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INTEREST RATE RISK
−Removed: The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the economic value of equity.
−Removed: For purposes of these calculations, the economic value of equity includes the discounted present values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses.
+Added: The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the economic value of equity (“EVE”).
+Added: For purposes of these calculations, EVE includes the discounted present values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses.
The model measures and projects the amount of potential changes in net interest income and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates.
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Further, the projected results are impacted by assumptions regarding the run-off and the extent of sensitivity to interest rate changes of deposits with no stated maturity (checking, savings and money market accounts).
−Removed: Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and economic value of equity.
+Added: Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and EVE.
Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.
The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates.
−Removed: The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in the economic value of equity from the baseline values based on current rates.
−Removed: Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of June 30, 2024 and December 31, 2023.
−Removed: In the analysis based on June 30, 2024 and December 31, 2023 data, the amounts of net interest income decrease, as compared to the amounts based on current interest rates, in both the upward and downward rate scenarios.
−Removed: Further, at June 30, 2024 and December 31, 2023, the economic value of equity is modeled to decrease in all of the rising and falling rate scenarios.
−Removed: The modeling results reflect the impact of management’s assumptions that, in light of the significant increases in short-term interest rates that have occurred since early 2022, the Corporation’s deposit rates would rise in the increasing rate scenarios to a greater extent than they would fall in the decreasing rate scenarios.
+Added: The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in EVE from the baseline values based on current rates.
+Added: Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of September 30, 2024 and December 31, 2023.
+Added: The Table shows that as of the respective dates, the changes in net interest income and changes in economic value of equity were within the policy limits in all scenarios.
+Added: Based on September 30, 2024 and December 31, 2023 data, the amounts of net interest income decrease, as compared to the amounts based on current interest rates, in both the upward and downward rate scenarios.
+Added: The modeling results reflect the impact of management’s assumptions that the Corporation’s deposit rates would rise in the increasing rate scenarios to a greater extent than they would fall in the decreasing rate scenarios.
Further, results in the downward rate scenarios reflect limitations on the benefit of falling rates on some deposit types due to a 0% assumed floor.
−Removed: The Table also shows that as of the respective dates, the changes in net interest income and changes in economic value were within the policy limits in all scenarios.
−Removed: In Table XI, the modeled economic value of equity is higher in all rate scenarios at June 30, 2024 as compared to December 31, 2023.
−Removed: The increase was mainly caused by an overall increase in the assumed lives of nonmaturity deposits used in the June 30, 2024 analysis based on an updated study completed in the second quarter 2024.
−Removed: generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date.
−Removed: The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included
+Added: At September 30, 2024 and December 31, 2023, EVE is modeled to decrease compared to the 0 basis point scenario in all of the rising and falling rate scenarios except for a slight (0.6%) increase at September 30, 2024 in the up 100 basis points scenario.
+Added: In Table XI, EVE is higher at September 30, 2024 as compared to December 31, 2023 in the 0 basis point, down 100 and 200 basis points and all of the rising rate scenarios, but lower in the down 300 and 400 basis point scenarios.
+Added: The volatility in comparative amounts of EVE reflects the impact of an overall increase in the assumed lives of nonmaturity deposits used in the September 30, 2024 analysis based on an updated study completed in the second quarter 2024.
+Added: Volatility in EVE values also reflect lower discount rates used in the model at September 30, 2024 than at December 31, 2023, consistent with lower market rates.
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
−Removed: in accumulated other comprehensive income (loss) within stockholders’ equity.
−Removed: Increases in interest rates have caused the fair value of the Corporation’s available-for-sale debt securities to decrease, resulting in an accumulated other comprehensive loss related to securities of $41.7 million at June 30, 2024.
+Added: generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date.
+Added: 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 income (loss) within stockholders’ equity.
+Added: Increases in interest rates have caused the fair value of the Corporation’s available-for-sale debt securities to decrease, resulting in an accumulated other comprehensive loss related to securities of $30.4 million at September 30, 2024.
In contrast, most of the Corporation’s other financial instruments, including loans receivable (held for investment), deposits and borrowed funds are carried on the balance sheet at historical cost without adjustment for the impact of changes in interest rates.
TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
−Removed: June 30, 2024 Data
+Added: September 30, 2024 Data
(In Thousands)
−Removed: Period Ending June 30, 2025
+Added: Period Ending September 30, 2025
Change in Rates
−Removed: Economic Value of Equity at June 30, 2024
+Added: Economic Value of Equity at September 30, 2024
Change in Rates
7 unchanged sentences
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.