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
● 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
● 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
● fraud and cyber malfunction risks as usage of artificial intelligence continues to expand
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
EARNINGS OVERVIEW
First Quarter 2024 as Compared to First Quarter 2023
First quarter 2024 net income was $5,306,000, or $0.35 per diluted share, as compared to $6,253,000, or $0.40 per diluted share, in the first quarter 2023. Significant variances were as follows:
● Net interest income of $19,041,000 in the first quarter 2024 was $1,740,000 lower than the first quarter 2023 total reflecting an increase in interest expense of $5,937,000 and an increase of $4,197,000 in interest and dividend income . The interest rate spread decreased 0.68%, as the average rate on interest-bearing liabilities increased 1.24%, while the average yield on earning assets increased 0.56%. The net interest margin was 3.29% in the first quarter 2024, down from 3.71% in the first quarter 2023.
● For the quarter ended March 31, 2024, there was a provision for credit losses of $954,000, an increase of $1,306,000 in expense compared to a credit for credit losses (reduction in expense) of $352,000 in the first quarter 2023. The provision for the first quarter 2024 included expense related to loans receivable of $960,000 and a credit related to off-balance sheet exposures of $6,000. In the first quarter 2024, the provision related to loans receivable resulted from an increase in qualitative factors and specific allowances on individually evaluated commercial loans, partially offset by reductions in the Corporation’s average net charge-off experience and the impact of an economic forecast used in the calculation of the allowance for credit losses (“ACL”). The credit for credit losses in the first quarter
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2023 resulted mainly from a reduction in the allowance related to the commercial segment of the portfolio. The ACL as a percentage of gross loans receivable was 1.07% at March 31, 2024 as compared to 1.05% at March 31, 2023.
● Noninterest income of $6,675,000 in the first quarter 2024 increased $1,059,000 from the first quarter 2023 amount. Significant variances included the following:
Ø Earnings from the increase in cash surrender value of life insurance of $470,000 increased $332,000 from the first quarter 2023 reflecting the earnings on the additional $30 million in Bank-Owned Life Insurance purchased in December 2023.
Ø Other noninterest income of $1,017,000 increased $246,000, including an increase of $182,000 in dividends from FHLB-Pittsburgh and Federal Reserve stock.
Ø Trust revenue of $1,897,000 increased $120,000, consistent with recent appreciation in the trading prices of many U.S. equity securities and includes revenue from new business.
Ø Net gains from sale of loans of $191,000 increased $117,000 from the first quarter 2023, reflecting an increase in volume of residential mortgage loans sold.
Ø Brokerage and insurance revenue of $539,000 increased $109,000 due to an increase in sales volume.
Ø Loan servicing fees, net, of $230,000 increased $108,000, as the fair value of servicing rights increased $25,000 in 2024 as compared to a decrease of $83,000 in 2023.
● Noninterest expense of $18,304,000 in the first quarter 2024 decreased $783,000 from the first quarter 2023 amount. Significant variances included the following:
Ø Other noninterest expense of $1,862,000 decreased $645,000 from the first quarter 2023. Within this category, significant variances included the following:
◾ In the first quarter 2024, there was a reduction in expense of $483,000 related to the defined benefit postretirement medical benefit plan including a curtailment gain of $469,000 related to plan adjustments. In comparison, in the first quarter 2023, there was a reduction in expense associated with the postretirement plan of $5,000.
◾ Expenses from check fraud, debit card fraud and other operational losses totaled $50,000 in the first quarter 2024, a decrease of $139,000 from the first quarter 2023.
◾ Advertising expense totaled $136,000 in the first quarter 2024, a decrease of $77,000.
◾ FDIC insurance expense increased $120,000 from the first quarter of 2023, reflecting the impact of an increase in base deposit insurance assessment rate applicable to all FDIC-insured banks.
Ø Professional fees of $518,000 decreased $419,000 as first quarter 2023 included $389,000 of conversion costs related to a change in wealth management platform for providing brokerage and investment advisory services.
Ø Salaries and employee benefits expense of $11,562,000 increased $135,000, including an increase in base salaries expense of $336,000, or 4.6%, while incentive compensation expense decreased $171,000.
● The income tax provision of $1,152,000, or 17.8% of pre-tax income for the first quarter 2024 decreased $257,000 from $1,409,000, or 18.4% of pre-tax income for the first quarter 2023. The decrease in income tax provision reflected the decrease in pre-tax income of $1,204,000 for the quarter.
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TABLE I – QUARTERLY FINANCIAL DATA
(Dollars In Thousands,
For the Three Months Ended :
Except Per Share Data)
March 31,
December 31,
September 30,
June 30,
March 31,
(Unaudited)
2024
2023
2023
2023
2023
Interest income
$
30,336
$
30,236
$
29,118
$
28,011
$
26,139
Interest expense
11,295
10,642
9,455
7,649
5,358
Net interest income
19,041
19,594
19,663
20,362
20,781
Provision (credit) for credit losses
954
951
(1,225)
812
(352)
Net interest income after provision (credit) for credit losses
18,087
18,643
20,888
19,550
21,133
Noninterest income
6,675
5,678
6,489
6,634
5,616
Noninterest expense
18,304
18,399
17,940
18,722
19,087
Income before income tax provision
6,458
5,922
9,437
7,462
7,662
Income tax provision
1,152
1,661
1,846
1,419
1,409
Net income
$
5,306
$
4,261
$
7,591
$
6,043
$
6,253
Net income attributable to common shares
$
5,267
$
4,231
$
7,534
$
5,996
$
6,201
Basic earnings per common share
$
0.35
$
0.28
$
0.50
$
0.39
$
0.40
Diluted earnings per common share
$
0.35
$
0.28
$
0.50
$
0.39
$
0.40
NONINTEREST INCOME
TABLE II – COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands)
Three Months Ended
March 31,
$
%
2024
2023
Change
Change
Trust revenue
$
1,897
$
1,777
$
120
6.8
%
Brokerage and insurance revenue
539
430
109
25.3
%
Service charges on deposit accounts
1,318
1,290
28
2.2
%
Interchange revenue from debit card transactions
1,013
1,007
6
0.6
%
Net gains from sales of loans
191
74
117
158.1
%
Loan servicing fees, net
230
122
108
88.5
%
Increase in cash surrender value of life insurance
470
138
332
240.6
%
Other noninterest income
1,017
771
246
31.9
%
Realized gains on available-for-sale debt securities, net
0
7
(7)
N/M
%
Total noninterest income
$
6,675
$
5,616
$
1,059
18.9
%
NONINTEREST EXPENSE
TABLE III - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands)
Three Months Ended
March 31,
$
%
2024
2023
Change
Change
Salaries and employee benefits
$
11,562
$
11,427
$
135
1.2
%
Net occupancy and equipment expense
1,450
1,402
48
3.4
%
Data processing and telecommunications expense
1,992
1,936
56
2.9
%
Automated teller machine and interchange expense
487
475
12
2.5
%
Pennsylvania shares tax
433
403
30
7.4
%
Professional fees
518
937
(419)
(44.7)
%
Other noninterest expense
1,862
2,507
(645)
(25.7)
%
Total noninterest expense
$
18,304
$
19,087
$
(783)
(4.1)
%
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Additional detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
Allowance for Credit Losses on Loans – A material estimate that is particularly susceptible to significant change is the determination of the allowance for credit losses (ACL) on loans. The Corporation maintains an ACL on loans which represents management’s estimate of expected net charge-offs over the life of the loans. The ACL includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis). Management considers the determination of the ACL on loans to be critical because it requires significant judgment regarding estimates of expected credit losses based on the Corporation’s historical loss experience, current conditions and economic forecasts. Management’s evaluation is based upon a continuous review of the Corporation’s loans, with consideration given to evaluations resulting from examinations performed by regulatory authorities. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for determining the ACL, and additional discussion of the ACL is provided in a separate section of Management’s Discussion and Analysis.
The ACL may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables, including new information regarding existing problem loans, identification of additional problem loans, changes in the fair value of underlying collateral, unforeseen events such as natural disasters and pandemics, and other factors. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly.
Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables IV, V and VI include information regarding the Corporation’s net interest income for the three-month periods ended March 31, 2024 and 2023. 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. Management believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related tables.
Three-Month Periods Ended March 31, 2024 and 2023
For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $19,236,000 in 2024 was $1,814,000 (8.6%) lower than in 2023. The decrease in net interest income reflected an increase in interest expense of $5,937,000 (includes $5,661,000 interest on deposits and $276,000 in interest on borrowings) and an increase of $4,123,000 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 first quarter 2024 as compared to first quarter 2023 by $862,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $2,676,000. As presented in Table V, the Net Interest Margin was 3.29% in the first quarter 2024 as compared to 3.71% in the first quarter 2023, and the “Interest Rate Spread” (excess of average rate of return on earning assets
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over average cost of funds on interest-bearing liabilities) decreased to 2.62% in 2024 from 3.30% in 2023. The average yield on earning assets of 5.22% was 0.56% higher in 2024 as compared to 2023, and the average rate on interest-bearing liabilities of 2.60% in 2024 was 1.24% higher.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $30,531,000 in 2024, an increase of $4,123,000, or 15.6% from 2023.
Interest and fees from loans receivable increased $4,229,000 in 2024 as compared to 2023. The fully taxable equivalent yield on loans in 2024 increased to 5.92% from 5.44% in 2023, reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased $133,383,000 (7.7%) to $1,859,246,000 in 2024 from $1,725,863,000 in 2023. The Corporation has experienced growth in commercial real estate and other commercial loans in 2023 and the first three months of 2024.
Income from interest-bearing due from banks totaled $383,000 in 2024, an increase of $105,000 from the total for 2023. The average yield on interest-bearing due from banks was 4.71% in 2024, up from 3.56% in 2023. The average balance of interest-bearing due from banks was $32,725,000 in 2024, up from $31,637,000 in 2023. Within this category, the largest asset balance in 2024 and 2023 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 $2,759,000 in 2024, down $219,000 from 2023, as the average balance (at amortized cost) of available-for-sale debt securities decreased $80,254,000 as indicated in Table V. The average yield on available-for-sale debt securities was 2.41% in 2024, up from 2.23% in 2023.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $5,937,000 to $11,295,000 in 2024 from $5,358,000 in 2023.
Interest expense on deposits increased $5,661,000, as the average rate on interest-bearing deposits increased to 2.35% in 2024 from 0.94% in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,001,278,000 for the first quarter 2024, up $70,152,000 (3.6%) from the first quarter 2023. Within average total deposits, average brokered deposits (primarily time and money market) were $84,318,000 with an average interest rate of 5.23% in the first quarter 2024, up from $16,179,000 with an average interest rate of 3.04% in the first quarter 2023. The deposit mix has changed as businesses and consumers have become more interest-rate sensitive in light of higher market rates. In comparing the first quarter 2024 to the first quarter 2023, average time deposits increased $116,588,000 and average interest checking deposits increased $57,628,000, while average noninterest-bearing demand deposits decreased $58,513,000 and average savings deposits decreased $43,769,000.
Interest expense on short-term borrowings decreased $500,000 to $597,000 in 2024 from $1,097,000 in 2023. The average balance of short-term borrowings decreased to $44,462,000 in 2024 from $91,767,000 in 2023. The average rate on short-term borrowings was 5.38% in 2024 compared to 4.85% in 2023.
Interest expense on long-term borrowings (FHLB advances) increased $775,000 to $1,456,000 in 2024 from $681,000 in 2023. The average balance of long-term borrowings was $142,753,000 in 2024, up from an average balance of $80,648,000 in 2023. 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 4.10% in 2024 compared to 3.42% in 2023.
More information regarding borrowed funds is provided in Note 8 to the unaudited consolidated financial statements.
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TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE
Three Months Ended
March 31,
Increase/
(In Thousands)
2024
2023
(Decrease)
INTEREST INCOME
Interest-bearing due from banks
$
383
$
278
$
105
Available-for-sale debt securities:
Taxable
2,136
2,211
(75)
Tax-exempt
623
767
(144)
Total available-for-sale debt securities
2,759
2,978
(219)
Loans receivable:
Taxable
26,703
22,431
4,272
Tax-exempt
670
713
(43)
Total loans receivable
27,373
23,144
4,229
Other earning assets
16
8
8
Total Interest Income
30,531
26,408
4,123
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking
2,806
987
1,819
Money market
2,180
873
1,307
Savings
55
63
(8)
Time deposits
3,850
1,307
2,543
Total interest-bearing deposits
8,891
3,230
5,661
Borrowed funds:
Short-term
597
1,097
(500)
Long-term - FHLB advances
1,456
681
775
Senior notes, net
120
120
0
Subordinated debt, net
231
230
1
Total borrowed funds
2,404
2,128
276
Total Interest Expense
11,295
5,358
5,937
Net Interest Income
$
19,236
$
21,050
$
(1,814)
Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis (a non-GAAP measure), using the Corporation’s marginal federal income tax rate of 21%. The following table is a reconciliation of net interest income under U.S. GAAP as compared to net interest income as adjusted to a fully taxable-equivalent basis.
(In Thousands)
Three Months Ended
March 31,
Increase/
2024
2023
(Decrease)
Net Interest Income Under U.S. GAAP
$
19,041
$
20,781
$
(1,740)
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities
69
127
(58)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans
126
142
(16)
Net Interest Income as adjusted to a fully taxable-equivalent basis
$
19,236
$
21,050
$
(1,814)
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TABLE V - Analysis of Average Daily Balances and Rates
(Dollars in Thousands)
Three Months
Three Months
Ended
Rate of
Ended
Rate of
3/31/2024
Return/
3/31/2023
Return/
Average
Cost of
Average
Cost of
Balance
Funds %
Balance
Funds %
EARNING ASSETS
Interest-bearing due from banks
$
32,725
4.71
%
$
31,637
3.56
%
Available-for-sale debt securities, at amortized cost:
Taxable
347,885
2.47
%
410,110
2.19
%
Tax-exempt
113,363
2.21
%
131,392
2.37
%
Total available-for-sale debt securities
461,248
2.41
%
541,502
2.23
%
Loans receivable:
Taxable
1,774,064
6.05
%
1,634,012
5.57
%
Tax-exempt
85,182
3.16
%
91,851
3.15
%
Total loans receivable
1,859,246
5.92
%
1,725,863
5.44
%
Other earning assets
1,384
4.65
%
1,200
2.70
%
Total Earning Assets
2,354,603
5.22
%
2,300,202
4.66
%
Cash
20,448
22,276
Unrealized loss on securities
(50,849)
(60,055)
Allowance for credit losses
(19,484)
(17,053)
Bank-owned life insurance
54,466
31,267
Bank premises and equipment
21,788
21,518
Intangible assets
54,925
55,331
Other assets
82,879
67,333
Total Assets
$
2,518,776
$
2,420,819
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
$
514,905
2.19
%
$
457,277
0.88
%
Money market
362,864
2.42
%
364,646
0.97
%
Savings
213,278
0.10
%
257,047
0.10
%
Time deposits
429,085
3.61
%
312,497
1.70
%
Total interest-bearing deposits
1,520,132
2.35
%
1,391,467
0.94
%
Borrowed funds:
Short-term
44,642
5.38
%
91,767
4.85
%
Long-term - FHLB advances
142,753
4.10
%
80,648
3.42
%
Senior notes, net
14,840
3.25
%
14,773
3.29
%
Subordinated debt, net
24,731
3.76
%
24,620
3.79
%
Total borrowed funds
226,966
4.26
%
211,808
4.07
%
Total Interest-bearing Liabilities
1,747,098
2.60
%
1,603,275
1.36
%
Demand deposits
481,146
539,659
Other liabilities
29,386
25,247
Total Liabilities
2,257,630
2,168,181
Stockholders' equity, excluding accumulated other comprehensive loss
301,032
299,599
Accumulated other comprehensive loss
(39,886)
(46,961)
Total Stockholders' Equity
261,146
252,638
Total Liabilities and Stockholders' Equity
$
2,518,776
$
2,420,819
Interest Rate Spread
2.62
%
3.30
%
Net Interest Income/Earning Assets
3.29
%
3.71
%
Total Deposits (Interest-bearing and Demand)
$
2,001,278
$
1,931,126
(1) Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2) Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
(3) Rates of return on earning assets and costs of funds are presented on an annualized basis.
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TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)
Three Months Ended 3/31/2024 vs. 3/31/2023
Change in
Change in
Total
Volume
Rate
Change
EARNING ASSETS
Interest-bearing due from banks
$
10
$
95
$
105
Available-for-sale debt securities:
Taxable
(352)
277
(75)
Tax-exempt
(97)
(47)
(144)
Total available-for-sale debt securities
(449)
230
(219)
Loans receivable:
Taxable
2,116
2,156
4,272
Tax-exempt
(47)
4
(43)
Total loans receivable
2,069
2,160
4,229
Other earning assets
1
7
8
Total Interest Income
1,631
2,492
4,123
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
140
1,679
1,819
Money market
(4)
1,311
1,307
Savings
(8)
0
(8)
Time deposits
633
1,910
2,543
Total interest-bearing deposits
761
4,900
5,661
Borrowed funds:
Short-term
(612)
112
(500)
Long-term - FHLB advances
617
158
775
Senior notes, net
1
(1)
0
Subordinated debt, net
2
(1)
1
Total borrowed funds
8
268
276
Total Interest Expense
769
5,168
5,937
Net Interest Income
$
862
$
(2,676)
$
(1,814)
(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 a lower amount of pre-tax income in 2024, the income tax provision for the first quarter 2024 of $1,152,000 was $257,000 lower than the provision for the first quarter 2023. The effective tax rate (tax provision as a percentage of pre-tax income) was 17.8% in the first quarter 2024 compared to 18.4% in the first quarter 2023. 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.
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The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at March 31, 2024 and December 31, 2023 represents the following temporary difference components:
March 31,
December 31,
(In Thousands)
2024
2023
Deferred tax assets:
Unrealized holding losses on securities
$
10,916
$
10,335
Allowance for credit losses on loans
4,397
4,230
Purchase accounting adjustments on loans
437
470
Deferred compensation
1,397
1,352
Operating leases liability
752
787
Deferred loan origination fees
726
731
Net operating loss carryforward
512
541
Accrued incentive compensation
169
463
Other deferred tax assets
1,071
1,316
Total deferred tax assets
20,377
20,225
Deferred tax liabilities:
BOLI surrender
950
950
Defined benefit plans - ASC 835
99
119
Bank premises and equipment
281
291
Core deposit intangibles
520
544
Right-of-use assets from operating leases
752
787
Other deferred tax liabilities
72
93
Total deferred tax liabilities
2,674
2,784
Deferred tax asset, net
$
17,703
$
17,441
The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income.
Management believes the recorded net deferred tax asset at March 31, 2024 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings .
SECURITIES
Management continually evaluates several objectives in determining the size, securities mix and other characteristics of the available-for-sale debt securities (investment) portfolio. Key objectives include supporting liquidity needs and maximizing return on earning assets within reasonable risk parameters.
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The composition of the available-for-sale debt securities portfolio at March 31, 2024, December 31, 2023, December 31, 2022 and December 31, 2021 is as follows:
(Dollars In Thousands)
March 31, 2024
December 31, 2023
December 31, 2022
December 31, 2021
Amortized
Fair
Amortized
Fair
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
Cost
Value
Cost
Value
Obligations of the U.S. Treasury
$
11,324
10,231
$
12,325
11,290
$
35,166
$
31,836
$
25,058
$
24,912
Obligations of U.S. Government agencies
10,637
9,376
11,119
9,946
25,938
23,430
23,936
24,091
Bank holding company debt securities
28,953
23,469
28,952
23,500
28,945
25,386
18,000
17,987
Obligations of states and political subdivisions:
Tax-exempt
113,181
102,826
113,464
104,199
146,149
132,623
143,427
148,028
Taxable
57,960
49,255
58,720
50,111
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
102,048
91,116
105,549
95,405
112,782
99,941
98,048
98,181
Residential collateralized mortgage obligations
48,477
44,501
50,212
46,462
44,868
40,296
44,015
44,247
Commercial mortgage-backed securities
76,249
66,121
76,412
66,682
91,388
79,686
86,926
87,468
Private label commercial mortgage-backed securities
8,252
8,199
8,215
8,160
8,070
8,023
0
0
Total Available-for-Sale Debt Securities
$
457,081
$
405,094
$
464,968
$
415,755
$
561,794
$
498,033
$
511,592
$
517,679
Aggregate Unrealized (Loss) Gain
$
(51,987)
$
(49,213)
$
(63,761)
$
6,087
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost
(11.4)
%
(10.6)
%
(11.3)
%
1.2
%
Market Yield on 5-Year U.S. Treasury Obligations (a)
4.21
%
3.84
%
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 $51,987,000, or 11.4%, at March 31, 2024, $49,213,000, or 10.6%, at December 31, 2023 and $63,761,000, or 11.3%, at December 31, 2022 while the aggregate unrealized gain position was $6,087,000, or (1.2%) at December 31, 2021. The volatility in the fair value of the portfolio, including the 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 0.37% higher at March 31, 2024 in comparison to December 31, 2023, 0.22% higher than at December 31, 2022 and 2.95% higher than at December 31, 2021. The table also shows that the amortized cost basis of the portfolio has been reduced to $457,081,000 at March 31, 2024 from $561,794,000 at December 31, 2022 as proceeds from maturities and sales have been used to help fund loan growth.
Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 3, Quantitative and Qualitative Disclosures about Market Risk.
As described in Note 5 to the unaudited consolidated financial statements, management determined the Corporation does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at March 31, 2024 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of
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March 31, 2024 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at March 31, 2024, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:
● Bank holding company debt securities – All of the Corporation’s holdings of bank holding company debt securities were investment grade and there have been no payment defaults. There were seven securities with face amounts ranging from $3 million to $5 million, including one senior security and six subordinated securities. All of the issuers have publicly traded common stock . At March 31, 2024, the securities have external ratings ranging from BBB-/Baa3 to A-.
● Obligations of states and political subdivisions (municipal bonds) – All of the Corporation’s holdings of municipal bonds were investment grade and there have been no payment defaults. Summary ratings information at March 31, 2024, 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 – 22% of the portfolio; AA – 71%; A – 7%.
● Private label commercial mortgage-backed securities (PLCMBS) – There were two PLCMBS securities, both of which were from the most senior payment (subordination) classes of their respective issuances. These securities were investment grade (rated Aaa), and there have been no payment defaults on these securities.
Based on the results of management’s assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at March 31, 2024.
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 2024.
Table VII shows the composition of the loan portfolio at March 31, 2024 and at year-end from 2019 through 2023. The significant loan growth in 2020 reflects the impact of an acquisition of a bank located in Southeastern Pennsylvania. Primarily as a result of the expansion into Southeastern Pennsylvania, as well as expansion by opening two offices in Southcentral Pennsylvania, the mix of the loan portfolio has become predominantly commercial in nature. At March 31, 2024, commercial loans represented 75% of the portfolio while residential loans totaled 22% of the portfolio.
Also included in Table VII is additional detail regarding the composition of the non-owner occupied commercial real estate loan portfolio at March 31, 2024. The data in Table VII shows the recorded investment in non-owner occupied commercial real estate loans for which the primary purpose is utilization of office space by third parties was $93,998,000, or 5.0% of gross loans receivable. At March 31, 2024, within this segment there were two loans with a total recorded investment of $3,899,000 in nonaccrual status with specific allowances totaling $506,000. The remainder of the non-owner occupied commercial real estate loans with a primary purpose of office space utilization were in accrual status with no specific allowance at March 31, 2024. The Provision and Allowance for Credit Losses section of Management’s Discussion and Analysis provides additional related discussion.
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 $38,252,000 at March 31, 2024 down from $38,652,000 at December 31, 2023.
The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through March 31, 2024, the Corporation’s activity under the MPF Direct Program has been minimal.
For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At March 31, 2024, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,322,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2023 was $1,335,000.
At March 31, 2024, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $322,319,000, including loans sold through the MPF Xtra program of $149,219,000 and loans sold through the Original program of $173,100,000. At December 31, 2023, outstanding balances of loans sold and serviced through the two programs totaled $323,298,000, including loans sold through the MPF Xtra program of $150,015,000 and loans sold through the Original Program of $173,283,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of March 31, 2024 and December 31, 2023.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE VII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands)
March 31,
December 31,
2024
2023
2022
2021
2020
2019
Commercial real estate - non-owner occupied:
Non-owner occupied
$
507,223
$
499,104
$
454,386
$
358,352
$
328,662
$
208,579
Multi-family (5 or more) residential
64,866
64,076
55,406
49,054
54,893
30,474
1-4 Family - commercial purpose
167,740
174,162
165,805
175,027
198,918
147,121
Total commercial real estate - non-owner occupied
739,829
737,342
675,597
582,433
582,473
386,174
Commercial real estate - owner occupied
250,145
237,246
205,910
196,083
191,075
78,729
All other commercial loans:
Commercial and industrial
80,136
78,832
95,368
118,488
222,923
67,288
Commercial lines of credit
121,791
117,236
141,444
106,338
105,802
92,509
Political subdivisions
84,652
79,031
86,663
75,401
46,295
46,054
Commercial construction and land
106,255
104,123
60,892
59,505
41,000
32,717
Other commercial loans
19,971
20,471
25,710
26,498
29,310
28,735
Total all other commercial loans
412,805
399,693
410,077
386,230
445,330
267,303
Residential mortgage loans:
1-4 Family - residential
387,542
389,262
363,005
327,593
356,532
388,415
1-4 Family residential construction
22,121
24,452
30,577
23,151
18,736
14,640
Total residential mortgage
409,663
413,714
393,582
350,744
375,268
403,055
Consumer loans:
Consumer lines of credit (including HELOCs)
41,204
41,503
36,650
33,522
34,566
30,810
All other consumer
18,803
18,641
18,224
15,837
15,497
16,151
Total consumer
60,007
60,144
54,874
49,359
50,063
46,961
Total
1,872,449
1,848,139
1,740,040
1,564,849
1,644,209
1,182,222
Less: allowance for credit losses on loans
(20,023)
(19,208)
(16,615)
(13,537)
(11,385)
(9,836)
Loans, net
$
1,852,426
$
1,828,931
$
1,723,425
$
1,551,312
$
1,632,824
$
1,172,386
Additional details regarding the composition of the non-owner occupied commercial real estate loan portfolio, excluding multi-family (5 or more) residential and 1-4 Family-commercial purpose loans, at March 31, 2024 is as follows:
NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
(In Thousands)
March 31,
% of Non-owner
% of
2024
Occupied CRE
Total Loans
Industrial
$
117,199
23.1
%
6.3
%
Retail
93,998
18.5
%
5.0
%
Office
93,585
18.5
%
5.0
%
Hotels
72,999
14.4
%
3.9
%
Mixed Use
59,230
11.7
%
3.2
%
Other
70,212
13.8
%
3.7
%
Total Non-owner Occupied CRE Loans
$
507,223
Total Gross Loans
$
1,872,449
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
A summary of the credit for credit losses for the first quarter 2024 and 2023 is as follows:
(In Thousands)
3 Months
3 Months
Ended
Ended
March 31,
March 31,
2024
2023
Provision (Credit) for credit losses:
Loans receivable
$
960
$
(312)
Off-balance sheet exposures
(6)
(40)
Total provision (credit) for credit losses
$
954
$
(352)
For the quarter ended March 31, 2024, there was a provision for credit losses of $954,000, an increase of $1,306,000 in expense compared to a credit for credit losses (reduction in expense) of $352,000 in the first quarter 2023. The ACL as a percentage of gross loans receivable increased to 1.07% at March 31, 2024 from 1.04% at December 31, 2023; in comparison, the ACL dropped to 1.05% of gross loans receivable at March 31, 2023 from 1.08% upon adoption of CECL on January 1, 2023.
As shown in Table IX, the ACL on loans individually evaluated increased to $1,403,000 at March 31, 2024 from $743,000 at December 31, 2023. The net increase in individual ACLs is primarily related to two borrowers: (1) at March 31, 2024, an ACL of $477,000 was recorded on loans totaling $2,360,000 for land related to a planned commercial construction project, and (2) consistent with an updated collateral valuation assessment, the ACL increased $239,000 to $244,000 at March 31, 2024 on commercial loans to one borrower totaling $284,000 at March 31, 2024. At March 31, 2024, there were seven commercial relationships with loans receivable totaling $10,062,000 for which individual ACLs were recorded, including two non-owner occupied office loans with total outstanding balances of $3,899,000 and individual ACLs totaling $506,000.
Table IX also shows that, at March 31, 2024 as compared to December 31, 2023, the ACL related to collectively evaluated commercial loans increased by a total of $1,125,000, while the ACL on collectively evaluated residential mortgage loans decreased $940,000 and the ACL on collectively evaluated consumer loans decreased $30,000. The increase for commercial loans includes the impact of an increase in outstanding loans and a net increase in qualitative factors used in the ACL evaluation, partially offset by the impact to the ACL valuation of lower estimated net charge-offs based on recent experience and a reduction from the impact of an economic forecast. The decrease for residential mortgage loans includes the impact of a net reduction in qualitative factors, lower net charge-offs based on recent experience and a reduction from the impact of an economic forecast.
Table X shows that total nonperforming assets as a percentage of total assets was 0.78% at March 31, 2024, up from 0.75% at December 31, 2023 and lower than that at year-end 2019 through 2022. Total nonperforming assets were $19.8 million at March 31, 2024, up from $18.8 million at December 31, 2023 but lower than the totals at year-end 2020 through 2022. Nonperforming loans included increases in nonaccrual loans of $3.9 million from December 31, 2023, while loans past due 90 days or more still accruing decreased $3.0 million from December 31, 2023. In the first quarter 2024, the increase in nonaccrual loans included the commercial construction and land loans to one borrower totaling $2,360,000 noted above.
In the first three months of 2024, net charge-offs were low by historical standards, totaling $145,000, 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 0.01% in 2023.
Over the period 2019-2023 and the first quarter of 2024, 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
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
from the allowances calculated as of March 31, 2024. 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 ON LOANS
(Dollars In Thousands)
Three Months Ended
March 31,
March 31,
Years Ended December 31,
2024
2023
2023
2022
2021
2020
2019
Balance, beginning of year
$
19,208
$
16,615
$
16,615
$
13,537
$
11,385
$
9,836
$
9,309
Adoption of ASU 2016-13 (CECL)
0
2,104
2,104
0
0
0
0
Charge-offs
(180)
(67)
(356)
(4,245)
(1,575)
(2,465)
(379)
Recoveries
35
6
92
68
66
101
57
Net charge-offs
(145)
(61)
(264)
(4,177)
(1,509)
(2,364)
(322)
Provision for credit losses on loans
960
(312)
753
7,255
3,661
3,913
849
Balance, end of year
$
20,023
$
18,346
$
19,208
$
16,615
$
13,537
$
11,385
$
9,836
Net charge-offs as a % of average loans
0.01
%
0.00
%
0.01
%
0.26
%
0.09
%
0.16
%
0.03
%
TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS
(In Thousands)
March 31,
December 31,
January 1,
2024
2023
2023
Loans individually evaluated
$
1,403
$
743
$
751
Loans collectively evaluated:
Commercial real estate - nonowner occupied
10,822
10,379
9,641
Commercial real estate - owner occupied
2,474
2,111
1,765
All other commercial loans
4,130
3,811
3,914
Residential mortgage
824
1,764
2,407
Consumer
370
400
241
Total Allowance
$
20,023
$
19,208
$
18,719
PRIOR TO CECL ADOPTION
(In Thousands)
As of December 31,
2022
2021
2020
2019
ASC 310 - Impaired loans - individually evaluated
$
453
$
740
$
925
$
1,051
ASC 450 - Collectively evaluated:
Commercial
10,845
7,553
5,545
3,913
Residential mortgage
4,073
4,338
4,091
4,006
Consumer
244
235
239
281
Unallocated
1,000
671
585
585
Total Allowance
$
16,615
$
13,537
$
11,385
$
9,836
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS
(Dollars In Thousands)
March 31,
As of December 31,
2024
2023
2022
2021
2020
2019
Loans individually evaluated with a valuation allowance
$
10,062
$
7,786
$
3,460
$
6,540
$
8,082
$
3,375
Loans individually evaluated without a valuation allowance
4,743
3,478
14,871
2,636
2,895
1,670
Purchased credit impaired loans
0
0
1,027
6,558
6,841
441
Total individually evaluated loans
$
14,805
$
11,264
$
19,358
$
15,734
$
17,818
$
5,486
Total loans past due 30-89 days and still accruing
$
6,560
$
9,275
$
7,079
$
5,106
$
5,918
$
8,889
Nonperforming assets:
Purchased credit impaired loans
$
0
$
0
$
1,027
$
6,558
$
6,841
$
441
Other nonaccrual loans
19,069
15,177
22,058
12,441
14,575
8,777
Total nonaccrual loans
19,069
15,177
23,085
18,999
21,416
9,218
Total loans past due 90 days or more and still accruing
227
3,190
2,237
2,219
1,975
1,207
Total nonperforming loans
19,296
18,367
25,322
21,218
23,391
10,425
Foreclosed assets held for sale (real estate)
456
478
275
684
1,338
2,886
Total nonperforming assets
$
19,752
$
18,845
$
25,597
$
21,902
$
24,729
$
13,311
Total nonperforming loans as a % of loans
1.03
%
0.99
%
1.46
%
1.36
%
1.42
%
0.88
%
Total nonperforming assets as a % of assets
0.78
%
0.75
%
1.04
%
0.94
%
1.10
%
0.80
%
Allowance for credit losses as a % of total loans
1.07
%
1.04
%
0.95
%
0.87
%
0.69
%
0.83
%
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand.
The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $20,237,000 at March 31, 2024.
The Corporation’s outstanding, available, and total credit facilities at March 31, 2024 and December 31, 2023 are as follows:
Outstanding
Available
Total Credit
(In Thousands)
March 31,
December 31,
March 31,
December 31,
March 31,
December 31,
2024
2023
2024
2023
2024
2023
Federal Home Loan Bank of Pittsburgh
$
215,018
$
189,021
$
712,932
$
737,824
$
927,950
$
926,845
Federal Reserve Bank Discount Window
0
0
19,063
19,982
19,063
19,982
Other correspondent banks
0
0
75,000
75,000
75,000
75,000
Total credit facilities
$
215,018
$
189,021
$
806,995
$
832,806
$
1,022,013
$
1,021,827
At March 31, 2024, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term advances of $47,000,000, long-term borrowings of $148,810,000 and letters of credit totaling $19,208,000. At December 31, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term borrowings of $31,500,000, long-term borrowings of $138,313,000 and letters of credit totaling $19,208,000. Additional information regarding borrowed funds is included in Note 8 to the unaudited consolidated financial statements.
Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At March 31, 2024, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $259,489,000.
Deposits totaled $1,995,903,000 at March 31,2024, down $18,903,000 (0.9%) from $2,014,806,000 at December 31, 2023. Excluding brokered deposits, adjusted total deposits at March 31, 2024 were lower by $23,925,000 (1.2%) as compared to December 31, 2023. Brokered deposits totaled $69,391,000 at March 31, 2024, an increase of $5,522,000 from December 31, 2023. The reduction in total deposits, excluding brokered deposits, included a reduction in total deposits from municipal relationships of $20,321,000 to $257,391,000 at March 31, 2024 from $277,712,000 at December 31, 2023, consistent with historic seasonal trends for the Corporation’s Pennsylvania-based municipal depositors.
As shown in the table below, at March 31, 2024, estimated uninsured deposits totaled $568.1 million, or 28.2% of total deposits, down from $592.2 million or 29.2% of total deposits at December 31, 2023. Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling $140.1 million at March 31, 2024. As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.3% of total deposits at March 31, 2024, down from 21.7% at December 31, 2023.
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 March 31, 2024. Available funding from these sources totaled 187.7% of uninsured deposits and 249.2% of total uninsured and uncollateralized deposits at March 31, 2024.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Uninsured Deposits Information
March 31,
December 31,
2024
2023
Total Deposits - C&N Bank
$
2,012,167
$
2,030,909
Estimated Total Uninsured Deposits
$
568,085
$
592,206
Portion of Uninsured Deposits that are
Collateralized
140,063
151,031
Uninsured and Uncollateralized Deposits
$
428,022
$
441,175
Uninsured and Uncollateralized Deposits as
a % of Total Deposits
21.3
%
21.7
%
Available Funding from Credit Facilities
$
806,995
$
832,806
Fair Value of Available-for-sale Debt
Securities in Excess of Pledging Obligations
259,489
256,058
Highly Liquid Available Funding
$
1,066,484
$
1,088,864
Highly Liquid Available Funding as a % of
Uninsured Deposits
187.7
%
183.9
%
Highly Liquid Available Funding as a % of
Uninsured and Uncollateralized Deposits
249.2
%
246.8
%
Despite the reduction in deposits, excluding brokered deposits, in the first three months of 2024, based on the ample sources of highly liquid funds as described above, management believes the Corporation is well-positioned to meet its short-term and long-term funding obligations.
STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY
In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at March 31, 2024; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Details concerning capital ratios at March 31, 2024 and December 31, 2023 are presented below. Management believes, as of March 31, 2024, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at March 31, 2024 and December 31, 2023 exceed the Corporation’s Board policy threshold levels.
(Dollars in Thousands)
Minimum To Be
Minimum To Maintain
Well
Minimum
Capital Conservation
Capitalized Under
Minimum To Meet
Capital
Buffer at Reporting
Prompt Corrective
the Corporation's
Actual
Requirement
Date
Action Provisions
Policy Thresholds
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
March 31, 2024:
Total capital to risk-weighted assets:
Consolidated
$
292,911
15.54
%
N/A
N/A
N/A
N/A
N/A
N/A
$
207,311
≥11
%
C&N Bank
277,887
14.77
%
150,470
≥8
%
197,492
≥10.5
%
188,087
≥10
%
206,896
≥11
%
Tier 1 capital to risk-weighted assets:
Consolidated
247,459
13.13
%
N/A
N/A
N/A
N/A
N/A
N/A
169,618
≥9
%
C&N Bank
257,180
13.67
%
112,852
≥6
%
159,874
≥8.5
%
150,470
≥8
%
169,279
≥9
%
Common equity tier 1 capital to risk-weighted assets:
Consolidated
247,459
13.13
%
N/A
N/A
N/A
N/A
N/A
N/A
141,348
≥7.5
%
C&N Bank
257,180
13.67
%
84,639
≥4.5
%
131,661
≥7.0
%
122,257
≥6.5
%
141,066
≥7.5
%
Tier 1 capital to average assets:
Consolidated
247,459
9.88
%
N/A
N/A
N/A
N/A
N/A
N/A
200,287
≥8
%
C&N Bank
257,180
10.33
%
99,578
≥4
%
N/A
N/A
124,472
≥5
%
199,156
≥8
%
December 31, 2023:
Total capital to risk-weighted assets:
Consolidated
$
290,425
15.67
%
N/A
N/A
N/A
N/A
N/A
N/A
$
203,809
≥11
%
C&N Bank
275,307
14.89
%
147,925
≥8
%
194,151
≥10.5
%
184,906
≥10
%
203,396
≥11
%
Tier 1 capital to risk-weighted assets:
Consolidated
245,810
13.27
%
N/A
N/A
N/A
N/A
N/A
N/A
166,753
≥9
%
C&N Bank
255,409
13.81
%
110,943
≥6
%
157,170
≥8.5
%
147,925
≥8
%
166,415
≥9
%
Common equity tier 1 capital to risk-weighted assets:
Consolidated
245,810
13.27
%
N/A
N/A
N/A
N/A
N/A
N/A
138,961
≥7.5
%
C&N Bank
255,409
13.81
%
83,208
≥4.5
%
129,434
≥7.0
%
120,189
≥6.5
%
138,679
≥7.5
%
Tier 1 capital to average assets:
Consolidated
245,810
9.87
%
N/A
N/A
N/A
N/A
N/A
N/A
199,151
≥8
%
C&N Bank
255,409
10.32
%
99,010
≥4
%
N/A
N/A
123,762
≥5
%
198,020
≥8
%
On September 25, 2023, the Corporation announced a new treasury stock repurchase program. Under the 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 March 31, 2024, no shares were repurchased under the new program.
Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At March 31, 2024, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
Minimum common equity tier 1 capital ratio
4.5
%
Minimum common equity tier 1 capital ratio plus capital conservation buffer
7.0
%
Minimum tier 1 capital ratio
6.0
%
Minimum tier 1 capital ratio plus capital conservation buffer
8.5
%
Minimum total capital ratio
8.0
%
Minimum total capital ratio plus capital conservation buffer
10.5
%
A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer
Maximum Payout
(as a % of risk-weighted assets)
(as a % of eligible retained income)
Greater than 2.5%
No payout limitation applies
≤2.5% and >1.875%
60
%
≤1.875% and >1.25%
40
%
≤1.25% and >0.625%
20
%
≤0.625%
0
%
At March 31, 2024 , C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 6.77%.
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 $41,071,000 at March 31, 2024 and $38,878,000 at December 31, 2023. The decrease in stockholders’ equity in the first three months of 2024 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 Note 5 to the unaudited consolidated financial statements provide additional information concerning management’s evaluation of available-for-sale debt securities for credit losses at March 31, 2024.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.