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
● recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, sources of liquidity and capital funding, and regulatory responses to these developments (including potential increases in the cost of deposit insurance assessments)
● the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses
● 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
● the effect of the novel coronavirus (COVID-19) and related events
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 2023 as Compared to First Quarter 2022
First quarter 2023 net income was $6,253,000, or $0.40 per diluted share. In comparison, first quarter 2022 net income was $6,895,000, or $0.44 per diluted share. Significant variances were as follows:
● First quarter 2023 net interest income of $20,781,000 was $449,000 higher than the first quarter 2022 total. The increase in net interest income was mainly driven by loan growth, as average earning assets increased $131,608,000, including an increase in average loans of $178,002,000, or 11.5%, while average interest-bearing due from banks decreased $52,478,000. Average total deposits of $1,931,126,000 were flat in the first quarter 2023 as compared to the first quarter 2022 while average borrowed funds increased $136,303,000. The net interest margin was 3.71% in the first quarter 2023, down from 3.86% in the first quarter 2022. The interest rate spread decreased 0.43%, as the average rate on interest-bearing liabilities increased 0.96%, while the average yield on earning assets increased 0.53%. Contributing to the comparatively lower margin and spread, total interest and fees on loans in the first quarter 2022 included $1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable amount in the first quarter 2023.
● The credit for credit losses (reduction in expense) was $352,000 in the first quarter 2023 as compared to the first quarter 2022 provision for loan losses of $891,000. The credit for credit losses in the first quarter 2023 resulted mainly from a reduction in
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the allowance related to the commercial segment of the portfolio. Within the net credit for credit losses on loans in the first quarter 2023, the provision related to specific loans was $205,000, including net charge-offs of $61,000 and an increase in specific allowances on loans of $144,000. In comparison, 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).
● Noninterest income of $5,616,000 in the first quarter 2023 decreased $207,000 from the first quarter 2022 amount. Significant variances included the following:
o Net gains from sale of loans of $74,000 decreased $308,000 from the first quarter 2022, reflecting a reduction in volume of residential mortgage loans sold.
o Brokerage and insurance revenue of $430,000 decreased $92,000 from the first quarter 2022, due to lower volume of new transactions.
o Loan servicing fees, net of $122,000 decreased $88,000, as the fair value of servicing rights decreased $83,000 in the first quarter 2023 as compared to an increase of $2,000 in the first quarter 2022.
o Other noninterest income of $771,000 increased $183,000 from the first quarter 2022, including dividends on FHLB-Pittsburgh stock totaling $217,000, an increase of $100,000 from the first quarter 2022, and a gain on sale of premises and equipment of $68,000 with no comparable amount in the first quarter 2022.
● Noninterest expense of $19,087,000 in the first quarter 2023 increased $2,201,000 from the first quarter 2022 amount. Significant variances included the following:
o Salaries and employee benefits expense of $11,427,000 increased $820,000 from the first quarter 2022, including an increase in base salaries expense of $597,000. In total, the number of full-time equivalent employees (FTEs) increased by 10 (2.5%) to 412 in the first quarter 2023 as compared to the first quarter 2022. Total cash and stock-based compensation expense increased $167,000 and health care expense increased $102,000 due to higher claims on the Corporation’s partially self-insured plan.
o Other noninterest expense of $2,507,000 increased $623,000 from the first quarter 2022. Within this category, significant variances included the following:
● In the first quarter 2022 the allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $242,000 with no comparable amount in the first quarter 2023.
● Other operational losses totaled $206,000, an increase of $82,000.
● Net collection expense totaled $44,000 in the first quarter 2023, an increase of $85,000 over net recoveries of $41,000 in the first quarter 2022.
● Advertising expense totaled $213,000 in the first quarter 2023, an increase of $77,000 reflecting expenses related to social media strategy and brand monitoring analysis.
o Professional fees of $937,000 increased $448,000, including $389,000 of conversion costs related to a change in Wealth Management platform for providing brokerage and investment advisory services.
o Data processing and telecommunications of $1,936,000 increased $313,000 from the first quarter 2022, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.
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● The income tax provision was $1,409,000, or 18.4% of pre-tax income for the first quarter 2023, as compared to $1,483,000, or 17.7% of pre-tax income for the fourth quarter 2022. The decrease in income tax provision reflected the decrease in pre-tax income of $716,000.
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)
2023
2022
2022
2022
2022
Interest income
$
26,139
$
25,855
$
23,710
$
21,309
$
21,773
Interest expense
5,358
3,563
2,831
1,684
1,441
Net interest income
20,781
22,292
20,879
19,625
20,332
(Credit) provision for credit losses
(352)
2,262
3,794
308
891
Net interest income after (credit) provision for credit losses
21,133
20,030
17,085
19,317
19,441
Noninterest income
5,616
6,109
5,671
6,829
5,823
Noninterest expense
19,087
16,587
17,443
17,039
16,886
Income before income tax provision
7,662
9,552
5,313
9,107
8,378
Income tax provision
1,409
1,773
858
1,618
1,483
Net income
$
6,253
$
7,779
$
4,455
$
7,489
$
6,895
Net income attributable to common shares
$
6,201
$
7,711
$
4,416
$
7,419
$
6,835
Basic earnings per common share
$
0.40
$
0.50
$
0.29
$
0.48
$
0.44
Diluted earnings per common share
$
0.40
$
0.50
$
0.29
$
0.48
$
0.44
NONINTEREST INCOME
TABLE II – COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands)
Three Months Ended
March 31,
$
%
2023
2022
Change
Change
Trust revenue
$
1,777
$
1,786
$
(9)
(0.5)
%
Brokerage and insurance revenue
430
522
(92)
(17.6)
%
Service charges on deposit accounts
1,290
1,235
55
4.5
%
Interchange revenue from debit card transactions
1,007
963
44
4.6
%
Net gains from sales of loans
74
382
(308)
(80.6)
%
Loan servicing fees, net
122
210
(88)
(41.9)
%
Increase in cash surrender value of life insurance
138
135
3
2.2
%
Other noninterest income
771
588
183
31.1
%
Realized gains on available-for-sale debt securities, net
7
2
5
250.0
%
Total noninterest income
$
5,616
$
5,823
$
(207)
(3.6)
%
NONINTEREST EXPENSE
TABLE III - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands)
Three Months Ended
March 31,
$
%
2023
2022
Change
Change
Salaries and employee benefits
$
11,427
$
10,607
$
820
7.7
%
Net occupancy and equipment expense
1,402
1,411
(9)
(0.6)
%
Data processing and telecommunications expense
1,936
1,623
313
19.3
%
Automated teller machine and interchange expense
475
384
91
23.7
%
Pennsylvania shares tax
403
488
(85)
(17.4)
%
Professional fees
937
489
448
91.6
%
Other noninterest expense
2,507
1,884
623
33.1
%
Total noninterest expense
$
19,087
$
16,886
$
2,201
13.0
%
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Additional 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.
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 Credit Losses on Loans – A material estimate that is particularly susceptible to significant change is the determination of the allowance for credit losses (ACL) on loans. The Corporation maintains an ACL on loans which represents management’s estimate of expected net charge-offs over the life of the loans. The ACL includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis). Management considers the determination of the ACL on loans to be critical because it requires significant judgment regarding estimates of expected credit losses based on the Corporation’s historical loss experience, current conditions and economic forecasts. Management’s evaluation is based upon a continuous review of the Corporation’s loans, with consideration given to evaluations resulting from examinations performed by regulatory authorities. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for determining the ACL, and additional discussion of the ACL is provided in a separate section of Management’s Discussion and Analysis.
The ACL may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables, including new information regarding existing problem loans, identification of additional problem loans, changes in the fair value of underlying collateral, unforeseen events such as natural disasters and pandemics, and other factors. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly.
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.
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 IV, V and VI include information regarding the Corporation’s net interest income for the three-month periods ended March 31, 2023 and 2022. 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. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. 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, 2023 and 2022
For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) was $21,050,000 in 2023, which was $416,000 (2.0%) higher than in 2022. Interest income in the first quarter 2023 was $26,408,000 which was $4,333,000 higher as compared to 2022. Interest expense of $5,358,000 in 2023 was $3,917,000 higher than in 2022. As presented in Table V, the Net Interest Margin was 3.71% in 2023 as compared to 3.86% in 2022, 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 3.30% in 2023 from 3.73% in 2022. The average yield on earning assets of 4.66% was 0.53% higher in 2023 as compared to 2022, and the average rate on interest-bearing liabilities of 1.36% in 2023 was 0.96% higher. Contributing to the comparatively lower margin and spread, total interest and fees on loans in the first quarter
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2022 included $1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable amount in the first quarter 2023.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $26,408,000 in 2023, an increase of $4,333,000, or 19.6% from 2022.
Interest and fees from loans receivable increased $4,022,000 in 2023 as compared to 2022. The fully taxable equivalent yield on loans in 2023 was 5.44% compared to 5.01% in 2022. Average outstanding loans receivable increased $178,002,000 (11.5%) to $1,725,863,000 in 2023 from $1,547,861,000 in 2022. 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 2023.
Income from interest-bearing due from banks totaled $278,000 in 2023, an increase of $211,000 from the total for 2022. The average yield on interest-bearing due from banks was 3.56% in 2023 and 0.32% in 2022. The average balance of interest-bearing due from banks was $31,637,000 in 2023 as compared to $84,115,000 in 2022. Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with the Federal Reserve.
Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $104,000 in 2023 as compared to 2022, as the average balance (at amortized cost) of available-for-sale debt securities increased $6,867,000. The average yield on available-for-sale debt securities was 2.23% for 2023, up slightly from 2.18% in 2022.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $3,917,000 to $5,358,000 in 2023 from $1,441,000 in 2022. Interest expense on deposits increased $2,320,000, as the average rate on interest-bearing deposits increased to 0.94% in 2023 from 0.26% in 2022. The increase in average rate on deposits includes increases of 1.13% on time deposits, 0.74% on money market accounts and 0.69% on interest checking accounts.
Average total deposits (interest-bearing and noninterest-bearing) remained stable with $1,931,126,000 for the first quarter 2023 compared to $1,931,681,000 for the first quarter 2022. Average interest checking deposits increased $38,147,000, average time deposits increased $35,092,000 and the average total balance of other categories of noninterest-bearing demand and other deposits increased $18,464,000, while average money market accounts decreased $92,258,000.
Interest expense on short-term borrowings in 2023 was $1,097,000 in 2023 as compared to $1,000 in 2022. The average balance of short-term borrowings increased to $91,767,000 in 2023 from $1,746,000 in 2022. The average rate on short-term borrowings was 4.85% in 2023 compared to 0.23% in 2022.
Interest expense on long-term borrowings (FHLB advances) increased $632,000 to $681,000 in 2023 from $49,000 in 2022. The average balance of long-term borrowings was $80,648,000 in 2023, up from an average balance of $26,102,000 in 2022. 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 3.42% in 2023 compared to 0.76% in 2022.
Interest expense on subordinated debt decreased $133,000 to $230,000 in 2023 from $363,000 in 2022. The average balance of subordinated debt decreased to $24,620,000 in 2023 from $32,948,000 in 2022. The average rate on subordinated debt decreased to 3.79% in 2023 from 4.47% in 2022. In the second quarter 2022, the Corporation redeemed subordinated debt with aggregate par values of $8.5 million and a weighted average interest rate of 6.29%.
More information regarding the terms of borrowed funds is provided in Note 8 to the unaudited consolidated financial statements.
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TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE
Three Months Ended
March 31,
Increase/
(In Thousands)
2023
2022
(Decrease)
INTEREST INCOME
Interest-bearing due from banks
$
278
$
67
$
211
Available-for-sale debt securities:
Taxable
2,211
1,969
242
Tax-exempt
767
905
(138)
Total available-for-sale debt securities
2,978
2,874
104
Loans receivable:
Taxable
22,428
17,974
4,454
Paycheck Protection Program
3
575
(572)
Tax-exempt
713
573
140
Total loans receivable
23,144
19,122
4,022
Other earning assets
8
12
(4)
Total Interest Income
26,408
22,075
4,333
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking
987
194
793
Money market
873
262
611
Savings
63
61
2
Time deposits
1,307
393
914
Total interest-bearing deposits
3,230
910
2,320
Borrowed funds:
Short-term
1,097
1
1,096
Long-term - FHLB advances
681
49
632
Senior notes, net
120
118
2
Subordinated debt, net
230
363
(133)
Total borrowed funds
2,128
531
1,597
Total Interest Expense
5,358
1,441
3,917
Net Interest Income
$
21,050
$
20,634
$
416
Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis (a non-GAAP measure), using the Corporation’s marginal federal income tax rate of 21%. The following table is a reconciliation of net interest income under U.S. GAAP as compared to net interest income as adjusted to a fully taxable-equivalent basis.
(In Thousands)
Three Months Ended
March 31,
Increase/
2023
2022
(Decrease)
Net Interest Income Under U.S. GAAP
$
20,781
$
20,332
$
449
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities
127
183
(56)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans
142
119
23
Net Interest Income as adjusted to a fully taxable-equivalent basis
$
21,050
$
20,634
$
416
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TABLE V - Analysis of Average Daily Balances and Rates
(Dollars in Thousands)
Three Months
Three Months
Ended
Rate of
Ended
Rate of
3/31/2023
Return/
3/31/2022
Return/
Average
Cost of
Average
Cost of
Balance
Funds %
Balance
Funds %
EARNING ASSETS
Interest-bearing due from banks
$
31,637
3.56
%
$
84,115
0.32
%
Available-for-sale debt securities, at amortized cost:
Taxable
410,110
2.19
%
390,301
2.05
%
Tax-exempt
131,392
2.37
%
144,334
2.54
%
Total available-for-sale debt securities
541,502
2.23
%
534,635
2.18
%
Loans receivable:
Taxable
1,633,850
5.57
%
1,445,353
5.04
%
Paycheck Protection Program
162
7.51
%
18,849
12.37
%
Tax-exempt
91,851
3.15
%
83,659
2.78
%
Total loans receivable
1,725,863
5.44
%
1,547,861
5.01
%
Other earning assets
1,200
2.70
%
1,983
2.45
%
Total Earning Assets
2,300,202
4.66
%
2,168,594
4.13
%
Cash
22,276
20,703
Unrealized loss on securities
(60,055)
(2,508)
Allowance for loan losses
(17,053)
(13,783)
Bank-owned life insurance
31,267
30,720
Bank premises and equipment
21,518
21,043
Intangible assets
55,331
55,765
Other assets
67,333
44,952
Total Assets
$
2,420,819
$
2,325,486
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
$
457,277
0.88
%
$
419,130
0.19
%
Money market
364,646
0.97
%
456,904
0.23
%
Savings
257,047
0.10
%
249,165
0.10
%
Time deposits
312,497
1.70
%
277,405
0.57
%
Total interest-bearing deposits
1,391,467
0.94
%
1,402,604
0.26
%
Borrowed funds:
Short-term
91,767
4.85
%
1,746
0.23
%
Long-term - FHLB advances
80,648
3.42
%
26,102
0.76
%
Senior notes, net
14,773
3.29
%
14,709
3.25
%
Subordinated debt, net
24,620
3.79
%
32,948
4.47
%
Total borrowed funds
211,808
4.07
%
75,505
2.85
%
Total Interest-bearing Liabilities
1,603,275
1.36
%
1,478,109
0.40
%
Demand deposits
539,659
529,077
Other liabilities
25,247
24,046
Total Liabilities
2,168,181
2,031,232
Stockholders' equity, excluding accumulated other comprehensive loss
299,599
295,996
Accumulated other comprehensive loss
(46,961)
(1,742)
Total Stockholders' Equity
252,638
294,254
Total Liabilities and Stockholders' Equity
$
2,420,819
$
2,325,486
Interest Rate Spread
3.30
%
3.73
%
Net Interest Income/Earning Assets
3.71
%
3.86
%
Total Deposits (Interest-bearing and Demand)
$
1,931,126
$
1,931,681
(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 VI - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)
Three Months Ended 3/31/23 vs. 3/31/22
Change in
Change in
Total
Volume
Rate
Change
EARNING ASSETS
Interest-bearing due from banks
$
(67)
$
278
$
211
Available-for-sale debt securities:
Taxable
103
139
242
Tax-exempt
(78)
(60)
(138)
Total available-for-sale debt securities
25
79
104
Loans receivable:
Taxable
2,480
1,974
4,454
Paycheck Protection Program
(410)
(162)
(572)
Tax-exempt
59
81
140
Total loans receivable
2,129
1,893
4,022
Other earning assets
(5)
1
(4)
Total Interest Income
2,082
2,251
4,333
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
20
773
793
Money market
(63)
674
611
Savings
2
0
2
Time deposits
56
858
914
Total interest-bearing deposits
15
2,305
2,320
Borrowed funds:
Short-term
792
304
1,096
Long-term - FHLB advances
236
396
632
Senior notes, net
1
1
2
Subordinated debt, net
(83)
(50)
(133)
Total borrowed funds
946
651
1,597
Total Interest Expense
961
2,956
3,917
Net Interest Income
$
1,121
$
(705)
$
416
(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.
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 quarter 2023 was $1,409,000, which was $74,000 lower than the provision for the first quarter 2022. The effective tax rate (tax provision as a percentage of pre-tax income) was 18.4% in the first quarter 2023 compared to 17.7% in the first quarter 2022. The Corporation’s effective tax rates differ from the statutory rate of 21% 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, 2023 and December 31, 2022 represents the following temporary difference components:
March 31,
December 31,
(In Thousands)
2023
2022
Deferred tax assets:
Unrealized holding losses on securities
$
11,504
$
13,391
Allowance for credit losses on loans
4,029
3,648
Purchase accounting adjustments on loans
573
938
Deferred compensation
1,198
1,149
Operating leases liability
876
907
Deferred loan origination fees
710
779
Net operating loss carryforward
630
659
Accrued incentive compensation
170
354
Other deferred tax assets
1,212
1,115
Total deferred tax assets
20,902
22,940
Deferred tax liabilities:
Defined benefit plans - ASC 835
125
129
Bank premises and equipment
283
298
Core deposit intangibles
610
633
Right-of-use assets from operating leases
876
907
Other deferred tax liabilities
94
89
Total deferred tax liabilities
1,988
2,056
Deferred tax asset, net
$
18,914
$
20,884
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, 2023 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 .
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 and maximizing return on earning assets within reasonable risk parameters.
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The composition of the available-for-sale debt securities portfolio at March 31, 2023, December 31, 2022 and December 31, 2021 is as follows:
(Dollars In Thousands)
March 31, 2023
December 31, 2022
December 31, 2021
Amortized
Fair
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
Cost
Value
Obligations of the U.S. Treasury
$
33,924
$
31,163
$
35,166
$
31,836
$
25,058
$
24,912
Obligations of U.S. Government agencies
25,479
23,348
25,938
23,430
23,936
24,091
Bank holding company debt securities
28,947
24,723
28,945
25,386
18,000
17,987
Obligations of states and political subdivisions:
Tax-exempt
128,285
117,812
146,149
132,623
143,427
148,028
Taxable
67,076
57,572
68,488
56,812
72,182
72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities
109,028
97,807
112,782
99,941
98,048
98,181
Residential collateralized mortgage obligations
42,296
38,117
44,868
40,296
44,015
44,247
Commercial mortgage-backed securities
84,449
74,195
91,388
79,686
86,926
87,468
Private label commercial mortgage-backed securities
8,105
8,077
8,070
8,023
0
0
Total Available-for-Sale Debt Securities
$
527,589
$
472,814
$
561,794
$
498,033
$
511,592
$
517,679
Aggregate Unrealized (Loss) Gain
$
(54,775)
$
(63,761)
$
6,087
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost
(10.4)
%
(11.3)
%
1.2
%
Market Yield on 5-Year U.S. Treasury Obligations (a)
3.60
%
3.99
%
1.26
%
(a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates)
As reflected in the table above, the fair value of available-for-sale securities was lower than the amortized cost basis by $54,775,000, or 10.4% at March 31, 2023 and $63,761,000 (11.3%) at December 31, 2022. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021. The volatility in the fair value of the portfolio, including the significant reduction in fair value in 2022, resulted from changes in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 0.39% lower at March 31, 2023 in comparison to December 31, 2022, and 2.34% higher than at December 31, 2021.
Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 3, Quantitative and Qualitative Disclosures about Market Risk.
As described in Note 5 to the unaudited, consolidated financial statements, management determined the Corporation does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at March 31, 2023 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of March 31, 2023 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at March 31, 2023, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:
● Bank holding company debt securities – All of the Corporation’s holdings of bank holding company debt securities were investment grade and there have been no payment defaults. There were seven securities with face amounts ranging from $3 million to $5 million, including one senior security and six subordinated securities. All of the issuers have publicly traded common stock. At March 31, 2023, the securities have external ratings ranging from BBB-/Baa3 to A-.
● Obligations of states and political subdivisions (municipal bonds) – All of the Corporation’s holdings of municipal bonds were investment grade and there have been no payment defaults. Summary ratings information at March 31, 2023, based on the amortized cost basis and reflecting the lowest enhanced or underlying rating by Moody’s, Standard & Poors or Fitch, is as follows: AAA or prerefunded – 23% of the portfolio; AA – 70%; A – 7%.
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● Private label commercial mortgage-backed securities (PLCMBS) – There were two PLCMBS securities, both of which were from the most senior payment (subordination) classes of their respective issuances. These securities were investment grade (rated Aaa), and there have been no payment defaults on these securities.
Based on the results of management’s assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at March 31, 2023.
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 credit losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. 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 2023.
Table VII shows the composition of the loan portfolio at March 31, 2023 and at year-end from 2018 through 2022. The segments presented in Table VII have been revised from those used in prior year disclosures to be consistent with the pools used in determining the collectively evaluated portion of the allowance for credit losses based on the CECL methodology in 2023.
As presented in Table VII, total loans outstanding at March 31, 2023 of $1,745,139,000 was more than double the corresponding total at December 31, 2018. The increase in loans outstanding includes the impact of acquisitions of banks located in Southeastern Pennsylvania in 2018 and 2019. Primarily as a result of the acquisitions, as well as expansion by opening 2 offices in Southcentral Pennsylvania, the mix of the loan portfolio has changed to become predominantly commercial in nature. At March 31, 2023, commercial loans represented 74% of the portfolio while residential loans totaled 23% of the portfolio; in comparison, commercial loans totaled 48% and residential loans totaled 47% of the portfolio at December 31, 2018.
Table VII shows an increase in commercial and industrial loans to $222,923,000 at December 31, 2020 followed by reductions in 2021, 2022 and the first quarter 2023. The elevated balance of commercial and industrial loans at December 31, 2020 included Paycheck Protection Program (PPP) loans of $132,269,000, a substantial portion of which were subsequently repaid. The outstanding balance of PPP loans was $155,000 at March 31, 2023.
At March 31, 2023, gross loans outstanding increased $5,099,000 from December 31, 2022. Gross loans outstanding at December 31, 2022 increased $175,191,000, or 11.2%, from the total at December 31, 2021. The pace of loan growth in 2023 will depend on the impact of potential further increases in interest rates, potential deterioration in economic conditions and 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. Total participation loans outstanding amounted to $42,047,000 at March 31, 2023, down from $44,723,000 at December 31, 2022.
At March 31, 2023, the total recorded investment in non-owner occupied commercial real estate loans for which the primary purpose is utilization of office space by third parties was $95,524,000, or 5.5% of total gross loans receivable. Within this segment, at March 31, 2023, there was 1 loan with a recorded investment of $2,615,000 risk rated as Special Mention with no related ACL, and 1 loan with a recorded investment of $1,379,000 risk rated as Substandard and nonaccrual with an ACL of $182,000. The remainder of the non-owner occupied commercial real estate loans for the primary purpose of office space utilization totaling $91,530,000 were accruing interest and risk rated Pass at March 31, 2023.
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
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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, 2023, the Corporation’s activity under the MPF Direct Program has been minimal.
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, 2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,376,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2022 was $1,515,000.
At March 31, 2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $331,326,000, including loans sold through the MPF Xtra program of $153,437,000 and loans sold through the Original program of $167,889,000. At December 31, 2022, outstanding balances of loans sold and serviced through the two programs totaled $325,677,000, including loans sold through the MPF Xtra program of $155,506,000 and loans sold through the Original Program of $170,171,000. 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, 2023 and December 31, 2022.
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 $4,799,000 at March 31, 2023 and $4,847,000 at December 31, 2022 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $90,000 at March 31, 2023 and December 31, 2022. In the three months ended March 31, 2023, the Corporation did not record an increase or reduction in other noninterest expense related to amounts realized on SBA claims in excess of prior estimates, as compared to a reduction of $242,000 in the three months ended March 31, 2022.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE VII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands)
March 31,
December 31,
2023
2022
2021
2020
2019
2018
Commercial real estate - nonowner occupied:
Nonowner occupied
$
457,814
$
454,386
$
358,352
$
328,662
$
208,579
$
115,128
Multi-family (5 or more) residential
58,111
55,406
49,054
54,893
30,474
7,104
1-4 Family - commercial purpose
166,773
165,805
175,027
198,918
147,121
35,176
Total commercial real estate - nonowner occupied
682,698
675,597
582,433
582,473
386,174
157,408
Commercial real estate - owner occupied
221,766
205,910
196,083
191,075
78,729
38,478
All other commercial loans:
Commercial and industrial
83,420
95,368
118,488
222,923
67,288
49,947
Commercial lines of credit
119,109
141,444
106,338
105,802
92,509
65,492
Political subdivisions
85,555
86,663
75,401
46,295
46,054
49,037
Commercial construction and land
70,612
60,892
59,505
41,000
32,717
11,126
Other commercial loans
26,106
25,710
26,498
29,310
28,735
23,130
Total all other commercial loans
384,802
410,077
386,230
445,330
267,303
198,732
Residential mortgage loans:
1-4 Family - residential
372,241
363,005
327,593
356,532
388,415
360,195
1-4 Family residential construction
29,479
30,577
23,151
18,736
14,640
24,698
Total residential mortgage
401,720
393,582
350,744
375,268
403,055
384,893
Consumer loans:
Consumer lines of credit (including HELOCs)
35,245
36,650
33,522
34,566
30,810
31,955
All other consumer
18,908
18,224
15,837
15,497
16,151
16,097
Total consumer
54,153
54,874
49,359
50,063
46,961
48,052
Total
1,745,139
1,740,040
1,564,849
1,644,209
1,182,222
827,563
Less: allowance for credit losses on loans
(18,346)
(16,615)
(13,537)
(11,385)
(9,836)
(9,309)
Loans, net
$
1,726,793
$
1,723,425
$
1,551,312
$
1,632,824
$
1,172,386
$
818,254
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
On January 1, 2023, the Corporation adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Note 1 to the unaudited consolidated financial statements provides a detailed explanation of the Corporation’s adopted accounting policies related to the application of CECL.
Effective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). At January 1, 2023, the impact of adopting CECL included an increase in gross loans receivable of $806,000 as compared to December 31, 2022 and an increase in the allowance for credit losses of $2,104,000 as compared to the allowance for loan losses determined under the Incurred Loss method at December 31, 2022.
The credit for credit losses (reduction in expense) was $352,000 in the first quarter 2023 as compared to the first quarter 2022 provision for loan losses of $891,000. The credit for credit losses in the first quarter 2023 resulted mainly from a reduction in the allowance related to the commercial segment of the portfolio. The net credit for loan losses in the first quarter 2023 included the impact of a reduction in qualitative factors applied to commercial loan pools, mainly due to an improvement in data used to evaluate commercial real estate values in the Corporation’s relevant market areas at March 31, 2023 as compared to January 1, 2023, along with a reduction in the
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historical net charge-off percentage for non-owner occupied commercial real estate. These adjustments were partially offset by the impact of an increase in the allowance at March 31, 2023 as compared to January 1, 2023 based on changes in the economic forecast. Within the net credit for credit losses on loans in the first quarter 2023, the provision related to specific loans was $205,000, including net charge-offs of $61,000 and an increase in specific allowances on loans of $144,000. In comparison, 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).
Table X shows that total nonperforming assets as a percentage of total assets was 0.60% at March 31, 2023, down from 1.04% at December 31, 2022 and lower than that at year-end 2018 through 2021. Total nonperforming assets were $14.6 million at March 31, 2023, down from $25.6 million at December 31, 2022. Similarly, total loans individually evaluated for credit loss decreased to $9.3 million at March 31, 2023 from $19.4 million at December 31, 2022. The net decrease in nonperforming assets at March 31, 2023 compared to December 31, 2022 included the impact of a $10.0 million payoff in the first quarter 2023 on a commercial loan relationship that was classified as nonaccrual at December 31, 2022. The reduction also included a paydown of $2,180,000 in the first quarter 2023 on a commercial loan for which partial charge-offs totaling $3,942,000 were recorded in 2022. The remaining carrying value of this loan was $474,000 at March 31, 2023. These reductions were partially offset by the addition to nonaccrual of a commercial loan relationship totaling $1,931,000 at March 31, 2023. Based on an estimate of the liquidation value of the real estate collateralizing the relationship, an allowance of $182,000 was recorded at March 31, 2023.
In the first quarter 2023, net charge-offs were minimal by historical standards, totaling $61,000. Table VIII shows annual average net charge-off rates ranging from a high of 0.26% in 2022 to a low of 0.02% in 2018.
Over the period 2018-2022 and the first three months of 2023, 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 individual loans, and may significantly impact the provision for credit losses and the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of loans requiring individual evaluation for credit loss, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of March 31, 2023. 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 credit losses.
TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
(Dollars In Thousands)
Three Months Ended
March 31,
March 31,
Years Ended December 31,
2023
2022
2022
2021
2020
2019
2018
Balance, beginning of year
$
16,615
$
13,537
$
13,537
$
11,385
$
9,836
$
9,309
$
8,856
Increase due to adoption of CECL
2,104
0
0
0
0
0
0
Charge-offs
(67)
(180)
(4,245)
(1,575)
(2,465)
(379)
(497)
Recoveries
6
23
68
66
101
57
366
Net charge-offs
(61)
(157)
(4,177)
(1,509)
(2,364)
(322)
(131)
(Credit) provision for credit losses
(312)
891
7,255
3,661
3,913
849
584
Balance, end of period
$
18,346
$
14,271
$
16,615
$
13,537
$
11,385
$
9,836
$
9,309
Net charge-offs as a % of average loans
0.00
%
0.01
%
0.26
%
0.09
%
0.16
%
0.03
%
0.02
%
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TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES
UPON ADOPTION OF CECL
(In Thousands)
March 31,
January 1,
2023
2023
Loans individually evaluated
$
895
$
751
Loans collectively evaluated:
Commercial real estate - nonowner occupied
9,045
9,641
Commercial real estate - owner occupied
1,759
1,765
All other commercial loans
3,477
3,914
Residential mortgage
2,864
2,407
Consumer
306
241
Total Allowance
$
18,346
$
18,719
PRIOR TO CECL ADOPTION
(In Thousands)
As of December 31,
2022
2021
2020
2019
2018
ASC 310 - Impaired loans - individually evaluated
$
453
$
740
$
925
$
1,051
$
1,605
ASC 450 - Collectively evaluated:
Commercial
10,845
7,553
5,545
3,913
3,102
Residential mortgage
4,073
4,338
4,091
4,006
3,870
Consumer
244
235
239
281
233
Unallocated
1,000
671
585
585
499
Total Allowance
$
16,615
$
13,537
$
11,385
$
9,836
$
9,309
TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS
(Dollars In Thousands)
March 31,
As of December 31,
2023
2022
2021
2020
2019
2018
Loans individually evaluated with a valuation allowance
$
5,802
$
3,460
$
6,540
$
8,082
$
3,375
$
4,851
Loans individually evaluated without a valuation allowance
3,507
14,871
2,636
2,895
1,670
4,923
Purchased credit impaired loans
0
1,027
6,558
6,841
441
0
Total impaired loans
$
9,309
$
19,358
$
15,734
$
17,818
$
5,486
$
9,774
Total loans past due 30-89 days and still accruing
$
5,493
$
7,079
$
5,106
$
5,918
$
8,889
$
7,142
Nonperforming assets:
Purchased credit impaired loans
$
0
$
1,027
$
6,558
$
6,841
$
441
$
0
Other nonaccrual loans
12,876
22,058
12,441
14,575
8,777
13,113
Total nonaccrual loans
12,876
23,085
18,999
21,416
9,218
13,113
Total loans past due 90 days or more and still accruing
1,216
2,237
2,219
1,975
1,207
2,906
Total nonperforming loans
14,092
25,322
21,218
23,391
10,425
16,019
Foreclosed assets held for sale (real estate)
459
275
684
1,338
2,886
1,703
Total nonperforming assets
$
14,551
$
25,597
$
21,902
$
24,729
$
13,311
$
17,722
Total nonperforming loans as a % of loans
0.81
%
1.46
%
1.36
%
1.42
%
0.88
%
1.94
%
Total nonperforming assets as a % of assets
0.60
%
1.04
%
0.94
%
1.10
%
0.80
%
1.37
%
Allowance for credit losses as a % of total loans
1.05
%
0.95
%
0.87
%
0.69
%
0.83
%
1.12
%
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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.
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 $23,314,000 at March 31, 2023.
The Corporation’s outstanding, available, and total credit facilities at March 31, 2023 and December 31, 2022 are as follows:
Outstanding
Available
Total Credit
(In Thousands)
March 31,
December 31,
March 31,
December 31,
March 31,
December 31,
2023
2022
2023
2022
2023
2022
Federal Home Loan Bank of Pittsburgh
$
201,357
$
150,099
$
655,577
$
689,279
$
856,934
$
839,378
Federal Reserve Bank Discount Window
0
0
22,340
23,107
22,340
23,107
Other correspondent banks
0
0
95,000
95,000
95,000
95,000
Total credit facilities
$
201,357
$
150,099
$
772,917
$
807,386
$
974,274
$
957,485
At March 31, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $91,000,000, long-term borrowings of $98,649,000 and letters of credit totaling $11,708,000. At December 31, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowing of $77,000,000, long-term borrowings of $62,272,000 and letters of credit totaling $10,827,000 . 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. In light of the unrealized loss at March 31, 2023 resulting from increases in interest rates in 2022, as described in more detail in the Securities section of Management’s Discussion and Analysis, management would be more likely in the near term to utilize securities as collateral for borrowings than to sell securities in such an emergency situation. At March 31, 2023, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $269,763,000.
Deposits totaled $1,916,040,000 at March 31, 2023, down $81,553,000 (4.1%) from $1,997,593,000 at December 31, 2022. Average total deposits of $1,931,126,000 for the first quarter 2023 were down $96,020,000 (4.7%) from the fourth quarter 2022 and were flat as compared to average deposits of $1,931,681,000 for the first quarter 2022. The reduction in total deposits included a reduction in the estimated amount of deposits in excess of FDIC insurance levels (uninsured deposit balances) of $75.6 million as compared to December 31, 2022. The net reduction in deposits resulted from several factors, including the impact of customer funds transferred to higher-yielding investment alternatives and seasonal reductions in municipal deposits. At March 31, 2023, the Corporation’s estimated uninsured deposits totaled $613.9 million, or 31.7% of total deposits, down from $689.4 million or 34.2% of total deposits at December 31, 2022. Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling $189.2 million, or 9.8% of total deposits at March 31, 2023.
The highly liquid sources of available funds described above, including unused borrowing capacity with the Federal Home Loan Bank of Pittsburgh, unused availability on the Federal Reserve Bank of Philadelphia’s discount window, available federal funds lines with other banks and unencumbered available-for-sale debt securities totaled $1.043 billion at March 31, 2023. Available funding from these sources exceeded the amount of uninsured deposits noted above by 69.9% at March 31, 2023.
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Despite the reduction in deposit balances in the first quarter 2023, based on the ample sources of highly liquid funds as described above, 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, 2023; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
Details concerning capital ratios at March 31, 2023 and December 31, 2022 are presented below. Management believes, as of March 31, 2023, 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, 2023 and December 31, 2022 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, 2023:
Total capital to risk-weighted assets:
Consolidated
$
287,182
16.49
%
N/A
N/A
N/A
N/A
N/A
N/A
$
182,849
≥10.5
%
C&N Bank
268,292
15.44
%
138,989
≥8
%
182,423
≥10.5
%
173,736
≥10
%
182,423
≥10.5
%
Tier 1 capital to risk-weighted assets:
Consolidated
243,024
13.96
%
N/A
N/A
N/A
N/A
N/A
N/A
148,021
≥8.5
%
C&N Bank
248,768
14.32
%
104,242
≥6
%
147,676
≥8.5
%
138,989
≥8
%
147,676
≥8.5
%
Common equity tier 1 capital to risk-weighted assets:
Consolidated
243,024
13.96
%
N/A
N/A
N/A
N/A
N/A
N/A
121,900
≥7
%
C&N Bank
248,768
14.32
%
78,181
≥4.5
%
121,615
≥7.0
%
112,928
≥6.5
%
121,615
≥7
%
Tier 1 capital to average assets:
Consolidated
243,024
10.07
%
N/A
N/A
N/A
N/A
N/A
N/A
193,026
≥8
%
C&N Bank
248,768
10.38
%
95,868
≥4
%
N/A
N/A
119,835
≥5
%
191,737
≥8
%
December 31, 2022:
Total capital to risk-weighted assets:
Consolidated
$
285,397
15.72
%
N/A
N/A
N/A
N/A
N/A
N/A
$
190,590
≥10.5
%
C&N Bank
265,784
14.68
%
144,873
≥8
%
190,145
≥10.5
%
181,091
≥10
%
190,145
≥10.5
%
Tier 1 capital to risk-weighted assets:
Consolidated
243,750
13.43
%
N/A
N/A
N/A
N/A
N/A
N/A
154,287
≥8.5
%
C&N Bank
248,744
13.74
%
108,654
≥6
%
153,927
≥8.5
%
144,873
≥8
%
153,927
≥8.5
%
Common equity tier 1 capital to risk-weighted assets:
Consolidated
243,750
13.43
%
N/A
N/A
N/A
N/A
N/A
N/A
127,060
≥7
%
C&N Bank
248,744
13.74
%
81,491
≥4.5
%
126,764
≥7.0
%
117,709
≥6.5
%
126,764
≥7
%
Tier 1 capital to average assets:
Consolidated
243,750
10.11
%
N/A
N/A
N/A
N/A
N/A
N/A
192,941
≥8
%
C&N Bank
248,744
10.38
%
95,826
≥4
%
N/A
N/A
119,783
≥5
%
191,652
≥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 2023, 77,430 shares were repurchased for a total cost of $1,662,000, at an average price of $21.47 per share. Cumulatively through March 31, 2023, 752,130 shares have been repurchased for a total cost of $18,249,000, at an average price of $24.26 per share.
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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.
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, 2023, 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, 2023, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 7.44%.
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 $43,271,000 at March 31, 2023 and $50,370,000 at December 31, 2022. The increase in stockholders’ equity in the first three months of 2023 from the change in accumulated other comprehensive loss resulted from a decrease in interest rates. Changes in accumulated other comprehensive loss are excluded from earnings and directly increase or decrease stockholders’ equity. To the extent unrealized losses on available-for-sale debt securities result from credit losses, unrealized losses are recorded as a charge against earnings. The securities section of Management’s Discussion and Analysis and Notes 1 and 5 to the unaudited consolidated financial statements provide additional information concerning management’s evaluation of available-for-sale debt securities for credit losses at March 31, 2023 .
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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.