18 
Other comprehensive loss on unfunded retirement obligations   (95)   32    (63)
                
Total other comprehensive income  $9,977   $(3,390)  $6,587 

 

   Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Quarter Ended June 30, 2012               
Unrealized gains on available-for-sale securities:               
Unrealized holding gains on available-for-sale securities  $1,227   $(428)  $799 
Reclassification adjustment for gains realized in income   (203)   71    (132)
Other comprehensive gain on available-for-sale securities   1,024    (357)   667 
                
Unfunded pension and postretirement obligations:               
Change in items from defined benefit plans included in accumulated other comprehensive income   0    0    0 
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost   20    (7)   13 
Other comprehensive gain on unfunded retirement obligations   20    (7)   13 
                
Total other comprehensive income  $1,044   $(364)  $680 

 

   Before-Tax   Income Tax   Net-of-Tax 
   Amount   Effect   Amount 
Quarter Ended June 30, 2011               
Unrealized gains on available-for-sale securities:               
Unrealized holding gains on available-for-sale securities  $5,949   $(2,021)  $3,928 
Reclassification adjustment for gains realized in income   (163)   56    (107)
Other comprehensive gain on available-for-sale securities   5,786    (1,965)   3,821 
                
Unfunded pension and postretirement obligations:               
Change in items from defined benefit plans included in accumulated other comprehensive income   (3)   1    (2)
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost   14    (5)   9 
Other comprehensive gain on unfunded retirement obligations   11    (4)   7 
                
Total other comprehensive income  $5,797   $(1,969)  $3,828 

 

10
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Changes in the components of accumulated other comprehensive income are as follows:

 

           Accumulated 
   Unrealized   Unfunded   Other 
   Holding Gains   Retirement   Comprehensive 
   on Securities   Obligations   Income 
Six Months Ended June 30, 2012               
Balance, beginning of period  $10,791   $(631)  $10,160 
Change during six months ended June 30, 2012   728    166    894 
Balance, end of period  $11,519   $(465)  $11,054 
                
Six Months Ended June 30, 2011               
Balance, beginning of period  $(1,351)  $(250)  $(1,601)
Change during six months ended June 30, 2011   6,650    (63)   6,587 
Balance, end of period  $5,299   $(313)  $4,986 
                
Quarter Ended June 30, 2012               
Balance, beginning of period  $10,852   $(478)  $10,374 
Change during three months ended June 30, 2012   667    13    680 
Balance, end of period  $11,519   $(465)  $11,054 
                
Quarter Ended June 30, 2011               
Balance, beginning of period  $1,478   $(320)  $1,158 
Change during three months ended June 30, 2011   3,821    7    3,828 
Balance, end of period  $5,299   $(313)  $4,986 

 

4. CASH AND DUE FROM BANKS

 

Cash and due from banks at June 30, 2012 and December 31, 2011 include the following:

 

(In thousands)  June 30,   Dec. 31, 
   2012   2011 
Cash and cash equivalents  $64,438   $56,815 
Certificates of deposit   4,720    3,760 
Total cash and due from banks  $69,158   $60,575 

 

Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.

 

The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $13,739,000 at June 30, 2012 and $14,035,000 at December 31, 2011.

 

5. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

 

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

 

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

 

11
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

 

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

 

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

 

At June 30, 2012 and December 31, 2011, assets measured at fair value and the valuation methods used are as follows:

 

       June 30, 2012     
   Quoted Prices   Other         
   in Active   Observable   Unobservable   Total 
   Markets   Inputs   Inputs   Fair 
(In Thousands)  (Level 1)   (Level 2)   (Level 3)   Value 
                 
Recurring fair value measurements                    
AVAILABLE-FOR-SALE SECURITIES:                    
Obligations of U.S. Government agencies  $0   $23,916   $0   $23,916 
Obligations of states and political subdivisions:                    
Tax-exempt   0    141,140    0    141,140 
Taxable   0    19,924    0    19,924 
Mortgage-backed securities   0    108,426    0    108,426 
Collateralized mortgage obligations, Issued by U.S. Government agencies   0    165,923    0    165,923 
Trust preferred securities issued by individual institutions   0    6,221    0    6,221 
Collateralized debt obligations:                    
Pooled trust preferred securities - senior tranches   0    0    2,386    2,386 
Pooled trust preferred securities - mezzanine tranches   0    0    1,146    1,146 
Other collateralized debt obligations   0    660    0    660 
Total debt securities   0    466,210    3,532    469,742 
Marketable equity securities   8,626    0    0    8,626 
Total available-for-sale securities   8,626    466,210    3,532    478,368 
Servicing rights   0    0    460    460 
Total recurring fair value measurements  $8,626   $466,210   $3,992   $478,828 
                     
Nonrecurring fair value measurements                    
Impaired loans with a valuation allowance  $0   $0   $3,434   $3,434 
Valuation allowance   0    0    (1,303)   (1,303)
Impaired loans, net   0    0    2,131    2,131 
Foreclosed assets held for sale   0    0    904    904 
Total nonrecurring fair value measurements  $0   $0   $3,035   $3,035 

 

12
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

       December 31, 2011     
   Quoted Prices   Other         
   in Active   Observable   Unobservable   Total 
   Markets   Inputs   Inputs   Fair 
(In Thousands)  (Level 1)   (Level 2)   (Level 3)   Value 
                 
Recurring fair value measurements                    
AVAILABLE-FOR-SALE SECURITIES:                    
Obligations of U.S. Government agencies  $0   $25,587   $0   $25,587 
Obligations of states and political subdivisions:                    
Tax-exempt   0    132,962    0    132,962 
Taxable   0    14,334    0    14,334 
Mortgage-backed securities   0    121,769    0    121,769 
Collateralized mortgage obligations,                    
Issued by U.S. Government agencies   0    165,131    0    165,131 
Trust preferred securities issued by individual institutions   0    8,146    0    8,146 
Collateralized debt obligations:                    
Pooled trust preferred securities - senior tranches   0    0    4,638    4,638 
Pooled trust preferred securities - mezzanine tranches   0    0    730    730 
Other collateralized debt obligations   0    660    0    660 
Total debt securities   0    468,589    5,368    473,957 
Marketable equity securities   7,728    0    0    7,728 
Total available-for-sale securities   7,728    468,589    5,368    481,685 
Servicing rights   0    0    375    375 
Total recurring fair value measurements  $7,728   $468,589   $5,743   $482,060 
                     
Nonrecurring fair value measurements                    
Impaired loans with a valuation allowance  $0   $0   $3,433   $3,433 
Valuation allowance   0    0    (1,126)   (1,126)
Impaired loans, net   0    0    2,307    2,307 
Foreclosed assets held for sale   0    0    1,235    1,235 
Total nonrecurring fair value measurements  $0   $0   $3,542   $3,542 

 

Management determined there have been few trades of pooled trust-preferred securities since 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, the Corporation follows a method of valuing pooled trust-preferred securities using a Level 3 methodology, based on discounted cash flows.

 

Management has calculated the fair value of the Corporation’s pooled trust-preferred securities by applying a discount rate to the estimated cash flows. Management used the cash flow estimates determined using the process described in Note 6 for evaluating pooled trust-preferred securities for other-than-temporary impairment (OTTI). Management used discount rates considered reflective of a market participant’s expectations regarding the extent of credit and liquidity risk inherent in the securities. In establishing the discount rate, management considered: (1) the implied discount rates as of the end of 2007, prior to the market for trust-preferred securities becoming inactive; (2) adjustment to the year-end 2007 discount rates for the change in the spread between indicative market rates over corresponding risk-free rates; 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.

 

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals less estimated selling costs.

 

13
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management. The following table shows quantitative information regarding significant techniques and inputs used at June 30, 2012 for assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:

 

    Fair Value at                    
    6/30/12   Valuation   Unobservable           Method or Value As of
Asset   (In Thousands)   Technique   Input(s)           6/30/12
Pooled trust preferred securities - senior tranches   $ 2,386   Discounted cash flow   Issuer defaults     46.15 %   Actual Deferrals and Defaults as % of Outstanding Collateral
                    23.31 %   Expected Additional Net Deferrals and Defaults as % of Performing Collateral
              Issuer prepayments     34.99 %   Expected Issuer Prepayments as % of Performing Collateral
              Discount rate     11.70 %   Implied 7.57% discount rate at 12/31/07 plus 4.13% spread for credit and liquidity risk
Pooled trust preferred securities - mezzanine tranches     1,146   Discounted cash flow   Issuer defaults     22.95 %   Actual Deferrals and Defaults as % of Outstanding Collateral
                    33.92 %   Expected Additional Net Deferrals and Defaults as % of Performing Collateral
              Future interest rates           Three-month LIBOR forward curve
              Issuer prepayments     3.70 %   Expected Issuer Prepayments as % of Performing Collateral
              Discount rate     3.95 %   Credit and liquidity risk spread added to three-month LIBOR forward curve
Servicing rights     460   Discounted cash flow   Discount rate     12.00 %   Rate used through modeling period
              Loan prepayment speeds     292.00 %   Weighted-average PSA
              Servicing fees     0.25 %   of loan balances
                    5.00 %   of payments are late
                    5.00 %   late fees assessed
                  $ 1.94     Miscellaneous fees per account per month
              Servicing costs   $ 5.50     Monthly servicing cost per account
                  $ 22.00     Additional monthly servicing cost per loan on loans more than 30 days delinquent
                    1.00 %   of loans more than 30 days delinquent
                    3.00 %   annual increase in servicing costs

 

Increases (decreases) in actual or expected issuer defaults tend to decrease (increase) the fair value of the Corporation’s senior and mezzanine tranches of pooled trust preferred securities. The values of the Corporation’s mezzanine tranches of pooled trust preferred securities are also affected by expected future interest rates. However, due to the structure of each security, timing of cash flows, and secondary effects on the financial performance of the underlying issuers, the effects of changes in future interest rates on the fair value of the Corporation’s holdings are not quantifiably estimable. The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans.

 

14
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:

 

   Three Months Ended June 30, 2012   Six Months Ended June 30, 2012 
   Pooled Trust   Pooled Trust           Pooled Trust   Pooled Trust         
   Preferred   Preferred           Preferred   Preferred         
   Securities -   Securities -           Securities -   Securities -         
   Senior   Mezzanine   Servicing       Senior   Mezzanine   Servicing     
   Tranches   Tranches   Rights   Total   Tranches   Tranches   Rights   Total 
Balance, beginning of period  $4,638   $782   $409   $5,829   $4,638   $730   $375   $5,743 
Issuances of servicing rights   0    0    74    74    0    0    129    129 
Accretion and amortization, net   (2)   0    0    (2)   (5)   0    0    (5)
Proceeds from sales and calls   (2,515)   (27)   0    (2,542)   (2,515)   (54)   0    (2,569)
Realized gains, net   40    27    0    67    40    54    0    94 
Unrealized losses included in earnings   0    0    (23)   (23)   0    0    (44)   (44)
Unrealized gains included in other comprehensive income   225    364    0    589    228    416    0    644 
Balance, end of period  $2,386   $1,146   $460   $3,992   $2,386   $1,146   $460   $3,992 

 

   Three Months Ended June 30, 2011   Six Months Ended June 30, 2011 
   Pooled Trust   Pooled Trust           Pooled Trust   Pooled Trust         
   Preferred   Preferred           Preferred   Preferred         
   Securities -   Securities -           Securities -   Securities -         
   Senior   Mezzanine   Servicing       Senior   Mezzanine   Servicing     
   Tranches   Tranches   Rights   Total   Tranches   Tranches   Rights   Total 
Balance, beginning of period  $9,038   $0   $293   $9,331   $7,400   $0   $204   $7,604 
Issuances of servicing rights   0    0    38    38    0    0    140    140 
Accretion and amortization, net   (14)   0    0    (14)   (34)   0    0    (34)
Proceeds from sales and calls   (2,035)   (25)   0    (2,060)   (2,035)   (50)   0    (2,085)
Realized gains, net   25    25    0    50    25    50    0    75 
Unrealized losses included in earnings   0    0    (16)   (16)   0    0    (29)   (29)
Unrealized gains included in other comprehensive income   193    0    0    193    1,851    0    0    1,851 
Balance, end of period  $7,207   $0   $315   $7,522   $7,207   $0   $315   $7,522 

 

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.

 

The Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments:

 

CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term instruments approximate fair values.

 

CERTIFICATES OF DEPOSIT - Fair values for certificates of deposit, included in cash and due from banks in the consolidated balance sheet, are based on quoted market prices for certificates of similar remaining maturities.

 

SECURITIES - Fair values for securities, excluding restricted equity securities, are based on quoted market prices or other methods as described above. The carrying value of restricted equity securities approximates fair value based on applicable redemption provisions.

 

LOANS HELD FOR SALE - Fair values of loans held for sale are determined based on applicable sale prices available under the Federal Home Loan Banks’ MPF Xtra program.

 

15
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

LOANS - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for estimated prepayments based on historical experience, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. Fair value of nonperforming loans is based on recent appraisals or estimates prepared by the Corporation’s lending officers.

 

SERVICING RIGHTS - The fair value of servicing rights, included in other assets in the consolidated balance sheet, is determined through a discounted cash flow valuation. Significant inputs include expected net servicing income, the discount rate and the expected prepayment speeds of the underlying loans.

 

DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable on demand at June 30, 2012 and December 31, 2011. The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

 

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.

 

OFF-BALANCE SHEET COMMITMENTS - The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

 

The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments are as follows:

 

(In Thousands)  Valuation   June 30, 2012   December 31, 2011  
  Method(s)   Carrying   Fair   Carrying   Fair 
  Used   Amount   Value   Amount   Value 
Financial assets:                         
Cash and cash equivalents   Level 1   $64,438   $64,438   $56,815   $56,815 
Certificates of deposit   Level 2    4,720    4,738    3,760    3,683 
Available-for-sale securities   See Above    478,368    478,368    481,685    481,685 
Restricted equity securities (included in Other Assets)   Level 2    6,125    6,125    6,773    6,773 
Loans held for sale   Level 1    3,190    3,190    939    939 
Loans, net   Level 3    696,777    716,462    700,610    718,274 
Accrued interest receivable   Level 1    4,556    4,556    4,797    4,797 
Servicing rights   Level 3    460    460    375    375 
Financial liabilities:                         
Deposits with no stated maturity   Level 1    683,183    683,183    677,461    677,461 
Time deposits   Level 3    346,273    349,561    340,745    344,936 
Short-term borrowings   Level 3    4,242    4,208    4,950    4,897 
Long-term borrowings   Level 3    110,038    125,159    125,363    145,641 
Accrued interest payable   Level 1    210    210    358    358 

 

16
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

6. SECURITIES

 

Amortized cost and fair value of available-for-sale securities at June 30, 2012 and December 31, 2011 are summarized as follows:

 

       June 30, 2012     
       Gross   Gross     
       Unrealized   Unrealized     
   Amortized   Holding   Holding   Fair 
(In Thousands)  Cost   Gains   Losses   Value 
                     
Obligations of U.S. Government agencies  $23,244   $672   $0   $23,916 
Obligations of states and political subdivisions:                    
Tax-exempt   135,736    5,894    (490)   141,140 
Taxable   19,524    437    (37)   19,924 
Mortgage-backed securities   103,801    4,625    0    108,426 
Collateralized mortgage obligations, Issued by U.S. Government agencies   162,780    3,153    (10)   165,923 
Trust preferred securities issued by individual institutions   6,179    42    0    6,221 
Collateralized debt obligations:                    
Pooled trust preferred securities - senior tranches   2,516    0    (130)   2,386 
Pooled trust preferred securities - mezzanine tranches   0    1,146    0    1,146 
Other collateralized debt obligations   660    0    0    660 
Total debt securities   454,440    15,969    (667)   469,742 
Marketable equity securities   6,208    2,468    (50)   8,626 
Total  $460,648   $18,437   $(717)  $478,368 

 

       December 31, 2011     
       Gross   Gross     
       Unrealized   Unrealized     
   Amortized   Holding   Holding   Fair 
(In Thousands)  Cost   Gains   Losses   Value 
                 
Obligations of U.S. Government agencies  $24,877   $710   $0   $25,587 
Obligations of states and political subdivisions:                    
Tax-exempt   129,401    4,891    (1,330)   132,962 
Taxable   14,004    334    (4)   14,334 
Mortgage-backed securities   116,602    5,167    0    121,769 
Collateralized mortgage obligations, Issued by U.S. Government agencies   161,818    3,350    (37)   165,131 
Trust preferred securities issued by individual institutions   7,334    865    (53)   8,146 
Collateralized debt obligations:                    
Pooled trust preferred securities - senior tranches   4,996    0    (358)   4,638 
Pooled trust preferred securities - mezzanine tranches   0    730    0    730 
Other collateralized debt obligations   660    0    0    660 
Total debt securities   459,692    16,047    (1,782)   473,957 
Marketable equity securities   5,643    2,186    (101)   7,728 
Total  $465,335   $18,233   $(1,883)  $481,685 

 

17
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

The following table presents gross unrealized losses and fair value of available-for-sale securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011:

 

June 30, 2012  Less Than 12 Months   12 Months or More   Total 
(In Thousands)  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
Obligations of states and political subdivisions:                              
Tax-exempt  $16,333   $(246)  $8,081   $(244)  $24,414   $(490)
Taxable   3,907    (37)   0    0    3,907    (37)
Collateralized mortgage obligations, Issued by U.S. Government agencies   7,094    (10)   0    0    7,094    (10)
Collateralized debt obligations, Pooled trust preferred securities - senior tranches   0    0    2,386    (130)   2,386    (130)
Total debt securities   27,334    (293)   10,467    (374)   37,801    (667)
Marketable equity securities   412    (49)   89    (1)   501    (50)
Total temporarily impaired available-for-sale securities  $27,746   $(342)  $10,556   $(375)  $38,302   $(717)

 

December 31, 2011  Less Than 12 Months   12 Months or More   Total 
(In Thousands)  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
Obligations of states and political subdivisions:                              
Tax-exempt  $4,301   $(34)  $20,692   $(1,296)  $24,993   $(1,330)
Taxable   927    (2)   244    (2)   1,171    (4)
Collateralized mortgage obligations, Issued by U.S. Government agencies   6,886    (36)   5,075    (1)   11,961    (37)
Trust preferred securities issued by individual institutions   0    0    947    (53)   947    (53)
Collateralized debt obligations, Pooled trust preferred securities - senior tranches   0    0    4,638    (358)   4,638    (358)
Total debt securities   12,114    (72)   31,596    (1,710)   43,710    (1,782)
Marketable equity securities   776    (44)   98    (57)   874    (101)
Total temporarily impaired available-for-sale securities  $12,890   $(116)  $31,694   $(1,767)  $44,584   $(1,883)

 

Gross realized gains and losses from available-for-sale securities (including OTTI losses in gross realized losses) and the related income tax provision were as follows:

 

(In Thousands)  3 Months Ended   6 Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2012   2011   2012   2011 
Gross realized gains  $252   $169   $317   $2,009 
Gross realized losses   (49)   (6)   (116)   (7)
Net realized gains  $203   $163   $201   $2,002 
Income tax provision related to net realized gains  $71   $56   $70   $681 

 

18
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of June 30, 2012. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized   Fair 
(In Thousands)  Cost   Value 
           
Due in one year or less  $8,791   $8,847 
Due from one year through five years   51,216    52,756 
Due from five years through ten years   35,688    36,350 
Due after ten years   92,164    97,440 
Subtotal   187,859    195,393 
Mortgage-backed securities   103,801    108,426 
Collateralized mortgage obligations,          
Issued by U.S. Government agencies   162,780    165,923 
Total  $454,440   $469,742 

 

The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.

 

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 no impairment losses in earnings in the three-month period ended June 30, 2012. The Corporation recognized an impairment loss in earnings totaling $67,000 in the six-month period ended June 30, 2012, which was related to a bank stock. No impairment losses were recognized in the three-month or six-month periods ended June 30, 2011.

 

A summary of information management considered in evaluating debt and equity securities for OTTI at June 30, 2012 is provided below.

 

Debt Securities

 

At June 30, 2012, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of these debt securities, including municipal bonds with no external ratings, at June 30, 2012 to be temporary.

 

The credit rating agencies have withdrawn their ratings on numerous municipal bonds held by the Corporation. At June 30, 2012, the total amortized cost basis of municipal bonds with no external credit ratings was $22,977,000, with an aggregate unrealized gain of $65,000. 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, and most of the ratings were removed in the fourth quarter 2009. However, the insurance remains in effect on the bonds, and none of the affected municipal bonds has failed to make a scheduled interest payment.

 

19
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

The following table provides information related to trust preferred securities issued by individual institutions as of June 30, 2012:

 

(In Thousands)                   Moody's/ 
                Cumulative   S&P/ 
                Realized   Fitch 
    Par Amount   Amortized   Fair   Unrealized   Credit   Credit 
Name of Issuer  Issuer's Parent Company  Outstanding   Cost   Value   Gain   Losses   Ratings 
Astoria Capital Trust I  Astoria Financial Corporation  $5,000   $5,179   $5,195   $16   $0    Ba1/BB/B+ 
Patriot Capital Trust I Susquehanna Bancshares, Inc.   1,000    1,000    1,026    26    0    NR 
Total    $6,000   $6,179   $6,221   $42   $0     

 

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.

 

The Corporation recognized OTTI charges in 2009 and 2010 related to its holding of a trust preferred security issued by Carolina First Mortgage Loan Trust, a subsidiary of The South Financial Group, Inc. In the fourth quarter 2010, The Toronto-Dominion Bank acquired The South Financial Group, Inc. After the acquisition, The Toronto-Dominion Bank made a payment for the full amount of previously deferred interest and resumed quarterly payments on the security. The Corporation recognized a material change in the expected cash flows in the fourth quarter 2010. The Corporation recorded accretion income (included in interest income) totaling $398,000 in the three-month period ended June 30, 2012 and $855,000 in the six-month period ended June 30, 2012. The Corporation recorded accretion income totaling $160,000 in the three-month period ended June 30, 2011 and $271,000 in the six-month period ended June 30, 2011. For the year ended December 31, 2011, the Corporation recorded accretion income totaling $825,000. The security had a face amount of $2,000,000 and matured in May 2012.

 

Pooled trust-preferred securities are very long-term (usually 30-year maturity) instruments, 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 a lesser amount issued by insurance companies. Trust-preferred securities typically permit deferral of quarterly interest payments for up to five years, and 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. Some issuers have defaulted.

 

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 three-month LIBOR (which is the index rate on the Corporation’s adjustable-rate pooled trust-preferred securities) based on the applicable forward curve. 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 the assumptions used could produce different conclusions for each security. Additional information regarding these assumptions is included in Note 5.

 

The following table provides detailed information related to pooled trust preferred securities – mezzanine tranches held as of June 30, 2012:

 

(In Thousands)                        
       Par Amount   Amortized   Fair   Unrealized   Cumulative 
Security  Tranche   Outstanding   Cost   Value   Gain   OTTI 
ALESCO Preferred Funding IX, Ltd.   C-1   $3,000   $0   $0   $0   ($2,988)
U.S. Capital Funding II, Ltd.   B-1    2,000    0    458    458    (1,992)
U.S. Capital Funding II, Ltd.   B-2    3,000    0    688    688    (2,973)
Total       $8,000   $0   $1,146   $1,146   ($7,953)

 

20
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

As of June 30, 2012, the Corporation’s investment in the senior tranche of MMCAPS Funding I, Ltd. had an investment grade rating. The security, with an amortized cost of $2,516,000, 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, 2012.

 

The table that follows provides additional information related to pooled trust preferred securities as of June 30, 2012:

 

Security  MMCAPS   U.S. Capital   U.S. Capital 
   Funding I, Ltd.   Funding II, Ltd.   Funding II, Ltd. 
Tranche  Senior   B-1   B-2 
Number of Issuers Currently Performing   9    35    35 
Moody’s/Fitch Credit Ratings   A3/BBB (1)    Caa3/C    Caa3/C 
Actual Deferrals and Defaults as % of Outstanding Collateral   46.15%   22.95%   22.95%
Expected Additional Net Deferrals and Defaults as % of Performing Collateral   23.31%   33.92%   33.92%
Excess Subordination as % of Performing Collateral   57.60%   -16.08%   -16.08%
Expected Issuer Prepayments as % of Performing Collateral   34.99%   3.70%   3.70%

 

(1) Fitch has the senior tranche of MMCAPS Funding I, Ltd. on negative outlook.

 

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 the Corporation’s investment)/Total face value of performing collateral.

 

The Excess Subordination Ratio measures the extent to which there may be tranches within the pooled trust preferred structure available to absorb credit losses before the Corporation’s security would be impacted. A positive Excess Subordination Ratio signifies there is available support from subordinate tranches to absorb losses before the Corporation’s investment would be impacted. A negative Excess Subordination Ratio signifies there is no available support from subordinate tranches to absorb losses before the Corporation’s securities would be impacted. The Excess Subordination Ratio is not definitive, in isolation, for determining OTTI or whether the Corporation will receive future payments on 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, who typically pay higher rates of interest than are paid out to the note holders.

 

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 recorded no OTTI losses related to pooled trust-preferred securities in the three-month and six-month periods ended June 30, 2012 and 2011.

 

Equity Securities

 

The Corporation’s marketable equity securities at June 30, 2012 and December 31, 2011 consisted exclusively of stocks of banking companies. The Corporation recognized an impairment loss in earnings related to a bank stock of $67,000 in the first quarter 2012. Management’s decision to recognize an impairment loss on this security followed an evaluation of the issuer’s published financial results in which management determined that the recovery of the Corporation’s cost basis within the foreseeable future was uncertain. As a result of this determination, the Corporation recognized an impairment loss to write the stock down to the most recent trade price at March 31, 2012. The Corporation recognized no OTTI losses related to bank stocks in the second quarter 2012. The Corporation recognized no OTTI losses related to bank stocks in the first six months of 2011. At June 30, 2012, management did not intend to sell impaired bank stocks, and based on the intent to hold the securities for the foreseeable future and other factors specific to the securities, has determined that none of the Corporation’s other bank stock holdings at June 30, 2012 were other than temporarily impaired.

 

The Corporation did not sell any bank stocks or realize any gains or losses from sales of bank stocks during the first six months of 2012. In the three-month period ended June 30, 2011, the Corporation realized a gain of $89,000 from the sale of a bank stock for which OTTI had been previously recognized. Realized gains from sales of bank stocks totaled $91,000 in the six-month period ended June 30, 2011 including $89,000 of realized gains from sales of stocks for which OTTI had been previously recognized.

 

21
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheet, was $5,995,000 at June 30, 2012 and $6,643,000 at December 31, 2011. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at June 30, 2012 and December 31, 2011. 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.

 

7. LOANS

 

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential mortgage segment includes the following classes: first and junior lien residential mortgages, home equity lines of credit and residential construction loans. The most significant classes of commercial loans are commercial loans secured by real estate, non-real estate secured commercial and industrial loans, loans to political subdivisions, commercial construction and land loans, and loans secured by farmland.

 

Loans outstanding at June 30, 2012 and December 31, 2011 are summarized as follows:

 

Summary of Loans by Type

(In Thousands)  June 30,   % of   Dec. 31,   % of 
   2012   Total   2011   Total 
Residential mortgage:                    
Residential mortgage loans - first liens  $321,163    45.59%  $331,015    46.73%
Residential mortgage loans - junior liens   27,404    3.89%   28,851    4.07%
Home equity lines of credit   31,858    4.52%   30,037    4.24%
1-4 Family residential construction   10,699    1.52%   9,959    1.41%
Total residential mortgage   391,124    55.52%   399,862    56.45%
Commercial:                    
Commercial loans secured by real estate   164,771    23.39%   156,388    22.08%
Commercial and industrial   52,704    7.48%   57,191    8.07%
Political subdivisions   36,858    5.23%   37,620    5.31%
Commercial construction   26,517    3.76%   23,518    3.32%
Loans secured by farmland   10,079    1.43%   10,949    1.55%
Multi-family (5 or more) residential   6,409    0.91%   6,583    0.93%
Agricultural loans   3,263    0.46%   2,987    0.42%
Other commercial loans   563    0.08%   552    0.08%
Total commercial   301,164    42.75%   295,788    41.76%
Consumer   12,146    1.72%   12,665    1.79%
Total   704,434    100.00%   708,315    100.00%
Less: allowance for loan losses   (7,657)        (7,705)     
Loans, net  $696,777        $700,610      

 

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in the Pennsylvania and New York counties that comprise the market serviced by Citizens & Northern Bank. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either June 30, 2012 or December 31, 2011.

 

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of June 30, 2012 and December 31, 2011, management determined that no allowance for credit losses related to unfunded loan commitments was required.

 

22
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and six-month periods ended June 30, 2012 and 2011 were as follows:

 

 Six Months Ended June 30, 2012  Dec. 31,               June 30, 
(In Thousands)  2011
Balance
   Charge-offs   Recoveries   Provision
(Credit)
   2012
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $3,026   $(188)  $18   $32   $2,888 
Residential mortgage loans - junior liens   266              (12)   254 
Home equity lines of credit   231              14    245 
1-4 Family residential construction   79              1    80 
Total residential mortgage   3,602    (188)   18    35    3,467 
Commercial:                         
Commercial loans secured by real estate   2,004              (28)   1,976 
Commercial and industrial   946    (35)   5    (204)   712 
Political subdivisions   0              0    0 
Commercial construction   267              339    606 
Loans secured by farmland   126              (9)   117 
Multi-family (5 or more) residential   66              (2)   64 
Agricultural loans   27              2    29 
Other commercial loans   5              0    5 
Total commercial   3,441    (35)   5    98    3,509 
Consumer   228    (68)   35    50    245 
Unallocated   434              2    436 
                          
Total Allowance for Loan Losses  $7,705   $(291)  $58   $185   $7,657 

 

23
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Six Months Ended June 30, 2011

 

   December 31,               June 30, 
(In Thousands)  2010
Balance
   Charge-
offs
   Recoveries   Provision
(Credit)
   2011
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $2,745   $(28)  $0   $333   $3,050 
Residential mortgage loans - junior liens   334    (51)   0    10    293 
Home equity lines of credit   218    0    0    2    220 
1-4 Family residential construction   208    0    0    (141)   67 
Total residential mortgage   3,505    (79)   0    204    3,630 
Commercial:                         
Commercial loans secured by real estate   3,314    (535)   0    (277)   2,502 
Commercial and industrial   862    (199)   177    68    908 
Political subdivisions   0    0    0    0    0 
Commercial construction   590    0    0    (309)   281 
Loans secured by farmland   139    0    0    (5)   134 
Multi-family (5 or more) residential   63    0    0    12    75 
Agricultural loans   32    0    0    (3)   29 
Other commercial loans   0    0    0    5    5 
Total commercial   5,000    (734)   177    (509)   3,934 
Consumer   289    (84)   43    27    275 
Unallocated   313              117    430 
                          
Total Allowance for Loan Losses  $9,107   $(897)  $220   $(161)  $8,269 

 

Three Months Ended June 30, 2012

 

   March 31,               June 30, 
(In Thousands)  2012
Balance
   Charge-
offs
   Recoveries   Provision
(Credit)
   2012
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $2,953   $(50)  $18   $(33)  $2,888 
Residential mortgage loans - junior liens   260              (6)   254 
Home equity lines of credit   232              13    245 
1-4 Family residential construction   62              18    80 
Total residential mortgage   3,507    (50)   18    (8)   3,467 
Commercial:                         
Commercial loans secured by real estate   1,920              56    1,976 
Commercial and industrial   762    (35)   4    (19)   712 
Political subdivisions   0              0    0 
Commercial construction and land   325              281    606 
Loans secured by farmland   121              (4)   117 
Multi-family (5 or more) residential   63              1    64 
Agricultural loans   27              2    29 
Other commercial loans   3              2    5 
Total commercial   3,221    (35)   4    319    3,509 
Consumer   206    (30)   13    56    245 
Unallocated   436              0    436 
                          
Total Allowance for Loan Losses  $7,370   $(115)  $35   $367   $7,657 

 

24
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Three Months Ended June 30, 2011

   March 31,               June 30, 
(In Thousands)  2011
Balance
   Charge-
offs
   Recoveries   Provision
(Credit)
   2011
Balance
 
Allowance for Loan Losses:                         
Residential mortgage:                         
Residential mortgage loans - first liens  $3,150   $(27)  $0   $(73)  $3,050 
Residential mortgage loans - junior liens   305    0    0    (12)   293 
Home equity lines of credit   212    0    0    8    220 
1-4 Family residential construction   62    0    0    5    67 
Total residential mortgage   3,729    (27)   0    (72)   3,630 
Commercial:                         
Commercial loans secured by real estate   3,118    (535)   0    (81)   2,502 
Commercial and industrial   842    (199)   176    89    908 
Political subdivisions   0    0    0    0    0 
Commercial construction   271    0    0    10    281 
Loans secured by farmland   142    0    0    (8)   134 
Multi-family (5 or more) residential   77    0    0    (2)   75 
Agricultural loans   29    0    0    0    29 
Other commercial loans   8    0    0    (3)   5 
Total commercial   4,487    (734)   176    5    3,934 
Consumer   275    (39)   16    23    275 
Unallocated   355              75    430 
                          
Total Allowance for Loan Losses  $8,846   $(800)  $192   $31   $8,269 

 

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

 

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

 

25
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of June 30, 2012 and December 31, 2011:

 

June 30, 2012:                    
(In Thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Residential mortgage:                         
Residential mortgage loans - first liens  $306,272   $2,216   $12,476   $199   $321,163 
Residential mortgage loans - junior liens   25,978    536    890    0    27,404 
Home equity lines of credit   31,231    361    266    0    31,858 
1-4 Family residential construction   10,616    0    83    0    10,699 
Total residential mortgage   374,097    3,113    13,715    199    391,124 
Commercial:                         
Commercial loans secured by real estate   152,208    7,462    5,101    0    164,771 
Commercial and industrial   44,154    4,174    4,163    213    52,704 
Political subdivisions   36,742    116    0    0    36,858 
Commercial construction and land   24,697    221    1,599    0    26,517 
Loans secured by farmland   7,758    763    1,523    35    10,079 
Multi-family (5 or more) residential   6,044    354    11    0    6,409 
Agricultural loans   3,171    29    63    0    3,263 
Other commercial loans   563    0    0    0    563 
Total commercial   275,337    13,119    12,460    248    301,164 
Consumer   11,956    17    173    0    12,146 
                          
Totals  $661,390   $16,249   $26,348   $447   $704,434 

 

26
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

December 31, 2011:                    
(In Thousands)  Pass   Special
Mention
   Substandard   Doubtful   Total 
Residential mortgage:                         
Residential mortgage loans - first liens  $314,900   $2,955   $12,956   $204   $331,015 
Residential mortgage loans - junior liens   27,260    660    924    7    28,851 
Home equity lines of credit   29,408    264    365    0    30,037 
1-4 Family residential construction   9,959    0    0    0    9,959 
Total residential mortgage   381,527    3,879    14,245    211    399,862 
Commercial:                         
Commercial loans secured by real estate   143,247    7,385    5,046    710    156,388 
Commercial and industrial   46,110    6,254    4,413    414    57,191 
Political subdivisions   37,499    121    0    0    37,620 
Commercial construction and land   21,668    211    1,639    0    23,518 
Loans secured by farmland   8,040    1,341    1,531    37    10,949 
Multi-family (5 or more) residential   6,200    369    14    0    6,583 
Agricultural loans   2,765    164    58    0    2,987 
Other commercial loans   552    0    0    0    552 
Total commercial   266,081    15,845    12,701    1,161    295,788 
Consumer   12,437    20    207    1    12,665 
                          
Totals  $660,045   $19,744   $27,153   $1,373   $708,315 

 

The general component of the allowance for loan losses covers pools of loans including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject to a restructuring agreement. The pools of loans are evaluated for loss exposure based upon three-year average historical net charge-off rates for each loan class, adjusted for qualitative factors. Qualitative risk factors (described in the following paragraph) are evaluated for the impact on each of the three segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. The adjustment for qualitative factors is applied as an increase or decrease to the three-year average net charge-off rate to each loan class within each segment.

 

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. Further, the residential mortgage segment is significantly affected by the values of residential real estate that provide collateral for the loans. The majority of the Corporation’s commercial segment loans (approximately 69% at June 30, 2012) is secured by real estate, and accordingly, the Corporation’s risk for the commercial segment is significantly affected by commercial real estate values. The consumer segment includes a wide mix of loans for different purposes, primarily secured loans, including loans secured by motor vehicles, manufactured housing and other types of collateral.

 

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

 

27
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

The scope of loans evaluated individually for impairment include all loan relationships greater than $200,000 for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Also, all loans classified as troubled debt restructurings (discussed in more detail below) and all loan relationships less than $200,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment. Loans that are individually evaluated for impairment, but which are not determined to be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance. The loans that have been individually evaluated, but which have not been determined to be impaired, are included in the “Collectively Evaluated” column in the tables summarizing the allowance and associated loan balances as of June 30, 2012 and December 31, 2011.

 

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of June 30, 2012 and December 31, 2011:

 

June 30, 2012  Loans:   Allowance for Loan Losses: 
(In Thousands)  Individually   Collectively       Individually   Collectively     
   Evaluated   Evaluated   Totals   Evaluated   Evaluated   Totals 
Residential mortgage:                              
Residential mortgage loans - first liens  $1,716   $319,447   $321,163   $396   $2,492   $2,888 
Residential mortgage loans - junior liens   58    27,346    27,404    0    254    254 
Home equity lines of credit   0    31,858    31,858    0    245    245 
1-4 Family residential construction   0    10,699    10,699    0    80    80 
Total residential mortgage   1,774    389,350    391,124    396    3,071    3,467 
Commercial:                              
Commercial loans secured by real estate   1,805    162,966    164,771    150    1,826    1,976 
Commercial and industrial   782    51,922    52,704    297    415    712 
Political subdivisions   0    36,858    36,858    0    0    0 
Commercial construction   1,476    25,041    26,517    381    225    606 
Loans secured by farmland   925    9,154    10,079    35    82    117 
Multi-family (5 or more) residential   11    6,398    6,409    0    64    64 
Agricultural loans   40    3,223    3,263    0    29    29 
Other commercial loans   0    563    563    0    5    5 
Total commercial   5,039    296,125    301,164    863    2,646    3,509 
Consumer   48    12,098    12,146    44    201    245 
Unallocated                            436 
                               
Total  $6,861   $697,573   $704,434   $1,303   $5,918   $7,657 

 

28
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

December 31, 2011  Loans:   Allowance for Loan Losses: 
(In Thousands)  Individually   Collectively       Individually   Collectively     
   Evaluated   Evaluated   Totals   Evaluated   Evaluated   Totals 
Residential mortgage:                              
Residential mortgage loans - first liens  $2,227   $328,788   $331,015   $461   $2,565   $3,026 
Residential mortgage loans - junior liens   137    28,714    28,851    11    255    266 
Home equity lines of credit   93    29,944    30,037    0    231    231 
1-4 Family residential construction   0    9,959    9,959    0    79    79 
Total residential mortgage   2,457    397,405    399,862    472    3,130    3,602 
Commercial:                              
Commercial loans secured by real estate   2,169    154,219    156,388    169    1,835    2,004 
Commercial and industrial   942    56,249    57,191    361    585    946 
Political subdivisions   0    37,620    37,620    0    0    0 
Commercial construction   1,266    22,252    23,518    65    202    267 
Loans secured by farmland   927    10,022    10,949    35    91    126 
Multi-family (5 or more) residential   14    6,569    6,583    0    66    66 
Agricultural loans   39    2,948    2,987    0    27    27 
Other commercial loans   0    552    552    0    5    5 
Total commercial   5,357    290,431    295,788    630    2,811    3,441 
Consumer   50    12,615    12,665    24    204    228 
Unallocated                            434 
                               
Total  $7,864   $700,451   $708,315   $1,126   $6,145   $7,705 

 

Summary information related to impaired loans as of June 30, 2012 and December 31, 2011 is as follows:

   As of   As of 
(In Thousands)  June 30,   Dec. 31, 
   2012   2011 
Impaired loans with a valuation allowance  $3,434   $3,433 
Impaired loans without a valuation allowance   3,427    4,431 
Total impaired loans  $6,861   $7,864 
Valuation allowance related to impaired loans  $1,303   $1,126 

 

The average balance of impaired loans and interest income recognized on impaired loans is as follows:

 

(In Thousands)  3 Months Ended   6 Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Average investment in impaired loans  $6,930   $7,266   $7,025   $8,020 
Interest income recognized on impaired loans   55    36    138    86 
Interest income recognized on a cash basis on impaired loans   55    36    138    86 

 

Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

 

29
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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

(In Thousands)  June 30, 2012   December 31, 2011 
   Past Due       Past Due     
   90+ Days and       90+ Days and     
   Accruing   Nonaccrual   Accruing   Nonaccrual 
Residential mortgage:                    
Residential mortgage loans - first liens  $931   $3,261   $949   $3,058 
Residential mortgage loans - junior liens   71    65    11    67 
                     
Total residential mortgage   1,002    3,326    960    3,125 
Commercial:                    
Commercial loans secured by real estate   105    1,342    75    1,595 
Commercial and industrial   30    456    21    541 
Commercial construction   0    1,328    139    978 
Loans secured by farmland   0    925    53    927 
Agricultural loans   0    40    0    0 
Total commercial   135    4,091    288    4,041 
Consumer   7    30    19    31 
                     
Totals  $1,144   $7,447   $1,267   $7,197 

 

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual.

 

The table below presents a summary of the contractual aging of loans as of June 30, 2012 and December 31, 2011:

 

   As of June 30, 2012   As of December 31, 2011 
   Current &               Current &             
(In Thousands)  Past Due   Past Due   Past Due       Past Due   Past Due   Past Due     
   Less than   30-89   90+       Less than   30-89   90+     
   30 Days   Days   Days   Total   30 Days   Days   Days   Total 
Residential mortgage:                                        
Residential mortgage loans - first liens  $314,401   $4,831   $1,931   $321,163   $321,907   $6,723   $2,385   $331,015 
Residential mortgage loans - junior liens   27,212    111    81    27,404    28,437    393    21    28,851 
Home equity lines of credit   31,621    237    0    31,858    29,986    51    0    30,037 
1-4 Family residential construction   10,699    0    0    10,699    9,959    0    0    9,959 
Total residential mortgage   383,933    5,179    2,012    391,124    390,289    7,167    2,406    399,862 
Commercial:                                        
Commercial loans secured by real estate   163,391    545    835    164,771    155,025    343    1,020    156,388 
Commercial and industrial   52,313    277    114    52,704    56,835    169    187    57,191 
Political subdivisions   36,858    0    0    36,858    37,620    0    0    37,620 
Commercial construction   25,191    387    939    26,517    22,323    1,056    139    23,518 
Loans secured by farmland   9,122    67    890    10,079    9,973    33    943    10,949 
Multi-family (5 or more) residential   6,406    3    0    6,409    6,583    0    0    6,583 
Agricultural loans   3,223    0    40    3,263    2,945    3    39    2,987 
Other commercial loans   557    6    0    563    552    0    0    552 
Total commercial   297,061    1,285    2,818    301,164    291,856    1,604    2,328    295,788 
Consumer   11,956    183    7    12,146    12,340    306    19    12,665 
                                         
Totals  $692,950   $6,647   $4,837   $704,434   $694,485   $9,077   $4,753   $708,315 

 

Nonaccrual loans are included in the contractual aging immediately above and on the previous page. A summary of the contractual aging of nonaccrual loans at June 30, 2012 and December 31, 2011 is as follows:

 

30
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

   Current &             
(In Thousands)  Past Due   Past Due   Past Due     
   Less than   30-89   90+     
   30 Days   Days   Days   Total 
June 30, 2012 Nonaccrual Totals  $2,298   $1,456   $3,693   $7,447 
December 31, 2011 Nonaccrual Totals  $2,532   $1,179   $3,486   $7,197 

 

Loans whose terms are modified are classified as Troubled Debt Restructurings (TDRs) if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The Update provides guidance in evaluating whether a restructuring constitutes a TDR. The Update was effective for the Corporation in 2011, with retrospective application to January 1, 2011.

 

The outstanding balance of loans subject to TDRs, as well as contractual aging information at June 30, 2012 and December 31, 2011 is as follows:

 

Troubled Debt Restructurings (TDRs)

   Current &                 
(In Thousands)  Past Due   Past Due   Past Due         
   Less than   30-89   90+         
   30 Days   Days   Days   Nonaccrual   Total 
June 30, 2012 Totals  $925   $0   $0   $1,754   $2,679 
December 31, 2011 Totals  $1,064   $0   $146   $2,267   $3,477 

 

There were no TDRs that occurred during the second quarter 2012. TDRs that occurred during the six-month period ended June 30, 2012 are as follows:

 

Six Months Ended June 30, 2012      Pre-   Post- 
(Balances in Thousands)      Modification   Modification 
   Number   Outstanding   Outstanding 
   of   Recorded   Recorded 
   Contracts   Investment   Investment 
Commercial, Commercial and industrial   1   $65   $65 

 

The TDR in the six-month period ended June 30, 2012 was an extension of the final maturity and lowering of monthly payments required on a commercial loan. There was no allowance for loan losses on this loan at June 30, 2012, and no change in the allowance for loan losses resulting from this TDR.

 

The outstanding balance of TDRs at December 31, 2011 included a balance of $466,000 related to six commercial loans secured by real estate stemming from a forbearance agreement entered into with one commercial customer. Under the terms of the forbearance agreement, the Corporation had agreed to accept payment of less than the total principal amount of the loans, assuming payment was received by dates specified within the forbearance agreement. In the first six months of 2012, the loans were not repaid and the forbearance agreement expired. Accordingly, the Corporation’s concession terminated, and the loans were not classified as TDRs at June 30, 2012. The outstanding balance of the loans was $466,000 at June 30, 2012. The loans were in nonaccrual status at June 30, 2012 and December 31, 2011. At June 30, 2012, the risk rating of the loans was Substandard, while the risk rating of the loans was Doubtful at December 31, 2011. Based on management’s estimate of the value of the underlying collateral, net of selling costs, the Corporation had no allowance for loan losses associated with these loans at June 30, 2012 and December 31, 2011.

 

In the second quarter 2012, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months. In the six-month period ended June 30, 2012, such defaults are as follows:

 

31
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

Six Months Ended June 30, 2012

   Number     
(Balances in Thousands)  of   Recorded 
   Contracts   Investment 
Commercial, Commercial construction and land   1   $950 

 

The event of default in the table above resulted from the borrowers’ failure to make payments due at maturity, based on a loan maturity date that had been extended from the original due date. The allowance for loan losses on this loan was $274,000 at June 30, 2012, an increase of $209,000 over the allowance on the loan at December 31, 2011.

 

8. 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 significantly affect the liability balance at June 30, 2012 and December 31, 2011, and are not expected to significantly affect the Corporation's future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.

 

In an acquisition in 2007, the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan. This plan covers certain employees who were employed by Citizens Trust Company on December 31, 2002, when the plan was amended to discontinue admittance of any future participant and to freeze benefit accruals. Information related to the Citizens Trust Company Retirement Plan has been included in the tables that follow. The Corporation uses a December 31 measurement date for this plan.

 

The components of net periodic benefit costs from these defined benefit plans are as follows:

 

Defined Benefit Plans                
(In Thousands)  Pension   Postretirement 
   Six Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Service cost  $0   $0   $46   $42 
Interest cost   36    37    41    46 
Expected return on plan assets   (36)   (36)   0    0 
Amortization of transition (asset) obligation   0    0    18    18 
Amortization of prior service cost   0    0    7    7 
Recognized net actuarial loss   15    2    0    0 
Net periodic benefit cost  $15   $3   $112   $113 

 

Defined Benefit Plans                
(In Thousands)  Pension   Postretirement 
   Three Months Ended   Three Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Service cost  $0   $0   $23   $21 
Interest cost   18    19    21    23 
Expected return on plan assets   (18)   (18)   0    0 
Amortization of transition (asset) obligation   0    0    9    9 
Amortization of prior service cost   0    0    3    4 
Recognized net actuarial loss   8    1    0    0 
Net periodic benefit cost  $8   $2   $56   $57 

 

In the first six months of 2012, the Corporation funded postretirement contributions totaling $29,000, with estimated annual postretirement contributions of $60,000 expected in 2012 for the full year. The Corporation made a contribution to the defined benefit pension plan of $21,000 in the first quarter of 2012 for the 2011 plan year. Based upon the related actuarial reports, the Corporation made a $23,000 contribution in the second quarter 2012 for the 2012 plan year. No further contributions are required in 2012, though the Corporation may make additional discretionary contributions.

 

32
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

9. STOCK-BASED COMPENSATION PLANS

 

In January 2012, the Corporation granted options to purchase a total of 64,757 shares of common stock through its Stock Incentive and Independent Directors Stock Incentive Plans. In January 2011, the Corporation granted options to purchase a total of 93,674 shares of common stock. The exercise price for the 2012 awards is $18.54 per share, and the exercise price for the 2011 awards is $15.06 per share, based on the market price as of the date of grant. Stock option expense is recognized over the vesting period of each option. The Corporation expects total stock option expense for the year ending December 31, 2012 will be $247,000, and total stock option expense for the year ended December 31, 2011 was $279,000.

 

The Corporation records stock option expense based on estimated fair value calculated using an option valuation model. In calculating the 2012 and 2011 fair values, 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:

 

   2012   2011 
Fair value of each option granted  $5.15   $4.26 
Volatility   41%   37%
Expected option lives   7 Years    8 Years 
Risk-free interest rate   1.53%   3.10%
Dividend yield   3.97%   3.86%

 

In calculating the estimated fair value of 2012 and 2011 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 expected option lives were based on management’s estimates of the average term for all options issued under both plans. In 2012 and 2011, management assumed a 33% 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 January 2012, the Corporation awarded a total of 42,552 shares of restricted stock under the Stock Incentive and Independent Directors Stock Incentive Plans. In January 2011, a total of 15,622 shares of restricted stock were awarded under the 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, the Corporation must meet an annual targeted return on average equity (“ROAE”) performance ratio, as defined, in order for participants to vest. Management has estimated restricted stock expense in the first six months of 2012 based on an assumption that the ROAE target for 2012 will be met. 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.

 

Total stock-based compensation expense is as follows:

 

(In Thousands)  Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2012   2011   2012   2011 
Stock options  $88   $123   $247   $279 
Restricted stock   82    36    164    72 
                     
Total  $170   $159   $411   $351 

 

33
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

10. INCOME TAXES

 

The net deferred tax asset at June 30, 2012 and December 31, 2011 represents the following temporary difference components:

 

   June 30,   December 31, 
(In Thousands)  2012   2011 
Deferred tax assets:          
Defined benefit plans - ASC 835  $250   $324 
Net realized losses on securities   2,915    3,175 
Allowance for loan losses   2,680    2,697 
Credit for alternative minimum tax paid   4,070    4,569 
Net operating loss carryforwards   44    44 
General business credit carryforwards   0    831 
Other deferred tax assets   1,786    1,671 
Total deferred tax assets   11,745    13,311 
           
Deferred tax liabilities:          
Unrealized holding gains on securities   6,201    5,559 
Bank premises and equipment   1,386    1,357 
Core deposit intangibles   61    74 
Other deferred tax liabilities   135    148 
Total deferred tax liabilities   7,783    7,138 
Deferred tax asset, net  $3,962   $6,173 

 

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, 2012. Of the total deferred tax asset from realized losses on securities, $332,000 is from securities that, if the Corporation were to sell them, would be classified as capital losses for income tax reporting purposes.

 

The Corporation has available an estimated $130,000 capital loss carryforward at June 30, 2012, expiring in 2015.

 

The provision for income tax for the three-month and six-month periods ended June 30, 2012 and 2011 is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The effective tax rates for the Corporation are as follows:

 

   Three Months Ended   Fiscal Year To Date 
(In thousands)  June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
   (Current)   (Prior Year)   (Current)   (Prior Year) 
Income before income tax provision  $7,779   $7,826   $15,475   $15,431 
Income tax provision   2,094    2,129    4,203    4,193 
                     
Effective tax rate   26.92%   27.20%   27.16%   27.17%

 

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.

 

The Corporation has no unrecognized tax benefits, nor pending examination issues related to tax positions taken in preparation of its income tax returns. With limited exceptions, the Corporation is no longer subject to examination by the Internal Revenue Service for years prior to 2008.

 

34
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

11. IMPAIRMENT OF LIMITED PARTNERSHIP INVESTMENT

 

In the first quarter 2011, the Corporation reported an impairment loss of $948,000 related to an investment in a real estate limited partnership. In addition to the limited partnership investment, the Corporation has a loan receivable from the limited partnership with an outstanding balance of $1,029,000 at June 30, 2012. Based on updated financial information, management prepared an estimated valuation based on cash flow analysis. That analysis showed the estimated return to the Corporation would be sufficient to repay the loan in full, but would not provide sufficient additional cash flow for return on the limited partnership investment. Accordingly, management made the decision to completely write-off the limited partnership investment in the first quarter 2011.

 

12. CONTINGENCIES

 

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

 

13. RECENT ACCOUNTING PRONOUNCEMENTS

 

The FASB issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.

 

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The Update amends ASC Topic 310 to provide guidance in evaluating whether a restructuring constitutes a Troubled Debt Restructuring. The main provisions conclude that a creditor must separately conclude that both of the following exist – (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. The amendments then provide guidance on a creditor’s evaluation of each of the requirements for a Troubled Debt Restructuring. For public entities, the Update was effective for the first interim or annual period beginning on or after June 15, 2011, including retrospective application to the beginning of the annual period of adoption. Note 7 provides disclosures required by this standard.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update will result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The Update includes various amendments, including amendments that: (1) clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements, and (2) change some particular principles or requirements for measuring fair value or disclosing information about fair value measurements. There were no changes in the Corporation’s procedures for determining fair value measurements as a result of this Update, however additional quantitative disclosures about unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy are provided. The amendments in this ASU are applied prospectively, and Note 5 includes disclosures required by this ASU.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. The intent of this standard is to increase the prominence of comprehensive income in the financial statements. This standard requires the components of comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single format includes the traditional income statement and the components of other comprehensive income, total other comprehensive income and total comprehensive income. In the two statement approach, the first statement is the traditional income statement, which would be immediately followed by a separate statement which would include the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this ASU are applied retrospectively, and the Corporation has adopted the two statement approach as reflected in the accompanying financial statements.

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment. The amendments in this ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, and management adopted this ASU in assessing goodwill for impairment as of December 31, 2011.

 

35
CITIZENS & NORTHERN CORPORATION – FORM 10-Q

 

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