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
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 $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 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
40
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 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 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 $2,577,000 increased $582,000 from the third quarter 2022. Within this category, significant variances included the following:
● 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.
41
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 $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%. 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 Other noninterest income of $3,442,000 increased $776,000 as dividends on FHLB-Pittsburgh stock totaled $830,000, an increase of $442,000. 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.
42
Table of Contents
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:
o Other noninterest expense of $8,443,000 increased $2,133,000. Within this category, significant variances included the following:
● 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 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.
43
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE I – QUARTERLY FINANCIAL DATA
(Dollars In Thousands,
For the Three Months Ended :
Except Per Share Data)
September 30,
June 30,
March 31,
December 31,
September 30,
(Unaudited)
2023
2023
2023
2022
2022
Interest income
$
29,118
$
28,011
$
26,139
$
25,855
$
23,710
Interest expense
9,455
7,649
5,358
3,563
2,831
Net interest income
19,663
20,362
20,781
22,292
20,879
(Credit) provision for credit losses
(1,225)
812
(352)
2,262
3,794
Net interest income after (credit) provision for credit losses
20,888
19,550
21,133
20,030
17,085
Noninterest income
6,489
6,634
5,616
6,109
5,671
Noninterest expense
17,940
18,722
19,087
16,587
17,443
Income before income tax provision
9,437
7,462
7,662
9,552
5,313
Income tax provision
1,846
1,419
1,409
1,773
858
Net income
$
7,591
$
6,043
$
6,253
$
7,779
$
4,455
Net income attributable to common shares
$
7,534
$
5,996
$
6,201
$
7,711
$
4,416
Basic earnings per common share
$
0.50
$
0.39
$
0.40
$
0.50
$
0.29
Diluted earnings per common share
$
0.50
$
0.39
$
0.40
$
0.50
$
0.29
44
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
NONINTEREST INCOME
TABLE II – COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands)
Three Months Ended
September 30,
$
%
2023
2022
Change
Change
Trust revenue
$
1,919
$
1,744
$
175
10.0
%
Brokerage and insurance revenue
394
696
(302)
(43.4)
%
Service charges on deposit accounts
1,443
1,105
338
30.6
%
Interchange revenue from debit card transactions
1,098
1,031
67
6.5
%
Net gains from sales of loans
237
131
106
80.9
%
Loan servicing fees, net
154
189
(35)
(18.5)
%
Increase in cash surrender value of life insurance
160
133
27
20.3
%
Other noninterest income
1,084
622
462
74.3
%
Realized gains on available-for-sale debt securities, net
0
20
(20)
(100.0)
%
Total noninterest income
$
6,489
$
5,671
$
818
14.4
%
(Dollars in Thousands)
Nine Months Ended
September 30,
$
%
2023
2022
Change
Change
Trust revenue
$
5,500
$
5,245
$
255
4.9
%
Brokerage and insurance revenue
1,189
1,784
(595)
(33.4)
%
Service charges on deposit accounts
4,121
3,662
459
12.5
%
Interchange revenue from debit card transactions
3,115
3,050
65
2.1
%
Net gains from sales of loans
450
733
(283)
(38.6)
%
Loan servicing fees, net
466
757
(291)
(38.4)
%
Increase in cash surrender value of life insurance
450
405
45
11.1
%
Other noninterest income
3,442
2,666
776
29.1
%
Realized gains on available-for-sale debt securities, net
6
21
(15)
(71.4)
%
Total noninterest income
$
18,739
$
18,323
$
416
2.3
%
45
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
NONINTEREST EXPENSE
TABLE III - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands)
Three Months Ended
September 30,
$
%
2023
2022
Change
Change
Salaries and employee benefits
$
10,878
$
10,826
$
52
0.5
%
Net occupancy and equipment expense
1,268
1,498
(230)
(15.4)
%
Data processing and telecommunications expense
1,823
1,719
104
6.1
%
Automated teller machine and interchange expense
504
397
107
27.0
%
Pennsylvania shares tax
403
487
(84)
(17.2)
%
Professional fees
487
521
(34)
(6.5)
%
Other noninterest expense
2,577
1,995
582
29.2
%
Total noninterest expense
$
17,940
$
17,443
$
497
2.8
%
(Dollars in Thousands)
Nine Months Ended
September 30,
$
%
2023
2022
Change
Change
Salaries and employee benefits
$
33,082
$
31,698
$
1,384
4.4
%
Net occupancy and equipment expense
3,993
4,217
(224)
(5.3)
%
Data processing and telecommunications expense
5,659
5,062
597
11.8
%
Automated teller machine and interchange expense
1,374
1,128
246
21.8
%
Pennsylvania shares tax
1,210
1,463
(253)
(17.3)
%
Professional fees
1,988
1,490
498
33.4
%
Other noninterest expense
8,443
6,310
2,133
33.8
%
Total noninterest expense
$
55,749
$
51,368
$
4,381
8.5
%
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
46
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 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. 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 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.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $29,330,000 in 2023, an increase of $5,311,000, or 22.1% from 2022.
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 5.72% 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 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. The average yield on interest-bearing due from banks was 4.31% in 2023, up from 2.03% in 2022. The average balance of interest-bearing due from banks was $31,729,000 in 2023, down from $34,465,000 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, 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 2.17% in 2023 and 2022.
47
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $6,624,000 to $9,455,000 in 2023 from $2,831,000 in 2022.
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 $1,990,092,000 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. Interest expense on short-term borrowings was $677,000 in 2023, up from $179,000 in 2022. The average balance of short-term borrowings increased to $49,157,000 in 2023 from $33,970,000 in 2022. The average rate on short-term borrowings was 5.46% in 2023 compared to 2.09% in 2022. 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 $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 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
Interest income totaled $83,988,000 in 2023, an increase of $16,273,000 from 2022.
Interest and fees from loans receivable increased $16,058,000 in 2023 as compared to 2022. 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 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. The average balance of interest-bearing due from banks was $31,076,000 in 2023, down from $55,154,000 in 2022. The reduction in interest-bearing due from bank balances reflects the use of funds to help support loan growth. Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with the Federal Reserve.
48
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Interest income from available-for-sale debt securities decreased $353,000 in 2023 from 2022. The average balance of available-for-sale debt securities (at amortized cost) decreased to $522,600,000 in 2023 from $557,155,000 in 2022, as net proceeds from maturities and sales of securities have been used to help fund loan growth. The average yield on available-for-sale debt securities was 2.20% for 2023 as compared to 2.15% in 2022.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
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 $1,956,757,000 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. Interest expense on short-term borrowings of $2,918,000 in 2023 was up from $302,000 in 2022 as the average balance of short-term borrowings increased to $75,978,000 in 2023 from $24,306,000 in 2022. The average rate on short-term borrowings was 5.13% in 2023 compared to 1.66% in 2022. Interest expense on long-term borrowings (FHLB advances) increased $2,465,000 to $2,901,000 in 2023 from $436,000 in 2022. The average balance of long-term borrowings was $103,817,000 in 2023, up from an average balance of $32,509,000 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 3.74% in 2023 compared to 1.79% in 2022. Interest expense on subordinated debt decreased $158,000 to $691,000 in 2023 from $849,000 in 2022. 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.
49
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE
Three Months Ended
Nine Months Ended
September 30,
Increase/
.
September 30,
Increase/
(In Thousands)
2023
2022
(Decrease)
2023
2022
(Decrease)
INTEREST INCOME
Interest-bearing due from banks
$
345
$
176
$
169
$
932
$
335
$
597
Available-for-sale debt securities:
Taxable
2,077
2,138
(61)
6,440
6,143
297
Tax-exempt
681
947
(266)
2,161
2,811
(650)
Total available-for-sale debt securities
2,758
3,085
(327)
8,601
8,954
(353)
Loans receivable:
Taxable
25,526
19,967
5,559
72,314
55,662
16,652
Paycheck Protection Program
3
118
(115)
8
899
(891)
Tax-exempt
680
635
45
2,093
1,796
297
Total loans receivable
26,209
20,720
5,489
74,415
58,357
16,058
Other earning assets
18
38
(20)
40
69
(29)
Total Interest Income
29,330
24,019
5,311
83,988
67,715
16,273
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking
2,360
487
1,873
4,859
989
3,870
Money market
1,669
639
1,030
3,654
1,270
2,384
Savings
60
66
(6)
186
191
(5)
Time deposits
3,175
780
2,395
6,894
1,562
5,332
Total interest-bearing deposits
7,264
1,972
5,292
15,593
4,012
11,581
Borrowed funds:
Short-term
677
179
498
2,918
302
2,616
Long-term - FHLB advances
1,164
332
832
2,901
436
2,465
Senior notes, net
120
119
1
359
357
2
Subordinated debt, net
230
229
1
691
849
(158)
Total borrowed funds
2,191
859
1,332
6,869
1,944
4,925
Total Interest Expense
9,455
2,831
6,624
22,462
5,956
16,506
Net Interest Income
$
19,875
$
21,188
$
(1,313)
$
61,526
$
61,759
$
(233)
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
Nine Months Ended
September 30,
Increase/
September 30,
Increase/
2023
2022
(Decrease)
2023
2022
(Decrease)
Net Interest Income Under U.S. GAAP
$
19,663
$
20,879
$
(1,216)
$
60,806
$
60,836
$
(30)
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities
84
179
(95)
314
553
(239)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans
128
130
(2)
406
370
36
Net Interest Income as adjusted to a fully taxable-equivalent basis
$
19,875
$
21,188
$
(1,313)
$
61,526
$
61,759
$
(233)
50
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE V - Analysis of Average Daily Balances and Rates
(Dollars in Thousands)
Three Months
Three Months
Nine Months
Nine Months
Ended
Rate of
Ended
Rate of
Ended
Rate of
Ended
Rate of
9/30/2023
Return/
9/30/2022
Return/
9/30/2023
Return/
9/30/2022
Return/
Average
Cost of
Average
Cost of
Average
Cost of
Average
Cost of
Balance
Funds %
Balance
Funds %
Balance
Funds %
Balance
Funds %
EARNING ASSETS
Interest-bearing due from banks
$
31,729
4.31
%
$
34,465
2.03
%
$
31,076
4.01
%
$
55,154
0.81
%
Available-for-sale debt securities, at amortized cost:
Taxable
379,709
2.17
%
414,147
2.05
%
395,070
2.18
%
408,178
2.01
%
Tax-exempt
124,435
2.17
%
150,773
2.49
%
127,530
2.27
%
148,977
2.52
%
Total available-for-sale debt securities
504,144
2.17
%
564,920
2.17
%
522,600
2.20
%
557,155
2.15
%
Loans receivable:
Taxable
1,729,835
5.85
%
1,582,245
5.01
%
1,687,444
5.73
%
1,507,756
4.94
%
Paycheck Protection Program
137
8.69
%
4,695
9.97
%
149
7.18
%
10,887
11.04
%
Tax-exempt
87,026
3.10
%
87,330
2.88
%
89,645
3.12
%
85,492
2.81
%
Total loans receivable
1,816,998
5.72
%
1,674,270
4.91
%
1,777,238
5.60
%
1,604,135
4.86
%
Other earning assets
1,468
4.86
%
3,925
3.84
%
1,332
4.02
%
2,750
3.35
%
Total Earning Assets
2,354,339
4.94
%
2,277,580
4.18
%
2,332,246
4.81
%
2,219,194
4.08
%
Cash
22,068
23,731
22,475
22,527
Unrealized loss on securities
(63,110)
(44,559)
(59,921)
(28,068)
Allowance for credit losses
(19,540)
(14,914)
(18,472)
(14,406)
Bank-owned life insurance
31,559
30,991
31,413
30,857
Bank premises and equipment
21,132
21,874
21,262
21,494
Intangible assets
55,125
55,547
55,227
55,655
Other assets
74,483
57,012
70,369
52,610
Total Assets
$
2,476,056
$
2,407,262
$
2,454,599
$
2,359,863
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
$
512,074
1.83
%
$
442,647
0.44
%
$
477,751
1.36
%
$
431,344
0.31
%
Money market
340,618
1.94
%
438,770
0.58
%
344,527
1.42
%
448,377
0.38
%
Savings
232,240
0.10
%
261,422
0.10
%
245,483
0.10
%
255,433
0.10
%
Time deposits
406,436
3.10
%
298,628
1.04
%
365,174
2.52
%
281,673
0.74
%
Total interest-bearing deposits
1,491,368
1.93
%
1,441,467
0.54
%
1,432,935
1.45
%
1,416,827
0.38
%
Borrowed funds:
Short-term
49,157
5.46
%
33,970
2.09
%
75,978
5.13
%
24,306
1.66
%
Long-term - FHLB advances
119,395
3.87
%
51,628
2.55
%
103,817
3.74
%
32,509
1.79
%
Senior notes, net
14,808
3.22
%
14,741
3.20
%
14,790
3.25
%
14,725
3.24
%
Subordinated debt, net
24,676
3.70
%
24,566
3.70
%
24,648
3.75
%
27,966
4.06
%
Total borrowed funds
208,036
4.18
%
124,905
2.73
%
219,233
4.19
%
99,506
2.61
%
Total Interest-bearing Liabilities
1,699,404
2.21
%
1,566,372
0.72
%
1,652,168
1.82
%
1,516,333
0.53
%
Demand deposits
498,724
557,116
523,822
547,836
Other liabilities
30,749
23,588
28,091
22,565
Total Liabilities
2,228,877
2,147,076
2,204,081
2,086,734
Stockholders' equity, excluding accumulated other comprehensive loss
296,577
295,086
297,386
295,019
Accumulated other comprehensive loss
(49,398)
(34,900)
(46,868)
(21,890)
Total Stockholders' Equity
247,179
260,186
250,518
273,129
Total Liabilities and Stockholders' Equity
$
2,476,056
$
2,407,262
$
2,454,599
$
2,359,863
Interest Rate Spread
2.73
%
3.46
%
2.99
%
3.55
%
Net Interest Income/Earning Assets
3.35
%
3.69
%
3.53
%
3.72
%
Total Deposits (Interest-bearing and Demand)
$
1,990,092
$
1,998,583
$
1,956,757
$
1,964,663
(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.
51
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)
Three Months Ended 9/30/2023 vs. 9/30/2022
.
Nine Months Ended 9/30/2023 vs. 9/30/2022
Change in
Change in
Total
Change in
Change in
Total
Volume
Rate
Change
Volume
Rate
Change
EARNING ASSETS
Interest-bearing due from banks
$
(76)
$
245
$
169
$
(203)
$
800
$
597
Available-for-sale debt securities:
Taxable
(180)
119
(61)
(202)
499
297
Tax-exempt
(154)
(112)
(266)
(380)
(270)
(650)
Total available-for-sale debt securities
(334)
7
(327)
(582)
229
(353)
Loans receivable:
Taxable
1,985
3,574
5,559
7,088
9,564
16,652
Paycheck Protection Program
(113)
(2)
(115)
(658)
(233)
(891)
Tax-exempt
(2)
47
45
90
207
297
Total loans receivable
1,870
3,619
5,489
6,520
9,538
16,058
Other earning assets
(26)
6
(20)
(41)
12
(29)
Total Interest Income
1,434
3,877
5,311
5,694
10,579
16,273
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
73
1,800
1,873
117
3,753
3,870
Money market
(175)
1,205
1,030
(357)
2,741
2,384
Savings
(8)
2
(6)
(8)
3
(5)
Time deposits
332
2,063
2,395
585
4,747
5,332
Total interest-bearing deposits
222
5,070
5,292
337
11,244
11,581
Borrowed funds:
Short-term
151
347
498
1,319
1,297
2,616
Long-term - FHLB advances
802
30
832
1,650
815
2,465
Senior notes, net
1
0
1
2
0
2
Subordinated debt, net
3
(2)
1
(96)
(62)
(158)
Total borrowed funds
957
375
1,332
2,875
2,050
4,925
Total Interest Expense
1,179
5,445
6,624
3,212
13,294
16,506
Net Interest Income
$
255
$
(1,568)
$
(1,313)
$
2,482
$
(2,715)
$
(233)
(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. 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.
52
Table of Contents
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 September 30, 2023 and December 31, 2022 represents the following temporary difference components:
September 30,
December 31,
(In Thousands)
2023
2022
Deferred tax assets:
Unrealized holding losses on securities
$
16,024
$
13,391
Allowance for credit losses on loans
3,982
3,648
Purchase accounting adjustments on loans
510
938
Deferred compensation
1,300
1,149
Operating leases liability
818
907
Deferred loan origination fees
715
779
Net operating loss carryforward
571
659
Accrued incentive compensation
390
354
Other deferred tax assets
1,308
1,115
Total deferred tax assets
25,618
22,940
Deferred tax liabilities:
Defined benefit plans - ASC 835
119
129
Bank premises and equipment
280
298
Core deposit intangibles
566
633
Right-of-use assets from operating leases
818
907
Other deferred tax liabilities
104
89
Total deferred tax liabilities
1,887
2,056
Deferred tax asset, net
$
23,731
$
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 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 .
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.
53
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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)
September 30, 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
$
33,938
$
30,557
$
35,166
$
31,836
$
25,058
$
24,912
Obligations of U.S. Government agencies
21,372
18,796
25,938
23,430
23,936
24,091
Bank holding company debt securities
28,950
22,311
28,945
25,386
18,000
17,987
Obligations of states and political subdivisions:
Tax-exempt
123,598
104,453
146,149
132,623
143,427
148,028
Taxable
65,408
53,457
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
109,102
94,469
112,782
99,941
98,048
98,181
Residential collateralized mortgage obligations
38,267
33,397
44,868
40,296
44,015
44,247
Commercial mortgage-backed securities
76,627
63,672
91,388
79,686
86,926
87,468
Private label commercial mortgage-backed securities
8,178
8,026
8,070
8,023
0
0
Total Available-for-Sale Debt Securities
$
505,440
$
429,138
$
561,794
$
498,033
$
511,592
$
517,679
Aggregate Unrealized (Loss) Gain
$
(76,302)
$
(63,761)
$
6,087
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost
(15.1)
%
(11.3)
%
1.2
%
Market Yield on 5-Year U.S. Treasury Obligations (a)
4.60
%
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 $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, resulted from changes in interest rates. As shown above, the market yield on the 5-year U.S. 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 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:
54
Table of Contents
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. 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 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 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; AA – 71%; A – 6%.
● 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 September 30, 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 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 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 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 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 $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 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. 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 $38,995,000 at September 30, 2023, down from $44,723,000 at December 31, 2022.
55
Table of Contents
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. 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 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. 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 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 September 30, 2023 and December 31, 2022.
56
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE VII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands)
September 30,
December 31,
2023
2022
2021
2020
2019
2018
Commercial real estate - non-owner occupied:
Non-owner occupied
$
503,434
$
454,386
$
358,352
$
328,662
$
208,579
$
115,128
Multi-family (5 or more) residential
61,061
55,406
49,054
54,893
30,474
7,104
1-4 Family - commercial purpose
172,792
165,805
175,027
198,918
147,121
35,176
Total commercial real estate - non-owner occupied
737,287
675,597
582,433
582,473
386,174
157,408
Commercial real estate - owner occupied
231,112
205,910
196,083
191,075
78,729
38,478
All other commercial loans:
Commercial and industrial
80,960
95,368
118,488
222,923
67,288
49,947
Commercial lines of credit
122,189
141,444
106,338
105,802
92,509
65,492
Political subdivisions
80,415
86,663
75,401
46,295
46,054
49,037
Commercial construction and land
91,014
60,892
59,505
41,000
32,717
11,126
Other commercial loans
21,125
25,710
26,498
29,310
28,735
23,130
Total all other commercial loans
395,703
410,077
386,230
445,330
267,303
198,732
Residential mortgage loans:
1-4 Family - residential
385,777
363,005
327,593
356,532
388,415
360,195
1-4 Family residential construction
24,236
30,577
23,151
18,736
14,640
24,698
Total residential mortgage
410,013
393,582
350,744
375,268
403,055
384,893
Consumer loans:
Consumer lines of credit (including HELOCs)
37,736
36,650
33,522
34,566
30,810
31,955
All other consumer
18,819
18,224
15,837
15,497
16,151
16,097
Total consumer
56,555
54,874
49,359
50,063
46,961
48,052
Total
1,830,670
1,740,040
1,564,849
1,644,209
1,182,222
827,563
Less: allowance for credit losses on loans
(18,085)
(16,615)
(13,537)
(11,385)
(9,836)
(9,309)
Loans, net
$
1,812,585
$
1,723,425
$
1,551,312
$
1,632,824
$
1,172,386
$
818,254
Additional details regarding the composition of the non-owner occupied commercial real estate loan portfolio at September 30, 2023 is as follows:
57
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
(In Thousands)
September 30,
% of Non-owner
% of
2023
Occupied CRE
Total Loans
Industrial
$
107,268
21.3
%
5.9
%
Office
94,729
18.8
%
5.2
%
Retail
94,542
18.8
%
5.2
%
Hotels
73,511
14.6
%
4.0
%
Mixed Use
59,702
11.9
%
3.3
%
Other
73,682
14.6
%
4.0
%
Total Non-owner Occupied CRE Loans
$
503,434
Total Gross Loans
$
1,830,670
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.
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)
3 Months
9 Months
Ended
Ended
September 30,
September 30,
2023
2023
(Credit) for credit losses:
Loans receivable
$
(933)
$
(409)
Off-balance sheet exposures (1)
(292)
(356)
Total (credit) for credit losses
$
(1,225)
$
(765)
(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
58
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 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 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.
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)
Nine Months Ended
September 30,
September 30,
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
(299)
(2,417)
(4,245)
(1,575)
(2,465)
(379)
(497)
Recoveries
74
57
68
66
101
57
366
Net charge-offs
(225)
(2,360)
(4,177)
(1,509)
(2,364)
(322)
(131)
(Credit) provision for credit losses
(409)
4,993
7,255
3,661
3,913
849
584
Balance, end of period
$
18,085
$
16,170
$
16,615
$
13,537
$
11,385
$
9,836
$
9,309
Net charge-offs as a % of average loans
0.01
%
0.15
%
0.26
%
0.09
%
0.16
%
0.03
%
0.02
%
59
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES
UPON ADOPTION OF CECL
(In Thousands)
September 30,
January 1,
2023
2023
Loans individually evaluated
$
820
$
751
Loans collectively evaluated:
Commercial real estate - nonowner occupied
9,671
9,641
Commercial real estate - owner occupied
1,803
1,765
All other commercial loans
3,457
3,914
Residential mortgage
1,993
2,407
Consumer
341
241
Total Allowance
$
18,085
$
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
60
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS
(Dollars In Thousands)
September 30,
As of December 31,
2023
2022
2021
2020
2019
2018
Loans individually evaluated with a valuation allowance
$
7,861
$
3,460
$
6,540
$
8,082
$
3,375
$
4,851
Loans individually evaluated without a valuation allowance
4,146
14,871
2,636
2,895
1,670
4,923
Purchased credit impaired loans
0
1,027
6,558
6,841
441
0
Total individually evaluated loans
$
12,007
$
19,358
$
15,734
$
17,818
$
5,486
$
9,774
Total loans past due 30-89 days and still accruing
$
3,675
$
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
15,501
22,058
12,441
14,575
8,777
13,113
Total nonaccrual loans
15,501
23,085
18,999
21,416
9,218
13,113
Total loans past due 90 days or more and still accruing
1,292
2,237
2,219
1,975
1,207
2,906
Total nonperforming loans
16,793
25,322
21,218
23,391
10,425
16,019
Foreclosed assets held for sale (real estate)
633
275
684
1,338
2,886
1,703
Total nonperforming assets
$
17,426
$
25,597
$
21,902
$
24,729
$
13,311
$
17,722
Total nonperforming loans as a % of loans
0.92
%
1.46
%
1.36
%
1.42
%
0.88
%
1.94
%
Total nonperforming assets as a % of assets
0.70
%
1.04
%
0.94
%
1.10
%
0.80
%
1.37
%
Allowance for credit losses as a % of total loans
0.99
%
0.95
%
0.87
%
0.69
%
0.83
%
1.12
%
61
Table of Contents
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 $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:
Outstanding
Available
Total Credit
(In Thousands)
September 30,
December 31,
September 30,
December 31,
September 30,
December 31,
2023
2022
2023
2022
2023
2022
Federal Home Loan Bank of Pittsburgh
$
165,951
$
150,099
$
752,847
$
689,279
$
918,798
$
839,378
Federal Reserve Bank Discount Window
0
0
20,766
23,107
20,766
23,107
Other correspondent banks
0
0
95,000
95,000
95,000
95,000
Total credit facilities
$
165,951
$
150,099
$
868,613
$
807,386
$
1,034,564
$
957,485
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 . 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 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 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
62
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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,
December 31,
2023
2022
Total Deposits - C&N Bank
$
2,040,506
$
2,016,666
Estimated Total Uninsured Deposits
$
602,957
$
689,435
Portion of Uninsured Deposits that are
Collateralized
188,927
205,886
Uninsured and Uncollateralized Deposits
$
414,030
$
483,549
Uninsured and Uncollateralized Deposits as
a % of Total Deposits
20.3
%
24.0
%
Available Funding from Credit Facilities
$
868,613
$
807,386
Fair Value of Available-for-sale Debt
Securities in Excess of Pledging Obligations
227,667
272,475
Highly Liquid Available Funding
$
1,096,280
$
1,079,861
Highly Liquid Available Funding as a % of
Uninsured Deposits
181.8
%
156.6
%
Highly Liquid Available Funding as a % of
Uninsured and Uncollateralized Deposits
264.8
%
223.3
%
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
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 September 30, 2023; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
63
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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)
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
September 30, 2023:
Total capital to risk-weighted assets:
Consolidated
$
288,587
15.81
%
N/A
N/A
N/A
N/A
N/A
N/A
$
200,756
≥11
%
C&N Bank
274,474
15.07
%
145,695
≥8
%
191,225
≥10.5
%
182,119
≥10
%
200,331
≥11
%
Tier 1 capital to risk-weighted assets:
Consolidated
244,913
13.42
%
N/A
N/A
N/A
N/A
N/A
N/A
164,255
≥9
%
C&N Bank
255,489
14.03
%
109,271
≥6
%
154,801
≥8.5
%
145,695
≥8
%
163,907
≥9
%
Common equity tier 1 capital to risk-weighted assets:
Consolidated
244,913
13.42
%
N/A
N/A
N/A
N/A
N/A
N/A
136,879
≥7.5
%
C&N Bank
255,489
14.03
%
81,954
≥4.5
%
127,483
≥7.0
%
118,377
≥6.5
%
136,589
≥7.5
%
Tier 1 capital to average assets:
Consolidated
244,913
9.91
%
N/A
N/A
N/A
N/A
N/A
N/A
197,691
≥8
%
C&N Bank
255,489
10.40
%
98,244
≥4
%
N/A
N/A
122,805
≥5
%
196,488
≥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 was authorized to repurchase up to 1,000,000 shares of its common stock. 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.
64
Table of Contents
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. 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 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
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 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. 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 $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 September 30, 2023 .
65
Table of Contents
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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.