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
Second Quarter 2024 as Compared to Second Quarter 2023
Second quarter 2024 net income was $6,113,000, or $0.40 per diluted share, as compared to $6,043,000, or $0.39 per diluted share, in the second quarter 2023. Significant variances were as follows:
● Net interest income of $19,445,000 in the second quarter 2024 was $917,000 lower than the second quarter 2023. The net interest margin was 3.31% in the second quarter 2024, down from 3.53% in the second quarter 2023. The interest rate spread decreased 0.37%, as the average rate on interest-bearing liabilities increased 0.85%, while the average yield on earning assets increased 0.48%.
● For the quarter ended June 30, 2024, the provision for credit losses was $565,000, a decrease of $247,000 compared to $812,000 in the second quarter 2023. The allowance for credit losses (“ACL”) as a percentage of gross loans receivable was 1.08% at June 30, 2024 as compared to 1.05% at June 30, 2023.
● Noninterest income of $7,854,000 in the second quarter 2024 increased $1,220,000 from the second quarter 2023 amount. Significant variances included the following:
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Ø Other noninterest income of $1,943,000 increased $356,000 from the second quarter of 2023, including an increase of $145,000 in dividends from FHLB-Pittsburgh and Federal Reserve stock and an increase of $120,000 in income recognized from tax credits related to donations.
Ø Earnings from the increase in cash surrender value of life insurance of $444,000 increased $292,000 from the second quarter 2023 reflecting the earnings on additional Bank-Owned Life Insurance purchased in December 2023.
Ø Trust revenue of $2,014,000 increased $210,000 from the second quarter of 2023, including an increase of $169,000 in revenue from new business.
Ø Brokerage and insurance revenue of $527,000 increased $162,000 from the second quarter of 2023 due to an increase in sales volume.
Ø Net gains from sale of loans of $235,000 increased $96,000 from the second quarter 2023, reflecting an increase in volume of residential mortgage loans sold.
Ø Service charges on deposit accounts increased $84,000 from the second quarter 2023 reflecting an increase in volume of fees.
● Noninterest expense of $19,255,000 in the second quarter 2024 increased $533,000 from the second quarter 2023 amount. Significant variances included the following:
Ø Salaries and employee benefits expense of $11,023,000 increased $246,000, or 2.3% from the second quarter of 2023, including increases in cash and stock-based incentive compensation expense of $378,000 and base salaries expense of $105,000, while Employee Stock Ownership Plan (ESOP) contributions and Supplemental Executive Retirement Plan (SERP) expenses decreased $233,000.
Ø Data processing and telecommunications of $2,003,000 increased $103,000 from the second quarter of 2023, including an increase in internet banking costs.
Ø Other noninterest expense of $3,437,000 increased $78,000 from the second quarter 2023. Within this category, significant variances included the following:
◾ Donations expense increased $165,000 including an increase of $133,000 in PA Educational Improvement Tax Credit program donations made in 2024 compared to 2023.
◾ Expenses from check fraud, debit card fraud and other operational losses totaled $26,000 in the second quarter 2024 as compared to a net reduction in expense of $110,000 in the second quarter 2023.
◾ Legal fees totaled $131,000 in 2024, a decrease of $196,000, mainly due to a decrease in fees incurred related to non-litigation-related corporate matters.
Ø Automated teller machine and interchange expense of $473,000 increased $78,000 from the second quarter of 2023 reflecting increased volume of activity.
Six Months Ended June 30, 2024 as Compared to Six Months Ended June 30, 2023
Net income for the six-month period ended June 30, 2024 was $11,419,000, or $0.74 per diluted share, as compared to $12,296,000, or $0.80 per diluted share, for the first six months of 2023. Significant variances were as follows:
● Net interest income totaled $38,486,000 in the six months ended June 30, 2024, a decrease of $2,657,000 from the total for the first six months of 2023. The net interest margin was 3.30% for the six months of 2024, down from 3.62%
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in the corresponding period of 2023. The interest rate spread decreased 0.52%, as the average rate on interest-bearing liabilities was higher by 1.04% while the average yield on earning assets increased 0.52%.
● For the six months ended June 30, 2024, the provision for credit losses was $1,519,000, an increase of $1,059,000 from the first six months of 2023. In the first six months of 2024, the ACL on loans receivable increased $1,174,000 to 1.08% at June 30, 2024 as compared to 1.04% at December 31, 2023. For the six months ended June 30, 2024, net charge-offs totaled $352,000, or 0.04% (annualized) of average loans receivable.
● Noninterest income totaled $14,529,000 in the first six months of 2024, up $2,279,000 from the total for the first six months of 2023. Significant variances included the following:
Ø Earnings from the increase in cash surrender value of life insurance of $914,000 increased $624,000 reflecting earnings on additional Bank-Owned Life Insurance purchased in December 2023.
Ø Other noninterest income of $2,960,000 increased $602,000 as dividends on FHLB-Pittsburgh and Federal Reserve stock totaled $835,000, an increase of $328,000, and income from tax credits related to donations increased $120,000.
Ø Trust revenue of $3,911,000 increased $330,000, consistent with recent appreciation in the trading prices of many U.S. equity securities and includes revenue from new business.
Ø Brokerage and insurance revenue of $1,066,000 increased $271,000 due to an increase in sales volume.
Ø Net gains from sale of loans of $426,000 increased $213,000, reflecting an increase in volume of residential mortgage loans sold.
● Noninterest expense totaled $37,559,000 for the first six months of 2024, a decrease of $250,000 from the total for the first six months of 2023. Significant variances included the following:
Ø Other noninterest expense of $5,299,000 decreased $567,000. Within this category, significant variances included the following:
◾ For the first six months of 2024, there was a reduction in expense of $498,000 related to the defined benefit postretirement medical benefit plan, including a curtailment of $469,000 related to plan adjustments in the first quarter 2024 as noted above. In comparison, in the first six months of 2023, there was a reduction in expense associated with the postretirement plan of $10,000.
◾ Legal fees totaled $273,000 in the first six months of 2024, a decrease of $240,000, mainly due to lower fees incurred related to non-litigation-related corporate matters.
◾ Donations expense increased $147,000 including an increase of $133,000 in PA Educational Improvement Tax Credit program donations made in the first six months of 2024 compared to the corresponding period in 2023.
Ø Professional fees of $1,070,000 decreased $431,000 as 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 $22,585,000 increased $381,000, including an increase in base salaries expense of $441,000, or 3.0%, an increase of $207,000 in cash and stock-based incentive compensation and an increase of $78,000 in severance expense, while ESOP and SERP expense decreased $433,000
Ø Data processing and telecommunications of $3,995,000 increased $159,000, including an increase of $191,000 in internet banking expenses.
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TABLE I – QUARTERLY FINANCIAL DATA
(Dollars In Thousands,
For the Three Months Ended :
Except Per Share Data)
June 30,
March 31,
December 31,
September 30,
June 30,
(Unaudited)
2024
2024
2023
2023
2023
Interest income
$
31,326
$
30,336
$
30,236
$
29,118
$
28,011
Interest expense
11,881
11,295
10,642
9,455
7,649
Net interest income
19,445
19,041
19,594
19,663
20,362
Provision (credit) for credit losses
565
954
951
(1,225)
812
Net interest income after provision (credit) for credit losses
18,880
18,087
18,643
20,888
19,550
Noninterest income
7,854
6,675
5,678
6,489
6,633
Noninterest expense
19,255
18,304
18,399
17,940
18,722
Income before income tax provision
7,479
6,458
5,922
9,437
7,461
Income tax provision
1,366
1,152
1,661
1,846
1,419
Net income
$
6,113
$
5,306
$
4,261
$
7,591
$
6,042
Net income attributable to common shares
$
6,066
$
5,267
$
4,231
$
7,534
$
5,996
Basic earnings per common share
$
0.40
$
0.35
$
0.28
$
0.50
$
0.39
Diluted earnings per common share
$
0.40
$
0.35
$
0.28
$
0.50
$
0.39
NONINTEREST INCOME
TABLE II – COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands)
Three Months Ended
June 30,
$
%
2024
2023
Change
Change
Trust revenue
$
2,014
$
1,804
$
210
11.6
%
Brokerage and insurance revenue
527
365
162
44.4
%
Service charges on deposit accounts
1,472
1,388
84
6.1
%
Interchange revenue from debit card transactions
1,089
1,010
79
7.8
%
Net gains from sales of loans
235
139
96
69.1
%
Loan servicing fees, net
130
190
(60)
(31.6)
%
Increase in cash surrender value of life insurance
444
152
292
192.1
%
Other noninterest income
1,943
1,587
356
22.4
%
Realized losses on available-for-sale debt securities, net
0
(1)
1
(100.0)
%
Total noninterest income
$
7,854
$
6,634
$
1,220
18.4
%
(Dollars in Thousands)
Six Months Ended
June 30,
$
%
2024
2023
Change
Change
Trust revenue
$
3,911
$
3,581
$
330
9.2
%
Brokerage and insurance revenue
1,066
795
271
34.1
%
Service charges on deposit accounts
2,790
2,678
112
4.2
%
Interchange revenue from debit card transactions
2,102
2,017
85
4.2
%
Net gains from sales of loans
426
213
213
100.0
%
Loan servicing fees, net
360
312
48
15.4
Increase in cash surrender value of life insurance
914
290
624
215.2
%
Other noninterest income
2,960
2,358
602
25.5
%
Realized gains on available-for-sale debt securities, net
0
6
(6)
(100.0)
%
Total noninterest income
$
14,529
$
12,250
$
2,279
18.6
%
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NONINTEREST EXPENSE
TABLE III - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands)
Three Months Ended
June 30,
$
%
2024
2023
Change
Change
Salaries and employee benefits
$
11,023
$
10,777
$
246
2.3
%
Net occupancy and equipment expense
1,333
1,323
10
0.8
%
Data processing and telecommunications expense
2,003
1,900
103
5.4
%
Automated teller machine and interchange expense
473
395
78
19.7
%
Pennsylvania shares tax
434
404
30
7.4
%
Professional fees
552
564
(12)
(2.1)
%
Other noninterest expense
3,437
3,359
78
2.3
%
Total noninterest expense
$
19,255
$
18,722
$
533
2.8
%
(Dollars in Thousands)
Six Months Ended
June 30,
$
%
2024
2023
Change
Change
Salaries and employee benefits
$
22,585
$
22,204
$
381
1.7
%
Net occupancy and equipment expense
2,783
2,725
58
2.1
%
Data processing and telecommunications expense
3,995
3,836
159
4.1
%
Automated teller machine and interchange expense
960
870
90
10.3
%
Pennsylvania shares tax
867
807
60
7.4
%
Professional fees
1,070
1,501
(431)
(28.7)
%
Other noninterest expense
5,299
5,866
(567)
(9.7)
%
Total noninterest expense
$
37,559
$
37,809
$
(250)
(0.7)
%
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
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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 six-month periods ended June 30, 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, which is a non-GAAP financial measure, 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 amount of net interest income on a fully taxable-equivalent basis reflected in these tables exceed the net interest income amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related tables.
Three-Month Periods Ended June 30, 2024 and 2023
For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $19,647,000 in 2024 was $954,000 (4.6%) lower than in 2023. The decrease in net interest income reflected an increase in interest expense of $4,232,000 and an increase in interest income of $3,278,000. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income in the second quarter 2024 as compared to second quarter 2023 by $374,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $1,328,000. As presented in Table V, the Net Interest Margin was 3.31% in the second quarter 2024 as compared to 3.53% in the second quarter 2023, 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 2.61% in 2024 from 2.98% in 2023. The average yield on earning assets of 5.32% was 0.48% higher in 2024 as compared to 2023, and the average rate on interest-bearing liabilities of 2.71% in 2024 was 0.85% higher.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $31,528,000 in 2024, an increase of $3,278,000, or 11.6% from 2023.
Interest and fees from loans receivable increased $3,158,000 in 2024 as compared to 2023. The fully taxable equivalent yield on loans in 2024 increased to 6.03% from 5.62% in 2023, reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased $95,535,000 (5.3%) to $1,883,386,000 in 2024 from $1,787,851,000 in 2023. The increase in average loans receivable includes the impact of growth in commercial real estate and other commercial loans.
Income from interest-bearing due from banks totaled $516,000 in 2024, an increase of $207,000 from the total for 2023. The average balance of interest-bearing due from banks was $43,139,000 in 2024, up from $29,861,000 in 2023. Within this category, the largest asset balance in 2024 and 2023 has been interest-bearing deposits held with the Federal Reserve. The average yield on interest-bearing due from banks was 4.81% in 2024, up from 4.15% in 2023.
Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, totaled $2,763,000 in 2024, down $102,000 from 2023, as the average balance (at amortized cost) of available-for-sale debt securities decreased $65,672,000 as indicated in Table V. The average yield on available-for-sale debt securities was 2.43% in 2024, up from 2.20% in 2023.
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INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $4,232,000 to $11,881,000 in 2024 from $7,649,000 in 2023.
Interest expense on deposits increased $4,215,000, as the average rate on interest-bearing deposits increased to 2.46% in 2024 from 1.45% in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,016,520,000 for the second quarter 2024, up $68,115,000 (3.5%) from the second quarter 2023. Within average total deposits, average brokered deposits (primarily time and money market) were $68,311,000 with an average interest rate of 5.20% in the second quarter 2024, up from $45,230,000 with an average interest rate of 4.52% in the second 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 second quarter 2024 to the second quarter 2023, average time deposits increased $82,328,000 and average interest checking deposits increased $53,845,000, while average savings deposits decreased $39,904,000 and average noninterest-bearing demand deposits decreased $39,611,000.
Interest expense on short-term borrowings decreased $784,000 to $360,000 in 2024 from $1,144,000 in 2023. The average balance of short-term borrowings decreased to $27,732,000 in 2024 from $87,479,000 in 2023. The average rate on short-term borrowings was 5.22% in 2024 compared to 5.25% in 2023.
Interest expense on long-term borrowings (FHLB advances) increased $799,000 to $1,855,000 in 2024 from $1,056,000 in 2023. The average balance of long-term borrowings was $175,373,000 in 2024, up from an average balance of $110,982,000 in 2023. Over the last several months of 2023 and the first six months of 2024, the Corporation entered into FHLB advances maturing mainly in 2025 to 2029, effectively using the proceeds to reduce higher rate short-term borrowings. 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 4.25% in 2024 compared to 3.82% in 2023.
Six-Month Periods Ended June 30, 2024 and 2023
For the six-month periods, fully taxable equivalent net interest income was $38,883,000 in 2024, which was $2,768,000 (6.6%) lower than in 2023. The decrease in net interest income reflected an increase in interest expense of $10,169,000 and an increase in interest income of $7,401,000. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for the six months ended June 30, 2024 over the six months ended June 30, 2023 by $1,236,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $4,004,000. As presented in Table V, the Net Interest Margin was 3.30% in the first six months of 2024 as compared to 3.62% in the first six months of 2023, 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 2.62% in 2024 from 3.14% in 2023. The average yield on earning assets of 5.27% was 0.52% higher in 2024 as compared to 2023, while the average rate on interest-bearing liabilities of 2.65% in 2024 was 1.04% higher.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $62,059,000 in 2024, an increase of $7,401,000 from 2023.
Interest and fees from loans receivable increased $7,387,000 in 2024 as compared to 2023. In the six-month period ended June 30, 2024, t he fully taxable equivalent yield on loans was 5.97%, up from 5.53% in the first half of 2023, reflecting the effects of rising interest rates on new loan originations and floating-rate loans. Average outstanding loans receivable increased $114,288,000 (6.5%) to $1,871,316,000 in 2024 from $1,757,028,000 in 2023. As noted above, the Corporation has experienced growth in commercial real estate and other commercial loans in 2023 and in the first six months of 2024.
Income from interest-bearing due from banks totaled $899,000 in 2024, an increase of $312,000 from 2023. The average balance of interest-bearing due from banks was $37,932,000 in 2024, up from $30,744,000 in 2023. Within this category, the largest asset balance in 2024 and 2023 has been interest-bearing deposits held with the Federal Reserve. The average yield on interest-bearing due from banks was 4.77% in 2024, up from 3.85% in 2023.
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Interest income from available-for-sale debt securities decreased $321,000 in 2024 from 2023. The average balance of available-for-sale debt securities (at amortized cost) decreased to $459,070,000 in 2024 from $531,981,000 in 2023, as proceeds from maturities and sales have been used to help fund loan growth. The average yield on available-for-sale debt securities was 2.42% for 2024 as compared to 2.21% in 2023.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
For the six-month periods, interest expense increased $10,169,000 to $23,176,000 in 2024 from $13,007,000 in 2023.
Interest expense on deposits increased $9,876,000, as the average rate on interest-bearing deposits increased to 2.41% in 2024 from 1.20% in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,008,899,000 for the first six months of 2024, up $69,086,000 (3.6%) from the first six months of 2023. Within average total deposits, average brokered deposits (primarily time and money market) were $76,315,000 with an average interest rate of 5.21% in 2024, up from $30,785,000 with an average interest rate of 4.13% in 2023. Average time deposits increased $99,284,000 and average interest checking deposits increased $55,720,000, while average noninterest-bearing demand deposits decreased $49,045,000 and the average balance of savings accounts decreased $41,810,000.
Interest expense on borrowed funds increased $293,000 in 2024 as compared to 2023. Interest expense on short-term borrowings of $957,000 in 2024 was down from $2,241,000 in 2023 as the average balance of short-term borrowings decreased to $36,187,000 in 2024 from $89,611,000 in 2023. The average rate on short-term borrowings was 5.32% in 2024 compared to 5.04% in 2023. Interest expense on long-term borrowings (FHLB advances) increased $1,574,000 to $3,311,000 in 2024 from $1,737,000 in 2023. The average balance of long-term borrowings was $159,063,000 in 2024, up from an average balance of $95,899,000 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 4.19% in 2024 compared to 3.65% 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
Six Months Ended
June 30,
Increase/
.
June 30,
Increase/
(In Thousands)
2024
2023
(Decrease)
2024
2023
(Decrease)
INTEREST INCOME
Interest-bearing due from banks
$
516
$
309
$
207
$
899
$
587
$
312
Available-for-sale debt securities:
Taxable
2,137
2,152
(15)
4,273
4,363
(90)
Tax-exempt
626
713
(87)
1,249
1,480
(231)
Total available-for-sale debt securities
2,763
2,865
(102)
5,522
5,843
(321)
Loans receivable:
Taxable
27,490
24,362
3,128
54,193
46,793
7,400
Tax-exempt
730
700
30
1,400
1,413
(13)
Total loans receivable
28,220
25,062
3,158
55,593
48,206
7,387
Other earning assets
29
14
15
45
22
23
Total Interest Income
31,528
28,250
3,278
62,059
54,658
7,401
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking
2,836
1,512
1,324
5,642
2,499
3,143
Money market
1,917
1,112
805
4,097
1,985
2,112
Savings
52
63
(11)
107
126
(19)
Time deposits
4,509
2,412
2,097
8,359
3,719
4,640
Total interest-bearing deposits
9,314
5,099
4,215
18,205
8,329
9,876
Borrowed funds:
Short-term
360
1,144
(784)
957
2,241
(1,284)
Long-term - FHLB advances
1,855
1,056
799
3,311
1,737
1,574
Senior notes, net
120
119
1
240
239
1
Subordinated debt, net
232
231
1
463
461
2
Total borrowed funds
2,567
2,550
17
4,971
4,678
293
Total Interest Expense
11,881
7,649
4,232
23,176
13,007
10,169
Net Interest Income
$
19,647
$
20,601
$
(954)
$
38,883
$
41,651
$
(2,768)
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
Six Months Ended
June 30,
Increase/
June 30,
Increase/
2024
2023
(Decrease)
2024
2023
(Decrease)
Net Interest Income Under U.S. GAAP
$
19,445
$
20,362
$
(917)
$
38,486
$
41,143
$
(2,657)
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities
67
103
(36)
136
230
(94)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans
135
136
(1)
261
278
(17)
Net Interest Income as adjusted to a fully taxable-equivalent basis
$
19,647
$
20,601
$
(954)
$
38,883
$
41,651
$
(2,768)
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE V - Analysis of Average Daily Balances and Rates
(Dollars in Thousands)
Three Months
Three Months
Six Months
Six Months
Ended
Rate of
Ended
Rate of
Ended
Rate of
Ended
Rate of
6/30/2024
Return/
6/30/2023
Return/
6/30/2024
Return/
6/30/2023
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
$
43,139
4.81
%
$
29,861
4.15
%
$
37,932
4.77
%
$
30,744
3.85
%
Available-for-sale debt securities, at amortized cost:
Taxable
343,971
2.50
%
395,725
2.18
%
345,928
2.48
%
402,878
2.18
%
Tax-exempt
112,921
2.23
%
126,839
2.25
%
113,142
2.22
%
129,103
2.31
%
Total available-for-sale debt securities
456,892
2.43
%
522,564
2.20
%
459,070
2.42
%
531,981
2.21
%
Loans receivable:
Taxable
1,792,556
6.17
%
1,697,740
5.76
%
1,783,310
6.11
%
1,666,052
5.66
%
Tax-exempt
90,830
3.23
%
90,111
3.12
%
88,006
3.20
%
90,976
3.13
%
Total loans receivable
1,883,386
6.03
%
1,787,851
5.62
%
1,871,316
5.97
%
1,757,028
5.53
%
Other earning assets
2,176
5.36
%
1,325
4.24
%
1,780
5.08
%
1,263
3.51
%
Total Earning Assets
2,385,593
5.32
%
2,341,601
4.84
%
2,370,098
5.27
%
2,321,016
4.75
%
Cash
22,396
23,084
21,422
22,682
Unrealized loss on securities
(56,765)
(56,564)
(53,807)
(58,300)
Allowance for credit losses
(20,290)
(18,795)
(19,887)
(17,929)
Bank-owned life insurance
50,018
31,410
52,242
31,339
Bank premises and equipment
21,994
21,140
21,891
21,328
Intangible assets
54,827
55,228
54,876
55,279
Other assets
89,859
69,213
86,369
68,278
Total Assets
$
2,547,632
$
2,466,317
$
2,533,204
$
2,443,693
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
$
517,145
2.21
%
$
463,300
1.31
%
$
516,025
2.20
%
$
460,305
1.09
%
Money market
340,038
2.27
%
328,581
1.36
%
351,451
2.34
%
346,514
1.16
%
Savings
207,530
0.10
%
247,434
0.10
%
210,404
0.10
%
252,214
0.10
%
Time deposits
457,885
3.96
%
375,557
2.58
%
443,485
3.79
%
344,201
2.18
%
Total interest-bearing deposits
1,522,598
2.46
%
1,414,872
1.45
%
1,521,365
2.41
%
1,403,234
1.20
%
Borrowed funds:
Short-term
27,732
5.22
%
87,479
5.25
%
36,187
5.32
%
89,611
5.04
%
Long-term - FHLB advances
175,373
4.25
%
110,982
3.82
%
159,063
4.19
%
95,899
3.65
%
Senior notes, net
14,856
3.25
%
14,789
3.23
%
14,848
3.25
%
14,781
3.26
%
Subordinated debt, net
24,759
3.77
%
24,648
3.76
%
24,745
3.76
%
24,634
3.77
%
Total borrowed funds
242,720
4.25
%
237,898
4.30
%
234,843
4.26
%
224,925
4.19
%
Total Interest-bearing Liabilities
1,765,318
2.71
%
1,652,770
1.86
%
1,756,208
2.65
%
1,628,159
1.61
%
Demand deposits
493,922
533,533
487,534
536,579
Other liabilities
29,972
28,217
29,679
26,740
Total Liabilities
2,289,212
2,214,520
2,273,421
2,191,478
Stockholders' equity, excluding accumulated other comprehensive loss
302,758
296,015
301,895
297,797
Accumulated other comprehensive loss
(44,338)
(44,218)
(42,112)
(45,582)
Total Stockholders' Equity
258,420
251,797
259,783
252,215
Total Liabilities and Stockholders' Equity
$
2,547,632
$
2,466,317
$
2,533,204
$
2,443,693
Interest Rate Spread
2.61
%
2.98
%
2.62
%
3.14
%
Net Interest Income/Earning Assets
3.31
%
3.53
%
3.30
%
3.62
%
Total Deposits (Interest-bearing and Demand)
$
2,016,520
$
1,948,405
$
2,008,899
$
1,939,813
(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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)
Three Months Ended 6/30/2024 vs. 6/30/2023
.
Six Months Ended 6/30/2024 vs. 6/30/2023
Change in
Change in
Total
Change in
Change in
Total
Volume
Rate
Change
Volume
Rate
Change
EARNING ASSETS
Interest-bearing due from banks
$
145
$
62
$
207
$
155
$
157
$
312
Available-for-sale debt securities:
Taxable
(303)
288
(15)
(655)
565
(90)
Tax-exempt
(78)
(9)
(87)
(175)
(56)
(231)
Total available-for-sale debt securities
(381)
279
(102)
(830)
509
(321)
Loans receivable:
Taxable
1,370
1,758
3,128
3,486
3,914
7,400
Tax-exempt
3
27
30
(44)
31
(13)
Total loans receivable
1,373
1,785
3,158
3,442
3,945
7,387
Other earning assets
10
5
15
11
12
23
Total Interest Income
1,147
2,131
3,278
2,778
4,623
7,401
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
197
1,127
1,324
337
2,806
3,143
Money market
32
773
805
28
2,084
2,112
Savings
(10)
(1)
(11)
(18)
(1)
(19)
Time deposits
669
1,428
2,097
1,302
3,338
4,640
Total interest-bearing deposits
888
3,327
4,215
1,649
8,227
9,876
Borrowed funds:
Short-term
(789)
5
(784)
(1,401)
117
(1,284)
Long-term - FHLB advances
672
127
799
1,289
285
1,574
Senior notes, net
1
0
1
2
(1)
1
Subordinated debt, net
1
0
1
3
(1)
2
Total borrowed funds
(115)
132
17
(107)
400
293
Total Interest Expense
773
3,459
4,232
1,542
8,627
10,169
Net Interest Income
$
374
$
(1,328)
$
(954)
$
1,236
$
(4,004)
$
(2,768)
(1) Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.
INCOME TAXES
The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the second quarter 2024 of $1,366,000 was $53,000 lower than the provision for the second quarter 2023 and the provision for the six months ended June 30, 2024 of $2,518,000 was $310,000 lower than the amount for the first six months of 2023 due to a lower amount of pre-tax income in 2024. The effective tax rate (tax provision as a percentage of pre-tax income) was 18.3% in the second quarter 2024 compared to 19.0% in the second quarter 2023 and 18.1% for the first six months of 2024 as compared to 18.7% for the first six months of 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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at June 30, 2024 and December 31, 2023 represents the following temporary difference components:
June 30,
December 31,
(In Thousands)
2024
2023
Deferred tax assets:
Unrealized holding losses on securities
$
11,089
$
10,335
Allowance for credit losses on loans
4,475
4,230
Purchase accounting adjustments on loans
402
470
Deferred compensation
1,435
1,352
Operating leases liability
758
787
Deferred loan origination fees
753
731
Net operating loss carryforward
482
541
Accrued incentive compensation
319
463
Other deferred tax assets
1,312
1,316
Total deferred tax assets
21,025
20,225
Deferred tax liabilities:
BOLI surrender
950
950
Defined benefit plans - ASC 835
95
119
Bank premises and equipment
280
291
Core deposit intangibles
499
544
Right-of-use assets from operating leases
758
787
Other deferred tax liabilities
68
93
Total deferred tax liabilities
2,650
2,784
Deferred tax asset, net
$
18,375
$
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 June 30, 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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The composition of the available-for-sale debt securities portfolio at June 30, 2024 and December 31, 2023, 2022 and 2021 is as follows:
(Dollars In Thousands)
June 30, 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
$
10,323
9,257
$
12,325
11,290
$
35,166
$
31,836
$
25,058
$
24,912
Obligations of U.S. Government agencies
10,582
9,350
11,119
9,946
25,938
23,430
23,936
24,091
Bank holding company debt securities
28,955
23,657
28,952
23,500
28,945
25,386
18,000
17,987
Obligations of states and political subdivisions:
Tax-exempt
113,659
102,020
113,464
104,199
146,149
132,623
143,427
148,028
Taxable
56,294
47,481
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
104,708
93,874
105,549
95,405
112,782
99,941
98,048
98,181
Residential collateralized mortgage obligations
46,623
42,565
50,212
46,462
44,868
40,296
44,015
44,247
Commercial mortgage-backed securities
74,510
64,718
76,412
66,682
91,388
79,686
86,926
87,468
Private label commercial mortgage-backed securities
8,290
8,223
8,215
8,160
8,070
8,023
0
0
Total Available-for-Sale Debt Securities
$
453,944
$
401,145
$
464,968
$
415,755
$
561,794
$
498,033
$
511,592
$
517,679
Aggregate Unrealized (Loss) Gain
$
(52,799)
$
(49,213)
$
(63,761)
$
6,087
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost
(11.6)
%
(10.6)
%
(11.3)
%
1.2
%
Market Yield on 5-Year U.S. Treasury Obligations (a)
4.33
%
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 $52,799,000, or 11.6%, at June 30, 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 0.49% higher at June 30, 2024 in comparison to December 31, 2023, 0.34% higher than at December 31, 2022 and 3.07% higher than at December 31, 2021. The table also shows that the amortized cost basis of the portfolio has been reduced to $453,944,000 at June 30, 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 June 30, 2024 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of June 30, 2024 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at June 30, 2024, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:
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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 June 30, 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 June 30, 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 June 30, 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 effect on the Corporation’s financial condition in 2024.
Table VII shows the composition of the loan portfolio at June 30, 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 June 30, 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 June 30, 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 $96,642,000, or 5.1% of gross loans receivable. At June 30, 2024, within this segment there were two loans with a total recorded investment of $3,885,000 in nonaccrual status with specific allowances totaling $493,000. 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 June 30, 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 $36,383,000 at June 30, 2024 down from $38,652,000 at December 31, 2023.
The Corporation is a party to financial instruments with off-balance risk, including commitments to extend credit and standby letters of credit. At June 30, 2024, the total contract amount of commitments to extend credit was $387,563,000 as compared to $395,997,000 at December 31, 2023, and the contract amount of standby letters of credit increased to $57,532,000 at June 30, 2024 from $19,158,000 at December 31, 2023. The increase in standby letters of credit at June 30, 2024 included a $40,000,000 letter of credit with a one-year term, subject to annual review for possible renewal, that was issued to guarantee performance on behalf of a municipal customer. This letter of credit is collateralized by the municipal customer’s investments in certificates of deposit and marketable securities.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse, when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. The allowance for credit losses for off-balance sheet exposures of $683,000 at June 30, 2024 and $690,000 at December 31, 2023, is included in accrued interest and other liabilities on the unaudited consolidated balance sheets.
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.
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 June 30, 2024, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,428,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2023 was $1,457,000.
At June 30, 2024, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $321,136,000, including loans sold through the MPF Xtra program of $149,523,000 and loans sold through the Original program of $171,613,000. 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 June 30, 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)
June 30,
December 31,
2024
2023
2022
2021
2020
2019
Commercial real estate - non-owner occupied:
Non-owner occupied
$
489,514
$
499,104
$
454,386
$
358,352
$
328,662
$
208,579
Multi-family (5 or more) residential
67,154
64,076
55,406
49,054
54,893
30,474
1-4 Family - commercial purpose
167,296
174,162
165,805
175,027
198,918
147,121
Total commercial real estate - non-owner occupied
723,964
737,342
675,597
582,433
582,473
386,174
Commercial real estate - owner occupied
267,169
237,246
205,910
196,083
191,075
78,729
All other commercial loans:
Commercial and industrial
77,339
78,832
95,368
118,488
222,923
67,288
Commercial lines of credit
130,924
117,236
141,444
106,338
105,802
92,509
Political subdivisions
89,460
79,031
86,663
75,401
46,295
46,054
Commercial construction and land
114,162
104,123
60,892
59,505
41,000
32,717
Other commercial loans
19,221
20,471
25,710
26,498
29,310
28,735
Total all other commercial loans
431,106
399,693
410,077
386,230
445,330
267,303
Residential mortgage loans:
1-4 Family - residential
383,494
389,262
363,005
327,593
356,532
388,415
1-4 Family residential construction
26,330
24,452
30,577
23,151
18,736
14,640
Total residential mortgage
409,824
413,714
393,582
350,744
375,268
403,055
Consumer loans:
Consumer lines of credit (including HELOCs)
42,325
41,503
36,650
33,522
34,566
30,810
All other consumer
18,819
18,641
18,224
15,837
15,497
16,151
Total consumer
61,144
60,144
54,874
49,359
50,063
46,961
Total
1,893,207
1,848,139
1,740,040
1,564,849
1,644,209
1,182,222
Less: allowance for credit losses on loans
(20,382)
(19,208)
(16,615)
(13,537)
(11,385)
(9,836)
Loans, net
$
1,872,825
$
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 June 30, 2024 is as follows:
NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
(In Thousands)
June 30,
% of Non-owner
% of
2024
Occupied CRE
Total Loans
Industrial
$
98,840
20.2
%
5.2
%
Office
96,642
19.7
%
5.1
%
Retail
93,552
19.1
%
4.9
%
Hotels
72,915
14.9
%
3.9
%
Mixed Use
58,891
12.0
%
3.1
%
Other
68,674
14.0
%
3.6
%
Total Non-owner Occupied CRE Loans
$
489,514
Total Gross Loans
$
1,893,207
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
A summary of the provision (credit) for credit losses for the three-month and six-month periods ended June 30, 2024 and 2023 is as follows:
(In Thousands)
3 Months
3 Months
6 Months
6 Months
Ended
Ended
Ended
Ended
June 30,
June 30,
June 30,
June 30,
2024
2023
2024
2023
Provision (credit) for credit losses:
Loans receivable
$
566
$
836
$
1,526
$
524
Off-balance sheet exposures
(1)
(24)
(7)
(64)
Total provision for credit losses
$
565
$
812
$
1,519
$
460
For the quarter ended June 30, 2024, there was a provision for credit losses of $565,000, a decrease of $247,000 compared to $812,000 in the second quarter 2023. For the six months ended June 30, 2024, there was a provision for credit losses of $1,519,000, an increase of $1,059,000 compared to $460,000 in 2023. The ACL as a percentage of gross loans receivable increased to 1.08% at June 30, 2024 from 1.04% at December 31, 2023; in comparison, the ACL dropped to 1.05% of gross loans receivable at June 30, 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 $1,230,000 at June 30, 2024 from $743,000 at December 31, 2023. The increase in individual ACLs is primarily related to two borrowers: (1) at June 30, 2024, an ACL of $447,000 was recorded on loans totaling $2,330,000 for land related to a planned commercial construction project, and (2) consistent with an updated collateral valuation assessment, the ACL increased $229,000 to $234,000 at June 30, 2024 on commercial loans to one borrower totaling $278,000 at June 30, 2024. A partial offset to the net increase in individual ACLs resulted from a net charge-off of $117,000 in the second quarter 2024 on a non-owner occupied commercial loan for which there was an ACL of $124,000 at December 31, 2023. At June 30, 2024, there was no ACL on the loan and the carrying value of the loan, net of the partial charge-off, was $3,276,000. At June 30, 2024, there were six commercial relationships with loans receivable totaling $6,613,000 for which individual ACLs were recorded, including two non-owner occupied office loans with total outstanding balances of $3,885,000 and individual ACLs totaling $493,000.
Table IX also shows that, at June 30, 2024 as compared to December 31, 2023, the ACL related to collectively evaluated commercial loans increased by a total of $1,225,000 and the ACL on collectively evaluated consumer loans increased $114,000, while the ACL on collectively evaluated residential mortgage loans decreased $652,000. 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 a reduction from the impact of an economic forecast and the impact to the ACL valuation of lower estimated net charge-offs based on recent experience. The decrease for residential mortgage loans includes a reduction from the impact of an economic forecast, a net decrease in qualitative factors and lower net charge-offs based on recent experience.
Table X shows that total nonperforming assets as a percentage of total assets was 0.76% at June 30, 2024, up from 0.75% at December 31, 2023 but lower than at year-end 2019 through 2022. Total nonperforming assets were $19.8 million at June 30, 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 $4.4 million from December 31, 2023, while loans past due 90 days or more still accruing decreased $3.2 million from December 31, 2023. In the first six months of 2024, the increase in nonaccrual loans included the commercial construction and land loans to one borrower totaling $2,330,000 noted above.
In the first six months of 2024, net charge-offs were low by historical standards, totaling $352,000, or 0.02% 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 six months 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
49
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
allowance required on individual loans and may significantly impact the provision for credit losses and the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of loans requiring individual evaluation for credit loss, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of June 30, 2024. Management continues to closely monitor its commercial loan relationships for 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)
Six Months Ended
June 30,
June 30,
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
(416)
(201)
(356)
(4,245)
(1,575)
(2,465)
(379)
Recoveries
64
14
92
68
66
101
57
Net charge-offs
(352)
(187)
(264)
(4,177)
(1,509)
(2,364)
(322)
Provision for credit losses on loans
1,526
524
753
7,255
3,661
3,913
849
Balance, end of year
$
20,382
$
19,056
$
19,208
$
16,615
$
13,537
$
11,385
$
9,836
Net charge-offs as a % of average loans
0.02
%
0.01
%
0.01
%
0.26
%
0.09
%
0.16
%
0.03
%
TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS
(In Thousands)
June 30,
December 31,
January 1,
2024
2023
2023
Loans individually evaluated
$
1,230
$
743
$
751
Loans collectively evaluated:
Commercial real estate - nonowner occupied
11,684
10,379
9,641
Commercial real estate - owner occupied
2,667
2,111
1,765
All other commercial loans
3,175
3,811
3,914
Residential mortgage
1,112
1,764
2,407
Consumer
514
400
241
Total Allowance
$
20,382
$
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)
June 30,
As of December 31,
2024
2023
2022
2021
2020
2019
Loans individually evaluated with a valuation allowance
$
6,613
$
7,786
$
3,460
$
6,540
$
8,082
$
3,375
Loans individually evaluated without a valuation allowance
8,567
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
$
15,180
$
11,264
$
19,358
$
15,734
$
17,818
$
5,486
Total loans past due 30-89 days and still accruing
$
3,088
$
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
19,579
15,177
22,058
12,441
14,575
8,777
Total nonaccrual loans
19,579
15,177
23,085
18,999
21,416
9,218
Total loans past due 90 days or more and still accruing
20
3,190
2,237
2,219
1,975
1,207
Total nonperforming loans
19,599
18,367
25,322
21,218
23,391
10,425
Foreclosed assets held for sale (real estate)
181
478
275
684
1,338
2,886
Total nonperforming assets
$
19,780
$
18,845
$
25,597
$
21,902
$
24,729
$
13,311
Total nonperforming loans as a % of loans
1.04
%
0.99
%
1.46
%
1.36
%
1.42
%
0.88
%
Total nonperforming assets as a % of assets
0.76
%
0.75
%
1.04
%
0.94
%
1.10
%
0.80
%
Allowance for credit losses as a % of total loans
1.08
%
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 $19,718,000 at June 30, 2024.
The Corporation’s outstanding, available, and total credit facilities at June 30, 2024 and December 31, 2023 are as follows:
Outstanding
Available
Total Credit
(In Thousands)
June 30,
December 31,
June 30,
December 31,
June 30,
December 31,
2024
2023
2024
2023
2024
2023
Federal Home Loan Bank of Pittsburgh
$
223,853
$
189,021
$
719,722
$
737,824
$
943,575
$
926,845
Federal Reserve Bank Discount Window
0
0
18,884
19,982
18,884
19,982
Other correspondent banks
0
0
75,000
75,000
75,000
75,000
Total credit facilities
$
223,853
$
189,021
$
813,606
$
832,806
$
1,037,459
$
1,021,827
At June 30, 2024, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term advances of $15,000,000, long-term borrowings of $185,645,000 and letters of credit totaling $23,208,000. 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 June 30, 2024, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $238,375,000.
Deposits totaled $2,059,309,000 at June 30, 2024, up $44,503,000 (2.2%) from $2,014,806,000 at December 31, 2023. Excluding brokered deposits, adjusted total deposits at June 30, 2024 were higher by $49,371,000 (2.5%) as compared to December 31, 2023. Brokered deposits totaled $59,501,000 at June 30, 2024, a decrease of $4,868,000 from December 31, 2023. The increase in total deposits, excluding brokered deposits, included an increase in total deposits from municipal relationships of $16,587,000 to $294,299,000 at June 30, 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 June 30, 2024, estimated uninsured deposits totaled $605.8 million, or 29.2% of total deposits, as compared to $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 $158.3 million at June 30, 2024. As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.6% of total deposits at June 30, 2024, as compared to 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 June 30, 2024. Available funding from these sources totaled 173.7% of uninsured deposits and 235.1% of total uninsured and uncollateralized deposits at June 30, 2024.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Uninsured Deposits Information
June 30,
December 31,
2024
2023
Total Deposits - C&N Bank
$
2,074,806
$
2,030,909
Estimated Total Uninsured Deposits
$
605,765
$
592,206
Portion of Uninsured Deposits that are
Collateralized
158,268
151,031
Uninsured and Uncollateralized Deposits
$
447,497
$
441,175
Uninsured and Uncollateralized Deposits as
a % of Total Deposits
21.6
%
21.7
%
Available Funding from Credit Facilities
$
813,606
$
832,806
Fair Value of Available-for-sale Debt
Securities in Excess of Pledging Obligations
238,375
256,058
Highly Liquid Available Funding
$
1,051,981
$
1,088,864
Highly Liquid Available Funding as a % of
Uninsured Deposits
173.7
%
183.9
%
Highly Liquid Available Funding as a % of
Uninsured and Uncollateralized Deposits
235.1
%
246.8
%
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 June 30, 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 June 30, 2024 and December 31, 2023 are presented below. Management believes, as of June 30, 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 June 30, 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
June 30, 2024:
Total capital to risk-weighted assets:
Consolidated
$
295,624
15.50
%
N/A
N/A
N/A
N/A
N/A
N/A
$
209,805
≥11
%
C&N Bank
280,826
14.75
%
152,290
≥8
%
199,881
≥10.5
%
190,363
≥10
%
209,399
≥11
%
Tier 1 capital to risk-weighted assets:
Consolidated
249,787
13.10
%
N/A
N/A
N/A
N/A
N/A
N/A
171,659
≥9
%
C&N Bank
259,762
13.65
%
114,218
≥6
%
161,808
≥8.5
%
152,290
≥8
%
171,326
≥9
%
Common equity tier 1 capital to risk-weighted assets:
Consolidated
249,787
13.10
%
N/A
N/A
N/A
N/A
N/A
N/A
143,049
≥7.5
%
C&N Bank
259,762
13.65
%
85,663
≥4.5
%
133,254
≥7.0
%
123,736
≥6.5
%
142,772
≥7.5
%
Tier 1 capital to average assets:
Consolidated
249,787
9.85
%
N/A
N/A
N/A
N/A
N/A
N/A
202,969
≥8
%
C&N Bank
259,762
10.30
%
100,919
≥4
%
N/A
N/A
126,149
≥5
%
201,838
≥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. For the three and six months ended June 30, 2024, 22,496 shares were repurchased for a total cost of $383,000, at an average price of $17.01 per share. At June 30, 2024, there were 727,504 shares available to be repurchased under the 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 June 30, 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 June 30, 2024 , C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 6.75%.
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 $41,710,000 at June 30, 2024 and $38,878,000 at December 31, 2023. The decrease in stockholders’ equity in the first six 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 June 30, 2024.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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