Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this Annual Report on Form 10-K are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
● changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
● changes in general economic conditions
● 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
● legislative or regulatory changes
● downturn in demand for loan, deposit and other financial services in the Corporation’s market area
● increased competition from other banks and non-bank providers of financial services
● technological changes and increased technology-related costs
● information security breach or other technology difficulties or failures
● changes in accounting principles, or the application of generally accepted accounting principles
● fraud and cyber malfunction risks as usage of artificial intelligence continues to expand
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
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EARNINGS OVERVIEW
2024 vs. 2023
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. 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:
● 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:
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◾ 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.
2023 vs. 2022
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.
● For the year ended December 31, 2023, net interest income totaled $80,400,000, $2,728,000 lower than in 2022. The interest rate spread decreased 0.66%, as the average rate on interest-bearing liabilities was higher by 1.36% while the average yield on earning assets increased 0.70%. The net interest margin was 3.47% in 2023, down from 3.77% in 2022. Average total earning assets increased $101,418,000 in 2023 over 2022, including an increase in average loans receivable of $164,055,000, or 10.1%. Average interest-bearing deposits increased $27,528,000 while average total deposits decreased $8,486,000, or 0.4%, in 2023 as compared to 2022.
● 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 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. 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. For the year ended December 31, 2023, net charge-offs totaled $264,000 or 0.01% of gross loans receivable as compared to $4,177,000 or 0.26% of gross loans receivable in 2022.
● Noninterest income, excluding realized (losses) gains on available-for-sale debt securities, totaled $27,453,000 for the year ended December 31, 2023, up $3,041,000 from the comparable category for the year ended December 31, 2022. Significant variances included the following:
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Ø Increase in cash surrender value of life insurance of $2,703,000 increased $2,158,000 in 2023 from 2022 including $2,100,000 in income from a one-time enhancement on a $30 million purchase of new BOLI as previously discussed.
Ø Other noninterest income of $4,610,000 increased $912,000 as dividends on FHLB-Pittsburgh stock totaled $1,138,000, an increase of $541,000. Additionally, in 2023, the Corporation recognized income of $156,000 from dividends on Federal Reserve Bank stock with no comparable amount in 2022 and income of $234,000, with no comparable amount in 2022, from a conversion assistance payment received related to a change in wealth management platform for providing brokerage and investment advisory services.
Ø Service charges on deposit accounts of $5,567,000 increased $548,000 as the volume of consumer and business overdraft activity increased and included in 2022 was a reduction in income of $290,000 related to refunds of consumer overdraft fees as the result of updated regulatory guidance on certain overdraft fees.
Ø Trust revenue of $7,413,000 increased $419,000 reflecting revenue from new business.
Ø Brokerage and insurance revenue of $1,675,000 decreased $616,000 due to a reduction in sales volume.
Ø Loan servicing fees, net, of $602,000 decreased $358,000, as the fair value of servicing rights decreased $200,000 in 2023 as compared to an increase of $126,000 in 2022.
● 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 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. Significant variances included the following:
Ø Other noninterest expense of $11,233,000 increased $3,012,000. Within this category, significant variances included the following:
◾ Other operational losses included net increase in expense of $854,000 to $505,000 in other losses in 2023 from a net reduction in expense of $349,000 in 2022. Included in 2023 is $427,000 related to a trust department tax compliance matter while most of the reduction in other losses in 2022 was from recoveries or reversals of previously recorded charges related to trust department tax compliance matters. Also included in other operational losses was $232,000 of expenses related to check fraud in 2023 with no comparable amount in 2022.
◾ FDIC insurance expense increased $481,000, reflecting the impact of an increase in base deposit insurance assessment rate applicable to all banks.
◾ Legal fees totaled $759,000 in 2023, an increase of $261,000, mainly due to fees incurred related to non-litigation-related corporate matters.
◾ In 2023, the allowance for disallowed SBA claims decreased $90,000, resulting in a reduction in expense of the same amount, reflecting better than previously estimated claims experience. The comparable amount in 2022 was a reduction in expense of $367,000. At December 31, 2023, there was no remaining allowance for disallowed SBA claims.
◾ Included in 2022 was a reduction of $172,000 in expense related to credit losses on off balance sheet exposures. 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 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.
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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 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. The higher effective rate in 2023 includes: (1) the tax charge of $950,000 for the initiated surrender of BOLI; (2) an increase in nondeductible interest expense; (3) the impact of the increase in trust department tax compliance-related penalties; and (4) the impact of the 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.
More detailed information concerning the Corporation’s earnings results are provided in other sections of Management’s Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
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. Actual results could differ from these estimates.
Allowance for Credit Losses on Loans – A material estimate that is particularly susceptible to significant change is the determination of the allowance for credit losses (ACL) on loans. The Corporation maintains an ACL on loans which represents management’s estimate of expected net charge-offs over the life of the loans. The ACL includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis). Management considers the determination of the ACL on loans to be critical because it requires significant judgment regarding estimates of expected credit losses based on the Corporation’s historical loss experience, current conditions and economic forecasts. Management’s evaluation is based upon a continuous review of the Corporation’s loans, with consideration given to evaluations resulting from examinations performed by regulatory authorities. Notes 1 and 7 to the consolidated financial statements provide an overview of the process management uses for determining the ACL, and additional discussion of the ACL is provided in a separate section of Management’s Discussion and Analysis.
The ACL may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables, including new information regarding existing problem loans, identification of additional problem loans, changes in the fair value of underlying collateral, unforeseen events such as natural disasters and pandemics, and other factors. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly.
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables I, II and III include information regarding the Corporation’s net interest income in 2024, 2023 and 2022. 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. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.
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2024 vs. 2023
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.
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2023 vs. 2022
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. As presented in Table II, the Net Interest Margin was 3.47% in 2023, as compared to 3.77% in 2022, 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 2.91% in 2023 from 3.57% in 2022. The average yield on earning assets of 4.89% was 0.70% higher in 2023 as compared to 2022, while the average rate on interest bearing liabilities of 1.98% was 1.36% higher in 2023 as compared to 2022. 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.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $114,423,000 in 2023, an increase of $20,550,000, or 21.9%, from 2022.
Interest and fees from loans receivable increased $20,540,000 in 2023 as compared to 2022. In 2023, the fully taxable equivalent yield on loans was 5.67%, up from 4.98% in 2022, reflecting the effects of rising interest rates on the loan portfolio. 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 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. The average yield on interest-bearing due from banks was 4.22% in 2023 and 1.25% in 2022. The average balance of interest-bearing due from banks was $32,709,000 in 2023 as compared to $51,407,000 in 2022. 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. The average yield on available-for-sale debt securities was 2.21% for 2023, up from 2.16% in 2022.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $23,585,000 to $33,104,000 in 2023 from $9,519,000 in 2022.
Interest expense on deposits increased $17,595,000, as the average rate on interest-bearing deposits increased to 1.66% in 2023 from 0.46% in 2022 reflecting the impact of increases in market rates in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,971,926,000 for 2023, down $8,486,000 (0.4%) from $1,980,412,000 in 2022. Within average deposits, average brokered deposits were $47,424,000 at an average rate of 4.78% for 2023 as compared to $33,458,000 at an average rate of 1.71% in 2022. The deposit mix changed significantly in 2023. Average time deposits increased $96,224,000 and average interest checking deposits increased $45,654,000, while the average total balance of money market accounts decreased $95,954,000, the average balance of noninterest bearing demand deposits decreased $36,014,000 and average savings deposits decreased $18,396,000.
Interest expense on short-term borrowings in 2023 was $3,240,000 as compared to $429,000 in 2022 as the average balance of short-term borrowings increased to $62,926,000 in 2023 from $21,766,000 in 2022. The average rate on short-term borrowings was 5.15% in 2023 compared to 1.97% in 2022.
Interest expense on long-term borrowings (FHLB advances) increased $3,334,000 to $4,230,000 in 2023 from $896,000 in 2022. The average balance of long-term borrowings was $110,943,000 in 2023, up from an average balance of $40,194,000 in 2022. 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 3.81% in 2023 compared to 2.23% 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.
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TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
Year Ended
December 31,
Increase/(Decrease)
(In Thousands)
2024
2023
2022
2024/2023
2023/2022
INTEREST INCOME
Interest-bearing due from banks
$
4,307
$
1,379
$
645
$
2,928
$
734
Available-for-sale debt securities:
Taxable
8,593
8,555
8,360
38
195
Tax-exempt
2,531
2,815
3,721
(284)
(906)
Total available-for-sale debt securities
11,124
11,370
12,081
(246)
(711)
Loans receivable:
Taxable
110,396
98,854
78,599
11,542
20,255
Tax-exempt
2,944
2,756
2,471
188
285
Total loans receivable
113,340
101,610
81,070
11,730
20,540
Other earning assets
126
64
77
62
(13)
Total Interest Income
128,897
114,423
93,873
14,474
20,550
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking
12,151
7,668
1,833
4,483
5,835
Money market
8,589
5,686
2,088
2,903
3,598
Savings
207
243
257
(36)
(14)
Time deposits
18,253
10,636
2,460
7,617
8,176
Total interest-bearing deposits
39,200
24,233
6,638
14,967
17,595
Borrowed funds:
Short-term
1,168
3,240
429
(2,072)
2,811
Long-term - FHLB advances
7,188
4,230
896
2,958
3,334
Senior notes, net
481
479
477
2
2
Subordinated debt, net
926
922
1,079
4
(157)
Total borrowed funds
9,763
8,871
2,881
892
5,990
Total Interest Expense
48,963
33,104
9,519
15,859
23,585
Net Interest Income
$
79,934
$
81,319
$
84,354
$
(1,385)
$
(3,035)
(1) Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis (a non-GAAP measure), using the Corporation’s marginal federal income tax rate of 21%.
(2) Fees on loans are included with interest on loans and amounted to $1,927,000 in 2024, $1,856,000 in 2023 and $2,958,000 in 2022.
(3) The table that follows is a reconciliation of net interest income under U.S. GAAP as compared to net interest income as adjusted to a fully taxable-equivalent basis.
(In Thousands)
Year Ended
December 31,
Increase/(Decrease)
2024
2023
2022
2024/2023
2023/2022
Net Interest Income Under U.S. GAAP
$
79,115
$
80,400
$
83,128
$
(1,285)
$
(2,728)
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities
271
388
720
(117)
(332)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans
548
531
506
17
25
Net Interest Income as adjusted to a fully taxable-equivalent basis
$
79,934
$
81,319
$
84,354
$
(1,385)
$
(3,035)
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TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(Dollars In Thousands)
Year
Year
Year
Ended
Rate of
Ended
Rate of
Ended
Rate of
12/31/2024
Return/
12/31/2023
Return/
12/31/2022
Return/
Average
Cost of
Average
Cost of
Average
Cost of
Balance
Funds%
Balance
Funds%
Balance
Funds%
EARNING ASSETS
Interest-bearing due from banks
$
86,703
4.97
%
$
32,709
4.22
%
$
51,407
1.25
%
Available-for-sale debt securities, at amortized cost:
Taxable
340,339
2.52
%
389,456
2.20
%
410,033
2.04
%
Tax-exempt
113,121
2.24
%
125,920
2.24
%
148,344
2.51
%
Total available-for-sale debt securities
453,460
2.45
%
515,376
2.21
%
558,377
2.16
%
Loans receivable:
Taxable
1,791,187
6.16
%
1,703,839
5.80
%
1,541,823
5.04
%
Tax-exempt
89,935
3.27
%
88,310
3.12
%
86,271
2.86
%
Total loans receivable
1,881,122
6.03
%
1,792,149
5.67
%
1,628,094
4.98
%
Other earning assets
2,198
5.73
%
1,383
4.63
%
2,321
3.32
%
Total Earning Assets
2,423,483
5.32
%
2,341,617
4.89
%
2,240,199
4.19
%
Cash
22,209
22,108
22,685
Unrealized loss on securities
(49,520)
(63,118)
(38,784)
Allowance for credit losses
(20,294)
(18,498)
(14,962)
Bank-owned life insurance
51,465
31,808
30,925
Bank premises and equipment
21,765
21,330
21,559
Intangible assets
54,778
55,176
55,599
Other assets
79,220
72,433
55,567
Total Assets
$
2,583,106
$
2,462,856
$
2,372,788
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
$
537,233
2.26
%
$
488,761
1.57
%
$
443,107
0.41
%
Money market
358,274
2.40
%
347,130
1.64
%
443,084
0.47
%
Savings
203,129
0.10
%
238,760
0.10
%
257,156
0.10
%
Time deposits
465,882
3.92
%
381,488
2.79
%
285,264
0.86
%
Total interest-bearing deposits
1,564,518
2.51
%
1,456,139
1.66
%
1,428,611
0.46
%
Borrowed funds:
Short-term
22,743
5.14
%
62,926
5.15
%
21,766
1.97
%
Long-term - FHLB advances
167,181
4.30
%
110,943
3.81
%
40,194
2.23
%
Senior notes, net
14,865
3.24
%
14,798
3.24
%
14,733
3.24
%
Subordinated debt, net
24,774
3.74
%
24,662
3.74
%
27,116
3.98
%
Total borrowed funds
229,563
4.25
%
213,329
4.16
%
103,809
2.78
%
Total Interest-bearing Liabilities.
1,794,081
2.73
%
1,669,468
1.98
%
1,532,420
0.62
%
Demand deposits
493,052
515,787
551,801
Other liabilities
30,089
29,107
23,474
Total Liabilities
2,317,222
2,214,362
2,107,695
Stockholders' equity, excluding accumulated other comprehensive loss
304,532
297,894
295,447
Accumulated other comprehensive loss
(38,648)
(49,400)
(30,354)
Total Stockholders' Equity
265,884
248,494
265,093
Total Liabilities and Stockholders' Equity
$
2,583,106
$
2,462,856
$
2,372,788
Interest Rate Spread
2.59
%
2.91
%
3.57
%
Net Interest Income/Earning Assets
3.30
%
3.47
%
3.77
%
Total Deposits (Interest-bearing and Demand)
$
2,057,570
$
1,971,926
$
1,980,412
(1) Rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2) Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
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TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)
.
Year Ended 12/31/2024 vs. 12/31/2023
.
Year Ended 12/31/2023 vs. 12/31/2022
Change in
Change in
Total
Change in
Change in
Total
Volume
Rate
Change
Volume
Rate
Change
EARNING ASSETS
Interest-bearing due from banks
$
2,642
$
286
$
2,928
$
(309)
$
1,043
$
734
Available-for-sale debt securities:
Taxable
(1,153)
1,191
38
(433)
628
195
Tax-exempt
(286)
2
(284)
(527)
(379)
(906)
Total available-for-sale debt securities
(1,439)
1,193
(246)
(960)
249
(711)
Loans receivable:
Taxable
5,209
6,333
11,542
8,451
11,804
20,255
Tax-exempt
52
136
188
59
226
285
Total loans receivable
5,261
6,469
11,730
8,510
12,030
20,540
Other earning assets
44
18
62
(37)
24
(13)
Total Interest Income
6,508
7,966
14,474
7,204
13,346
20,550
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking
822
3,661
4,483
208
5,627
5,835
Money market
188
2,715
2,903
(542)
4,140
3,598
Savings
(36)
0
(36)
(14)
0
(14)
Time deposits
2,690
4,927
7,617
1,073
7,103
8,176
Total interest-bearing deposits
3,664
11,303
14,967
725
16,870
17,595
Borrowed funds:
Short-term
(2,064)
(8)
(2,072)
1,517
1,294
2,811
Long-term - FHLB advances
2,363
595
2,958
2,375
959
3,334
Senior notes, net
2
0
2
2
0
2
Subordinated debt, net
4
0
4
(94)
(63)
(157)
Total borrowed funds
305
587
892
3,800
2,190
5,990
Total Interest Expense
3,969
11,890
15,859
4,525
19,060
23,585
Net Interest Income
$
2,539
$
(3,924)
$
(1,385)
$
2,679
$
(5,714)
$
(3,035)
(1) Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
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NONINTEREST INCOME
TABLE IV - COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands)
Year Ended
December 31,
$
%
2024
2023
Change
Change
Trust revenue
$
7,928
$
7,413
$
515
6.9
%
Brokerage and insurance revenue
2,271
1,675
596
35.6
%
Service charges on deposit accounts
5,867
5,567
300
5.4
%
Interchange revenue from debit card transactions
4,276
4,160
116
2.8
%
Net gains from sales of loans
1,158
723
435
60.2
%
Loan servicing fees, net
649
602
47
7.8
%
Increase in cash surrender value of life insurance
1,830
2,703
(873)
(32.3)
%
Other noninterest income
5,230
4,610
620
13.4
%
Realized (losses) on available-for-sale debt securities, net
0
(3,036)
3,036
N/M
%
Total noninterest income
$
29,209
$
24,417
$
4,792
19.6
%
(Dollars in Thousands)
Year Ended
December 31,
$
%
2023
2022
Change
Change
Trust revenue
$
7,413
$
6,994
$
419
6.0
%
Brokerage and insurance revenue
1,675
2,291
(616)
(26.9)
%
Service charges on deposit accounts
5,567
5,019
548
10.9
%
Interchange revenue from debit card transactions
4,160
4,148
12
0.3
%
Net gains from sales of loans
723
757
(34)
(4.5)
%
Loan servicing fees, net
602
960
(358)
(37.3)
%
Increase in cash surrender value of life insurance
2,703
545
2,158
396.0
%
Other noninterest income
4,610
3,698
912
24.7
%
Realized (losses) gains on available-for-sale debt securities, net
(3,036)
20
(3,056)
N/M
%
Total noninterest income
$
24,417
$
24,432
$
(15)
(0.1)
%
(1) N/M Not Meaningful
NONINTEREST EXPENSE
TABLE V - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands)
Year Ended
December 31,
$
%
2024
2023
Change
Change
Salaries and employee benefits
$
44,930
$
44,195
$
735
1.7
%
Net occupancy and equipment expense
5,473
5,357
116
2.2
%
Data processing and telecommunications expense
7,768
7,582
186
2.5
%
Automated teller machine and interchange expense
1,818
1,682
136
8.1
%
Pennsylvania shares tax
1,733
1,602
131
8.2
%
Professional fees
2,175
2,497
(322)
(12.9)
%
Other noninterest expense
10,361
11,233
(872)
(7.8)
%
Total noninterest expense
$
74,258
$
74,148
$
110
0.1
%
24
Table of Contents
(Dollars in Thousands)
Year Ended
December 31,
$
%
2023
2022
Change
Change
Salaries and employee benefits
$
44,195
$
41,833
$
2,362
5.6
%
Net occupancy and equipment expense
5,357
5,533
(176)
(3.2)
%
Data processing and telecommunications expense
7,582
6,806
776
11.4
%
Automated teller machine and interchange expense
1,682
1,601
81
5.1
%
Pennsylvania shares tax
1,602
1,956
(354)
(18.1)
%
Professional fees
2,497
2,005
492
24.5
%
Other noninterest expense
11,233
8,221
3,012
36.6
%
Total noninterest expense
$
74,148
$
67,955
$
6,193
9.1
%
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.
INCOME TAXES
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, 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. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. Further, the value of the benefit from realization of deferred tax assets would be impacted if income tax rates were changed from currently enacted levels.
Management believes the recorded net deferred tax asset at December 31, 2024 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.
Additional information related to income taxes is presented in Note 13 to the consolidated financial statements.
SECURITIES
Management continually evaluates several objectives in determining the size, securities mix and other characteristics of the available-for-sale debt securities (investment) portfolio. Key objectives include supporting liquidity needs and maximizing return on earning assets within reasonable risk parameters.
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 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: (1) tax-exempt and taxable municipal bonds, 36.3%; (2) residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies, including pass-through securities and collateralized mortgage obligations, 35.1%; and (3) commercial mortgage-backed securities issued or guaranteed by U.S. Government sponsored agencies, 16.3%.
25
Table of Contents
The composition of the available-for-sale debt securities portfolio at December 31, 2024, December 31, 2023 and December 31, 2022 is as follows:
TABLE VI - INVESTMENT SECURITIES
2024
2023
2022
Amortized
Fair
Amortized
Fair
Amortized
Fair
(In Thousands)
Cost
Value
Cost
Value
Cost
Value
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury
$
8,067
$
7,118
$
12,325
$
11,290
$
35,166
$
31,836
Obligations of U.S. Government agencies
10,154
9,025
11,119
9,946
25,938
23,430
Bank holding company debt securities
28,958
25,246
28,952
23,500
28,945
25,386
Obligations of states and political subdivisions:
Tax-exempt
111,995
101,302
113,464
104,199
146,149
132,623
Taxable
51,147
42,506
58,720
50,111
68,488
56,812
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities
104,378
94,414
105,549
95,405
112,782
99,941
Residential collateralized mortgage obligations
53,389
49,894
50,212
46,462
44,868
40,296
Commercial mortgage-backed securities
73,470
64,501
76,412
66,682
91,388
79,686
Private label commercial mortgage-backed securities
8,365
8,374
8,215
8,160
8,070
8,023
Total Available-for-Sale Debt Securities
$
449,923
$
402,380
$
464,968
$
415,755
$
561,794
$
498,033
Aggregate Unrealized Loss
$
(47,543)
$
(49,213)
$
(63,761)
Aggregate Unrealized Loss as a % of Amortized Cost
(10.6)
%
(10.6)
%
(11.3)
%
Market Yield on 5-Year U.S. Treasury Obligations (a)
4.38
%
3.84
%
3.99
%
(a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates)
As reflected in the table above, the fair value of available-for-sale securities was lower than the amortized cost basis by $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 0.54% 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.
As described in Note 6 to the 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 December 31, 2024 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of December 31, 2024 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at December 31, 2024, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:
● Bank holding company debt securities – All of the Corporation’s holdings of bank holding company debt securities were investment grade and there have been no payment defaults. There were seven securities with face amounts ranging from $3 million to $5 million, including one senior security and six subordinated securities. All of the issuers have publicly traded common stock . At December 31, 2024, the securities have external ratings ranging from BBB-/Baa3 to A-.
● Obligations of states and political subdivisions (municipal bonds) – All of the Corporation’s holdings of municipal bonds were investment grade and there have been no payment defaults. Summary ratings information at December 31, 2024, based on the amortized cost basis and reflecting the lowest enhanced or underlying rating by Moody’s, Standard & Poors or Fitch, is as follows: AAA or pre-refunded – 20% of the portfolio; AA – 74%; A – 6%.
26
Table of Contents
● Private label commercial mortgage-backed securities (PLCMBS) – There were two PLCMBS securities, both of which were from the most senior payment (subordination) classes of their respective issuances. These securities were investment grade (rated Aaa), and there have been no payment defaults on these securities.
Based on the results of management’s assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at December 31, 2024.
The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2024. Yields on tax-exempt securities are presented on a fully taxable-equivalent basis. For callable securities, yields on securities purchased at a discount are based on yield-to-maturity, while yields on securities purchased at a premium are based on yield to the first call date. Yields on mortgage-backed securities are estimated and include the effects of prepayment assumptions. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
Within
One-
Five-
After
One
Five
Ten
Ten
(Dollars In Thousands)
Year
Yield
Years
Yield
Years
Yield
Years
Yield
Total
Yield
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury
$
0
0.00
%
$
5,115
1.29
%
$
2,952
1.57
%
$
0
0.00
%
$
8,067
1.39
%
Obligations of U.S. Government agencies
0
0.00
%
0
0.00
%
6,875
2.24
%
3,279
3.44
%
10,154
2.63
%
Bank holding company debt securities
0
0.00
%
0
0.00
%
28,958
3.47
%
0
0.00
%
28,958
3.47
%
Obligations of states and political subdivisions:
Tax-exempt
4,731
2.22
%
13,837
2.70
%
27,729
2.83
%
65,698
2.36
%
111,995
2.51
%
Taxable
565
3.59
%
14,488
1.87
%
12,152
2.66
%
23,942
2.41
%
51,147
2.33
%
Sub-total
$
5,296
2.37
%
$
33,440
2.13
%
$
78,666
2.94
%
$
92,919
2.41
%
$
210,321
2.56
%
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities
104,378
2.59
%
Residential collateralized mortgage obligations
53,389
3.38
%
Commercial mortgage-backed securities
73,470
2.01
%
Private label commercial mortgage-backed securities
8,365
5.44
%
Total
$
449,923
2.63
%
The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period.
FINANCIAL CONDITION
This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for credit losses 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, 2024.
Table VII shows the composition of the loan portfolio at year-end from 2020 through 2024. 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.
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, 2024 and 2023, total commercial
27
Table of Contents
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 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.
While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to $35,129,000 at December 31, 2024, down from $38,652,000 at December 31, 2023.
The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. The Corporation also may originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through December 31, 2024, the Corporation’s activity under the MPF Direct Program has been minimal.
For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At 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, 2024.
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Table of Contents
TABLE VII – Five-Year Summary of Loans by Type
(Dollars In Thousands)
2024
%
2023
%
2022
%
2021
%
2020
%
Commercial real estate - non-owner occupied:
Non-owner occupied
$
471,171
24.9
$
499,104
27.0
$
454,386
26.1
$
358,352
22.9
$
328,662
20.0
Multi-family (5 or more) residential
105,174
5.5
64,076
3.5
55,406
3.2
49,054
3.1
54,893
3.3
1-4 Family - commercial purpose
163,220
8.6
174,162
9.4
165,805
9.5
175,027
11.2
198,918
12.1
Total commercial real estate - non-owner occupied
739,565
39.0
737,342
39.9
675,597
38.8
582,433
37.2
582,473
35.4
Commercial real estate - owner occupied
261,071
13.8
237,246
12.8
205,910
11.8
196,083
12.5
191,075
11.6
All other commercial loans:
Commercial and industrial
96,665
5.1
78,832
4.3
95,368
5.5
118,488
7.6
222,923
13.6
Commercial lines of credit
120,078
6.3
117,236
6.3
141,444
8.1
106,338
6.8
105,802
6.4
Political subdivisions
94,009
5.0
79,031
4.3
86,663
5.0
75,401
4.8
46,295
2.8
Commercial construction and land
92,741
4.9
104,123
5.6
60,892
3.5
59,505
3.8
41,000
2.5
Other commercial loans
19,784
1.0
20,471
1.2
25,710
1.5
26,498
1.8
29,310
1.9
Total all other commercial loans
423,277
22.3
399,693
21.7
410,077
23.6
386,230
24.8
445,330
27.2
Residential mortgage loans:
1-4 Family - residential
383,797
20.2
389,262
21.1
363,005
20.9
327,593
20.9
356,532
21.7
1-4 Family residential construction
24,212
1.3
24,452
1.3
30,577
1.8
23,151
1.5
18,736
1.1
Total residential mortgage
408,009
21.5
413,714
22.4
393,582
22.7
350,744
22.4
375,268
22.8
Consumer loans:
Consumer lines of credit (including HELOCs)
47,196
2.5
41,503
2.2
36,650
2.1
33,522
2.1
34,566
2.1
All other consumer
16,730
0.9
18,641
1.0
18,224
1.0
15,837
1.0
15,497
0.9
Total consumer
63,926
3.4
60,144
3.2
54,874
3.1
49,359
3.1
50,063
3.0
Total
1,895,848
100.0
1,848,139
100.0
1,740,040
100.0
1,564,849
100.0
1,644,209
100.0
Less: allowance for credit losses on loans
(20,035)
(19,208)
(16,615)
(13,537)
(11,385)
Loans, net
$
1,875,813
$
1,828,931
$
1,723,425
$
1,551,312
$
1,632,824
Additional details regarding the composition of the non-owner occupied commercial real estate loan portfolio at December 31, 2024 is as follows:
(In Thousands)
December 31,
% of Non-owner
% of
2024
Occupied CRE
Total Loans
Office
$
102,831
21.8
%
5.4
%
Retail
96,142
20.4
%
5.1
%
Industrial
79,839
16.9
%
4.2
%
Hotels
70,229
14.9
%
3.7
%
Mixed Use
60,837
12.9
%
3.2
%
Other
61,293
13.0
%
3.2
%
Total Non-owner Occupied CRE Loans
$
471,171
Total Gross Loans
$
1,895,848
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TABLE VIII – LOAN MATURITY DISTRIBUTION
As of December 31, 2024
Fixed-Rate Loans
Variable- or Adjustable-Rate Loans
All Loans
1 Year
1-5
>5-15
>15
1 Year
1-5
>5-15
>15
(In Thousands)
or Less
Years
Years
Years
Total
or Less
Years
Years
Years
Total
Total
Commercial Real Estate- Nonowner Occupied:
Non-owner occupied
$
19,319
$
202,763
$
11,483
$
9
$
233,574
$
80,396
$
154,149
$
3,052
$
0
$
237,597
$
471,171
Multi-family (5 or more) residential
7,335
18,009
2,419
678
28,441
22,578
54,155
0
0
76,733
105,174
1-4 Family - commercial purpose
8,245
45,212
12,347
94
65,898
10,228
86,931
163
0
97,322
163,220
Total commercial real estate - non-owner occupied
34,899
265,984
26,249
781
327,913
113,202
295,235
3,215
0
411,652
739,565
Commercial real estate - owner occupied
10,073
81,204
24,696
410
116,382
28,786
115,903
0
0
144,689
261,071
All other commercial loans:
Commercial and industrial
1,828
47,387
14,186
464
63,865
12,950
19,248
602
0
32,800
96,665
Commercial lines of credit
5,539
74
764
0
6,377
113,627
74
0
0
113,701
120,078
Political subdivisions
7,206
15,636
47,035
7,763
77,640
0
6,380
9,989
0
16,369
94,009
Commercial construction and land
6,712
24,838
658
0
32,208
56,420
4,113
0
0
60,533
92,741
Other commercial loans
277
5,283
1,918
87
7,565
4,283
7,936
0
0
12,219
19,784
Total all other commercial loans
21,562
93,218
64,561
8,314
187,655
187,280
37,751
10,591
0
235,622
423,277
Residential mortgage loans:
1-4 Family - residential
1,232
5,807
88,293
52,103
147,435
18,796
66,055
151,511
0
236,362
383,797
1-4 Family residential construction
163
811
5,553
2,448
8,975
0
0
15,237
0
15,237
24,212
Total residential mortgage
1,395
6,618
93,846
54,551
156,410
18,796
66,055
166,748
0
251,599
408,009
Consumer loans:
Consumer lines of credit (including HELOCs)
321
0
0
1
322
46,874
0
0
0
46,874
47,196
All other consumer
1,003
9,864
1,920
0
12,787
3,943
0
0
0
3,943
16,730
Total consumer
1,324
9,864
1,920
1
13,109
50,817
0
0
0
50,817
63,926
Total
$
69,253
$
456,888
$
211,272
$
64,057
$
801,469
$
398,881
$
514,944
$
180,554
$
0
$
1,094,379
$
1,895,848
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Table of Contents
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
A summary of the provision for credit losses for the years ended December 31, 2024 and 2023, is as follows:
(In Thousands)
Year
Year
Ended
Ended
December 31,
December 31,
2024
2023
Provision for credit losses:
Loans receivable
$
2,430
$
753
Off-balance sheet exposures
(235)
(567)
Total provision for credit losses
$
2,195
$
186
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 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.
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Table of Contents
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.
TABLE IX - ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS
(Dollars In Thousands)
Years Ended December 31,
2024
2023
2022
2021
2020
Balance, beginning of year
$
19,208
$
16,615
$
13,537
$
11,385
$
9,836
Adoption of ASU 2016-13 (CECL)
0
2,104
0
0
0
Charge-offs
(1,716)
(356)
(4,245)
(1,575)
(2,465)
Recoveries
113
92
68
66
101
Net charge-offs
(1,603)
(264)
(4,177)
(1,509)
(2,364)
Provision for credit losses on loans
2,430
753
7,255
3,661
3,913
Balance, end of year
$
20,035
$
19,208
$
16,615
$
13,537
$
11,385
Net charge-offs as a % of average loans
0.09
%
0.01
%
0.26
%
0.09
%
0.16
%
TABLE X - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES
UPON ADOPTION OF CECL
(In Thousands)
December 31,
December 31,
January 1,
2024
2023
2023
Loans individually evaluated
$
122
$
743
$
751
Loans collectively evaluated:
Commercial real estate - nonowner occupied
11,964
10,379
9,641
Commercial real estate - owner occupied
2,722
2,111
1,765
All other commercial loans
3,361
3,811
3,914
Residential mortgage
1,356
1,764
2,407
Consumer
510
400
241
Total Allowance
$
20,035
$
19,208
$
18,719
PRIOR TO CECL ADOPTION
(In Thousands)
As of December 31,
2022
2021
2020
ASC 310 - Impaired loans - individually evaluated
$
453
$
740
$
925
ASC 450 - Collectively evaluated:
Commercial
10,845
7,553
5,545
Residential mortgage
4,073
4,338
4,091
Consumer
244
235
239
Unallocated
1,000
671
585
Total Allowance
$
16,615
$
13,537
$
11,385
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Table of Contents
TABLE XI - PAST DUE AND NONPERFORMING ASSETS
(Dollars In Thousands)
As of December 31,
2024
2023
2022
2021
2020
Loans individually evaluated with a valuation allowance
$
258
$
7,786
$
3,460
$
6,540
$
8,082
Loans individually evaluated without a valuation allowance
18,843
3,478
14,871
2,636
2,895
Purchased credit impaired loans
0
0
1,027
6,558
6,841
Total individually evaluated loans
$
19,101
$
11,264
$
19,358
$
15,734
$
17,818
Total loans past due 30-89 days and still accruing
$
5,658
$
9,275
$
7,079
$
5,106
$
5,918
Nonperforming assets:
Purchased credit impaired loans
$
0
$
0
$
1,027
$
6,558
$
6,841
Other nonaccrual loans
23,842
15,177
22,058
12,441
14,575
Total nonaccrual loans
23,842
15,177
23,085
18,999
21,416
Total loans past due 90 days or more and still accruing
119
3,190
2,237
2,219
1,975
Total nonperforming loans
23,961
18,367
25,322
21,218
23,391
Foreclosed assets held for sale (real estate)
181
478
275
684
1,338
Total nonperforming assets
$
24,142
$
18,845
$
25,597
$
21,902
$
24,729
Total nonperforming loans as a % of loans
1.26
%
0.99
%
1.46
%
1.36
%
1.42
%
Total nonperforming assets as a % of assets
0.92
%
0.75
%
1.04
%
0.94
%
1.10
%
Nonaccrual loans as a % of loans
1.26
%
0.82
%
1.33
%
1.21
%
1.30
%
Allowance for credit losses as a % of nonaccrual loans
84.03
%
79.01
%
71.97
%
71.25
%
53.16
%
Allowance for credit losses as a % of total loans
1.06
%
1.04
%
0.95
%
0.87
%
0.69
%
TABLE XII – FIVE-YEAR HISTORY OF LOAN LOSSES
(Dollars In Thousands)
2024
2023
2022
2021
2020
Average
Average gross loans
$
1,881,122
$
1,792,149
$
1,628,094
$
1,596,756
$
1,445,098
$
1,668,644
Year-end gross loans
1,895,848
1,848,139
1,740,040
1,564,849
1,644,209
$
1,738,617
Year-end allowance for credit losses on loans
20,035
19,208
16,615
13,537
11,385
$
16,156
Year-end nonaccrual loans
23,842
15,177
23,085
18,999
21,416
$
20,504
Year-end loans 90 days or more past due and still accruing
119
3,190
2,237
2,219
1,975
1,948
Net charge-offs
1,603
264
4,177
1,509
2,364
1,983
Provision for credit losses on loans
2,430
753
7,255
3,661
3,913
3,602
Earnings coverage of charge-offs
20
x
119
x
8
x
26
x
10
x
16
x
Allowance coverage of charge-offs
12
x
73
x
4
x
9
x
5
x
8
x
Net charge-offs as a % of provision for credit losses on loans
65.97
%
35.06
%
57.57
%
41.22
%
60.41
%
55.06
%
Net charge-offs as a % of average gross loans
0.09
%
0.01
%
0.26
%
0.09
%
0.16
%
0.12
%
Income before income taxes on a fully taxable equivalent basis
32,690
31,402
33,576
38,822
24,192
32,136
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Corporation’s significant fixed and determinable contractual obligations as of December 31, 2024 include repayment obligations related to time deposits and borrowed funds. Information related to maturities of time deposits is provided in Note 10 to the consolidated financial statements. Information related to maturities of borrowed funds is provided in Note 11 to the consolidated financial statements. The Corporation’s operating lease commitments with terms of one year or less and other commitments at December 31, 2024 are immaterial. Information concerning operating lease commitments with terms greater than one year is provided in Note 16 to the consolidated financial statements.
33
Table of Contents
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)
December 31,
2024
Commercial real estate loans
$
5,045
Commercial lines of credit
212,927
Commercial construction and land
23,197
Other commercial loan
12,902
1-4 family residential construction
11,650
Consumer lines of credit (including HELOCs)
69,070
All other consumer loans
45,212
Total commitments to extend credit
$
380,003
Financial letters of credit
$
7,197
Performance letters of credit
57,389
Total standby letters of credit
$
64,586
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. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. At December 31, 2024, outstanding balances of such loans sold totaled $329,766,000.
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand.
The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale securities with a carrying value of $18,881,000 at December 31, 2024.
The Corporation’s outstanding, available, and total credit facilities at December 31, 2024 and 2023 are as follows:
34
Table of Contents
Outstanding
Available
Total Credit
(In Thousands)
December 31,
December 31,
December 31,
December 31,
December 31,
December 31,
2024
2023
2024
2023
2024
2023
Federal Home Loan Bank of Pittsburgh
$
188,692
$
189,021
$
749,999
$
737,824
$
938,691
$
926,845
Federal Reserve Bank Discount Window
0
0
18,093
19,982
18,093
19,982
Other correspondent banks
0
0
75,000
75,000
75,000
75,000
Total credit facilities
$
188,692
$
189,021
$
843,092
$
832,806
$
1,031,784
$
1,021,827
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.
Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could utilize available-for-sale debt securities as collateral for borrowings or sell securities to meet its obligations. 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 $2,093,909,000 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 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. Available funding from these sources totaled 170.7% of uninsured deposits and 229.4% of total uninsured and uncollateralized deposits at December 31, 2024.
Uninsured Deposits Information
December 31,
December 31,
2024
2023
Total Deposits - C&N Bank
$
2,111,547
$
2,030,909
Estimated Total Uninsured Deposits
$
632,804
$
592,206
Portion of Uninsured Deposits that are
Collateralized
161,958
151,031
Uninsured and Uncollateralized Deposits
$
470,846
$
441,175
Uninsured and Uncollateralized Deposits as
a % of Total Deposits
22.3
%
21.7
%
Available Funding from Credit Facilities
$
843,092
$
832,806
Fair Value of Available-for-sale Debt
Securities in Excess of Pledging Obligations
236,945
256,058
Highly Liquid Available Funding
$
1,080,037
$
1,088,864
Highly Liquid Available Funding as a % of
Uninsured Deposits
170.7
%
183.9
%
Highly Liquid Available Funding as a % of
Uninsured and Uncollateralized Deposits
229.4
%
246.8
%
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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
Details concerning capital ratios at December 31, 2024 and December 31, 2023 are presented in Note 17 to the consolidated financial statements. Management believes, as of December 31, 2024, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, the Corporation’s and C&N Bank’s capital ratios at December 31, 2024 and December 31, 2023 exceed the Corporation’s Board policy threshold levels. Management expects C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future.
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. These restrictions are described in Note 17 to the consolidated financial statements. 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 sufficient capital commensurate with its overall risk profile.
To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, C&N Bank 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 December 31, 2024, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
Minimum common equity tier 1 capital ratio
4.5
%
Minimum common equity tier 1 capital ratio plus capital conservation buffer
7.0
%
Minimum tier 1 capital ratio
6.0
%
Minimum tier 1 capital ratio plus capital conservation buffer
8.5
%
Minimum total capital ratio
8.0
%
Minimum total capital ratio plus capital conservation buffer
10.5
%
A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer
Maximum Payout
(as a % of risk-weighted assets)
(as a % of eligible retained income)
Greater than 2.5%
No payout limitation applies
≤2.5% and >1.875%
60
%
≤1.875% and >1.25%
40
%
≤1.25% and >0.625%
20
%
≤0.625%
0
%
At December 31, 2024, C&N Bank’s Capital Conservation Buffer (determined based on the minimum total capital ratio) was 7.19%.
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 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
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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. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive loss within stockholders’ equity. 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 $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.
ITEM 7A. QUANTITA TIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices of the Corporation’s financial instruments. In addition to the effects of interest rates, the market prices of the Corporation’s available-for-sale debt securities are affected by fluctuations in the risk premiums (amounts of spread over risk-free rates) demanded by investors. Management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).
The Corporation’s major category of market risk, interest rate risk, is discussed in the following section.
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 (“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. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.
The projected results based on the model includes the impact of estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. 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 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 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. 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.
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Table of Contents
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.
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.
Under U.S. generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date. 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. 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 of $37.1 million at December 31, 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 XIII – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
December 31, 2024 Data
(In Thousands)
Period Ending December 31, 2025
Basis Point
Interest
Interest
Net Interest
NII
NII
Change in Rates
Income
Expense
Income (NII)
% Change
Risk Limit
+400
$
157,710
$
87,489
$
70,221
(17.4)
%
25.0
%
+300
151,610
75,796
75,814
(10.8)
%
20.0
%
+200
145,458
65,308
80,150
(5.7)
%
15.0
%
+100
139,233
56,023
83,210
(2.1)
%
10.0
%
0
132,939
47,942
84,997
0.0
%
0.0
%
-100
126,757
42,671
84,086
(1.1)
%
10.0
%
-200
119,814
37,450
82,364
(3.1)
%
15.0
%
-300
111,964
32,229
79,735
(6.2)
%
20.0
%
-400
103,390
27,650
75,740
(10.9)
%
25.0
%
Economic Value of Equity at December 31, 2024
Present
Present
Present
Basis Point
Value
Value
Value
Change in Rates
Equity
% Change
Risk Limit
+400
$
475,112
(16.1)
%
50.0
%
+300
507,221
(10.4)
%
45.0
%
+200
534,636
(5.6)
%
35.0
%
+100
555,058
(2.0)
%
25.0
%
0
566,339
0.0
%
0.0
%
-100
552,813
(2.4)
%
25.0
%
-200
520,196
(8.1)
%
35.0
%
-300
470,155
(17.0)
%
45.0
%
-400
403,255
(28.8)
%
50.0
%
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December 31, 2023 Data
(In Thousands)
Period Ending December 31, 2024
Basis Point
Interest
Interest
Net Interest
NII
NII
Change in Rates
Income
Expense
Income (NII)
% Change
Risk Limit
+400
$
148,407
$
81,707
$
66,700
(21.5)
%
25.0
%
+300
143,333
70,165
73,168
(13.9)
%
20.0
%
+200
138,291
59,859
78,432
(7.7)
%
15.0
%
+100
133,224
50,797
82,427
(3.0)
%
10.0
%
0
127,920
42,979
84,941
0.0
%
0.0
%
-100
122,446
37,701
84,745
(0.2)
%
10.0
%
-200
116,922
32,462
84,460
(0.6)
%
15.0
%
-300
110,919
27,710
83,209
(2.0)
%
20.0
%
-400
104,495
23,067
81,428
(4.1)
%
25.0
%
Economic Value of Equity at December 31, 2023
Present
Present
Present
Basis Point
Value
Value
Value
Change in Rates
Equity
% Change
Risk Limit
+400
$
330,130
(21.2)
%
50.0
%
+300
359,302
(14.3)
%
45.0
%
+200
385,045
(8.1)
%
35.0
%
+100
405,178
(3.3)
%
25.0
%
0
419,199
0.0
%
0.0
%
-100
406,957
(2.9)
%
25.0
%
-200
406,145
(3.1)
%
35.0
%
-300
385,859
(8.0)
%
45.0
%
-400
363,763
(13.2)
%
50.0
%
39
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