What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-07 · 209 added, 173 removed, 524 unchanged (42% of the section changed)

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● the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses

● legislative or regulatory changes

● current, pending or future legislation or regulation that could have a negative effect on the Corporation’s revenue and businesses, including rules and regulations relating to capital and liquidity requirements, bank products and financial services, and the Corporation’s ability to address, and the expense related to complying, with those requirements

● downturn in demand for loan, deposit and other financial services in the Corporation’s market area

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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.

Third Quarter 2024 as Compared to Third Quarter 2023

Third quarter 2024 net income was $6,365,000, or $0.41 per diluted share, as compared to $7,591,000, or $0.50 per diluted share, in the third 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.

● Net interest income of $20,156,000 in the third quarter 2024 was $493,000 higher than in the third quarter 2023.

Average earning assets were $106,852,000 higher in the third quarter 2024 as compared to the third quarter 2023.

Average total deposits increased $94,562,000 in the third quarter 2024 over the third quarter 2023.

The net interest margin was 3.29% in the third quarter 2024, down from 3.35% in the third quarter 2023.

The interest rate spread decreased 0.18%, as the average rate on interest-bearing liabilities increased 0.62%, while the average yield on earning assets increased 0.44%.

● 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:

● For the quarter ended September 30, 2024, there was a provision for credit losses of $1,207,000, an increase of $2,432,000 in expense compared to a credit for credit losses (reduction in expense) of $1,225,000 in the third quarter 2023.

The allowance for credit losses (“ACL”) as a percentage of gross loans receivable was 1.08% at September 30, 2024 as compared to 0.99% at September 30, 2023.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.

● Noninterest income of $7,133,000 in the third quarter 2024 increased $644,000 from the third 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.

Ø Earnings from the increase in cash surrender value of life insurance of $458,000 increased $298,000 from the third quarter 2023 as the average balance of Bank-Owned Life Insurance increased to $50,470,000 in the third quarter 2024 from $31,559,000 in the third quarter 2023.

Ø Brokerage and insurance revenue of $523,000 increased $129,000 due to an increase in sales volume.

Ø Net gains from sale of loans of $360,000 increased $123,000 from the third quarter 2023, reflecting an increase in volume of residential mortgage loans sold.

Ø Service charges on deposit accounts increased $103,000 from the third quarter 2024 reflecting an increase in volume of fees.

● Noninterest expense of $18,269,000 in the third quarter 2024 increased $329,000 (1.8%) from the third quarter 2023 including increases of $109,000 in net occupancy and equipment expense, $68,000 in professional fees, $60,000 in other expenses and $59,000 in data processing and telecommunications expenses.

● The income tax provision of $1,448,000, or 18.5% of pre-tax income, for the third quarter 2024 decreased $398,000 from $1,846,000 or 19.6% of pre-tax income, for the third quarter 2023 consistent with the decrease in pre-tax income.

Nine Months Ended September 30, 2024 as Compared to Nine Months Ended September 30, 2023

Net income for the nine-month period ended September 30, 2024 was $17,784,000, or $1.16 per diluted share, as compared to $19,887,000, or $1.29 per diluted share, for the first nine 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%

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

in the corresponding period of 2023.

● Net interest income totaled $58,642,000 in the nine months ended September 30, 2024, a decrease of $2,164,000 from the total for the first nine months of 2023.

The net interest margin was 3.30% for the first nine months of 2024, down from 3.53% in the corresponding period of 2023.

The interest rate spread decreased 0.39%, as the average rate on interest-bearing liabilities was higher by 0.89% while the average yield on earning assets increased 0.50%.

● 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.

Average total earning assets increased $68,438,000.

Average total loans increased $99,838,000 (5.6%) and average total deposits increased $77,578,000 (4.0%).

● For the nine months ended September 30, 2024, the provision for credit losses was $2,726,000, compared to a credit for credit losses (reduction in expense) of $765,000 in the first nine months of 2023 resulting in an increase of $3,491,000.

For the nine months ended September 30, 2024, the provision related to loans receivable included the impact of increases in the ACL from an increase in qualitative adjustments related to changes in external indexes and an increase in past due and nonaccrual loans as well as net charge-offs in excess of specific allowances at December 31, 2023.

The credit related to loans receivable for the nine months ended September 30, 2023 was mainly attributable to qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, as well as a reduction in the Corporation’s average net charge-off experience, used in the calculation of the ACL.

In the first nine months of 2024, the ACL increased $1,234,000 to 1.08% of loans receivable at September 30, 2024 as compared to 1.04% at December 31, 2023.

For the nine months ended September 30, 2024, net charge-offs totaled $1,589,000, or 0.08% of average loans receivable as compared to $225,000 or 0.02% annualized for the first nine months of 2023.

● Noninterest income totaled $21,662,000 in the first nine months of 2024, up $2,923,000 from the total for the first nine 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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Ø Earnings from the increase in cash surrender value of life insurance of $1,372,000 increased $922,000 as the average balance of Bank-Owned Life Insurance increased to $51,647,000 in the nine months ended September 30, 2024 from $31,413,000 in the first nine months of 2023.

Ø Other noninterest income of $4,083,000 increased $641,000 as dividends on FHLB-Pittsburgh and Federal Reserve stock totaled $1,292,000, an increase of $400,000, 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 $1,589,000 increased $400,000 due to an increase in sales volume.

Ø Trust revenue of $5,857,000 increased $357,000, consistent with 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 $786,000 increased $336,000, 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.

Ø Service charges on deposit accounts of $4,336,000 increased $215,000 reflecting an increase in volume of fees.

● Noninterest expense totaled $55,828,000 for the first nine months of 2024, a decrease of $79,000 from the total for the first nine months of 2023.

Significant variances included the following:

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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.

◾ For the first nine months of 2024, there was a reduction in expense of $513,000 related to the defined benefit postretirement medical benefit plan, including a curtailment of $469,000 related to plan adjustments in the first quarter 2024.

In comparison, in the first nine months of 2023, there was a reduction in expense associated with the postretirement plan of $15,000.

◾ Legal fees totaled $491,000 in the first nine months of 2024, a decrease of $209,000, mainly due to lower fees incurred related to non-litigation-related corporate matters.

Ø Professional fees of $1,625,000 decreased $363,000 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.

Ø Salaries and employee benefits expense of $33,460,000 increased $378,000, including an increase in base salaries expense of $690,000, or 3.1% and an increase of $451,000 in cash and stock-based incentive compensation, while estimated contributions to the Employee Stock Ownership Plan and Supplemental Executive Retirement Plan decreased $638,000 and health insurance expense decreased $344,000.

● The income tax provision of $3,966,000, or 18.2% of pre-tax income, for the nine months ended September 30, 2024 decreased $708,000 from $4,674,000, or 19.0% of pre-tax income, for nine months ended September 30, 2023.

The decrease in income tax provision in 2024 reflected the decrease in pre-tax income of $2,811,000.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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September 30,

Interest income

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Three Months Ended

September 30,

Trust revenue

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Other noninterest income

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

Total noninterest income

(Dollars in Thousands)

Six Months Ended

Nine Months Ended

September 30,

Trust revenue

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Three Months Ended

September 30,

Salaries and employee benefits

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(Dollars in Thousands)

Six Months Ended

Nine Months Ended

September 30,

Salaries and employee benefits

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CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in conformity with U.S.

The presentation of consolidated 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.

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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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly.

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.

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The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense.

Tables IV, V and VI include information regarding the Corporation’s net interest income for the three-month and six-month periods ended June 30, 2024 and 2023.

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

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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.

Three-Month Periods Ended September 30, 2024 and 2023

For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $20,361,000 in 2024 was $486,000 (2.4%) higher than in 2023 as average earning assets were $106,852,000 higher in the third quarter 2024 as compared to the third quarter 2023.

Average total deposits increased $94,562,000 in the third quarter 2024 over the third quarter 2023.

As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income in the third quarter 2024 as compared to third quarter 2023 by $613,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $127,000.

As presented in Table V, the Net Interest Margin was 3.29% in the third quarter 2024 as compared to 3.35% in the third 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 2.55% in 2024 from 2.73% in 2023.

The average yield on earning assets of 5.38% was 0.44% higher in 2024 as compared to 2023, and the average rate on interest-bearing liabilities of 2.83% in 2024 was 0.62% higher.

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Income from interest-bearing due from banks totaled $1,622,000 in 2024, an increase of $1,277,000 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 5.38% in 2024, up from 4.31% 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.

The average balance of interest-bearing due from banks was $119,885,000 in 2024, up $88,156,000 from $31,729,000 in 2023.

The increase in interest-bearing due from banks included the net impact of the increase in average total deposits of $94,562,000, a reduction in average available-for-sale debt securities (amortized cost) of $54,384,000 and an increase in average borrowed funds of $27,739,000, partially offset by the increase in the average loans receivable of $71,472,000 and the net use of cash that contributed to an increase in average Bank-Owned Life Insurance of $18,911,000.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, totaled $2,774,000 in 2024, up $16,000 from 2023, as the average yield on available-for-sale debt securities was 2.45% in 2024, up from 2.17% in 2023.

The average balance (at amortized cost) of available-for-sale debt securities decreased $54,384,000.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

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Interest expense on deposits increased $3,148,000, as the average rate on interest-bearing deposits increased to 2.62% in 2024 from 1.93% 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.

Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,084,654,000 for the third quarter 2024, up $94,562,000 (4.8%) from the third quarter 2023.

Within average total deposits, average brokered deposits (primarily time and money market) were $58,782,000 with an average interest rate of 5.28% in the third quarter 2024, as compared to $60,829,000 with an average interest rate of 4.98% in the third quarter 2023.

At September 30, 2024, total brokered deposits were $45,051,000.

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.

In comparing the third quarter 2024 to the third quarter 2023, average time deposits increased $79,272,000, average interest checking deposits increased $31,214,000 and average total money market accounts increased $15,689,000 while average savings deposits decreased $33,928,000.

Interest expense on short-term borrowings decreased $493,000 to $184,000 in 2024 from $677,000 in 2023.

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The average balance of long-term borrowings was $181,075,000 in 2024, up from an average balance of $119,395,000 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.

Over the last several months of 2023 and the first nine 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 and increase cash held with the Federal Reserve.

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 4.36% in 2024 compared to 3.87% 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.

Nine-Month Periods Ended September 30, 2024 and 2023

For the nine-month periods, fully taxable equivalent net interest income (a non-GAAP measure) was $59,244,000 in 2024, which was $2,282,000 (3.7%) lower than in 2023.

The decrease in net interest income reflected an increase in interest expense of $13,645,000 and an increase in interest income of $11,363,000.

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.

As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for the nine months ended September 30, 2024 over the nine months ended September 30, 2023 by $1,849,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $4,131,000.

As presented in Table V, the Net Interest Margin was 3.30% in the first nine months of 2024 as compared to 3.53% in the first nine 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 2.60% in 2024 from 2.99% in 2023.

The average yield on earning assets of 5.31% was 0.50% higher in 2024 as compared to 2023, while the average rate on interest-bearing liabilities of 2.71% in 2024 was 0.89% higher.

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Interest and fees from loans receivable increased $10,026,000 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.

In the nine-month period ended September 30, 2024, t he fully taxable equivalent yield on loans was 6.01%, up from 5.60% in the first nine months of 2023, reflecting the effects of primarily rising interest rates on new loan originations and floating-rate loans.

Average outstanding loans receivable increased $99,838,000 (5.6%) to $1,877,076,000 in 2024 from $1,777,238,000 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.

As noted above, the Corporation has experienced growth in commercial real estate and other commercial loans in 2023 and in the first nine months of 2024.

Income from interest-bearing due from banks totaled $2,521,000 in 2024, an increase of $1,589,000 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.

The average yield on

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

interest-bearing due from banks was 5.15% in 2024, up from 4.01% in 2023.

The average balance of interest-bearing due from banks was $65,449,000 in 2024, up from $31,076,000 in 2023.

Similar to the third quarter 2024 to third quarter 2023 comparison, the net increase in average interest-bearing due from banks for the first nine months of 2024 as compared to 2023 reflected net sources of cash from deposit growth, a reduction in average available-for-sale debt securities and an increase in borrowed funds, partially offset by net uses of cash for loan growth and an increase in Bank-Owned Life Insurance.

Interest income from available-for-sale debt securities decreased $305,000 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.

The average balance of available-for-sale debt securities (at amortized cost) decreased to $455,944,000 in 2024 from $522,600,000 in 2023.

The average yield on available-for-sale debt securities increased to 2.43% for 2024 from 2.20% 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.

For the nine-month periods, interest expense increased $13,645,000 to $36,107,000 in 2024 from $22,462,000 in 2023.

Interest expense on deposits increased $13,024,000, as the average rate on interest-bearing deposits increased to 2.48% in 2024 from 1.45% 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.

Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,034,335,000 for the first nine months of 2024, up $77,578,000 (4.0%) from the first nine months of 2023.

Within average total deposits, average brokered deposits (primarily time and money market) were $70,428,000 with an average interest rate of 5.24% in 2024, up from $40,910,000 with an average interest rate of 4.56% 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.

Average time deposits increased $92,488,000 and average interest checking deposits increased $47,428,000, while the average balance of savings accounts decreased $39,139,000 and average noninterest-bearing demand deposits decreased $31,814,000.

Interest expense on borrowed funds increased $621,000 in 2024 as compared to 2023.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In Thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net Interest Income Under U.S.

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Three Months Ended 9/30/2024 vs.

Six Months Ended 6/30/2024 vs.

Nine Months Ended 9/30/2024 vs.

EARNING ASSETS

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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.

The income tax provision for the third quarter 2024 of $1,448,000 was $398,000 lower than the provision for the third quarter 2023 and the provision for the nine months ended September 30, 2024 of $3,966,000 was $708,000 lower than the amount for the first nine months of 2023 due to lower pre-tax income in 2024.

The effective tax rate (tax provision as a percentage of pre-tax income) was 18.5% in the third quarter 2024 compared to 19.6% in the third quarter 2023 and 18.2% for the first nine months of 2024 as compared to 19.0% for the first nine months of 2023.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

The net deferred tax asset at June 30, 2024 and December 31, 2023 represents the following temporary difference components:

The net deferred tax asset at September 30, 2024 and December 31, 2023 represents the following temporary difference components:

September 30,

(In Thousands)

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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;

Management believes the recorded net deferred tax asset at September 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 .

2 unchanged sentences

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:

The composition of the available-for-sale debt securities portfolio at September 30, 2024 and December 31, 2023, 2022 and 2021 is as follows:

(Dollars In Thousands)

June 30, 2024

September 30, 2024

December 31, 2023

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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.

As reflected in the table above, the fair value of available-for-sale securities was lower than the amortized cost basis by $38,970,000, or 8.7%, at September 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.

Treasury Note was 0.26% lower at September 30, 2024 in comparison to December 31, 2023, 0.41% lower than at December 31, 2022 and 2.32% higher than at December 31, 2021.

The table also shows that the amortized cost basis of the portfolio has been reduced to $447,392,000 at September 30, 2024 from $561,794,000 at December 31, 2022 as proceeds from maturities and sales have been used to help fund loan growth and for other purposes.

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:

As described in Note 5 to the unaudited consolidated financial statements, management determined the Corporation does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at September 30, 2024 before it is able to recover the amortized cost basis.

Further, management reviewed the Corporation’s holdings as of September 30, 2024 and concluded there were no credit-related declines in fair value.

Additional information related to the types

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

of securities held at September 30, 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.

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All of the issuers have publicly traded common stock .

At June 30, 2024, the securities have external ratings ranging from BBB-/Baa3 to A-.

At September 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:

Summary ratings information at September 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;

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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.

Based on the results of management’s assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at September 30, 2024.

FINANCIAL CONDITION

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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.

Table VII shows the composition of the loan portfolio at September 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.

At September 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 September 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 $96,241,000, 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.

At September 30, 2024, within this segment there were two loans with a total recorded investment of $3,204,000 in nonaccrual status with a specific allowance of $14,000 on one loan.

During the third quarter 2024, there was a partial charge-off of $640,000 on the other office loan in nonaccrual status which had a specific allowance of $455,000 at June 30, 2024.

The charge-off resulted from a decrease in the appraised value of property which is the primary source of collateral.

At September 30, 2024, the carrying value of this loan was $1,846,000.

At September 30, 2024, there was no specific allowance on this loan though it remained in nonaccrual status.

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 September 30, 2024.

The Provision and Allowance for Credit Losses section of Management’s Discussion and Analysis provides additional related discussion.

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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.

Total participation loans outstanding amounted to $35,652,000 at September 30, 2024 down from $38,652,000 at December 31, 2023.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.

At September 30, 2024, the total contract amount of commitments to extend credit was $378,535,000 as compared to $395,997,000 at December 31, 2023, and the contract amount of standby letters of credit increased to $64,938,000 at September 30, 2024 from $19,158,000 at December 31, 2023.

The increase in standby letters of credit at September 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.

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.

2 unchanged sentences

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 allowance for credit losses for off-balance sheet exposures of $593,000 at September 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.

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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 September 30, 2024, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $2,698,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2023 was $2,839,000.

At September 30, 2024, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $325,004,000, including loans sold through the MPF Xtra program of $152,880,000 and loans sold through the Original program of $172,124,000.

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.

Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, 2024 and December 31, 2023.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

2 unchanged sentences

(In Thousands)

September 30,

Commercial real estate - non-owner occupied:

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allowance for credit losses on loans

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)

September 30,

% of Non-owner

3 unchanged sentences

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:

A summary of the provision (credit) for credit losses for the three-month and nine-month periods ended September 30, 2024 and 2023 is as follows:

(In Thousands)

September 30,

Provision (credit) for credit losses:

1 unchanged sentence

Off-balance sheet exposures

Total provision for credit losses

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.

Total provision (credit) for credit losses

For the quarter ended September 30, 2024, there was a provision for credit losses of $1,207,000, an increase of $2,432,000 compared to a credit for credit losses (reduction in expense) of $1,225,000 in third quarter 2023.

For the nine months ended September 30, 2024, there was a provision for credit losses of $2,726,000, an increase of $3,491,000 compared to a credit for credit losses of $765,000 in 2023.

For the nine months ended September 30, 2024, the provision related to loans receivable included the impact of increases in the ACL from an increase in qualitative adjustments resulting mainly from changes in external indexes and an increase in past due and nonaccrual loans as well as net charge-offs in excess of specific allowances .

The ACL as a percentage of gross loans receivable increased to 1.08% at September 30, 2024 from 1.04% at December 31, 2023;

in comparison, the ACL dropped to 0.99% of gross loans receivable at September 30, 2023 from 1.08% upon adoption of CECL on January 1, 2023.

As shown in Table IX, the ACL on loans individually evaluated decreased to $173,000 at September 30, 2024 from $743,000 at December 31, 2023, primarily from partial charge-offs on two loans with individual ACLs at December 31, 2023.

In the third quarter 2024, there was a partial charge-off of $640,000 on a non-owner occupied commercial real estate office loan with a specific allowance of $455,000 at June 30, 2024 and $486,000 at December 31, 2023.

At September 30, 2024, the carrying value of this loan was $1,846,000 with no specific allowance on the loan.

In the second quarter 2024, there was a partial charge-off of $117,000 on a non-owner occupied commercial real estate loan for which there was an ACL of $124,000 at December 31, 2023.

At September 30, 2024, there was no ACL on the loan and the carrying value of the loan was $3,276,000 .

At September 30, 2024, there were two commercial relationships with loans receivable totaling $1,622,000 for which individual ACLs were recorded, including one non-owner occupied office loan with an outstanding balance of $1,357,000 and an individual ACL of $14,000.

Table IX also shows that, at September 30, 2024 as compared to December 31, 2023, the ACL related to collectively evaluated commercial loans increased by a total of $1,741,000 and the ACL on collectively evaluated consumer loans increased $67,000, while the ACL on collectively evaluated residential mortgage loans decreased $4,000.

The increase for commercial loans includes the impact of an increase in qualitative adjustments resulting mainly from changes in external indexes and an increase in past due and nonaccrual loans.

In the first nine months of 2024, net charge-offs totaled $1,589,000, or 0.08% (0.11% annualized) of average outstanding loans.

In addition to the two charge-offs described above, in the third quarter 2024 there was a partial charge-off of $427,000 on two commercial construction and land loans to one borrower with a specific ACL of $447,000 at June 30, 2024 and no specific ACL at December 31, 2023.

At September 30, 2024, the carrying value of these loans totaled $1,883,000 with no specific allowance on the 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

Table X shows that total nonperforming assets as a percentage of total assets was 0.92% at September 30, 2024, up from 0.75% at December 31, 2023 but lower than at year-end 2020 through 2022.

Total nonperforming assets were $24,638,000 at September 30, 2024, up from $18,845,000 at December 31, 2023.

Nonperforming loans included an increase in nonaccrual loans of $9,244,000 from December 31, 2023, while loans past due 90 days or more still accruing decreased $3,134,000 from December 31, 2023.

In the first nine

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.

months of 2024, the net increase in nonaccrual loans included an increase in nonaccrual commercial construction and land loans, primarily to three borrowers.

Table X also shows that loans past due 30-89 days totaled $15,906,000 at September 30, 2024, up from $9,275,000 at December 31, 2023.

The net increase includes a multi-family residential loan with a carrying value of $7,650,000 that was 60 days past due at September 30, 2024.

The property that collateralizes this loan is a newly-built apartment complex for which construction was completed to the point of allowing tenants to begin occupying the units in the summer of 2024.

Based on management’s assessment of appraisal and market information, and support provided by a guarantor, there was no individual ACL on this loan at September 30, 2024.

Over the period 2019-2023 and the first nine 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 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.

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

2 unchanged sentences

(Dollars In Thousands)

Six Months Ended

Nine Months Ended

September 30,

Years Ended December 31,

2 unchanged sentences

Net charge-offs

Provision for credit losses on loans

Provision (credit) for credit losses on loans

Balance, end of year

Net charge-offs as a % of average loans

Net charge-offs (annualized) as a % of average loans

TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS

(In Thousands)

September 30,

Loans individually evaluated

5 unchanged sentences

Total Allowance

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PRIOR TO CECL ADOPTION

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Total Allowance

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS

(Dollars In Thousands)

September 30,

As of December 31,

22 unchanged sentences

Management intends to use this line of credit as a contingency funding source.

As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $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:

As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $19,387,000 at September 30, 2024.

The Corporation’s outstanding, available, and total credit facilities at September 30, 2024 and December 31, 2023 are as follows:

(In Thousands)

September 30,

Federal Home Loan Bank of Pittsburgh

2 unchanged sentences

Total credit facilities

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 September 30, 2024, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term advances of $10,000,000, long-term borrowings of $174,617,000 and letters of credit totaling $23,241,000.

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.

2 unchanged sentences

If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets.

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.

At September 30, 2024, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $223,060,000.

Deposits totaled $2,135,879,000 at September 30, 2024, up $121,073,000 (6.0%) from $2,014,806,000 at December 31, 2023.

Excluding brokered deposits, adjusted total deposits at September 30, 2024 were higher by $140,391,000 (7.2%) as compared to December 31, 2023.

Brokered deposits totaled $45,051,000 at September 30, 2024, a decrease of $19,318,000 from December 31, 2023.

The increase in total deposits, excluding brokered deposits, included an increase in total deposits from municipal relationships of $64,829,000 to $342,541,000 at September 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 September 30, 2024, estimated uninsured deposits totaled $655.6 million, or 30.5% 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 $183.3 million at September 30, 2024.

As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.9% of total deposits at September 30, 2024, as compared to 21.7% at December 31, 2023.

Available funding from these sources totaled 160.8% of uninsured deposits and 223.2% of total uninsured and uncollateralized deposits at September 30, 2024.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Uninsured Deposits Information

September 30,

Total Deposits - C&N Bank

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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.

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.

Details concerning capital ratios at September 30, 2024 and December 31, 2023 are presented below.

Management believes, as of September 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 C&N Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers.

For comparison purposes, the Corporation’s capital ratios are presented along with those of C&N Bank in the table below.

Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at September 30, 2024 and December 31, 2023 exceed the Corporation’s Board policy threshold levels.

(Dollars in Thousands)

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Policy Thresholds

June 30, 2024:

September 30, 2024:

Total capital to risk-weighted assets:

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Tier 1 capital to average assets:

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.

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:

At September 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

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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.

Eligible net income is defined as net income for the four calendar

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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:

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≤1.25% and >0.625%

At June 30, 2024 , C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 6.75%.

At September 30, 2024 , C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 6.96%.

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

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.

For the three and nine months ended September 30, 2024, 26,034 shares were repurchased for a total cost of $443,000, at an average price of $17.02 per share.

At September 30, 2024, there were 723,966 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.

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

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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.

The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $30,396,000 at September 30, 2024 and $38,878,000 at December 31, 2023.

The increase in stockholders’ equity in the first nine months of 2024 from the change in accumulated other comprehensive loss resulted from a decrease in interest rates.

Changes in accumulated other comprehensive loss are excluded from earnings and directly increase or decrease stockholders’ equity.

To the extent unrealized losses on available-for-sale debt securities result from credit losses, unrealized losses are recorded as a charge against earnings.

The securities section of Management’s Discussion and Analysis and 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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis