Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
● changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
● changes in general economic conditions
● the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses
● the effect of the novel coronavirus (COVID-19) and related events
● legislative or regulatory changes
● downturn in demand for loan, deposit and other financial services in the Corporation’s market area
● increased competition from other banks and non-bank providers of financial services
● technological changes and increased technology-related costs
● information security breach or other technology difficulties or failures
● changes in accounting principles, or the application of generally accepted accounting principles
● failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
EARNINGS OVERVIEW
First quarter 2022 net income was $6,895,000, or $0.44 per diluted share. In comparison, first quarter 2021 net income was $8,787,000, or $0.55 per diluted share. Significant variances were as follows:
● First quarter 2022 net interest income of $20,332,000 was $249,000 higher than the first quarter 2021 total. Total interest and fees on loans included $1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable income in the first quarter 2021. Interest and fees on PPP loans totaled $575,000 in the first quarter 2022, a decrease of $1,423,000 compared to the first quarter 2021 amount. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $960,000 in the first quarter 2022 as compared to the first quarter 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $199.4 million. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $450,000 in the first quarter 2022 as compared to a net positive impact of $952,000 in the first quarter 2021. Average outstanding loans decreased $86.7 million, including a reduction in average PPP loans of $119.7 million, and average total deposits increased $100.6 million (5.5%). The net interest margin for the first quarter 2022 was 3.86% as compared to 4.00% for the first quarter 2021. The average yield on earning assets of 4.13% was down 0.20% from the first quarter 2021, while the average rate on interest-bearing liabilities of 0.40% in the first quarter 2022 was 0.07% lower than the comparable first quarter 2021 average rate.
● The provision for loan losses was $891,000 in the first quarter 2022 as compared to $259,000 in the first quarter 2021. The first quarter 2022 provision included a net charge of $147,000 related to specific loans (net charge-offs of $157,000 offset by a net decrease in specific allowances on loans of $10,000), an increase of $748,000 in the collectively determined portion of the allowance and a decrease of $4,000 in the unallocated portion of the allowance. The increase in the collectively determined
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portion of the allowance reflected the impact of an increase in volume of commercial loans, excluding PPP loans. The first quarter 2021 provision included a net charge of $182,000 related to specific loans (increase in specific allowances on loans of $199,000, partially offset by net recoveries of $17,000), an increase of $92,000 in the unallocated portion of the allowance and a reduction of $15,000 attributable to decreases in the collectively determined portion of the allowance for loan losses.
● Noninterest income for the first quarter 2022 was down $959,000 from the first quarter 2021 total. Significant variances included the following:
o Other noninterest income of $588,000 decreased $884,000 from the first quarter 2021 total. There was no income from tax credits in the first quarter 2022 compared to $765,000 in the first quarter 2021. In 2022, the Corporation will make PA Educational Improvement Tax Credit Program donations in the second quarter comparable to total donations made in the first quarter 2021, generating tax credits in 2022 comparable to the first quarter 2021.
o Net gains from sales of loans of $382,000 decreased $682,000 from the first quarter 2021 total, as the volume of residential mortgage loans sold in the first quarter 2022 was down from the first quarter 2021 level.
o Service charges on deposit accounts of $1,235,000 increased $220,000 from the first quarter 2021 total, as the volume of consumer and business overdraft and other activity increased.
o Brokerage and insurance revenue of $522,000 increased $196,000 from the first quarter 2021 total, due to commissions on higher transaction volume.
o Trust revenue of $1,786,000 increased $160,000 from the first quarter 2021 total, reflecting the impact of growth in trust assets under management.
● Noninterest expense increased $1,177,000 in the first quarter 2022 over the first quarter 2021 amount. Significant variances included the following:
o Salaries and employee benefits of $10,607,000 increased $1,712,000 from the first quarter 2021 total, including an increase in base salaries expense of $1,018,000. In addition to the impact of merit-based salary increases, the number of employees increased, reflecting expansion of the Southcentral PA market with the opening of an office in Lancaster as well as additions to staffing for information technology (IT), human resources and other functions. In total, the number of full-time equivalent employees (FTEs) increased 5.2% to 403 in the first quarter 2022 as compared to the first quarter 2021. Additional increases include $241,000 due to a lower proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated in 2021 and an increase in health care expense of $183,000 due to higher claims on the Corporation’s partially self-insured plan.
o Data processing and telecommunications expense of $1,623,000 increased $243,000 from the first quarter 2021 total, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.
o Net occupancy and equipment expense of $1,411,000 increased $107,000 from the first quarter 2021 total, including computer supplies and repairs and maintenance related to IT and Digital departments and increases related to a new branch location in Lancaster, PA.
o Other noninterest expense of $1,884,000 decreased $871,000 from the first quarter 2021 total. Within this category, significant variances included the following:
● Donations expense totaled $29,000 in the first quarter 2022, down $785,000 from the first quarter 2021. As noted above, donations of approximately $800,000 related to the PA Educational Improvement Tax Credit Program will be made in the second quarter 2022, comparable to donations made in the first quarter 2021.
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● The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $242,000 in the first quarter 2022 with no comparable amount in the first quarter 2021.
● The income tax provision of $1,483,000, or 17.7% of pre-tax income for the first quarter 2022 decreased $627,000 from $2,110,000, or 19.4% of pre-tax income for the first quarter 2021, reflecting lower pre-tax income.
More detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis.
TABLE I – QUARTERLY FINANCIAL DATA
(Dollars In Thousands,
For the Three Months Ended :
Except Per Share Data)
March 31,
December 31,
September 30,
June 30,
March 31,
(Unaudited)
2022
2021
2021
2021
2021
Interest income
$
21,773
$
21,246
$
21,073
$
20,428
$
21,754
Interest expense
1,441
1,530
1,614
1,747
1,671
Net interest income
20,332
19,716
19,459
18,681
20,083
Provision for loan losses
891
1,128
1,530
744
259
Net interest income after provision for loan losses
19,441
18,588
17,929
17,937
19,824
Noninterest income
5,823
6,415
6,382
6,302
6,782
Noninterest expense
16,886
16,018
15,346
15,399
15,709
Income before income tax provision
8,378
8,985
8,965
8,840
10,897
Income tax provision
1,483
1,677
1,566
1,780
2,110
Net income
$
6,895
$
7,308
$
7,399
$
7,060
$
8,787
Net income attributable to common shares
$
6,835
$
7,256
$
7,336
$
6,999
$
8,722
Basic earnings per common share
$
0.44
$
0.46
$
0.47
$
0.44
$
0.55
Diluted earnings per common share
$
0.44
$
0.46
$
0.47
$
0.44
$
0.55
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
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NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month periods ended March 31, 2022 and 2021. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.
Three-Month Periods Ended March 31, 2022 and 2021
For the three-month periods, fully taxable equivalent net interest income was $20,634,000 in 2022, which was $278,000 (1.4%) higher than in 2021. Interest income in the first quarter was $22,075,000 which was $48,000 higher in 2022 as compared to 2021, while interest expense was lower by $230,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.86% in 2022 as compared to 4.00% in 2021, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.73% in 2022 from 3.86% in 2021. The average yield on earning assets of 4.13% was 0.20% lower in 2022 as compared to 2021, and the average rate on interest- bearing liabilities of 0.40% in 2022 was 0.07% lower.
Income from purchase accounting-related adjustments in the first quarter 2022 had a positive effect on net interest income of $450,000, including an increase in income on loans of $305,000 and net reductions in interest expense on time deposits and borrowed funds totaling $145,000. The positive impact to the first quarter 2022 net interest margin from purchase accounting adjustments was 0.08%. In comparison, the positive impact of purchase accounting adjustments to the first quarter 2021 net interest margin was $952,000, or 0.19%.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $22,075,000 in 2022, an increase of $48,000 from 2021.
Interest and fees from loans receivable decreased $922,000 in 2022 as compared to 2021. Interest and fees on PPP loans totaled $575,000 in the first quarter 2022, a decrease of $1,423,000 from the first quarter 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers. In the first quarter 2022, total interest and fees on loans included $1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable income in the first quarter 2021.
Average outstanding loans receivable decreased $86,725,000 (5.3%) to $1,547,861,000 in 2022 from $1,634,586,000 in 2021, including a reduction in average PPP loans of $119,715,000. Average total loans outstanding, excluding PPP loans, increased $32,990,000 (2.2%).
The average yield on loans in the first quarter 2022 was 5.01%, up from 4.97% in the first quarter 2021. The average yield on loans included the positive impact of the income on PCI loans in the first quarter 2022 and the comparatively high yield on PPP loans in both quarters.
Interest income from available-for-sale debt securities increased $960,000 in 2022 from 2021. Total average available-for-sale debt securities (at amortized cost) increased to $534,635,000 in 2022 from $335,265,000 in 2021. The increase in available-for-sale debt securities reflects the investment of otherwise excess cash. The average yield on available-for-sale debt securities was 2.18% for 2022, down from 2.32% in 2021.
Income from interest-bearing due from banks totaled $67,000 in 2022, an increase of $17,000 from 2021. The average yield on interest-bearing due from banks was 0.32% in 2022 and 0.22% in 2021. The average balance of interest-bearing due from banks was $84,115,000 in the first quarter 2022 as compared to $92,619,000 in the first quarter 2021. Within this category, the largest asset balance in 2022 and 2021 has been interest-bearing deposits held with the Federal Reserve.
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INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
For the three-month periods, interest expense decreased $230,000 to $1,441,000 in 2022 from $1,671,000 in 2021. Interest expense on deposits decreased $368,000, as the average rate on interest-bearing deposits decreased to 0.26% in 2022 from 0.38% in 2021. The decrease in average rates on deposits includes decreases of 0.19% on time deposits, 0.08% on money market accounts, and 0.06% on interest checking accounts. The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 14.4% of average total deposits in the first quarter 2022 from 20.2% in the first quarter 2021.
Average total deposits increased $100,569,000 (5.5%) to $1,931,681,000 in the first quarter 2022 from $1,831,112,000 in the first quarter 2021. The increase in average deposits includes the impact of PPP-related activity and funding from other government stimulus programs.
Interest expense on short-term borrowings in the first quarter 2022 was $1,000 as compared to $15,000 in 2021. The average balance of short-term borrowings decreased to $1,746,000 in 2022 from $14,365,000 in 2021. The average rate on short-term borrowings was 0.23% in 2021 compared to 0.42% in 2021.
Interest expense on long-term borrowings (FHLB advances) decreased $85,000 to $49,000 in 2022 from $134,000 in 2021. The average balance of long-term borrowings was $26,102,000 in 2022, down from an average balance of $52,847,000 in 2021. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.76% in 2022 compared to 1.03% in 2021.
Interest expense on senior notes issued in May 2021 totaled $118,000 in the first quarter 2022. The average balance of the senior notes was $14,709,000 in the first quarter of 2022 at an average rate of 3.25%.
Interest expense on subordinated debt increased $119,000 to $363,000 in 2022 from $244,000 in 2021. The average balance of subordinated debt increased to $32,948,000 in 2022 from $16,543,000 in 2021, reflecting the net impact of a new issue of subordinated debt of $24,437,000, net, at an effective rate of 3.74% in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 4.47% in 2022 from 5.98% in 2021.
More information regarding the terms of borrowed funds is provided in Note 8 to the unaudited consolidated financial statements.
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TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
Three Months Ended
March 31,
Increase/
(In Thousands)
2022
2021
(Decrease)
INTEREST INCOME
Interest-bearing due from banks
$
67
$
50
$
17
Available-for-sale debt securities:
Taxable
1,969
1,113
856
Tax-exempt
905
801
104
Total available-for-sale debt securities
2,874
1,914
960
Loans receivable:
Taxable
17,974
17,493
481
Paycheck Protection Program - 1st Draw
38
1,812
(1,774)
Paycheck Protection Program - 2nd Draw
537
186
351
Tax-exempt
573
553
20
Total loans receivable
19,122
20,044
(922)
Other earning assets
12
19
(7)
Total Interest Income
22,075
22,027
48
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking
194
221
(27)
Money market
262
306
(44)
Savings
61
55
6
Time deposits
393
696
(303)
Total interest-bearing deposits
910
1,278
(368)
Borrowed funds:
Short-term
1
15
(14)
Long-term - FHLB advances
49
134
(85)
Senior notes, net
118
0
118
Subordinated debt, net
363
244
119
Total borrowed funds
531
393
138
Total Interest Expense
1,441
1,671
(230)
Net Interest Income
$
20,634
$
20,356
$
278
Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Table III - Analysis of Average Daily Balances and Rates
(Dollars in Thousands)
Three Months
Three Months
Ended
Rate of
Ended
Rate of
3/31/2022
Return/
3/31/2021
Return/
Average
Cost of
Average
Cost of
Balance
Funds %
Balance
Funds %
EARNING ASSETS
Interest-bearing due from banks
$
84,115
0.32
%
$
92,619
0.22
%
Available-for-sale debt securities, at amortized cost:
Taxable
390,301
2.05
%
217,733
2.07
%
Tax-exempt
144,334
2.54
%
117,532
2.76
%
Total available-for-sale debt securities
534,635
2.18
%
335,265
2.32
%
Loans receivable:
Taxable
1,445,353
5.04
%
1,428,721
4.97
%
Paycheck Protection Program - 1st Draw
1,049
14.69
%
104,367
7.04
%
Paycheck Protection Program - 2nd Draw
17,800
12.24
%
34,197
2.21
%
Tax-exempt
83,659
2.78
%
67,301
3.33
%
Total loans receivable
1,547,861
5.01
%
1,634,586
4.97
%
Other earning assets
1,983
2.45
%
2,851
2.70
%
Total Earning Assets
2,168,594
4.13
%
2,065,321
4.33
%
Cash
20,703
23,796
Unrealized (loss) gain on securities
(2,508)
12,890
Allowance for loan losses
(13,783)
(11,739)
Bank-owned life insurance
30,720
30,154
Bank premises and equipment
21,043
21,348
Intangible assets
55,765
56,288
Other assets
44,952
44,628
Total Assets
$
2,325,486
$
2,242,686
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
$
419,130
0.19
%
$
355,993
0.25
%
Money market
456,904
0.23
%
406,841
0.31
%
Savings
249,165
0.10
%
213,437
0.10
%
Time deposits
277,405
0.57
%
370,555
0.76
%
Total interest-bearing deposits
1,402,604
0.26
%
1,346,826
0.38
%
Borrowed funds:
Short-term
1,746
0.23
%
14,365
0.42
%
Long-term - FHLB advances
26,102
0.76
%
52,847
1.03
%
Senior notes, net
14,709
3.25
%
0
0.00
%
Subordinated debt, net
32,948
4.47
%
16,543
5.98
%
Total borrowed funds
75,505
2.85
%
83,755
1.90
%
Total Interest-bearing Liabilities
1,478,109
0.40
%
1,430,581
0.47
%
Demand deposits
529,077
484,286
Other liabilities
24,046
27,930
Total Liabilities
2,031,232
1,942,797
Stockholders' equity, excluding accumulated other comprehensive (loss) income
295,996
289,591
Accumulated other comprehensive (loss) income
(1,742)
10,298
Total Stockholders' Equity
294,254
299,889
Total Liabilities and Stockholders' Equity
$
2,325,486
$
2,242,686
Interest Rate Spread
3.73
%
3.86
%
Net Interest Income/Earning Assets
3.86
%
4.00
%
Total Deposits (Interest-bearing and Demand)
$
1,931,681
$
1,831,112
(1) Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2) Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
(3) Rates of return on earning assets and costs of funds are presented on an annualized basis.
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TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)
Three Months Ended 3/31/22 vs. 3/31/21
Change in
Change in
Total
Volume
Rate
Change
EARNING ASSETS
Interest-bearing due from banks
$
(5)
$
22
$
17
Available-for-sale debt securities:
Taxable
871
(15)
856
Tax-exempt
172
(68)
104
Total available-for-sale debt securities
1,043
(83)
960
Loans receivable:
Taxable
205
276
481
Paycheck Protection Program - 1st Draw
(2,723)
949
(1,774)
Paycheck Protection Program - 2nd Draw
(128)
479
351
Tax-exempt
121
(101)
20
Total loans receivable
(2,525)
1,603
(922)
Other earning assets
(5)
(2)
(7)
Total Interest Income
(1,492)
1,540
48
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
35
(62)
(27)
Money market
35
(79)
(44)
Savings
9
(3)
6
Time deposits
(153)
(150)
(303)
Total interest-bearing deposits
(74)
(294)
(368)
Borrowed funds:
Short-term
(9)
(5)
(14)
Long-term - FHLB advances
(56)
(29)
(85)
Senior notes, net
118
0
118
Subordinated debt, net
193
(74)
119
Total borrowed funds
246
(108)
138
Total Interest Expense
172
(402)
(230)
Net Interest Income
$
(1,664)
$
1,942
$
278
(1) Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.
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NONINTEREST INCOME
TABLE V – COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands)
Three Months Ended
March 31,
$
%
2022
2021
Change
Change
Trust revenue
$
1,786
$
1,626
$
160
9.8
%
Brokerage and insurance revenue
522
326
196
60.1
%
Service charges on deposit accounts
1,235
1,015
220
21.7
%
Interchange revenue from debit card transactions
963
881
82
9.3
%
Net gains from sales of loans
382
1,064
(682)
(64.1)
%
Loan servicing fees, net
210
248
(38)
(15.3)
%
Increase in cash surrender value of life insurance
135
150
(15)
(10.0)
%
Other noninterest income
588
1,472
(884)
(60.1)
%
Realized gains on available-for-sale debt securities, net
2
0
2
%
Total noninterest income
$
5,823
$
6,782
$
(959)
(14.1)
%
Total noninterest income decreased $959,000 (14.1%) from the first quarter 2021 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.
NONINTEREST EXPENSE
TABLE VI - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands)
Three Months Ended
March 31,
$
%
2022
2021
Change
Change
Salaries and employee benefits
$
10,607
$
8,895
$
1,712
19.2
%
Net occupancy and equipment expense
1,411
1,304
107
8.2
%
Data processing and telecommunications expense
1,623
1,380
243
17.6
%
Automated teller machine and interchange expense
384
337
47
13.9
%
Pennsylvania shares tax
488
491
(3)
(0.6)
%
Professional fees
489
547
(58)
(10.6)
%
Other noninterest expense
1,884
2,755
(871)
(31.6)
%
Total noninterest expense
$
16,886
$
15,709
$
1,177
7.5
%
Total noninterest expense in the first quarter 2022 increased $1,177,000 (7.5%) from the first quarter 2021 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.
INCOME TAXES
The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first three months of 2022 was $1,483,000, which was $627,000 lower than the provision for the first three months of 2021. The effective tax rate (tax provision as a percentage of pre-tax income) was 17.7% in the first three months of 2022 compared to 19.4% in the first three months of 2021. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first three months of 2022 and 2021 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences.
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The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at March 31, 2022 and December 31, 2021 represents the following temporary difference components:
March 31,
December 31,
(In Thousands)
2022
2021
Deferred tax assets:
Unrealized holding losses on securities
$
5,448
$
0
Allowance for loan losses
3,124
2,935
Purchase accounting adjustments on loans
1,237
1,621
Deferred compensation
1,060
965
Operating leases liability
762
821
Net operating loss carryforward
748
778
Accrued incentive compensation
129
529
Other deferred tax assets
1,473
1,766
Total deferred tax assets
13,981
9,415
Deferred tax liabilities:
Unrealized holding gains on securities
0
1,278
Defined benefit plans - ASC 835
82
57
Bank premises and equipment
425
460
Core deposit intangibles
702
725
Right-of-use assets from operating leases
762
821
Other deferred tax liabilities
192
187
Total deferred tax liabilities
2,163
3,528
Deferred tax asset, net
$
11,818
$
5,887
The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income.
Management believes the recorded net deferred tax asset at March 31, 2022 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings .
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SECURITIES
Management continually evaluates several objectives in determining the size, securities mix and other characteristics of the available-for-sale debt securities (investment) portfolio. Key objectives include supporting liquidity needs, maximizing return on earning assets within reasonable risk parameters and providing a means to hedge the Corporation’s overall interest rate risk exposure, while maintaining high credit quality.
The composition of the available-for-sale debt securities portfolio at March 31, 2022, December 31, 2021 and December 31, 2020 is as follows:
(Dollars In Thousands)
March 31, 2022
December 31, 2021
December 31, 2020
Amortized
Fair
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
Cost
Value
Obligations of the U.S. Treasury
$
38,152
$
36,494
$
25,058
$
24,912
$
12,184
$
12,182
Obligations of U.S. Government agencies
24,455
23,408
23,936
24,091
25,349
26,344
Bank holding company debt securities
24,942
24,043
18,000
17,987
0
0
Obligations of states and political subdivisions:
Tax-exempt
149,140
143,633
143,427
148,028
116,427
122,401
Taxable
73,732
69,629
72,182
72,765
45,230
47,452
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities
112,122
106,568
98,048
98,181
36,853
38,176
Residential collateralized mortgage obligations
45,628
43,868
44,015
44,247
56,048
57,467
Commercial mortgage-backed securities
90,682
85,270
86,926
87,468
42,461
45,310
Total Available-for-Sale Debt Securities
$
558,853
$
532,913
$
511,592
$
517,679
$
334,552
$
349,332
Aggregate Unrealized (Loss) Gain
$
(25,940)
$
6,087
$
14,780
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost
(4.6)
%
1.2
%
4.4
%
Market Yield on 5-Year U.S. Treasury Obligations (a)
2.42
%
1.26
%
0.36
%
(a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates)
The amortized cost of available-for-sale debt securities increased to $558,853,000 at March 31, 2022 from $511,592,000 at December 31, 2021 and $334,552,000 at December 31, 2020. The increase in the securities portfolio resulted from management’s decision to invest excess funds available from the fast growth in deposits and loan repayments throughout most of 2020, 2021 and the first quarter 2022.
As reflected in the table above, the fair value of available-for-sale securities as of March 31, 2022 was lower than the amortized cost basis by $25,940,000, or 4.6%. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021 and $14,780,000 (4.4%) at December 31, 2020. The unrealized decrease in fair value of the portfolio in the first quarter 2022 and in 2021 resulted from an increase in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 1.16% higher at March 31, 2022 in comparison to December 31, 2021, and 2.06% higher than at December 31, 2020.
Management reviewed the Corporation’s holdings as of March 31, 2022 and concluded there were no credit-related declines in fair value and that the unrealized losses on all of the securities in an unrealized loss position are considered temporary. In assessing whether there were other-than-temporary impairment losses, management considered (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, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
FINANCIAL CONDITION
This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at March 31, 2022, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2022.
Table VII shows the composition of the loan portfolio at March 31, 2022 and at year-end from 2017 through 2021. The significant loan growth in 2019 and 2020 reflects the impact of acquisitions. Also, the Corporation has increased the proportion of residential mortgage loans sold into the secondary market, contributing to a reduction of $59,887,000 in residential mortgage loans outstanding at March 31, 2022 compared to December 31, 2020. At March 31, 2022, commercial loans represented approximately 62% of the portfolio while residential mortgage loans totaled 36% of the portfolio.
At March 31, 2022, gross loans outstanding totaled $1,538,190,000, a decrease of $26,659,000 from December 31, 2021, including a reduction in PPP loans of $14,487,000 due to repayments and a net reduction in residential mortgage loans of $9,061,000. Excluding PPP loans, total commercial loans at March 31, 2022 were down $3,741,000 from December 31, 2021. Recently, residential mortgage lending activity has slowed, consistent with the rapid increase in interest rates. The “pipeline” of commercial lending opportunities has grown substantially in recent months as portions of the economy have shown signs of recovery from the pandemic. The pace of loan growth for the remainder of 2022 will depend on the impact of potential further increases in interest rates and many other factors.
While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $46,083,000 at March 31, 2022, down from $54,372,000 at December 31, 2021. At March 31, 2022, the balance of participation loans outstanding includes a total of $25,767,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $6,742,000 at March 31, 2022 and $7,469,000 at December 31, 2021.
The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through March 31, 2022, the Corporation’s activity under the MPF Direct Program has been minimal.
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For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At March 31, 2022, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,557,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2021 was $1,571,000.
At March 31, 2022, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $338,482,000, including loans sold through the MPF Xtra program of $163,199,000 and loans sold through the Original program of $175,283,000. At December 31, 2021, outstanding balances of loans sold and serviced through the two programs totaled $334,741,000, including loans sold through the MPF Xtra program of $165,668,000 and loans sold through the Original Program of $169,073,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of March 31, 2022 and December 31, 2021.
For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At March 31, 2022, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,998,000, and the Corporation has recorded a related allowance for credit losses in the amount of $660,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the related allowance for credit losses was $635,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $90,000 for the three months ended March 31, 2022 and $115,000 for the three months ended March 31, 2021. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $25,000 was recorded in the three months ended March 31, 2022 with a provision for losses of $30,000 in the three months ended March 31, 2021. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.
The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Pursuant to an acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the purchased loans originated through the various SBA loan programs as of July 1, 2020 and recorded an allowance for SBA claim adjustments. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on purchased loans was $8,907,000 at March 31, 2022 and $12,856,000 at December 31, 2021 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $215,000 at March 31, 2022 and $457,000 at December 31, 2021. In the three months ended March 31, 2022, the Corporation recorded a reduction in other noninterest expense of $242,000 representing amounts realized on SBA claims in excess of prior estimates, with no corresponding expense or reduction in expense in the first quarter 2021.
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TABLE VII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands)
March 31,
December 31,
2022
2021
2020
2019
2018
2017
Commercial:
Commercial loans secured by real estate
$
585,677
$
569,840
$
531,810
$
301,227
$
162,611
$
159,266
Commercial and industrial
159,793
159,073
159,577
126,374
91,856
88,276
Paycheck Protection Program - 1st Draw
887
1,356
132,269
0
0
0
Paycheck Protection Program - 2nd Draw
11,490
25,508
0
0
0
0
Political subdivisions
81,975
81,301
53,221
53,570
53,263
59,287
Commercial construction and land
37,258
60,579
42,874
33,555
11,962
14,527
Loans secured by farmland
12,507
11,121
11,736
12,251
7,146
7,255
Multi-family (5 or more) residential
53,141
50,089
55,811
31,070
7,180
7,713
Agricultural loans
2,588
2,351
3,164
4,319
5,659
6,178
Other commercial loans
14,827
17,153
17,289
16,535
13,950
10,986
Total commercial
960,143
978,371
1,007,751
578,901
353,627
353,488
Residential mortgage:
Residential mortgage loans - first liens
481,119
483,629
532,947
510,641
372,339
$
359,987
Residential mortgage loans - junior liens
22,572
23,314
27,311
27,503
25,450
25,325
Home equity lines of credit
39,649
39,252
39,301
33,638
34,319
35,758
1-4 Family residential construction
16,945
23,151
20,613
14,798
24,698
26,216
Total residential mortgage
560,285
569,346
620,172
586,580
456,806
447,286
Consumer
17,762
17,132
16,286
16,741
17,130
14,939
Total
1,538,190
1,564,849
1,644,209
1,182,222
827,563
815,713
Less: allowance for loan losses
(14,271)
(13,537)
(11,385)
(9,836)
(9,309)
(8,856)
Loans, net
$
1,523,919
$
1,551,312
$
1,632,824
$
1,172,386
$
818,254
$
806,857
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses.
While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
The allowance for loan losses was $14,271,000 at March 31, 2022, up from $13,537,000 at December 31, 2021. Table IX shows total specific allowances on impaired loans of $730,000 at March 31, 2022, down slightly from $740,000 at December 31, 2021. Table IX also shows the increase in the allowance in 2022 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $8,192,000 at March 31, 2022 from $7,553,000 at December 31, 2021. The net increase in the collectively determined portion of the allowance includes increases related to management’s updated assessments of purchased performing loans. The impact of changes in the collectively determined portion of the allowance related to purchased performing loans is included in “Changes in loan volume” in the accompanying analysis of the provision.
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Table X shows the allowance for loan losses totaled 0.93% of gross loans outstanding at March 31, 2022, up from 0.87% at December 31, 2021 and down from levels in excess of 1.00% from 2017 and 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.11% at March 31, 2022, in line with ratios from the previous years.
The provision (credit) for loan losses by segment in the three-month periods ended March 31, 2022 and 2021 are as follows:
Three Months Ended
March 31,
March 31,
(In Thousands)
2022
2021
Commercial
$
779
$
242
Residential mortgage
91
(55)
Consumer
25
(20)
Unallocated
(4)
92
Total
$
891
$
259
The provision (credit) for loan losses is further detailed as follows:
Commercial segment
Three Months Ended
March 31,
March 31,
(In Thousands)
2022
2021
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs
$
140
$
193
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume
577
142
Changes in historical loss experience factors
62
(49)
Changes in qualitative factors
0
(44)
Total provision for loan losses - Commercial segment
$
779
$
242
Residential mortgage segment
Three Months Ended
March 31,
March 31,
(In Thousands)
2022
2021
Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs
$
(16)
$
(10)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume
68
(7)
Changes in historical loss experience factors
(10)
(38)
Changes in qualitative factors
49
0
Total provision for loan losses - Residential mortgage segment
$
91
$
(55)
Consumer segment
Three Months Ended
March 31,
March 31,
(In Thousands)
2022
2021
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs
$
23
$
(1)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume
0
(10)
Changes in historical loss experience factors
(3)
(10)
Changes in qualitative factors
5
1
Total provision for loan losses - Consumer segment
$
25
$
(20)
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Total - All segments
Three Months Ended
March 31,
March 31,
(In Thousands)
2022
2021
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs
$
147
$
182
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume
645
125
Changes in historical loss experience factors
49
(97)
Changes in qualitative factors
54
(43)
Sub-total
895
167
Unallocated
(4)
92
Total provision for loan losses - All segments
$
891
$
259
For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off.
In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase or reduction in loans outstanding (excluding purchased loans and loans specifically evaluated for impairment) for the period.
The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment).
In the three months ended March 31, 2022, net charge-offs were $157,000, including recoveries of $23,000 and charge-offs of $180,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.01% in the three months ended March 31, 2022, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.
Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. Total nonperforming loans as a percentage of outstanding loans was 1.19% at March 31, 2022, down from 1.36% at December 31, 2021, and nonperforming assets as a percentage of total assets was 0.81% at March 31, 2022, down from 0.94% at December 31, 2021. Table X presents data at the end of each of the years ended December 31, 2017 through 2021. Table X shows that total nonperforming loans as a percentage of loans of 1.19% at March 31, 2022, though up from December 31, 2019, was lower than the corresponding year-end ratio for all other years presented. Similarly, the March 31, 2022 ratio of total nonperforming assets as a percentage of assets of 0.81% was lower than the corresponding ratio for all years presented except December 31, 2019.
Total impaired loans of $12,005,000 at March 31, 2022 are down $3,729,000 from the corresponding amount at December 31, 2021 of $15,734,000. Purchased credit impaired loans were included in impaired loans and had carrying values totaling $3,983,000 at March 31, 2022 and $6,558,000 at December 31, 2021. In the first quarter 2022, the Corporation received pay-offs on a few purchased credit impaired loans and recognized interest income of $1,398,000 for the excess received over previous carrying amounts.
Over the period 2017-2021 and the first three months of 2022, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
of March 31, 2022. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.
Tables VIII through X present historical data related to loans and the allowance for loan losses.
TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars In Thousands)
Three Months Ended
March 31,
March 31,
Years Ended December 31,
2022
2021
2021
2020
2019
2018
2017
Balance, beginning of year
$
13,537
$
11,385
$
11,385
$
9,836
$
9,309
$
8,856
$
8,473
Charge-offs:
Commercial
(150)
0
(1,464)
(2,343)
(6)
(165)
(132)
Residential mortgage
0
0
(11)
0
(190)
(158)
(197)
Consumer
(30)
(11)
(100)
(122)
(183)
(174)
(150)
Total charge-offs
(180)
(11)
(1,575)
(2,465)
(379)
(497)
(479)
Recoveries:
Commercial
0
14
22
16
6
317
4
Residential mortgage
16
2
6
44
12
8
19
Consumer
7
12
38
41
39
41
38
Total recoveries
23
28
66
101
57
366
61
Net (charge-offs) recoveries
(157)
17
(1,509)
(2,364)
(322)
(131)
(418)
Provision for loan losses
891
259
3,661
3,913
849
584
801
Balance, end of period
$
14,271
$
11,661
$
13,537
$
11,385
$
9,836
$
9,309
$
8,856
Net charge-offs as a % of average loans
0.01
%
0.00
%
0.09
%
0.16
%
0.03
%
0.02
%
0.05
%
TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands)
March 31,
As of December 31,
2022
2021
2020
2019
2018
2017
ASC 310 - Impaired loans - individually evaluated
$
730
$
740
$
925
$
1,051
$
1,605
$
1,279
ASC 450 - Collectively evaluated:
Commercial
8,192
7,553
5,545
3,913
3,102
3,078
Residential mortgage
4,445
4,338
4,091
4,006
3,870
3,841
Consumer
237
235
239
281
233
159
Unallocated
667
671
585
585
499
499
Total Allowance
$
14,271
$
13,537
$
11,385
$
9,836
$
9,309
$
8,856
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TABLE X - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(Dollars In Thousands)
March 31,
As of December 31,
2022
2021
2020
2019
2018
2017
Impaired loans with a valuation allowance
$
6,528
$
6,540
$
8,082
$
3,375
$
4,851
$
4,100
Impaired loans without a valuation allowance
1,494
2,636
2,895
1,670
4,923
5,411
Purchased credit impaired loans
3,983
6,558
6,841
441
0
0
Total impaired loans
$
12,005
$
15,734
$
17,818
$
5,486
$
9,774
$
9,511
Total loans past due 30-89 days and still accruing
$
3,868
$
5,106
$
5,918
$
8,889
$
7,142
$
9,449
Nonperforming assets:
Purchased credit impaired loans
$
3,983
$
6,558
$
6,841
$
441
$
0
$
0
Other nonaccrual loans
10,962
12,441
14,575
8,777
13,113
13,404
Total nonaccrual loans
14,945
18,999
21,416
9,218
13,113
13,404
Total loans past due 90 days or more and still accruing
3,429
2,219
1,975
1,207
2,906
3,724
Total nonperforming loans
18,374
21,218
23,391
10,425
16,019
17,128
Foreclosed assets held for sale (real estate)
531
684
1,338
2,886
1,703
1,598
Total nonperforming assets
$
18,905
$
21,902
$
24,729
$
13,311
$
17,722
$
18,726
Loans subject to troubled debt restructurings (TDRs):
Performing
$
279
$
288
$
166
$
889
$
655
$
636
Nonperforming
3,954
5,517
7,285
1,737
2,884
3,027
Total TDRs
$
4,233
$
5,805
$
7,451
$
2,626
$
3,539
$
3,663
Total nonperforming loans as a % of loans
1.19
%
1.36
%
1.42
%
0.88
%
1.94
%
2.10
%
Total nonperforming assets as a % of assets
0.81
%
0.94
%
1.10
%
0.80
%
1.37
%
1.47
%
Allowance for loan losses as a % of total loans
0.93
%
0.87
%
0.69
%
0.83
%
1.12
%
1.09
%
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a)
1.11
%
1.08
%
1.05
%
0.93
%
1.12
%
1.09
%
Allowance for loan losses as a % of nonperforming loans
77.67
%
63.80
%
48.67
%
94.35
%
58.11
%
51.70
%
(a) Credit adjustment on purchased non-impaired loans at end of period
$
2,783
$
3,335
$
5,979
$
1,216
$
0
$
0
Allowance for loan losses
14,271
13,537
11,385
9,836
9,309
8,856
Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1)
$
17,054
$
16,872
$
17,364
$
11,052
$
9,309
$
8,856
Total loans receivable
$
1,538,190
$
1,564,849
$
1,644,209
$
1,182,222
$
827,563
$
815,713
Credit adjustment on purchased non-impaired loans at end of period
2,783
3,335
5,979
1,216
0
0
Total (2)
$
1,540,973
$
1,568,184
$
1,650,188
$
1,183,438
$
827,563
$
815,713
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2)
1.11
%
1.08
%
1.05
%
0.93
%
1.12
%
1.09
%
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At March 31, 2022, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $85,775,000. The Corporation’s cash position at March 31, 2022 was elevated in comparison to historical (pre-pandemic) levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash.
The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $12,817,000 at March 31, 2022.
The Corporation’s outstanding, available, and total credit facilities at March 31, 2022 and December 31, 2021 are as follows:
Outstanding
Available
Total Credit
(In Thousands)
March 31,
December 31,
March 31,
December 31,
March 31,
December 31,
2022
2021
2022
2021
2022
2021
Federal Home Loan Bank of Pittsburgh
$
26,382
$
33,311
$
731,429
$
723,557
$
757,811
$
756,868
Federal Reserve Bank Discount Window
0
0
12,429
13,642
12,429
13,642
Other correspondent banks
0
0
45,000
45,000
45,000
45,000
Total credit facilities
$
26,382
$
33,311
$
788,858
$
782,199
$
815,240
$
815,510
At March 31, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $20,348,000 and letters of credit totaling $6,034,000. At December 31, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $27,727,000 and letters of credit totaling $5,584,000. Additional information regarding borrowed funds is included in Note 8 to the unaudited consolidated financial statements.
Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At March 31, 2022, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $328,909,000.
Management believes the Corporation is well-positioned to meet its short-term and long-term funding obligations.
STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY
In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at March 31, 2022; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Details concerning capital ratios at March 31, 2022 and December 31, 2021 are presented below. Management believes, as of March 31, 2022, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at March 31, 2022 and December 31, 2021 exceed the Corporation’s Board policy threshold levels.
(Dollars in Thousands)
Minimum To Be
Minimum To Maintain
Well
Minimum
Capital Conservation
Capitalized Under
Minimum To Meet
Capital
Buffer at Reporting
Prompt Corrective
the Corporation's
Actual
Requirement
Date
Action Provisions
Policy Thresholds
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
March 31, 2022:
Total capital to risk-weighted assets:
Consolidated
$
288,530
18.23
%
N/A
N/A
N/A
N/A
N/A
N/A
$
166,142
≥10.5
%
C&N Bank
256,215
16.26
%
126,278
≥8
%
165,740
≥10.5
%
157,848
≥10
%
165,740
≥10.5
%
Tier 1 capital to risk-weighted assets:
Consolidated
240,568
15.20
%
N/A
N/A
N/A
N/A
N/A
N/A
134,496
≥8.5
%
C&N Bank
241,284
15.29
%
94,709
≥6
%
134,171
≥8.5
%
126,278
≥8
%
134,171
≥8.5
%
Common equity tier 1 capital to risk-weighted assets:
Consolidated
240,568
15.20
%
N/A
N/A
N/A
N/A
N/A
N/A
110,762
≥7
%
C&N Bank
241,284
15.29
%
71,032
≥4.5
%
110,494
≥7.0
%
102,601
≥6.5
%
110,494
≥7
%
Tier 1 capital to average assets:
Consolidated
240,568
10.59
%
N/A
N/A
N/A
N/A
N/A
N/A
181,748
≥8
%
C&N Bank
241,284
10.70
%
90,215
≥4
%
N/A
N/A
112,769
≥5
%
180,430
≥8
%
December 31, 2021:
Total capital to risk-weighted assets:
Consolidated
$
287,614
18.21
%
N/A
N/A
N/A
N/A
N/A
N/A
$
165,846
≥10.5
%
C&N Bank
252,606
16.04
%
126,012
≥8
%
165,390
≥10.5
%
157,514
≥10
%
165,390
≥10.5
%
Tier 1 capital to risk-weighted assets:
Consolidated
240,433
15.22
%
N/A
N/A
N/A
N/A
N/A
N/A
134,256
≥8.5
%
C&N Bank
238,434
15.14
%
94,509
≥6
%
133,887
≥8.5
%
126,012
≥8
%
133,887
≥8.5
%
Common equity tier 1 capital to risk-weighted assets:
Consolidated
240,433
15.22
%
N/A
N/A
N/A
N/A
N/A
N/A
110,564
≥7
%
C&N Bank
238,434
15.14
%
70,881
≥4.5
%
110,260
≥7.0
%
102,384
≥6.5
%
110,260
≥7
%
Tier 1 capital to average assets:
Consolidated
240,433
10.53
%
N/A
N/A
N/A
N/A
N/A
N/A
182,683
≥8
%
C&N Bank
238,434
10.52
%
90,688
≥4
%
N/A
N/A
113,360
≥5
%
181,376
≥8
%
In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of its common stock. In the first quarter 2022, 129,867 shares were repurchased for a total cost of $3,227,000, at an average price of $24.85 per share. Cumulatively through March 31, 2022, 428,926 shares have been repurchased for a total cost of $10,639,000, at an average price of $24.80 per share.
Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At March 31, 2022, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
Minimum common equity tier 1 capital ratio
4.5
%
Minimum common equity tier 1 capital ratio plus capital conservation buffer
7.0
%
Minimum tier 1 capital ratio
6.0
%
Minimum tier 1 capital ratio plus capital conservation buffer
8.5
%
Minimum total capital ratio
8.0
%
Minimum total capital ratio plus capital conservation buffer
10.5
%
A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer
Maximum Payout
(as a % of risk-weighted assets)
(as a % of eligible retained income)
Greater than 2.5%
No payout limitation applies
≤2.5% and >1.875%
60
%
≤1.875% and >1.25%
40
%
≤1.25% and >0.625%
20
%
≤0.625%
0
%
At March 31, 2022, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 8.23%.
The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive (loss) income within stockholders’ equity. Accumulated other comprehensive (loss) income is excluded from the Bank’s and Corporation’s regulatory capital ratios. The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $20,492,000 at March 31, 2022 as compared to the balance in accumulated other comprehensive income related to unrealized gains on available-for-sale debt securities, net of deferred income tax of $4,809,000 at December 31, 2021. The decrease in stockholders’ equity in the first quarter 2022 from the change in accumulated other comprehensive (loss) income resulted from an increase in interest rates. Changes in accumulated other comprehensive (loss) income are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. The securities section of Management’s Discussion and Analysis and Note 5 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at March 31, 2022.
INFLATION
Inflation affects the cost of labor, supplies and services used to provide banking services as well as interest rates. After many years of low inflation, disruptions to labor markets and supply chains triggered by the COVID-19 pandemic and government policies, have led to high inflation. The annual inflation rate for the 12-month period ended March 31, 2022, based on changes in the Consumer Price Index, was 8.5%. The 8.5% increase was the largest 12-month advance since 1981.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. In March of 2020, in response to significant concerns about the impact of the COVID-19 pandemic on the U.S. economy, the Federal Reserve lowered the fed funds target rate (at the high end of the range) from 1.75% to 0.25% and resumed injections of massive amounts of liquidity into the nation’s monetary system through a variety of programs including purchases of large amounts of securities. At its March 15-16, 2022 meeting, the Federal Open Market Committee (FOMC) changed course, raising the high end of the fed funds target rate to 0.50% and announcing that it anticipates ongoing increases to its target rate will be appropriate and that it expects to begin reducing its holdings of securities at a coming meeting. The Committee noted its desire to achieve maximum employment and inflation at a rate of 2 percent over the longer run.
Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including indicators of inflationary pressures, in managing interest rate and other financial risks.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.