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Item 7. Management’s Discussion and Analysis

2025-03-06 compared with 2024-03-11 · 184 added, 217 removed, 587 unchanged (41% of the section changed)

8 unchanged sentences

● changes in general economic conditions

● recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, sources of liquidity and capital funding, and regulatory responses to these developments

● the potential for adverse developments in the banking industry that could have a negative impact on customer confidence

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

5 unchanged sentences

● 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

2 unchanged sentences

Net income for the year ended December 31, 2024 was $25,958,000, or $1.69 per diluted share, as compared to $24,148,000, or $1.57 per diluted share, for the year ended December 31, 2023.

As described in more detail below, the results for 2023 included the impact of a $1.3 million charge, or $0.08 per diluted share, related to the repositioning of available-for-sale securities and BOLI investments.

The results for 2023 included the impact of a $1.3 million charge, or $0.08 per diluted share, related to the repositioning of available-for-sale securities and bank-owned life insurance (BOLI).

Significant variances were as follows:

● In December 2023 , the Corporation repositioned its available-for-sale securities portfolio and its investments in bank-owned life insurance (“BOLI”).

● Net interest income totaled $79,115,000 for the year ended December 31, 2024, a decrease of $1,285,000 from 2023.

The net interest margin was 3.30% in 2024, down from 3.47% in 2023.

The interest rate spread decreased 0.32%, as the average rate on interest-bearing liabilities was higher by 0.75% while the average yield on earning assets increased 0.43%.

Average total earning assets increased $81,866,000.

Average total loans increased $88,973,000 (5.0%) and average total deposits increased $85,644,000 (4.3%).

● For the year ended December 31, 2024, the provision for credit losses was $2,195,000, compared to $186,000 in 2023.

For the year ended December 31, 2024, the provision related to loans receivable included the impact of a net increase in the allowance for credit losses (ACL) related to qualitative factors, partially offset by a decrease in total specific allowances on individual loans and decreases in other components of the ACL.

The ACL increased $827,000 to 1.06% of loans receivable at December 31, 2024 as compared to 1.04% at December 31, 2023.

For the year ended December 31, 2024, net charge-offs totaled $1,603,000, or 0.09% of average loans receivable as compared to $264,000 or 0.01% of average loans receivable for 2023.

● Noninterest income totaled $29,209,000 for the year ended December 31, 2024, up $4,792,000 from the year ended December 31, 2023.

Significant variances included the following:

Ø There were no net gains or losses on available-for-sale debt securities for the year ended December 31, 2024 compared to net losses on available-for-sale debt securities of $3,036,000 for the year ended December 31, 2023.

The net losses on available-for-sale debt securities of $3,036,000 for the year ended December 31, 2023 were primarily from sales in the fourth quarter 2023 related to the repositioning of the portfolio.

Ø Earnings from the increase in cash surrender value of life insurance of $1,830,000 decreased $873,000 in 2024 from 2023.

Included in 2023 was income from a one-time enhancement of $2,100,000 on BOLI purchased in December 2023.

Excluding the impact of the income from the enhancement in 2023, earnings from the increase in cash surrender value of life insurance increased $1,227,000 reflecting the increase in the average balance of BOLI to $51,465,000 in 2024 from $31,808,000 in 2023.

Ø Other noninterest income of $5,230,000 increased $620,000 as dividends on FHLB-Pittsburgh and Federal Reserve stock totaled $1,743,000, an increase of $451,000, and income from tax credits related to donations increased $77,000.

Ø Brokerage and insurance revenue of $2,271,000 increased $596,000 due to an increase in sales volume.

Ø Trust revenue of $7,928,000 increased $515,000, 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 $1,158,000 increased $435,000, reflecting an increase in volume of residential mortgage loans sold.

Ø Service charges on deposit accounts of $5,867,000 increased $300,000 reflecting an increase in volume of fees.

● Noninterest expense totaled $74,258,000 for the year ended December 31, 2024, an increase of $110,000 from the total for the year ended December 31, 2023.

Significant variances included the following:

Ø Other noninterest expense of $10,361,000 decreased $872,000.

Within this category, significant variances included the following:

◾ Other operational losses included a net decrease in expense of $407,000 to $98,000 in other losses in 2024 from expense of $505,000 in 2023.

Included in 2023 was $427,000 related to a trust department tax compliance matter.

◾ In 2024, there was a reduction in expense of $527,000 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 2023, there was a reduction in expense associated with the postretirement plan of $19,000.

◾ Donations expense increased $195,000 from 2023 including an increase of $133,000 in PA Educational Improvement Tax Credit Program donations and $50,000 in 2024 donations to benefit Northern Tier and Northcentral PA communities impacted by storm damage.

Ø Professional fees of $2,175,000 decreased $322,000 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 $44,930,000 increased $735,000, including an increase of $905,000 in cash and stock-based incentive compensation, an increase in base salaries expense of $630,000, or 2.1%, and an increase of $253,000 in wealth management-related commissions while there were decreases in expense related to the Employee Stock Ownership Plan of $579,000, health insurance expense of $361,000 and the Supplemental Executive Retirement Plan of $267,000.

● The income tax provision of $5,913,000, or 18.6% of pre-tax income for the year ended December 31, 2024 decreased $422,000 from $6,335,000, or 20.8% of pre-tax income for the year ended December 31, 2023.

The higher effective tax rate in 2023 included the net impact of a tax charge of $950,000 related to the initiated surrender of BOLI, partially offset by the non-taxable income of $2,100,000 from the one-time enhancement on the purchase of BOLI.

Net income for the year ended December 31, 2023 was $24,148,000, or $1.57 per diluted share, as compared to $26,618,000, or $1.71 per diluted share, for the year ended December 31, 2022.

As noted above, the results for 2023 included the impact of a $1.3 million charge, or $0.08 per diluted share, related to the repositioning of available-for-sale securities and BOLI.

Significant variances were as follows:

● In December 2023 , the Corporation repositioned its available-for-sale securities portfolio and its investments in BOLI.

As a result of the repositioning, the Corporation recognized a net charge to earnings of approximately $1.3 million, or $0.08 per diluted share in the fourth quarter 2023 reflecting the net impact of:

(1) a $3.0 million pre-tax loss and after-tax loss of $2.4 million from the sale of available-for-sale debt securities with an amortized cost basis of $45.5 million, (2) a tax charge of $950,000 from initiating the surrender of BOLI with a book value of $14.3 million, and (3) noninterest income of $2.1 million from a one-time enhancement on a $30 million purchase of new BOLI.

Proceeds from the sale of securities were used in the $30 million purchase of BOLI as noted and in purchases totaling $13.7 million of debt securities in December 2023.

Management expects to recover the fourth quarter 2023 loss in less than one year from reinvestment in assets with higher yields as compared to the yields on the assets sold or surrendered.

● For the year ended December 31, 2023, net interest income totaled $80,400,000, $2,728,000 lower than in 2022.

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● For the year ended December 31, 2023, there was a provision for credit losses of $186,000, a decrease of $7,069,000 in expense compared to $7,255,000 in 2022.

The provision for 2023 included expense related to loans receivable of $753,000 and a credit related to off-balance sheet exposures of $567,000.

The expense related to loans receivable was mainly attributable to qualitative adjustments of the Corporation’s historical loss experience in estimating the allowance for credit losses (“ACL”) and the impact of an economic forecast, as well as a reduction in the Corporation’s average net charge-off experience used in the calculation of the ACL.

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● Net losses on available-for-sale debt securities were $3,036,000 for the year ended December 31, 2023, compared to net gains on available-for-sale debt securities of $20,000 for the year ended December 31, 2022.

The net losses on available-for-sale debt securities of $3,036,000 for the year ended December 31, 2023, were primarily from the sales in the fourth quarter related to the previously described repositioning of the portfolio.

The net losses on available-for-sale debt securities of $3,036,000 for the year ended December 31, 2023, were primarily from the previously described repositioning of the portfolio.

● Noninterest expense totaled $74,148,000 for the year ended December 31, 2023, an increase of $6,193,000 from the total for the year ended December 31, 2022.

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In 2023, the net credit for credit losses related to off-balance sheet exposures of $567,000 is included in the provision for credit losses in the consolidated statements of income.

Ø Salaries and employee benefits expense of $44,195,000 increased $2,362,000, including increases in base salaries expense of $1,713,000, or 6.0% and in estimated cash and stock-based incentive compensation expense of $670,000 consistent with comparisons in both years of the Corporation’s earnings performance to that of defined peer groups .

Ø Salaries and employee benefits expense of $44,195,000 increased $2,362,000, including increases in base salaries expense of $1,713,000, or 6.0% and in cash and stock-based incentive compensation expense of $670,000 consistent with comparisons in both years of the Corporation’s earnings performance to that of defined peer groups .

Ø Data processing and telecommunications expense of $7,582,000 increased $776,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

Ø Professional fees of $2,497,000 increased $492,000, including $389,000 of conversion costs related to a change in wealth management platform for providing brokerage and investment advisory services.

Ø Pennsylvania shares tax expense of $1,602,000 in 2023 is lower by $354,000, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax.

Ø Pennsylvania shares tax expense of $1,602,000 in 2023 was lower by $354,000, consistent with a reduction in C&N Bank’s equity that provided the base for determining the annual tax.

● The income tax provision of $6,335,000, or 20.8% of pre-tax income for the year ended December 31, 2023 increased $603,000 from $5,732,000, or 17.7% of pre-tax income for the year ended December 31, 2022.

5 unchanged sentences

Partially offsetting the higher effective rate in 2023 was the non-taxable income of $2,100,000 from a one-time enhancement on $30 million purchase of new BOLI.

Net income for the year ended December 31, 2022 was $26,618,000, or $1.71 per diluted share as compared to 2021 net income of $30,554,000 or $1.92 per share.

Significant variances were as follows:

● Net interest income of $83,128,000 in 2022 was up $5,189,000 over the 2021 total.

The net interest margin increased to 3.77% in 2022 from 3.69% in 2021.

Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $3,610,000 in 2022 as compared to 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $168.2 million.

Total interest and fees on loans increased $4,289,000 in 2022 as compared to 2021.

Interest and fees on loans included $1,852,000 in 2022 and $231,000 in 2021 from repayments received on purchased credit impaired loans in excess of previous carrying amounts.

Total interest and fees from the Small Business Administration’s Paycheck Protection Program (“PPP”) loans were $958,000 in 2022, a decrease of $5,572,000 from the 2021 total of $6,530,000.

Average outstanding loans increased $31.3 million, despite a reduction in average PPP loans of $89.2 million.

Average loans, excluding PPP loans, were up $120.6 million (8.0%) in 2022 as compared to 2021.

Average total deposits increased $75.0 million (3.9%) in 2022 as compared to 2021.

● The provision for loan losses of $7,255,000 for 2022 was higher than the 2021 provision by $3,594,000.

In 2022, the provision includes the impact of partial charge-offs totaling $3,942,000 on a commercial real estate secured participation loan to a borrower in the health care industry.

In total, the provision for 2022 includes $3,890,000 related to specific loans (net charge-offs of $4,177,000 and net decrease in specific allowances on loans of $287,000), an increase of $3,036,000 in the collectively determined portion of the allowance and a $329,000 increase in the unallocated portion.

In comparison, the provision for loan losses in 2021 includes $1,324,000 related to specific loans (net charge-offs of $1,509,000 and a decrease in specific allowances on loans of $185,000), an increase of $2,251,000 in the collectively determined portion of the allowance and an $86,000 increase in the unallocated portion.

● Noninterest income decreased $1,449,000, or 5.6% in 2022 from 2021.

Significant variances include the following:

Ø Net gains from sales of loans of $757,000 decreased $2,671,000 reflecting a reduction in volume of residential mortgage loans sold.

Ø Trust revenue of $6,994,000 decreased $240,000 reflecting the impact of market value depreciation of assets under management.

Ø Brokerage and insurance revenue of $2,291,000 increased $431,000 due to commissions on higher transaction volumes for the year.

Ø Service charges on deposit accounts of $5,019,000 increased $386,000 as the volume of consumer and business overdraft and other activity increased partially offset by the impact of refunds resulting from updated regulatory guidance on certain consumer overdraft fees.

Ø Interchange revenue from debit card transactions of $4,148,000 increased $293,000, reflecting an increase in transaction volumes.

Ø Loan servicing fees, net of $960,000 increased $266,000, reflecting growth in volume of residential mortgage loans sold with servicing retained.

Further, the fair value of servicing rights increased $126,000 in 2022 as compared to a decrease of $68,000 in 2021 mainly due to changes in assumptions related to prepayments of mortgage loans.

Ø Other noninterest income of $3,699,000 increased $119,000, including increases in income from interest rate swap fees on commercial loans of $268,000, credit card interchange income of $107,000 and dividend income from Federal Home Loan Bank stock of $83,000.

Offsetting decreases include a $147,000 reduction in income from title agencies and an increase in unrealized fair value depreciation on a marketable equity security of $83,000.

● Noninterest expense increased $5,483,000, or 8.8% in 2022 over 2021.

Significant variances included the following:

Ø Salaries and employee benefits of $41,833,000 increased $4,230,000, including an increase in base salaries expense of $3.8 million reflecting merit-based salary increases and an increase in number of personnel related to expansion of the Southcentral PA market with the opening of an office in Lancaster.

Additional increases include an increase in health care expense of $658,000 due to higher claims on the Corporation’s partially self-insured plan, $327,000 related to savings, retirement and pension plan contribution expenses, $249,000 related to payroll taxes and $131,000 due to a lower portion of payroll costs capitalized (added to the carrying value of loans) due to the higher volume of PPP loans originated in 2021.

Decreases include a reduction in estimated cash and stock-based incentive compensation expense of $822,000 consistent with a comparison of the Corporation’s earnings performance to that of defined peer groups and a reduction in severance expense of $232,000.

Ø Data processing and telecommunications of $6,806,000 increased $903,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

Ø Net occupancy and equipment expense of $5,533,000 increased $549,000, including accelerated depreciation expense of $329,000 related to the closure of two branches in November 2022.

Ø Automated teller machine and interchange expense increased $168,000 reflecting increased volume of activity.

Ø Professional fees of $1,601,000 decreased $238,000, mainly due to decreases in recruiting services and PPP loan processing-related professional fees.

Ø Other noninterest expense totaled $8,221,000, a decrease of $134,000 from 2021.

Within this category, significant variances included the following:

● There was a net reduction in other operational losses of $348,000 in 2022 as compared to expense of $199,000 in 2021.

In 2022, there was a reduction in expense resulting from abatement of Trust Department tax compliance penalties for which expense was recorded in 2020 and a favorable outcome on appeal of a Trust Department state tax reporting matter for which expense was also recorded in 2020.

● There was a reduction in expense related to credit losses on off balance sheet exposures related to residential mortgage loans sold of $172,000 in 2022 as compared to a provision for credit losses of $135,000 in 2021.

● The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $367,000 in 2022 as compared to a reduction in expense of $236,000 in 2021.

● Travel and entertainment expenses totaled $457,000 in 2022, an increase of $236,000 over 2021, as the volume of travel and related costs for meetings with customers and internal meetings increased.

● The income tax provision of $5,732,000, or 17.7% of pre-tax income for the year ended December 31, 2022, decreased $1,401,000 from $7,133,000, or 18.9% of pre-tax income for the year ended December 31, 2021.

The lower provision in 2022 includes the impact of a reduction in pre-tax income.

The lower effective tax rate in 2022 includes the impact of higher tax-exempt interest as a percentage of pre-tax income, a larger permanent difference (deduction) related to restricted stock compensation and the benefit of a $340,000 reduction in expense from the reversal of tax penalties being non-deductible.

More detailed information concerning the Corporation’s earnings results are provided in other sections of Management’s Discussion and Analysis.

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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.

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

Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities.

For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers.

In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments.

Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.

NET INTEREST INCOME

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Fully taxable equivalent net interest income was $79,934,000 in 2024, $1,385,000 (1.7%) lower than in 2023.

The decrease in net interest income reflected an increase in interest expense of $15,859,000 and an increase in interest income of $14,474,000.

As presented in Table II, the Net Interest Margin was 3.30% in 2024, as compared to 3.47% in 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 2.59% in 2024 from 2.91% in 2023.

The average yield on earning assets of 5.32% was 0.43% higher in 2024 as compared to 2023, while the average rate on interest bearing liabilities of 2.73% was 0.75% higher in 2024 as compared to 2023.

Additionally , average total earning assets increased $81,866,000, average total loans increased $88,973,000 (5.0%) and average total deposits increased $85,644,000 (4.3%).

Table III shows the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for 2024 over 2023 by $2,539,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $3,924,000.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $128,897,000 in 2024, an increase of $14,474,000, or 12.6%, from 2023.

Interest and fees from loans receivable increased $11,730,000 in 2024 as compared to 2023.

In 2024, the fully taxable equivalent yield on loans was 6.03%, up from 5.67% in 2023, r eflecting the effects of primarily rising interest rates on new loan originations and floating-rate loans .

Average outstanding loans receivable increased $88,973,000 (5.0%) to $1,881,122,000 in 2024 from $1,792,149,000 in 2023.

The Corporation has experienced growth in commercial real estate and other commercial loans in 2023 and in 2024.

Income from interest-bearing due from banks totaled $4,307,000 in 2024, an increase of $2,928,000 from 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 4.97% in 2024, up from 4.22% in 2023.

The average balance of interest-bearing due from banks was $86,703,000 in 2024, up from $32,709,000 in 2023.

The net increase in average interest-bearing due from banks for 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, on a fully taxable-equivalent basis, decreased $246,000 in 2024 as compared to 2023, as the average balance (at amortized cost) of available-for-sale debt securities decreased $61,916,000 as indicated in Table II.

The average yield on available-for-sale debt securities was 2.45% for 2024, up from 2.21% in 2023.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense increased $15,859,000 to $48,963,000 in 2024 from $33,104,000 in 2023.

Interest expense on deposits increased $14,967,000, as the average rate on interest-bearing deposits increased to 2.51% in 2024 from 1.66% in 2023.

Average total deposits (interest-bearing and noninterest-bearing) increased $85,644,000 (4.3%) in 2024 as compared to 2023.

Within average deposits, average brokered deposits were $61,537,000 at an average rate of 5.19% in 2024 as compared to $47,424,000 at an average rate of 4.78% for 2023.

Average time deposits increased $84,394,000, average interest checking deposits increased $48,472,000 and the average total balance of money market accounts increased $11,144,000 while average savings deposits decreased $35,631,000 and the average balance of noninterest bearing demand deposits decreased $22,735,000.

Interest expense on borrowed funds increased $892,000 in 2024 as compared to 2023.

Interest expense on short-term borrowings in 2024 of $1,168,000 was down from $3,240,000 in 2023 as the average balance of short-term borrowings decreased to $22,743,000 in 2024 from $62,926,000 in 2023.

The average rate on short-term borrowings was 5.14% in 2024 compared to 5.15% in 2023.

Interest expense on long-term borrowings (FHLB advances) increased $2,958,000 to $7,188,000 in 2024 from $4,230,000 in 2023.

The average balance of long-term borrowings was $167,181,000 in 2024, up from an average balance of $110,943,000 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 4.30% in 2024 compared to 3.81% in 2023.

Fully taxable equivalent net interest income was $81,319,000 in 2023, $3,035,000 (3.6%) lower than in 2022.

The decrease in net interest income reflected an increase in interest expense of $23,585,000 (includes $17,595,000 interest on deposits and $5,990,000 in interest on borrowings) and an increase of $20,550,000 in total interest income as compared to 2022.

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Table III shows the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for 2023 over 2022 by $2,679,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $5,714,000.

Income from purchase accounting-related adjustments in 2023 had a positive effect on net interest income of $697,000, including an increase in income on loans of $623,000 and a net reduction in interest expense on time deposits and borrowed funds totaling $74,000.

The positive impact of purchase accounting-related adjustments to the net interest margin was 0.03% in 2023.

In comparison, the net positive impact of purchase accounting-related adjustments was $1,621,000, with a positive impact on the net interest margin of 0.07% in 2022.

INTEREST INCOME AND EARNING ASSETS

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Average outstanding loans receivable increased $164,055,000 (10.1%) to $1,792,149,000 in 2023 from $1,628,094,000 in 2022.

The Corporation has

experienced growth in outstanding commercial real estate and residential mortgage loans over the last three quarters of 2022 and in 2023.

The Corporation experienced growth in outstanding commercial real estate and residential mortgage loans over the last three quarters of 2022 and in 2023.

Income from interest-bearing due from banks totaled $1,379,000 in 2023, an increase of $734,000 from the total for 2022.

1 unchanged sentence

The average balance of interest-bearing due from banks was $32,709,000 in 2023 as compared to $51,407,000 in 2022.

The average balance of interest-bearing due from banks fell to 1.4% of average earning assets in 2023 from 2.3% in 2022 as excess funds were invested primarily in loans.

Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with the Federal Reserve.

Within this category, the largest asset balance in 2023 and 2022 was interest-bearing deposits held with the Federal Reserve.

Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, decreased $711,000 in 2023 as compared to 2022, as the average balance (at amortized cost) of available-for-sale debt securities decreased $43.0 million as indicated in Table II.

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The average rate on long-term borrowings was 3.81% in 2023 compared to 2.23% in 2022.

Interest expense on senior notes issued in May 2021 totaled $479,000 in 2023 as compared to $477,000 in 2022.

The average rate on senior notes was 3.24% in 2023 and in 2022.

Interest expense on subordinated debt decreased $157,000 to $922,000 in 2023 from $1,079,000 in 2022.

The average balance of subordinated debt decreased to $24,662,000 in 2023 from $27,116,000 in 2022 and the average rate on subordinated debt decreased to 3.74% in 2023 from 3.98% in 2022 reflecting the repayment of subordinated debt assumed in an acquisition of $8,500,000 in the second quarter 2022.

Fully taxable equivalent net interest income was $84,354,000 in 2022, $5,280,000 (6.7%) higher than in 2021.

Interest income was $8,237,000 higher in 2022 as compared to 2021;

interest expense was higher by $2,957,000 in comparing the same periods.

As presented in Table II, the Net Interest Margin was 3.77% in 2022, as compared to 3.69% in 2021, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased slightly to 3.57% in 2022 from 3.55% in 2021.

The average yield on earning assets of 4.19% was 0.20% higher in 2022 as compared to 2021, and the average rate on interest bearing liabilities of 0.62% was 0.18% higher in 2022 as compared to 2021.

Table III shows that, in the aggregate, rising interest rates in 2022 had a positive impact on net interest income as the portion of the increase attributable to changes in rate was $4,976,000.

Income from purchase accounting-related adjustments in 2022 had a positive effect on net interest income of $1,621,000, including an increase in income on loans of $1,216,000 and a net reduction in interest expense on time deposits and borrowed funds totaling $405,000.

The positive impact of purchase accounting-related adjustments to the net interest margin was 0.07% in 2022.

In comparison, the net positive impact of purchase accounting-related adjustments was $2,659,000, with a positive impact on the net interest margin of 0.13% in 2021.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $93,873,000 in 2022, an increase of $8,237,000, or 9.6% from 2021.

The average yield on available-for-sale debt securities was 2.16% for 2022, down slightly from 2.17% in 2021.

Interest and fees from loans receivable increased $4,289,000 in 2022 as compared to 2021.

Total interest and fees from loans excluding PPP loans increased $9,861,000 in 2022 as compared to 2021.

Interest and fees on PPP loans totaled $958,000 in 2022, a decrease of $5,572,000 from 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers.

In 2022, total interest and fees on loans included $1,852,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts as compared to income from similar repayments of $231,000 in 2021.

Average outstanding loans receivable increased $31,338,000 (2.0%) to $1,628,094,000 in 2022 from $1,596,756,000 in 2021, despite a reduction in average PPP loans of $89,246,000.

Average total loans outstanding, excluding PPP loans, increased $120,584,000 (8.0%).

The fully taxable equivalent yield on loans in 2022 was 4.98% compared to 4.81% in 2021.

The average yield on loans included the positive impact of the income on PCI loans in 2022.

The comparatively high yield on PPP loans provided a benefit to the margin in both periods though the higher volume resulted in a larger benefit in 2021.

Excluding PPP loans and income from excess repayments on purchased credit impaired loans, the adjusted yield on loans was 4.83% in 2022, up from the similarly adjusted yield of 4.67% in 2021.

Income from interest-bearing due from banks totaled $645,000 in 2022, an increase of $327,000 from the total for 2021.

The average yield on interest-bearing due from banks was 1.25% in 2022 and 0.20% in 2021.

The average balance of interest-bearing due from banks was $51,407,000 in 2022 as compared to $156,152,000 in 2021.

The average balance of interest-bearing due from banks fell to 2.3% of average earning assets in 2022 from 7.3% in 2021 as excess funds were invested in securities and loans.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense increased $2,957,000, or 45.1%, to $9,519,000 in 2022 from $6,562,000 in 2021.

Interest expense on deposits increased $2,100,000.

Table II shows the average rate on interest-bearing deposits increased to 0.46% in 2022 from 0.33% in 2021 reflecting the impact of increases in market rates in 2022.

Average total deposits (interest-bearing and noninterest-bearing) increased $75,012,000 (3.9%) to $1,980,412,000 in 2022 from $1,905,400 in 2021.

Average time deposits decreased $42,552,000, while the average total balance of other categories increased $117,564,000, or 7.5%.

The increase in average deposits included the impact of growth in commercial deposits, reflecting higher average balances maintained and new business.

Interest expense on short-term borrowings in 2022 was $429,000 as compared to $23,000 in 2021.

The average balance of short-term borrowings increased to $21,766,000 in 2022 from $6,269,000 in 2021.

The average rate on short-term borrowings was 1.97% in 2022 compared to 0.37% in 2021.

Interest expense on long-term borrowings (FHLB advances) increased $497,000 to $896,000 in 2022 from $399,000 in 2021.

The average balance of long-term borrowings was $40,194,000 in 2022, down from an average balance of $44,026,000 in 2021.

The average rate on long-term borrowings was 2.23% in 2022 compared to 0.91% in 2021.

Interest expense on senior notes issued in May 2021 totaled $477,000 in 2022 as compared to $293,000 in 2021.

The average balance of the senior notes increased to $14,733,000 in 2022 from $9,129,000 in 2021.

The average rate on senior notes was 3.24% in 2022 and 3.21% in 2021.

Interest expense on subordinated debt decreased $230,000 to $1,079,000 in 2022 from $1,309,000 in 2021.

The average balance of subordinated debt decreased slightly to $27,116,000 in 2022 from $27,399,000 in 2021.

The average rate on subordinated debt decreased to 3.98% in 2022 from 4.78% in 2021 including the net impact of a new issue of subordinated debt of $24,437,000, net, at an effective rate of 3.74% in May 2021 and the redemption of subordinated notes totaling $8,000,000 in the second quarter 2021 and $8,500,000 in the second quarter 2002.

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

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Loans receivable:

Paycheck Protection Program

Total loans receivable

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Loans receivable:

Paycheck Protection Program

Total loans receivable

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Total Earning Assets

Unrealized (loss) gain on securities

Unrealized loss on securities

Allowance for credit losses

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Total Liabilities

Stockholders' equity, excluding accumulated other comprehensive (loss) income

Accumulated other comprehensive (loss) income

Stockholders' equity, excluding accumulated other comprehensive loss

Accumulated other comprehensive loss

Total Stockholders' Equity

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Loans receivable:

Paycheck Protection Program

Total loans receivable

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Other noninterest income

Realized (losses) gains on available-for-sale debt securities, net

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

Total noninterest income

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Other noninterest income

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

Realized (losses) gains on available-for-sale debt securities, net

Total noninterest income

(1) N/M Not Meaningful

NONINTEREST EXPENSE

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Additional detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis.

The effective income tax rate was 20.8% of pre-tax income in 2023, up from 17.7% in 2022 and 18.9% in 2021.

The higher effective income tax rate in 2023 as compared to 2022 includes:

(1) a tax charge of $950,000 for the initiated surrender of BOLI;

(2) an increase in nondeductible interest expense;

(3) an increase in non-deductible trust department tax compliance-related penalties;

and (4) a permanent difference related to stock-based compensation resulting in an increase in taxable income in 2023 as compared to a deduction in 2022 due to the reduction in CZNC stock price.

Partially offsetting the higher effective rate in 2023 was the non-taxable income of $2,100,000 from a one-time enhancement on $30 million purchase of new BOLI.

The Corporation’s effective tax rates differed from the federal statutory rate of 21% mainly because of the effects of tax-exempt interest income for 2022 and 2021.

The lower effective income tax rate in 2022 as compared to 2021 resulted mainly from an increase in the proportion of tax-exempt interest income to total pre-tax income.

The effective income tax rate was 18.6% of pre-tax income in 2024, down from 20.8% in 2023 and up from 17.7% in 2022.

Tax-exempt interest income and income from BOLI contributed to the effective rate being lower than the federal statutory rate in 2022 through 2024.The higher effective income tax rate in 2023 included the net impact of a tax charge of $950,000 for the initiated surrender of BOLI.

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.

At December 31, 2023, the net deferred tax asset was $17,441,000, down from the balance at December 31, 2022 of $20,884,000.

The most significant change in temporary difference components was a decrease of $3,056,000 in the net deferred tax asset related to the unrealized loss on available-for-sale debt securities, consistent with a decrease in interest rates.

At December 31, 2024, the net deferred tax asset was $19,098,000, up from the balance at December 31, 2023 of $17,441,000.

The most significant change in temporary difference components among those periods was a decrease in the net deferred tax liabilities of $950,000 related to a tax charge for the surrender of BOLI in 2023.

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.

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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, maximizing return on earning assets within reasonable risk parameters and providing a means to hedge the Corporation’s overall asset-sensitive interest rate risk exposure, while maintaining high credit quality.

Key objectives include supporting liquidity needs and maximizing return on earning assets within reasonable risk parameters.

Table VI shows the composition of the available-for-sale debt securities portfolio at December 31, 2024, 2023 and 2022.

The total amortized cost of available-for-sale debt securities decreased $96,826,000 to $464,968,000 at December 31, 2023 from $561,794,000 at December 31, 2022.

The decrease in 2023 followed an increase of $50,202,000 at December 31, 2022 as compared to December 31, 2021.

The decrease in the amortized cost basis of the securities portfolio at December 31, 2023 resulted from maturities and proceeds

from sales which included the sale of available-for-sale debt securities with an amortized cost basis of $45.5 million as part of the repositioning of its available-for-sale securities portfolio in December 2023.

In 2022, the increase in the amortized cost basis of the securities portfolio resulted from management’s decision to invest excess funds available mainly due to growth in deposits.

The total amortized cost of available-for-sale debt securities at December 31, 2024 was lower by $15,045,000 from December 31, 2023 and by $111,871,000 from December 31, 2022.

Proceeds from maturities and sales of securities over the past three years have been used to help fund loan growth and for other purposes.

At December 31, 2024, the largest categories of securities held as a percentage of total amortized cost, were as follows:

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Total Available-for-Sale Debt Securities

Aggregate Unrealized (Loss) Gain

Aggregate Unrealized (Loss) Gain as a % of Amortized Cost

Aggregate Unrealized Loss

Aggregate Unrealized Loss as a % of Amortized Cost

Market Yield on 5-Year U.S.

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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 $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 (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 $47,543,000, or 10.6% at December 31, 2024, $49,213,000 or 10.6% at December 31, 2023 and $63,761,000 or 11.3% at December 31, 2022.

The volatility in the fair value of the portfolio, including the significant reduction in fair value, resulted from changes in interest rates.

As shown above, the market yield on the 5-year U.S.

Treasury Note was 0.15% lower at December 31, 2023 in comparison to December 31, 2022, and 2.58% higher than at December 31, 2021.

Treasury Note was 0.54% higher at December 31, 2024 in comparison to December 31, 2023, and 0.39% higher than at December 31, 2022.

Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk.

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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.

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 for loans and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis.

There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at December 31, 2023, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2024.

There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at December 31, 2024.

Table VII shows the composition of the loan portfolio at year-end from 2020 through 2024.

The significant loan growth in 2019 and 2020 reflects the impact of acquisitions located in Southeastern Pennsylvania.

Primarily as a result of the acquisitions, as well as expansion by opening two offices in Southcentral Pennsylvania, the mix of the loan portfolio has changed to become predominantly commercial in nature.

Throughout this time period, the portfolio was primarily commercial in nature.

At December 31, 2024, commercial loans represented 75% of the portfolio while residential loans totaled 22% of the portfolio.

The segments presented in Table VII have been revised from those used in prior year disclosures to be consistent with the pools used in determining the collectively evaluated portion of the allowance for credit losses based on the CECL methodology in 2023.

As presented in Table VII, total loans outstanding at December 31, 2024 were $1,895,848,000 which is an increase of $47,709,000 (2.6%) from total loans at December 31, 2023.

In comparing outstanding balances at December 31, 2023 and 2022, total commercial loans were up $82,697,000 (6.4%), reflecting growth in non-owner occupied commercial real estate loans of $61,745,000 and owner occupied commercial real estate loans of $31,336,000 and a net decrease of $10,384,000 in other commercial loans.

Within other commercial loans, the outstanding balance of commercial construction and land loans increased $43,231,000, offset by decreases in the outstanding balances of commercial and industrial, commercial lines of credit, loans to political subdivisions and other commercial loans.

Total residential mortgage loans were up $20,132,000 (5.1%) and total consumer loans increased $5,270,000 (9.6% ).

In comparing outstanding balances at December 31, 2024 and 2023, total commercial

loans were up $49,632,000 (3.6%), reflecting growth in owner occupied commercial real estate loans of $23,825,000, other commercial loans of $23,584,000 and non-owner occupied commercial real estate loans of $2,223,000.

Within non-owner occupied commercial real estate loans, multi-family residential loans increased $41,098,000 reflecting the completion of several Corporation-financed construction projects in 2024.

Total outstanding residential mortgage loans were down $5,705,000 (1.4%), and total consumer loans increased $3,782,000 (6.3%).

Also included in Table VII is additional detail regarding the composition of the non-owner occupied commercial real estate loan portfolio at December 31, 2024.

The data in Table VII shows the recorded investment in non-owner occupied commercial real estate loans for which the primary purpose is utilization of office space by third parties was $94,341,000, or 5.1% of gross loans receivable.

At December 31, 2023, within this segment there were two loans with a total recorded investment of $3,908,000 in nonaccrual status with specific allowances totaling $524,000.

The data in Table VII shows the amortized cost in non-owner occupied commercial real estate loans for which the primary purpose is utilization of office space by third parties was $102,831,000, or 5.4% of gross loans receivable.

At December 31, 2024, within this segment there were two loans with a total amortized cost of $3,147,000 in nonaccrual status with no specific allowances.

During the third quarter 2024, there was a partial charge-off of $640,000 on one of the office loans in nonaccrual status.

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

At December 31, 2024, the carrying value of this loan was $1,814,000.

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 December 31, 2024.

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

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans.

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Such repurchases or reimbursements generally result from an underwriting or documentation deficiency.

At December 31, 2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,335,000 compared to $1,515,000 at December 31, 2022.

At December 31, 2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original 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.

At December 31, 2024, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $2,671,000.

At December 31, 2024, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $329, 766,000, including loans sold through the MPF Xtra program of $158,302,000 and loans sold through the Original program of $171,464,000.

Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 2023 and December 31, 2022.

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

TABLE VII – Five-Year Summary of Loans by Type

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PROVISION AND ALLOWANCE FOR CREDIT LOSSES

On January 1, 2023, the Corporation adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (ASC 326).

This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.

CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts.

Note 1 to the consolidated financial statements provides a detailed explanation of the Corporation’s adopted accounting policies related to the application of CECL.

Effective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Results for 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

At January 1, 2023, the impact of adopting CECL included an increase in gross loans receivable of $806,000 as compared to December 31, 2022 and an increase in the

allowance for credit losses of $2,104,000 as compared to the allowance for loan losses determined under the Incurred Loss method at December 31, 2022.

A summary of the provision for credit losses for the year ended December 31, 2023, is as follows:

A summary of the provision for credit losses for the years ended December 31, 2024 and 2023, is as follows:

(In Thousands)

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Off-balance sheet exposures

Tota provision for credit losses

(1) The (credit) provision for credit losses on off-balance sheet exposures prior to January 1, 2023 was included in other noninterest expense in the consolidated statements of income.

For the year ended December 31, 2023, there was a provision for credit losses of $186,000, a decrease of $7,069,000 in expense compared to a provision for loan losses of $7,255,000 in 2022.

Total provision for credit losses

For the year ended December 31, 2024, there was a provision for credit losses of $2,195,000, an increase of $2,009,000 in expense compared to a provision for loan losses of $186,000 in 2023.

The provision for 2024 included expense related to loans receivable of $2,430,000 and a credit related to off-balance sheet exposures of $235,000.

The expense related to loans receivable was mainly attributable to qualitative adjustments of the Corporation’s historical loss experience in estimating the ACL and the impact of an economic forecast, as well as a reduction in the Corporation’s average net charge-off experience, used in the calculation of the ACL.

The ACL as a percentage of gross loans receivable was 1.04% at December 31, 2023 as compared to 1.08% at January 1, 2023 upon the initial adoption of CECL.

Table XI shows that total nonperforming assets as a percentage of total assets was 0.75% at December 31, 2023, down from 1.04% at December 31, 2022 and lower than that at year-end 2019 through 2021.

Total nonperforming assets were $18.8 million at December 31, 2023, down from $25.6 million at December 31, 2022.

Similarly, total loans individually evaluated for credit loss decreased to $11.3 million at December 31, 2023 from $19.4 million at December 31, 2022.

The net decrease in nonperforming assets at December 31, 2023 compared to December 31, 2022 included the impact of a $10.0 million payoff in the first quarter 2023 on a commercial loan relationship that was classified as nonaccrual at December 31, 2022.

The reduction also included paydowns totaling $2,302,000 in 2023 on a commercial loan for which partial charge-offs totaling $3,942,000 were recorded in 2022.

The remaining carrying value of this loan was $352,000 at December 31, 2023.

These reductions were partially offset by the addition to nonaccrual of two commercial loan relationships totaling $4,457,000, including two commercial real estate loans with a primary purpose of office space utilization totaling $3,908,000, at December 31, 2023.

In 2023, net charge-offs were low by historical standards, totaling $264,000, or 0.01% of average outstanding loans.

The expense related to loans receivable included a net increase in the ACL related to qualitative factors, partially offset by a decrease in total specific allowances on individual loans and decreases in other components of the ACL.

The ACL increased $827,000 to 1.06% as a percentage of gross loans receivable at December 31, 204 as compared to 1.04% at December 31, 2023.

As shown in Table X, the ACL on loans individually evaluated decreased to $122,000 at December 31, 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 $486,000 at December 31, 2023.

At December 31, 2024, the carrying value of this loan was $1,814,000 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 December 31, 2024, there was no ACL on the loan and the carrying value of the loan was $3,276,000 .

At December 31, 2024, there was one commercial relationship with loans receivable totaling $258,000 for which an individual ACL was recorded.

Table X also shows that, at December 31, 2024 as compared to December 31, 2023, the ACL related to collectively evaluated commercial loans increased by a total of $1,746,000 and the ACL on collectively evaluated consumer loans increased $110,000, while the ACL on collectively evaluated residential mortgage loans decreased $408,000.

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 2024, net charge-offs totaled $1,603,000, or 0.09% 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 no specific ACL at December 31, 2023.

At December 31, 2024, the carrying value of these loans totaled $1,883,000 with no specific allowance on the loans.

Table IX shows annual average net charge-off rates ranging from a high of 0.26% in 2022 to a low of 0.01% in 2023.

Table XII shows that over the five-year period ended December 31, 2024, the average net-charge off rate was 0.12%.

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

Total nonperforming assets were $24.1 million at December 31, 2024, up from $18.8 million at December 31, 2023.

Similarly, total loans individually evaluated for credit loss increased to $19.1 million at December 31, 2024 from $11.3 million at December 31, 2023.

The net increase in nonperforming assets at December 31, 2024 compared to December 31, 2023 included the impact of classifying commercial construction and land loans to two borrowers with carrying balances totaling $6.7 million at December 31, 2024 as nonaccrual.

Based on management’s assessment, there was no specific ACL on these loans at December 31, 2024.

Over the period 2020-2024, 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 December 31, 2023.

Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

Management believes it has been prudent 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 ACL calculated as of December 31, 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 IX through XII present historical data related to loans and the allowance for credit losses.

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Net charge-offs

Provision for credit losses

Provision for credit losses on loans

Balance, end of year

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Total nonperforming assets as a % of assets

Nonaccrual loans as a % of loans

Allowance for credit losses as a % of nonaccrual loans

Allowance for credit losses as a % of total loans

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Information concerning operating lease commitments with terms greater than one year is provided in Note 16 to the consolidated financial statements.

The Corporation’s significant off-balance sheet arrangements include commitments to extend credit and standby letters of credit.

Off-balance sheet arrangements are described in Note 15 and the allowance for credit losses on off-balance sheet exposures is described in Note 7 to the consolidated financial statements.

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers.

These financial instruments include commitments to extend credit and standby letters of credit.

These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheets.

Commitments to extend credit are legally binding agreements to lend to customers and generally have fixed expiration dates or other termination clauses and may require payment of fees.

The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments and standby letters of credit do not necessarily represent future liquidity requirements, as they may expire without being used.

The following table presents the Corporation's commitments to extend credit and standby letters of credit as of December 31, 2024:

(In Thousands)

Commercial real estate loans

Commercial lines of credit

Commercial construction and land

Other commercial loan

1-4 family residential construction

Consumer lines of credit (including HELOCs)

All other consumer loans

Total commitments to extend credit

Financial letters of credit

Performance letters of credit

Total standby letters of credit

Off-balance sheet arrangements are further described in Note 15 and the allowance for credit losses on off-balance sheet exposures is described in Note 7 to the consolidated financial statements.

As described in more detail in the Financial Condition section of Management’s Discussion and Analysis, the Corporation sells residential mortgage loans for which 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.

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Total credit facilities

At December 31, 2024, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings with par values totaling $165,451,000 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 with par values totaling $138,313,000 and letters of credit totaling $19,208,000.

At December 31, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowing of $77,000,000, long-term borrowings of $62,272,000 and letters of credit totaling $10,827,000.

Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis.

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At December 31, 2024, the carrying value of available-for-sale debt securities in excess of amounts required to meet pledging or repurchase agreement obligations was $236,945,000.

Deposits totaled $2,014,806,000 at December 31, 2023, up $17,213,000 (0.9%) from $1,997,593,000 at December 31, 2022.

Average total deposits were 0.4% lower for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

Excluding brokered deposits, adjusted total deposits at December 31, 2023 were lower by $26,173,000 (1.3%) as compared to December 31, 2022.

Brokered deposits, consisting mainly of short-term certificates of deposit, totaled $64,369,000 at December 31, 2023, an increase of $43,386,000 from December 31, 2022.

The reduction in total deposits, excluding brokered deposits, included a reduction in the estimated amount of deposits in excess of FDIC insurance levels (uninsured deposit balances) of $97.2 million as compared to December 31, 2022.

The net reduction in uninsured deposits resulted from several factors, including the impact of customer funds transferred to higher-yielding investment alternatives and increased use of reciprocal deposits that allow C&N Bank to place customer funds in excess of the FDIC insurance limit with other financial institutions through a deposit placement network in exchange for a matching amount of deposits from other network financial institutions.

Reciprocal deposits totaled $223.5 million at December 31, 2023, up $121.7 million from December 31, 2022.

As shown in the table below, at December 31, 2023, estimated uninsured deposits totaled $592.2 million, or 29.2% of total deposits, down from $689.4 million or 34.2% of total deposits at December 31, 2022.

Deposits totaled $2,093,909,000 at December 31, 2024, up $79,103,000 (3.9%) from $2,014,806,000 at December 31, 2023 despite a decrease in brokered deposits of $40,348,000.

Average total deposits of $2,057,570,000 were 4.3% higher for the year ended December 31, 2024, as compared to $1,971,926,000 for the year ended December 31, 2023 .

Brokered deposits, consisting mainly of short-term certificates of deposit, totaled $24,021,000 at December 31, 2024, a decrease of $40,348,000 from December 31, 2023.

As shown in the table below, at December 31, 2024, estimated uninsured deposits totaled $632.8 million, or 30.0% of total deposits, up from $592.2 million, or 29.2% of total deposits at December 31, 2023.

Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling $162.0 million at December 31, 2024.

As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.7% of total deposits at December 31, 2023, down from 24.0% at December 31, 2022.

As shown in the table below, total uninsured and uncollateralized deposits amounted to 22.3% of total deposits at December 31, 2024, up from 21.7% at December 31, 2023.

As summarized in the table that immediately follows, the Corporation’s highly liquid sources of available funds described above, including unused borrowing capacity with the Federal Home Loan Bank of Pittsburgh, unused availability on the Federal Reserve Bank of Philadelphia’s discount window, available federal funds lines with other banks and unencumbered available-for-sale debt securities totaled $1.1 billion at December 31, 2024.

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Uninsured and Uncollateralized Deposits

Despite the reduction in deposits, excluding brokered deposits, in 2023, based on the ample sources of highly liquid funds as described above, management believes the Corporation is well-positioned to meet its short-term and long-term funding obligations.

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

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

Under the newly approved program, the Corporation is authorized to repurchase up to 750,000 shares of the Corporation’s common stock, or slightly less than 5% of the Corporation’s issued and outstanding shares at August 4, 2023.

The new program was effective when publicly announced and will continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion.

All shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plans and its equity compensation program.

Through December 31, 2023, no shares were repurchased under the new 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 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 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.

During the year ended December 31, 2024, 26,034 shares were repurchased for a total cost of $443,000, at an average price of $17.02 per share.

At December 31, 2024, there were 723,966 shares available to be repurchased under the program.

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 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 $38,878,000 at December 31, 2023 and $50,370,000 at December 31, 2022 as compared to the balance in accumulated other comprehensive income related to unrealized gains on available-for-sale debt securities, net of deferred income tax of $ 4,809,000 at December 31, 2021.

The volatility in stockholders’ equity related to accumulated other comprehensive loss from available-for-sale debt securities has been caused by significant fluctuations in interest rates including overall significant increases in rates as compared to market rates when most of the Corporation’s securities were purchased.

The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $37,084,000 at December 31, 2024 and $38,878,000 at December 31, 2023.

The volatility in stockholders’ equity related to accumulated other comprehensive loss from available-for-sale debt securities has been caused by fluctuations in interest rates including overall increases in rates as compared to market rates when most of the Corporation’s securities were purchased.

The securities section of Management’s Discussion and Analysis and Note 6 to the consolidated financial statements provide additional information concerning information management considered in evaluating debt and equity securities for credit losses at December 31, 2024.

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INTEREST RATE RISK

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.

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.

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”).

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).

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.

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.

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.

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.

Table XIII, which follows this discussion, is based on the results of calculations performed using the simulation model as of December 31, 2024 and 2023.

In the analysis based on 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.

Further, the economic value of equity is modeled to decrease in both the rising and falling rate scenarios.

The results based on December 31, 2023 data as presented in Table XIII are significantly different from the results based on the modeling performed using December 31, 2022 data which showed the net interest income profile to be asset-sensitive.

In the analysis based on December 31, 2023 data, management assumed that, in rising rate scenarios, the average rate to be paid on interest checking, savings and money market accounts would increase by a higher percentage of the baseline scenario as compared to the assumptions used in the December 31, 2022 analysis.

This change reflects management’s assessment that, in light of significant increases in short-term interest rates that have occurred over the course of 2022 and 2023, the Corporation’s deposit rates would increase to a greater extent if such scenarios would occur.

The change in results also reflects changes in deposit mix, as the carrying amount of total deposits without stated maturities was $112.0 million lower at December 31, 2023 as compared to December 31, 2022, while time deposits were higher by $129.3 million.

The Table shows that as of the respective dates, the changes in net interest income and changes in EVE were within the policy limits in all scenarios.

Based on December 31, 2024 and 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.

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.

The Table also shows that as of the respective dates, despite the impact of the modeling changes and changes in deposit mix, the changes in net interest income and changes in economic value were within the policy limits in all scenarios.

At December 31, 2024 and 2023, EVE is modeled to decrease compared to the 0 basis point scenario in all of the rising and falling rate scenarios.

In Table XIII, EVE is higher at December 31, 2024 as compared to December 31, 2023 all of the rate scenarios.

The increases in comparative amounts of EVE reflects the impact of an overall increase in the assumed lives of nonmaturity deposits used in the December 31, 2024 analysis based on an updated study completed in the second quarter 2024.

The increases in EVE also reflect generally higher long-term interest rates used in calculating the present values of nonmaturity deposits at December 31, 2024 as compared to December 31, 2023.

generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date.

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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-K

Item 7. Management’s Discussion and Analysis