What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-08 · 225 added, 184 removed, 538 unchanged (43% of the section changed)

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EARNINGS OVERVIEW

Second Quarter 2023 as Compared to Second Quarter 2022

Second quarter 2023 net income was $6,043,000, or $0.39 per diluted share, as compared to $7,489,000, or $0.48 per diluted share, in the second quarter 2022.

Third Quarter 2023 as Compared to Third Quarter 2022

Third quarter 2023 net income was $7,591,000, or $0.50 per diluted share, as compared to $4,455,000, or $0.29 per diluted share, in the third quarter 2022.

Significant variances were as follows:

● Net interest income of $20,362,000 in the second quarter 2023 was higher than the second quarter 2022 total by $737,000.

The increase in net interest income was mainly driven by loan growth, as average earning assets increased $131,391,000, with an increase in average loans of $198,967,000, or 12.5%, while the average amortized cost balance of available-for-sale debt securities decreased $49,013,000 and average interest-bearing due from banks decreased $17,567,000.

Average total deposits decreased $14,586,000, or 0.7%, while average total borrowed funds increased $140,333,000.

The net interest margin was 3.53% in the second quarter 2023, down from 3.62% in the second quarter 2022.

● Net interest income of $19,663,000 in the third quarter 2023 was $1,216,000 lower than the third quarter 2022 reflecting an increase in interest expense of $6,624,000 (includes $5,292,000 interest on deposits and $1,332,000 interest on borrowings) and an increase of $5,408,000 in interest and dividend income.

The interest rate spread decreased 0.73%, as the average rate on interest-bearing liabilities increased 1.49%, while the average yield on earning assets increased 0.76%.

● The provision for credit losses of $812,000 in the second quarter 2023 exceeded the second quarter 2022 amount by $504,000.

The provision in the second quarter 2023 resulted mainly from an increase in the allowance for credit losses

The net interest margin was 3.35% in the third quarter 2023, down from 3.69% in the third quarter 2022.

● The credit for credit losses was $1,225,000 in the third quarter 2023, as compared to a provision for credit losses of $3,794,000 in the third quarter 2022.

The credit in the third quarter 2023 included the impact of reductions in the allowance for credit losses (ACL) from a reduction in estimated future net charge-offs related to an economic forecast, qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, and a reduction in the Corporation’s average net charge-off experience .

The third quarter 2022

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(“ACL”) attributable to commercial loan growth, while the lower second quarter 2022 provision included the impact of a net reduction related to specific loans of $271,000.

● Noninterest income of $6,634,000 in the second quarter 2023 decreased $195,000 from the second quarter 2022 amount.

provision included the impact of recognizing a partial charge-off of $2,160,000 on a commercial real estate secured participation loan .

● Noninterest income of $6,489,000 in the third quarter 2023 increased $818,000 from the third quarter 2022 amount.

Significant variances included the following:

o Brokerage and insurance revenue of $365,000 decreased $201,000 from the second quarter 2022, due to lower volume of new transactions.

o Loan servicing fees, net, of $190,000 decreased $168,000, as the fair value of servicing rights decreased $12,000 in the second quarter 2023 as compared to an increase of $150,000 in the second quarter 2022.

o Net gains from sale of loans of $139,000 decreased $81,000 from the second quarter 2022, reflecting a reduction in volume of residential mortgage loans sold.

o Other noninterest income of $1,587,000 increased $131,000 from the second quarter 2022, including dividends on FHLB-Pittsburgh stock totaling $290,000, an increase of $131,000 from the second quarter 2022.

o Other noninterest income of $1,084,000 increased $462,000 from the third quarter 2022, including dividends on FHLB-Pittsburgh stock totaling $323,000, an increase of $163,000 from the third quarter 2022 and dividends on Federal Reserve Bank stock of $63,000 with no comparable amount in 2022.

Additionally, in the third quarter 2023, the Corporation recognized income of $64,000, with no comparable amount in 2022, from a conversion assistance payment received related to a change in wealth management platform for providing brokerage and investment advisory services.

o Service charges on deposit accounts of $1,443,000 increased $338,000 from the third quarter 2022.

In the third quarter 2022, income was reduced by $290,000 related to refunds of consumer overdraft fees as the result of updated regulatory guidance on certain overdraft fees with no comparable amount in 2023.

o Trust revenue of $1,919,000 increased $175,000, consistent with recent appreciation in the trading prices of many U.S.

equity securities.

● Noninterest expense of $18,722,000 in the second quarter 2023 increased $1,683,000 from the second quarter 2022 amount.

equity securities and includes an increase in fees from services provided to estates.

o Net gains from sale of loans of $237,000 increased $106,000 from the third quarter 2022, reflecting an increase in the volume of residential mortgage loans sold.

o Brokerage and insurance revenue of $394,000 decreased $302,000 from the third quarter 2022, due to a reduction in sales volume.

● Noninterest expense of $17,940,000 in the third quarter 2023 increased $497,000 from the third quarter 2022 amount.

Significant variances included the following:

o Other noninterest expense of $3,359,000 increased $928,000 from the second quarter 2022.

o Other noninterest expense of $2,577,000 increased $582,000 from the third quarter 2022.

Within this category, significant variances included the following:

● Legal fees totaled $327,000 in the second quarter 2023, an increase of $236,000 over the second quarter 2022 total, mainly due to fees incurred related to non-litigation-related corporate matters.

● FDIC insurance expense increased $224,000, reflecting the impact of an increase in the base deposit insurance assessment rate schedules applicable to all FDIC-insured banks.

● The reduction in expense related to other operational losses of $82,000 in the second quarter 2023, as previously described, was a lesser benefit by $158,000 as compared to a reduction in other operational losses of $240,000 in the second quarter 2022.

The reduction in expense in the second quarter 2023 was related to check fraud and Trust Department tax-related compliance matters while most of the reduction in the second quarter 2022 was related to Trust Department tax compliance matters.

o Salaries and employee benefits expense of $10,777,000 increased $512,000 from the second quarter 2022, including an increase in base salaries expense of $555,000, or 8.0%.

The increase in base salaries expense includes the effects of annual merit-based increases and an increase of 7 full-time employees to 412 at June 30, 2023 from 405 at June 30, 2022.

o Data processing and telecommunications of $1,900,000 increased $180,000 from the second quarter 2022, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

o Professional fees of $564,000 increased $84,000, mainly due to increased costs related to commercial loan-related external credit reviews.

● Other operational losses included $127,000 of expenses related to check fraud in the third quarter 2023 with no comparable amount in the third quarter 2022.

● FDIC insurance expense increased $124,000 from the third quarter of 2022, reflecting the impact of an increase in base deposit insurance assessment rate applicable to all FDIC-insured banks.

● In the third quarter 2023, there was no adjustment to the allowance for disallowed SBA claims compared to a decrease of $77,000 in the allowance for disallowed SBA claims in third quarter of 2022, resulting in a net increase in expense of $77,000.

● Legal fees totaled $187,000 in the third quarter 2023, an increase of $66,000 over the third quarter 2022 total, mainly due to fees incurred related to non-litigation-related corporate matters.

● Net recoveries of previously incurred collection expenses were $70,000 in the third quarter 2023 as compared to net collection expense of $16,000 in the third quarter 2022, a net decrease in expense of $86,000.

o Automated teller machine and interchange expense of $504,000 increased $107,000 from the third quarter 2022, mainly due to a higher volume of interchange transactions processed.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Six Months Ended June 30, 2023 as Compared to Six Months Ended June 30, 2022

Net income for the six-month period ended June 30, 2023 was $12,296,000, or $0.80 per diluted share, as compared to $14,384,000, or $0.92 per diluted share, for the first six months of 2022.

o Data processing and telecommunications expense of $1,823,000 increased $104,000 from the third quarter 2022, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

o Pennsylvania shares tax expense of $403,000 is lower by $84,000 from the third quarter 2022, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax.

o Net occupancy and equipment expense of $1,268,000 decreased $230,000 from the third quarter 2022 total, as 2022 included accelerated depreciation expense of $205,000 related to planned closures of two branches in November 2022.

● The income tax provision of $1,846,000, or 19.6% of pre-tax income for the third quarter 2023 increased $988,000 from $858,000, or 16.1% of pre-tax income for the third quarter 2022.

The higher provision in 2023 reflects the increase in pre-tax income of $4,124,000.

The higher effective tax rate in the third quarter 2023 as compared to the third quarter 2022 reflects the impact of an increase in nondeductible interest expense associated with funding for tax-exempt securities and loans .

Nine Months Ended September 30, 2023 as Compared to Nine Months Ended September 30, 2022

Net income for the nine-month period ended September 30, 2023 was $19,887,000, or $1.29 per diluted share, as compared to $18,839,000, or $1.21 per diluted share, for the first nine months of 2022.

Significant variances were as follows:

● Net interest income totaled $41,143,000 in the six months ended June 30, 2023, an increase of $1,186,000 over the total for the first six months of 2022.

Average earning assets increased $131,499,000, with an increase in average loans of $188,542,000, or 12.0%, while interest-bearing due from banks decreased $34,926,000 and the average amortized cost balance of available-for-sale debt securities decreased $21,227,000.

Average total deposits decreased $7,609,000, or 0.4%, while average total borrowed funds increased $138,329,000.

The net interest margin was 3.62% for the first six months of 2023, down from 3.74% in the corresponding period of 2022.

● Net interest income totaled $60,806,000 in the nine months ended September 30, 2023, $30,000 lower than 2022, reflecting an increase in interest expense of $16,506,000 (includes $11,581,000 interest on deposits and $4,925,000 interest on borrowings) and an increase of $16,476,000 in interest and dividend income (includes $16,022,000 in interest and fees on loans).

The interest rate spread decreased 0.56%, as the average rate on interest-bearing liabilities was higher by 1.29% while the average yield on earning assets increased 0.73%.

● Effective January 1, 2023, the Corporation adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, that required a change in accounting for credit losses on loans receivable from an incurred loss methodology to an expected credit loss methodology commonly referred to as “CECL.” Effective January 1, 2023, the Corporation recorded adjustments resulting from adopting CECL which increased the ACL on loans $2,104,000, increased the allowance for credit losses on off-balance sheet exposures $793,000, increased loans receivable $806,000, and decreased retained earnings (stockholders’ equity) $1,652,000.

For the six months ended June 30, 2023, the provision for credit losses was $460,000, a reduction in expense of $739,000 from the first six months of 2022.

The provision for the first six months of 2023 included a provision related to loans receivable of $524,000, partially offset by a credit related to off-balance sheet exposures of $64,000.

The provision related to loans receivable was mainly attributable to loan growth, as the ACL as a percentage of gross loans receivable was 1.05% at June 30, 2023 as compared to 1.08% at January 1, 2023 upon the initial adoption of CECL.

● Noninterest income totaled $12,250,000 in the first six months of 2023, down $407,000 from the total for the first six months of 2022.

The net interest margin was 3.53% for the first nine months of 2023, down from 3.72% in the corresponding period of 2022.

● For the nine months ended September 30, 2023, there was a credit for credit losses (reduction in expense) of $765,000 compared to a provision of $4,993,000 for the first nine months of 2022, resulting in a net decrease in expense of $5,758,000.

The credit for the first nine months of 2023 included a credit related to loans receivable of $409,000 and a credit related to off-balance sheet exposures of $356,000.

The credit related to loans receivable and off-balance sheet exposures was mainly attributable to qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, as well as a reduction in the Corporation’s average net charge-off experience, used in the calculation of the ACL.

The ACL as a percentage of gross loans receivable was 0.99% at September 30, 2023 as compared to 1.08% at January 1, 2023 upon the initial adoption of CECL.

● Noninterest income totaled $18,739,000 in the first nine months of 2023, up $416,000 from the total for the first nine months of 2022.

Significant variances included the following:

o Net gains from sale of loans of $213,000 decreased $389,000, reflecting a reduction in volume of residential mortgage loans sold.

o Brokerage and insurance revenue of $795,000 decreased $293,000 due to lower volume of new transactions.

o Loan servicing fees, net, of $312,000 decreased $256,000, as the fair value of servicing rights decreased $95,000 in the first six months of 2023 as compared to an increase of $152,000 in the first six months of 2022.

o Other noninterest income of $3,442,000 increased $776,000 as dividends on FHLB-Pittsburgh stock totaled $830,000, an increase of $442,000.

● Noninterest expense totaled $37,809,000 for the first six months of 2023, an increase of $3,884,000 from the total for the first six months of 2022.

Additionally, in the first nine months of 2023, the Corporation recognized income of $63,000 from dividends on Federal Reserve Bank stock with no comparable amount in 2022 and income of $160,000, with no comparable amount in 2022, from a conversion assistance payment received related to a change in wealth management platform for providing brokerage and investment advisory services.

o Service charges on deposit accounts of $4,121,000 increased $459,000 as the volume of consumer and business overdraft activity increased and included in first nine months of 2022 there was a reduction in income of $290,000 related to refunds of consumer overdraft fees as the result of updated regulatory guidance on certain overdraft fees.

o Trust revenue of $5,500,000 increased $255,000 reflecting an increase consistent with recent appreciation in the trading prices of many U.S.

equity securities and an increase in fees from services provided to estates.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

o Brokerage and insurance revenue of $1,189,000 decreased $595,000 due to a reduction in sales volume.

o Loan servicing fees, net, of $466,000 decreased $291,000, as the fair value of servicing rights decreased $136,000 in the first nine months of 2023 as compared to an increase of $128,000 in the first nine months of 2022.

o Net gains from sale of loans of $450,000 decreased $283,000, reflecting a reduction in volume of residential mortgage loans sold.

● Noninterest expense totaled $55,749,000 for the first nine months of 2023, an increase of $4,381,000 from the total for the first nine months of 2022.

Significant variances included the following:

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Within this category, significant variances included the following:

● Other operational losses totaled $171,000 in the first six months of 2023 as compared to a net reduction in expense of $182,000 in the first six months of 2022.

Most of the reduction in expense in 2022 was related to Trust Department tax compliance matters.

● Legal fees totaled $513,000 in the first six months of 2023, an increase of $293,000, mainly due to fees incurred related to non-litigation-related corporate matters.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

● In the six-month period ended June 30, 2023, the allowance for disallowed SBA claims decreased $35,000, resulting in a reduction in expense of the same amount, reflecting better than previously estimated claims experience.

In comparison, in the first six months of 2022, the allowance for disallowed SBA claims decreased $290,000, resulting in a decrease in expense of $290,000.

At June 30, 2023, the allowance for disallowed SBA claims, which was included in accrued interest and other liabilities in the unaudited consolidated balance sheets, was $55,000.

● Other operational losses included $168,000 of expense related to check fraud losses in 2023 with no corresponding amount in 2022 as well as a net increase in expense of $263,000 to $32,000 in other losses in the first month nine months of 2023 from a net reduction in expense of $231,000 in the first nine months of 2022.

Most of the reduction in other losses in 2022 was from recoveries or reversals of previously recorded charges related to Trust Department tax compliance matters.

● FDIC insurance expense increased $366,000, reflecting the impact of the increase in base deposit insurance assessment rate previously described.

● Legal fees totaled $700,000 in the first nine months of 2023, an increase of $359,000, mainly due to fees incurred related to non-litigation-related corporate matters.

● In the nine-month period ended September 30, 2023, the allowance for disallowed SBA claims decreased $35,000, resulting in a reduction in expense of the same amount, reflecting better than previously estimated claims experience.

In comparison, the reduction in expense in the first nine months of 2022 was $367,000.

At September 30, 2023, the allowance for disallowed SBA claims, which was included in other liabilities, was $55,000 .

o Salaries and employee benefits expense of $33,082,000 increased $1,384,000, including an increase in base salaries expense of $1,363,000, or 6.5%.

o Data processing and telecommunications expense of $5,659,000 increased $597,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities .

o Professional fees of $1,988,000 increased $498,000, 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 $3,836,000 increased $493,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

o Pennsylvania shares tax expense of $807,000 for the first six months of 2023 is lower by $169,000, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax.

o Pennsylvania shares tax expense of $1,210,000 for the first nine months of 2023 is lower by $253,000, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax .

● The income tax provision of $4,674,000, or 19.0% of pre-tax income for the nine months ended September 30, 2023 increased $715,000 from $3,959,000, or 17.4% of pre-tax income for the nine months ended September 30, 2022.

The higher provision in 2023 reflects the increase in pre-tax income of $1,763,000.

The higher effective rate in 2023 includes:

(1) the impact of the permanent difference related to stock-based compensation resulting in an increase in taxable income in 2023 as compared to a deduction in 2022 due to the reduction in the Corporation’s stock price;

and (2) an increase in nondeductible interest expense.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE I – QUARTERLY FINANCIAL DATA

3 unchanged sentences

September 30,

Interest income

1 unchanged sentence

Net interest income

Provision (credit) for credit losses

Net interest income after provision (credit) for credit losses

(Credit) provision for credit losses

Net interest income after (credit) provision for credit losses

Noninterest income

10 unchanged sentences

Three Months Ended

September 30,

Trust revenue

6 unchanged sentences

Other noninterest income

Realized losses on available-for-sale debt securities, net

Realized gains on available-for-sale debt securities, net

Total noninterest income

(Dollars in Thousands)

Six Months Ended

Nine Months Ended

September 30,

Trust revenue

13 unchanged sentences

Three Months Ended

September 30,

Salaries and employee benefits

7 unchanged sentences

(Dollars in Thousands)

Six Months Ended

Nine Months Ended

September 30,

Salaries and employee benefits

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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 and six-month periods ended June 30, 2023 and 2022.

Tables IV, V and VI include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 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.

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The discussion that follows is based on amounts in the related Tables.

Three-Month Periods Ended June 30, 2023 and 2022

For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $20,601,000 in 2023 was $664,000 (3.3%) higher than in 2022.

The increase in net interest income reflected the impact of growth in average earning assets of $131,391,000 (5.9%) in the second quarter 2023 as compared to the second quarter 2022, mainly attributable to loan growth.

As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income in the second quarter 2023 as compared to second quarter 2022 by $1,106,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $442,000.

As presented in Table V, the Net Interest Margin was 3.53% in the second 2023 as compared to 3.62% in the second quarter 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 2.98% in 2023 from 3.47% in 2022.

Three-Month Periods Ended September 30, 2023 and 2022

For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $19,875,000 in 2023 was $1,313,000 (6.2%) lower than in 2022.

The decrease in net interest income reflected an increase in interest expense of $6,624,000 (includes $5,292,000 interest on deposits and $1,332,000 in interest on borrowings) and an increase of $5,311,000 in total interest income.

As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income in the third quarter 2023 as compared to third quarter 2022 by $255,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $1,568,000.

As presented in Table V, the Net Interest Margin was 3.35% in the third quarter 2023 as compared to 3.69% in the third quarter 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 2.73% in 2023 from 3.46% in 2022.

The average yield on earning assets of 4.94% was 0.76% higher in 2023 as compared to 2022, and the average rate on interest-bearing liabilities of 2.21% in 2023 was 1.49% higher.

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Interest and fees from loans receivable increased $5,489,000 in 2023 as compared to 2022.

The fully taxable equivalent yield on loans in 2023 increased to 5.62% from 4.67% in 2022, reflecting the effects of rising interest rates on new loan originations.

The fully taxable equivalent yield on loans in 2023 increased to 5.72% from 4.91% in 2022, reflecting the effects of rising interest rates on the loan portfolio.

Average outstanding loans receivable increased $142,728,000 (8.5%) to $1,816,998,000 in 2023 from $1,674,270,000 in 2022.

The Corporation has experienced robust loan growth over the last three quarters of 2022 and first six months of 2023, including growth in commercial real estate and residential mortgage loans.

The Corporation has experienced growth in commercial real estate and residential mortgage loans over the last three quarters of 2022 and first nine months of 2023.

Income from interest-bearing due from banks totaled $345,000 in 2023, an increase of $169,000 from the total for 2022.

3 unchanged sentences

Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, totaled $2,758,000 in 2023, down $327,000 from 2022, as the average balance (at amortized cost) of available-for-sale debt securities decreased $60,776,000.

The average yield on available-for-sale debt securities was 2.20% for 2023, up from 2.10% in 2022.

The average yield on available-for-sale debt securities was 2.17% in 2023 and 2022.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

2 unchanged sentences

Interest expense on deposits increased $5,292,000, as the average rate on interest-bearing deposits increased to 1.93% in 2023 from 0.54% in 2022.

Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,948,405,000 for the second quarter 2023, down $14,586,000 (0.7%) from the second quarter 2022.

Average time deposits increased $106,804,000 and average interest checking deposits increased $31,303,000, while the average total balance of money market accounts decreased $121,075,000 and average noninterest-bearing demand deposits decreased $23,474,000.

Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,990,092,000 for the third quarter 2023, down $8,491,000 (0.4%) from the third quarter 2022.

Within average total deposits, average brokered deposits (primarily time and money market) were $60,829,000 with an average interest rate of 4.98% in the third quarter 2023, up from $39,074,000 with an average interest rate of 2.51% in the third quarter 2022.

The deposit mix has changed significantly over the past several months as businesses and consumers have become more interest-rate sensitive in light of higher market rates.

Average time deposits increased $107,808,000 and average interest checking deposits increased $69,427,000, while the average total balance of money market accounts decreased $98,152,000, average noninterest-bearing demand deposits decreased $58,392,000 and average savings deposits decreased $29,182,000.

Interest expense on borrowed funds increased $1,332,000 in 2023 as compared to 2022, as the Corporation utilized higher levels of short-term and long-term FHLB borrowings to help provide funding for loan growth.

3 unchanged sentences

Interest expense on long-term borrowings (FHLB advances) increased $832,000 to $1,164,000 in 2023 from $332,000 in 2022.

The average balance of long-term borrowings was $110,982,000 in 2023, up from an average balance of $19,516,000 in 2022.

The average balance of long-term borrowings was $119,395,000 at an average rate of 3.87% in 2023, up from an average balance of $51,628,000 at an average rate of 2.55% 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 3.82% in 2023 compared to 1.13% in 2022.

Six-Month Periods Ended June 30, 2023 and 2022

For the six-month periods, fully taxable equivalent net interest income was $41,651,000 in 2023, which was $1,080,000 (2.7%) higher than in 2022.

Similar to the discussion for the second quarter 2023, the increase in net interest income reflected the impact of growth in average earning assets of $131,499,000 (6.0%) for the first six months of 2023 as compared to the first six months of 2022, including significant loan growth.

As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for the six months ended June 30, 2023 over the six months ended June 30, 2022 by $2,227,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $1,147,000.

As presented in Table V, the Net Interest Margin was 3.62% in the first six months of 2023 as compared to 3.74% in the first six months of 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 3.14% in 2023 from 3.60% in 2022.

The average yield on earning assets of 4.75% was 0.73% higher in 2023 as compared to 2022, while the average rate on interest-bearing liabilities of 1.61% in 2023 was 1.19% higher.

The average rate on total borrowed funds was 4.18% in 2023 compared to 2.73% in 2022.

Nine-Month Periods Ended September 30, 2023 and 2022

For the nine-month periods, fully taxable equivalent net interest income was $61,526,000 in 2023, which was $233,000 (0.4%) lower than in 2022.

Similar to the discussion for the third quarter 2023, the decrease in net interest income reflected an increase in interest expense of $16,506,000 (includes $11,581,000 interest on deposits and $4,925,000 in interest on borrowings) and an increase of $16,273,000 in total interest income.

As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for the nine months ended September 30, 2023 over the nine months ended September 30, 2022 by $2,482,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $2,715,000.

As presented in Table V, the Net Interest Margin was 3.53% in the first nine months of 2023 as compared to 3.72% in the first nine months of 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 2.99% in 2023 from 3.55% in 2022.

The average yield on earning assets of 4.81% was 0.73% higher in 2023 as compared to 2022, while the average rate on interest-bearing liabilities of 1.82% in 2023 was 1.29% higher as compared to 2022.

INTEREST INCOME AND EARNING ASSETS

1 unchanged sentence

Interest and fees from loans receivable increased $16,058,000 in 2023 as compared to 2022.

In the six-month period ended June 30, 2023, t he fully taxable equivalent yield on loans was 5.53%, up from 4.84% in the first half of 2022, reflecting the effects of rising interest rates on new loan originations.

In the nine-month period ended September 30, 2023, t he fully taxable equivalent yield on loans was 5.60%, up from 4.86% in the first nine months of 2022, reflecting the effects of rising interest rates on the loan portfolio.

Average outstanding loans receivable increased $173,103,000 (10.8%) to $1,777,238,000 in 2023 from $1,604,135,000 in 2022.

As noted above, the Corporation has experienced growth in outstanding commercial real estate and residential mortgage loans over the last three quarters of 2022 and first six months of 2023.

Income from interest-bearing due from banks totaled $587,000 in 2023, an increase of $428,000 from 2022.

As noted above, the Corporation has experienced growth in outstanding commercial real estate and residential mortgage loans over the last three quarters of 2022 and first nine months of 2023.

Income from interest-bearing due from banks was $932,000 in 2023, an increase of $597,000 from 2022.

The average yield on interest-bearing due from banks was 4.01% in 2023, up from 0.81% in 2022.

2 unchanged sentences

Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with the Federal Reserve.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Interest income from available-for-sale debt securities decreased $353,000 in 2023 from 2022.

1 unchanged sentence

The average yield on available-for-sale debt securities was 2.20% for 2023 as compared to 2.15% in 2022.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the six-month periods, interest expense increased $9,882,000 to $13,007,000 in 2023 from $3,125,000 in 2022.

For the nine-month periods, interest expense increased $16,506,000 to $22,462,000 in 2023 from $5,956,000 in 2022.

Interest expense on deposits increased $11,581,000, as the average rate on interest-bearing deposits increased to 1.45% in 2023 from 0.38% in 2022.

Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,939,813,000 for the first six months of 2023, down $7,609,000 (0.3%) from the first six months of 2022.

Average time deposits increased $71,146,000 and average interest checking deposits increased $34,706,000, while the average total balance of money market accounts decreased $106,746,000.

Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,956,757,000 for the first nine months of 2023, down $7,906,000 (0.4%) from the first nine months of 2022.

Within average deposits, average brokered deposits were $40,910,000 at an average rate of 4.56% for the first nine months of 2023 as compared to $35,423,000 at an average rate of 1.36% in the first nine months of 2022.

As noted above, the deposit mix has changed significantly over the last several months.

Average time deposits increased $83,501,000 and average interest checking deposits increased $46,407,000, while the average total balance of money market accounts decreased $103,850,000, the average balances of noninterest bearing demand deposits decreased $24,014,000 and average savings deposits decreased $9,950,000.

Interest expense on borrowed funds increased $4,925,000 in 2023 as compared to 2022.

7 unchanged sentences

The average balance of subordinated debt decreased to $24,648,000 in 2023 from $27,966,000 in 2022, and the average rate on subordinated debt decreased to 3.75% in 2023 from 4.06% 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%.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In Thousands)

25 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net Interest Income Under U.S.

47 unchanged sentences

Three Months Ended 9/30/2023 vs.

Six Months Ended 6/30/2023 vs.

Nine Months Ended 9/30/2023 vs.

EARNING ASSETS

22 unchanged sentences

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.

Due to lower levels of pre-tax income in 2023, the income tax provision for the second quarter 2023 of $1,419,000 was $199,000 lower than the provision for the second quarter 2022 and the provision for the six months ended June 30, 2023 of $2,828,000 was $273,000 lower than the amount for the first six months of 2022.

The effective tax rate (tax provision as a percentage of pre-tax income) was 19.0% in the second quarter 2023 compared to 17.8% in the second quarter 2022 and 18.7% for the first six months of 2023 as compared to 17.7% for the first six months of 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.

Due to higher levels of pre-tax income in 2023, the income tax provision for the third quarter 2023 of $1,846,000 was $988,000 higher than the provision for the third quarter 2022 and the provision for the nine months ended September 30, 2023 of $4,674,000 was $715,000 higher than the amount for the first nine months of 2022.

The effective tax rate (tax provision as a percentage of pre-tax income) was 19.6% in the third quarter 2023 compared to 16.1% in the third quarter 2022 and 19.0% for the first nine months of 2023 as compared to 17.4% for the first nine months of 2022.

The Corporation’s effective tax rates differ from the statutory rate of 21% principally because of the effects of tax-exempt interest income, nondeductible interest expense, state income taxes and other permanent differences.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities.

The net deferred tax asset at June 30, 2023 and December 31, 2022 represents the following temporary difference components:

The net deferred tax asset at September 30, 2023 and December 31, 2022 represents the following temporary difference components:

September 30,

(In Thousands)

20 unchanged sentences

Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income.

Management believes the recorded net deferred tax asset at June 30, 2023 is fully realizable;

Management believes the recorded net deferred tax asset at September 30, 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 .

2 unchanged sentences

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The composition of the available-for-sale debt securities portfolio at June 30, 2023, December 31, 2022 and December 31, 2021 is as follows:

The composition of the available-for-sale debt securities portfolio at September 30, 2023, December 31, 2022 and December 31, 2021 is as follows:

(Dollars In Thousands)

June 30, 2023

September 30, 2023

December 31, 2022

17 unchanged sentences

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 $61,437,000, or 12.1% at June 30, 2023 and $63,761,000 (11.3%) at December 31, 2022.

As reflected in the table above, the fair value of available-for-sale securities was lower than the amortized cost basis by $76,302,000, or 15.1% at September 30, 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.

The volatility in the fair value of the portfolio, including the significant reduction in fair value, resulted from changes in interest rates.

As shown above, the market yield on the 5-year U.S.

Treasury Note was 0.14% higher at June 30, 2023 in comparison to December 31, 2022, and 2.87% higher than at December 31, 2021.

Treasury Note was 0.61% higher at September 30, 2023 in comparison to December 31, 2022, and 3.34% 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 June 30, 2023 before it is able to recover the amortized cost basis.

Further, management reviewed the Corporation’s holdings as of June 30, 2023 and concluded there were no credit-related declines in fair value.

Additional information related to the types of securities held at June 30, 2023, other than securities issued or guaranteed by U.S.

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 September 30, 2023 before it is able to recover the amortized cost basis.

Further, management reviewed the Corporation’s holdings as of September 30, 2023 and concluded there were no credit-related declines in fair value.

Additional information related to the types of securities held at September 30, 2023, other than securities issued or guaranteed by U.S.

Government entities or agencies, is as follows:

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

● 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.

1 unchanged sentence

All of the issuers have publicly traded common stock .

At June 30, 2023, the securities have external ratings ranging from BBB-/Baa3 to A-.

At September 30, 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 June 30, 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:

Summary ratings information at September 30, 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 pre-refunded – 23% of the portfolio;

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

● 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 June 30, 2023.

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 September 30, 2023.

FINANCIAL CONDITION

3 unchanged sentences

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 June 30, 2023 and at year-end from 2018 through 2022.

Table VII shows the composition of the loan portfolio at September 30, 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 June 30, 2023 of $1,814,510,000 was more than double the corresponding total at December 31, 2018.

As presented in Table VII, total loans outstanding at September 30, 2023 of $1,830,670,000 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 2019 and 2020.

Primarily as a result of the acquisitions, as well as expansion by opening two offices in Southcentral Pennsylvania, the mix of the loan portfolio has changed to become predominantly commercial in nature.

At June 30, 2023, commercial loans represented 75% of the portfolio while residential loans totaled 22% of the portfolio;

At September 30, 2023, commercial loans represented 75% of the portfolio while residential loans totaled 22% 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 six months of 2023.

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 nine months of 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 $143,000 at June 30, 2023.

At June 30, 2023, gross loans outstanding increased $74,040,000 from December 31, 2022.

The outstanding balance of PPP loans was $130,000 at September 30, 2023.

At September 30, 2023, gross loans outstanding increased $90,630,000 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 the second half of 2023 will depend on the impact of potential further increases in interest rates, potential deterioration in economic conditions and other factors.

The pace of loan growth in the fourth quarter of 2023 and in future periods will depend on the impact of the increases in interest rates that have occurred in 2022 and 2023, 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.

1 unchanged sentence

Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities.

Total participation loans outstanding amounted to $39,366,000 at June 30, 2023, down from $44,723,000 at December 31, 2022.

At June 30, 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 $95,644,000, or 5.3% of total gross loans receivable.

Within this segment, at June 30, 2023, there was one loan with a recorded investment of $2,591,000 risk rated as Special Mention with no related ACL, and one loan with a recorded investment of $1,381,000 risk rated as Substandard and nonaccrual with an ACL of $38,000.

The remainder of the non-owner occupied commercial real estate loans for the primary purpose of office space utilization totaling $91,672,000 were accruing interest and risk rated Pass at June 30, 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

Total participation loans outstanding amounted to $38,995,000 at September 30, 2023, down from $44,723,000 at December 31, 2022.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 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 $94,729,000, or 5.2% of total gross loans receivable.

Within this segment, at September 30, 2023, there were two loans with a recorded investment of $3,963,000 risk rated as substandard and nonaccrual with specific allowance for credit losses totaling $540,000.

The remainder of the non-owner occupied commercial real estate loans for the primary purpose of office space utilization totaling $90,766,000 were accruing interest and risk rated Pass at September 30, 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 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.

2 unchanged sentences

The Corporation does not retain servicing rights for loans sold under the MPF Direct Program.

Through June 30, 2023, the Corporation’s activity under the MPF Direct Program has been minimal.

Through September 30, 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.

1 unchanged sentence

Such repurchases or reimbursements generally result from an underwriting or documentation deficiency.

At June 30, 2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,363,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2022 was $1,515,000.

At June 30, 2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $318,267,000, including loans sold through the MPF Xtra program of $152,930,000 and loans sold through the Original program of $165,337,000.

At September 30, 2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,472,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2022 was $1,515,000.

At September 30, 2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $318,526,000, including loans sold through the MPF Xtra program of $151,094,000 and loans sold through the Original program of $167,432,000.

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 June 30, 2023 and December 31, 2022.

Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, 2023 and December 31, 2022.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

2 unchanged sentences

(In Thousands)

Commercial real estate - nonowner occupied:

Nonowner occupied

September 30,

Commercial real estate - non-owner occupied:

Non-owner occupied

Multi-family (5 or more) residential

1-4 Family - commercial purpose

Total commercial real estate - nonowner occupied

Total commercial real estate - non-owner occupied

Commercial real estate - owner occupied

15 unchanged sentences

allowance for credit losses on loans

Additional details regarding the composition of the nonowner occupied commercial real estate loan portfolio at June 30, 2023 is as follows:

NONOWNER OCCUPIED COMMERCIAL REAL ESTATE

Additional details regarding the composition of the non-owner occupied commercial real estate loan portfolio at September 30, 2023 is as follows:

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE

(In Thousands)

% of Nonowner

Total Nonowner Occupied CRE Loans

September 30,

% of Non-owner

Total Non-owner Occupied CRE Loans

Total Gross Loans

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

7 unchanged sentences

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.

A summary of the provision for credit losses for the second and first quarters of 2023, and for the six-month period ended June 30, 2023, is as follows:

A summary of the credit for credit losses for the third quarter 2023 and for the nine-month period ended September 30, 2023 is as follows:

(In Thousands)

Provision (credit) for credit losses:

September 30,

(Credit) for credit losses:

Loans receivable

Off-balance sheet exposures (1)

Total provision (credit) for credit losses

(1) The provision (credit) for credit losses on off-balance sheet exposures prior to January 1, 2023 was included in other noninterest expense in the consolidated statements of income.

The provision for credit losses for the second quarter and six-month periods ended June 30, 2023 was mainly attributable to loan growth, as the ACL as a percentage of gross loans receivable was 1.05% at June 30, 2023 and March 31, 2023 as compared to 1.08% at January 1, 2023 upon initial adoption of CECL.

The net impact of changes in qualitative factors and the economic forecast used to calculate the ACL at June 30, 2023 was not significant in comparison to March 31, 2023.

In comparison, 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 resulting from 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, along with a reduction in the historical net charge-off percentage for non-owner occupied commercial real estate.

In the first quarter 2023, these adjustments were partially offset by the impact of an increase in the allowance based on changes in the economic forecast.

Within the net provision for credit losses on loans in the first six months of 2023, the net provision related to specific loans was $156,000, including net charge-offs of $187,000 and a net decrease in specific allowances on loans of $31,000.

In comparison, the provision for the first six months of 2022 included a net credit of $124,000 related to specific loans (net charge-offs of $189,000 offset by a net decrease in specific allowances on loans of $313,000).

Table X shows that total nonperforming assets as a percentage of total assets was 0.58% at June 30, 2023, down from 1.04% at December 31, 2022 and lower than that at year-end 2018 through 2021.

Total nonperforming assets were $14.5 million at June 30, 2023, down from $25.6 million at December 31, 2022.

Similarly, total loans individually evaluated for credit loss decreased to $9.1 million at June 30, 2023 from $19.4 million at December 31, 2022.

The net decrease in nonperforming assets at June 30, 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 paydowns totaling $2,221,000 in the first six months of 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 $433,000 at June 30, 2023.

These reductions were partially offset by the addition to nonaccrual of a commercial loan relationship totaling

Total (credit) for credit losses

(1) The (credit) provision for credit losses on off-balance sheet exposures prior to January 1, 2023 was included in other noninterest expense in the consolidated statements of income.

In the third quarter 2023, the credit for credit losses included the impact of reductions in the ACL from a reduction in estimated future net charge-offs related to an economic forecast, qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, and a reduction in the Corporation’s average net charge-off experience.

Similarly, the credit for credit losses for the first nine months of 2023 included the impact of reductions in the ACL related to the qualitative adjustments described above and a reduction in the Corporation’s average net charge-off experience;

however , the net impact of changes in the economic forecast was not significant.

The ACL as a percentage of gross loans receivable was 0.99% at September 30, 2023 and 1.05% at June 30, 2023 as compared to 1.08% at January 1, 2023 upon initial adoption of CECL.

Within the credit for

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

$1,931,000 at June 30, 2023.

Based on an updated appraisal, the allowance related to the loans to this borrower was reduced from $182,000 at March 31, 2023 to $38,000 at June 30, 2023.

In the first six months of 2023, net charge-offs were minimal by historical standards, totaling $187,000, or 0.01% of average outstanding loans.

credit losses on loans in the first nine months of 2023, the net provision related to specific loans was $294,000, including net charge-offs of $225,000 and a net increase in specific allowances on loans of $69,000.

In comparison, the provision for loan losses in the first nine months of 2022 included $2,047,000 related to specific loans (net decrease in specific allowances on loans of $313,000 and net charge-offs of $2,360,000), an increase of $2,617,000 in the collectively determined portion of the allowance and a $329,000 increase in the unallocated portion.

Table X shows that total nonperforming assets as a percentage of total assets was 0.70% at September 30, 2023, down from 1.04% at December 31, 2022 and lower than that at year-end 2018 through 2021.

Total nonperforming assets were $17.4 million at September 30, 2023, down from $25.6 million at December 31, 2022.

Similarly, total loans individually evaluated for credit loss decreased to $12.0 million at September 30, 2023 from $19.4 million at December 31, 2022.

The net decrease in nonperforming assets at September 30, 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 paydowns totaling $2,262,000 in the first nine months of 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 $392,000 at September 30, 2023.

These reductions were partially offset by the addition to nonaccrual of two commercial loan relationships totaling $4,512,000, including two commercial real estate loans with a primary purpose of office space utilization totaling $3,963,000, at September 30, 2023.

In the first nine months of 2023, net charge-offs were low by historical standards, totaling $225,000, or 0.01% of average outstanding loans.

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 six months of 2023, each period includes a few large commercial relationships that have required significant monitoring and workout efforts.

Over the period 2018-2022 and the first nine 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 June 30, 2023.

however, the actual losses realized from these relationships could vary materially from the allowances calculated as of September 30, 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.

2 unchanged sentences

(Dollars In Thousands)

Six Months Ended

Nine Months Ended

September 30,

Years Ended December 31,

2 unchanged sentences

Net charge-offs

Provision for credit losses

(Credit) provision for credit losses

Balance, end of period

4 unchanged sentences

(In Thousands)

September 30,

Loans individually evaluated

12 unchanged sentences

Total Allowance

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS

(Dollars In Thousands)

September 30,

As of December 31,

22 unchanged sentences

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 $22,814,000 at June 30, 2023.

The Corporation’s outstanding, available, and total credit facilities at June 30, 2023 and December 31, 2022 are as follows:

As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $21,731,000 at September 30, 2023.

The Corporation’s outstanding, available, and total credit facilities at September 30, 2023 and December 31, 2022 are as follows:

(In Thousands)

September 30,

Federal Home Loan Bank of Pittsburgh

2 unchanged sentences

Total credit facilities

At June 30, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term advances of $30,500,000, long-term borrowings of $115,220,000 and letters of credit totaling $11,708,000.

At September 30 , 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term advances of $21,500,000, long-term borrowings of $125,243,000 and letters of credit totaling $19,208,000.

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 .

2 unchanged sentences

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 June 30, 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 June 30, 2023, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $257,537,000.

Deposits totaled $2,010,118,000 at June 30, 2023, up $12,525,000 (0.6%) from $1,997,593,000 at December 31, 2022.

Excluding brokered deposits, adjusted total deposits at June 30, 2023 were lower by $37,145,000 (1.9%) as compared to December 31, 2022.

Brokered deposits, consisting mainly of short-term certificates of deposits, totaled $70,653,000 at June 30, 2023, an increase of $49,670,000 from December 31, 2022.

Average total deposits of $1,948,405,000 for the second quarter 2023 were up $17,279,000 from the first quarter 2023 and were down $14,586,000 (0.7%) as compared to the second quarter 2022.

For the six months ended June 30, 2023, average total deposits of $1,939,813,000 were down $7,609,000 (0.4%) as compared to the first six months of 2022.

In light of the unrealized loss at September 30, 2023 resulting from increases in interest rates, 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 September 30, 2023, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $227,667,000.

Deposits totaled $2,024,997,000 at September 30, 2023, up $27,404,000 (1.4%) from $1,997,593,000 at December 31, 2022.

Excluding brokered deposits, adjusted total deposits at September 30, 2023 were lower by $14,125,000 (0.7%) as compared to December 31, 2022.

Brokered deposits, consisting mainly of short-term certificates of deposit, totaled $62,512,000 at September 30, 2023, an increase of $41,529,000 from December 31, 2022.

The reduction in total deposits, excluding brokered deposits, included a reduction in the estimated amount of deposits in excess of FDIC insurance levels (uninsured deposit balances) of $86.4 million as compared to December 31, 2022.

The net reduction in uninsured deposits resulted from several factors, including the impact of customer funds transferred to higher-yielding investment alternatives and seasonal reductions in municipal deposits.

As shown in the table below, at June 30, 2023, estimated uninsured deposits totaled $605.8 million, or 29.9% 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 $173.0 million at June 30, 2023.

As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.4% of total deposits, down from 24.0% at December 31, 2022.

The net reduction in uninsured deposits resulted from several factors, including the impact of customer funds transferred to higher-yielding investment alternatives and increased use of reciprocal deposits that allow C&N Bank to place customer funds in excess of the FDIC insurance limit with other financial institutions through a deposit placement network in exchange for a matching amount of deposits from other network financial institutions.

Reciprocal deposits totaled $220.6 million at September 30, 2023, up $120.8 million from December 31, 2022.

As shown in the table below, at September 30, 2023, estimated uninsured deposits totaled $603.0 million, or 29.5% 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 $188.9 million at September 30, 2023.

As shown in the table below, total

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

of Philadelphia’s discount window, available federal funds lines with other banks and unencumbered available-for-sale debt securities totaled $1.1 billion at June 30, 2023.

Available funding from these sources totaled 181.6% of uninsured deposits and 254.1% of total uninsured and uncollateralized deposits at June 30, 2023.

uninsured and uncollateralized deposits amounted to 20.3% of total deposits at September 30, 2023, down from 24.0% at December 31, 2022.

As summarized in the table that immediately follows, the Corporation’s 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 $1.1 billion at September 30, 2023.

Available funding from these sources totaled 181.8% of uninsured deposits and 264.8% of total uninsured and uncollateralized deposits at September 30, 2023.

Uninsured Deposits Information

September 30,

Total Deposits - C&N Bank

13 unchanged sentences

Uninsured and Uncollateralized Deposits

Despite the reduction in deposits, excluding brokered deposits, in the first six months of 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.

Despite the reduction in deposits, excluding brokered deposits, in the first nine months of 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

5 unchanged sentences

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 June 30, 2023;

however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Details concerning capital ratios at June 30, 2023 and December 31, 2022 are presented below.

Management believes, as of June 30, 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 June 30, 2023 and December 31, 2022 exceed the Corporation’s Board policy threshold levels.

Details concerning capital ratios at September 30, 2023 and December 31, 2022 are presented below.

Management believes, as of September 30, 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 September 30, 2023 and December 31, 2022 exceed the Corporation’s Board policy threshold levels.

(Dollars in Thousands)

9 unchanged sentences

Policy Thresholds

June 30, 2023:

September 30, 2023:

Total capital to risk-weighted assets:

9 unchanged sentences

Under the amended program, the Corporation was authorized to repurchase up to 1,000,000 shares of its common stock.

In the second quarter 2023, 237,187 shares were repurchased for a total cost of $4,635,000, at an average price of $19.54 per share.

For the six months ended June 30, 2023, 314,617 shares were repurchased for a total cost of $6,297,000, at an average price of $20.01 per share.

At June 30, 2023, there were 10,683 shares available to be repurchased under the program, all of which were repurchased in July 2023.

Cumulatively, the Corporation repurchased 1,000,000 shares for a total cost of $23,086,000, at an average price of $23.09 per share.

The Board of Directors has not announced a new treasury stock repurchase program, though the Board may consider doing so in the future depending on market conditions.

On July 11, 2023, C&N announced that it had completed the treasury stock repurchase program that began in February 2021.

Cumulatively, C&N repurchased 1,000,000 shares of common stock for a total cost of $23,086,000, at an average price of $23.09 per share.

For the three months ended September 30, 2023, 10,683 shares were repurchased for a total cost of $203,000, at an average price of $19.01 per share.

For the nine months ended September 30, 2023, 325,300 shares were repurchased for a total cost of $6,500,000, at an average price of $19.98 per share.

On September 25, 2023, the Corporation announced a new treasury stock repurchase program.

Under the newly approved program, the Corporation is authorized to repurchase up to 750,000 shares of the Corporation’s common stock, or slightly less than 5% of the Corporation’s issued and outstanding shares at August 4, 2023.

The new program was effective when publicly announced and will continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion.

All shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plans and its equity compensation program.

Through September 30, 2023, no shares were repurchased under the new program.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements.

1 unchanged sentence

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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements.

The buffer is measured relative to risk-weighted assets.

At June 30, 2023, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:

At September 30, 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

18 unchanged sentences

≤1.25% and >0.625%

At June 30, 2023, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 7.37%.

At September 30, 2023, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 7.07%.

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities.

1 unchanged sentence

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 $48,536,000 at June 30, 2023 and $50,370,000 at December 31, 2022.

The increase in stockholders’ equity in the first six months of 2023 from the change in accumulated other comprehensive loss resulted from a decrease in interest rates.

The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $60,278,000 at September 30, 2023 and $50,370,000 at December 31, 2022.

The decrease in stockholders’ equity in the first nine months of 2023 from the change in accumulated other comprehensive loss resulted from an increase 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 June 30, 2023 .

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis