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CITIZENS & NORTHERN CORP - Quarter Report: 2023 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _________________________.

Commission file number: 000-16084

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

PENNSYLVANIA

    

23-2451943

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

    

Trading Symbol

    

Name of Each Exchange on Which Registered

Common Stock Par Value $1.00

CZNC

NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock ($1.00 par value)

15,274,766 Shares Outstanding on November 2, 2023

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets (Unaudited) –September 30, 2023 and December 31, 2022

Page 3

 

 

Consolidated Statements of Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2023 and 2022

Page 4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2023 and 2022

Page 5

 

 

Consolidated Statements of Cash Flows (Unaudited) – Nine-month Periods Ended September 30, 2023 and 2022

Page 6

 

 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2023 and 2022

Page 7

 

 

Notes to Unaudited Consolidated Financial Statements

Pages 8 – 39

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Pages 40 – 65

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Pages 66 – 68

Item 4. Controls and Procedures

Page 68

 

 

Part II. Other Information

Pages 69 – 71

 

 

Signatures

Page 72

2

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data) (Unaudited)

    

September 30, 

    

December 31, 

2023

2022

ASSETS

 

  

 

  

Cash and due from banks:

 

  

 

  

Noninterest-bearing

$

25,775

$

25,811

Interest-bearing

 

26,883

 

29,237

Total cash and due from banks

 

52,658

 

55,048

Available-for-sale debt securities, at fair value

 

429,138

 

498,033

Loans receivable

 

1,830,670

 

1,740,040

Allowance for credit losses on loans

 

(18,085)

 

(16,615)

Loans, net

 

1,812,585

 

1,723,425

Bank-owned life insurance

 

31,557

 

31,214

Accrued interest receivable

 

9,311

 

8,653

Bank premises and equipment, net

 

21,267

 

21,574

Foreclosed assets held for sale

 

633

 

275

Deferred tax asset, net

 

23,731

 

20,884

Goodwill

 

52,505

 

52,505

Core deposit intangibles, net

 

2,571

 

2,877

Other assets

 

47,993

 

39,819

TOTAL ASSETS

$

2,483,949

$

2,454,307

LIABILITIES

 

 

Deposits:

 

 

Noninterest-bearing

$

495,829

$

563,843

Interest-bearing

 

1,529,168

 

1,433,750

Total deposits

 

2,024,997

 

1,997,593

Short-term borrowings

 

23,253

 

80,062

Long-term borrowings - FHLB advances

 

125,276

 

62,347

Senior notes, net

14,814

14,765

Subordinated debt, net

 

24,689

 

24,607

Accrued interest and other liabilities

 

30,715

 

25,608

TOTAL LIABILITIES

 

2,243,744

 

2,204,982

STOCKHOLDERS' EQUITY

 

 

Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation

 

 

preference per share; no shares issued

 

0

 

0

Common stock, par value $1.00 per share; authorized 30,000,000 shares;

 

 

issued 16,030,172 and outstanding 15,275,686 at September 30, 2023;

 

 

issued 16,030,172 and outstanding 15,518,819 at December 31, 2022

 

16,030

 

16,030

Paid-in capital

 

143,972

 

143,950

Retained earnings

 

157,044

 

151,743

Treasury stock, at cost; 754,486 shares at September 30, 2023 and 511,353

 

 

shares at December 31, 2022

 

(17,015)

 

(12,520)

Accumulated other comprehensive loss

 

(59,826)

 

(49,878)

TOTAL STOCKHOLDERS' EQUITY

 

240,205

 

249,325

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

$

2,483,949

$

2,454,307

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

2023

2022

2023

2022

INTEREST INCOME

 

  

 

  

  

 

  

Interest and fees on loans:

 

  

 

  

  

 

  

Taxable

$

25,529

$

20,085

$

72,322

$

56,561

Tax-exempt

 

552

 

505

 

1,687

 

1,426

Income from available-for-sale debt securities:

 

 

 

 

Taxable

 

2,077

 

2,138

 

6,440

 

6,143

Tax-exempt

 

597

 

768

 

1,847

 

2,258

Other interest and dividend income

 

363

 

214

 

972

 

404

Total interest and dividend income

 

29,118

 

23,710

 

83,268

 

66,792

INTEREST EXPENSE

 

  

 

 

  

 

Interest on deposits

 

7,264

 

1,972

 

15,593

 

4,012

Interest on short-term borrowings

 

677

 

179

 

2,918

 

302

Interest on long-term borrowings - FHLB advances

 

1,164

 

332

 

2,901

 

436

Interest on senior notes, net

 

120

119

359

357

Interest on subordinated debt, net

 

230

 

229

 

691

 

849

Total interest expense

 

9,455

 

2,831

 

22,462

 

5,956

Net interest income

 

19,663

 

20,879

 

60,806

 

60,836

(Credit) provision for credit losses

 

(1,225)

 

3,794

 

(765)

 

4,993

Net interest income after (credit) provision for credit losses

 

20,888

 

17,085

 

61,571

 

55,843

NONINTEREST INCOME

 

  

 

  

 

  

 

  

Trust revenue

 

1,919

 

1,744

 

5,500

 

5,245

Brokerage and insurance revenue

 

394

 

696

 

1,189

 

1,784

Service charges on deposit accounts

 

1,443

 

1,105

 

4,121

 

3,662

Interchange revenue from debit card transactions

 

1,098

 

1,031

 

3,115

 

3,050

Net gains from sale of loans

 

237

 

131

 

450

 

733

Loan servicing fees, net

 

154

 

189

 

466

 

757

Increase in cash surrender value of life insurance

 

160

 

133

 

450

 

405

Other noninterest income

 

1,084

 

622

 

3,442

 

2,666

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

0

20

6

21

Total noninterest income

 

6,489

 

5,671

 

18,739

 

18,323

NONINTEREST EXPENSE

 

 

 

  

 

  

Salaries and employee benefits

10,878

10,826

33,082

31,698

Net occupancy and equipment expense

1,268

1,498

3,993

4,217

Data processing and telecommunications expense

1,823

1,719

5,659

5,062

Automated teller machine and interchange expense

 

504

 

397

 

1,374

 

1,128

Pennsylvania shares tax

 

403

 

487

 

1,210

 

1,463

Professional fees

 

487

 

521

 

1,988

 

1,490

Other noninterest expense

 

2,577

 

1,995

 

8,443

 

6,310

Total noninterest expense

 

17,940

 

17,443

 

55,749

 

51,368

Income before income tax provision

 

9,437

 

5,313

 

24,561

 

22,798

Income tax provision

 

1,846

 

858

 

4,674

 

3,959

NET INCOME

$

7,591

$

4,455

$

19,887

$

18,839

EARNINGS PER COMMON SHARE - BASIC

$

0.50

$

0.29

$

1.29

$

1.21

EARNINGS PER COMMON SHARE - DILUTED

$

0.50

$

0.29

$

1.29

$

1.21

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands) (Unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

2023

    

2022

2023

    

2022

Net income

$

7,591

$

4,455

$

19,887

$

18,839

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

(14,865)

(25,880)

(12,535)

(77,923)

Reclassification adjustment for gains realized in income

0

(20)

(6)

(21)

Other comprehensive loss on available-for-sale debt securities

(14,865)

(25,900)

(12,541)

(77,944)

Unfunded pension and postretirement obligations:

 

 

 

 

Changes from plan amendments and actuarial gains and losses

 

0

 

0

 

(8)

 

133

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

 

(14)

 

(9)

 

(42)

 

(31)

Other comprehensive (loss) income on pension and postretirement obligations

 

(14)

 

(9)

 

(50)

 

102

Other comprehensive loss before income tax

 

(14,879)

 

(25,909)

 

(12,591)

 

(77,842)

Income tax related to other comprehensive loss

 

3,126

 

5,442

 

2,643

 

16,347

Net other comprehensive loss

 

(11,753)

 

(20,467)

 

(9,948)

 

(61,495)

Comprehensive (loss) income

$

(4,162)

$

(16,012)

$

9,939

$

(42,656)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

    

Nine Months Ended

September 30, 

September 30, 

2023

    

2022

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

19,887

$

18,839

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

(Credit) provision for credit losses

 

(765)

 

4,993

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

 

(6)

 

(21)

Net amortization of securities

1,556

2,174

Increase in cash surrender value of life insurance

 

(450)

 

(405)

Depreciation and amortization of bank premises and equipment

 

1,633

 

1,780

Net accretion of purchase accounting adjustments

 

(198)

 

(1,017)

Stock-based compensation

 

1,015

 

1,169

Deferred income taxes

 

235

 

(93)

Decrease (increase) in fair value of servicing rights

 

136

 

(128)

Gains on sales of loans, net

 

(450)

 

(733)

Origination of loans held for sale

 

(14,568)

 

(25,003)

Proceeds from sales of loans held for sale

 

14,341

 

26,752

Increase in accrued interest receivable and other assets

 

(1,175)

 

(1,562)

Increase (decrease) in accrued interest payable and other liabilities

 

4,588

 

(352)

Other

 

22

 

148

Net Cash Provided by Operating Activities

 

25,801

 

26,541

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

Purchase of certificates of deposit

0

(250)

Proceeds from maturities of certificates of deposit

 

3,000

 

750

Proceeds from sales of available-for-sale debt securities

 

18,357

 

4,100

Proceeds from calls and maturities of available-for-sale debt securities

 

44,208

 

50,263

Purchase of available-for-sale debt securities

 

(8,215)

 

(104,601)

Redemption of Federal Home Loan Bank of Pittsburgh stock

 

19,503

 

10,765

Purchase of Federal Home Loan Bank of Pittsburgh stock

 

(19,905)

 

(12,009)

Purchase of Federal Reserve Bank stock

(6,243)

0

Net increase in loans

 

(89,998)

 

(126,792)

Proceeds from bank owned life insurance

 

147

 

0

Purchase of premises and equipment

 

(1,381)

 

(2,986)

Proceeds from sale of foreclosed assets

 

62

 

351

Other

 

109

 

161

Net Cash Used in Investing Activities

 

(40,356)

 

(180,248)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

Net increase in deposits

 

27,425

 

114,667

Net (decrease) increase in short-term borrowings

 

(56,809)

 

654

Proceeds from long-term borrowings - FHLB advances

70,049

39,041

Repayments of long-term borrowings - FHLB advances

 

(7,078)

 

(11,430)

Redemption of subordinated debt

0

(8,500)

Sale of treasury stock

 

0

 

141

Purchases of treasury stock

 

(6,719)

 

(9,349)

Common dividends paid

 

(11,703)

 

(11,921)

Net Cash Provided by Financing Activities

 

15,165

 

113,303

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

610

 

(40,404)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

47,698

 

95,848

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

48,308

$

55,444

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

(Decrease) increase in accrued purchase of available-for-sale debt securities

$

(454)

$

160

Assets acquired through foreclosure of real estate loans

$

390

$

51

Leased assets obtained in exchange for new operating lease liabilities

$

0

$

904

Interest paid

$

21,392

$

5,729

Income taxes paid

$

4,667

$

3,835

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands Except Share and Per Share Data) (Unaudited)

 

Accumulated

 

Other

 

Common

 

Treasury

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

Three Months Ended September 30, 2023

 

Shares

 

Shares

 

Stock

 

Capital

 

Earnings

 

Loss

 

Stock

 

Total

Balance, June 30, 2023

 

16,030,172

 

762,076

$

16,030

$

143,661

$

153,725

$

(48,073)

$

(17,226)

$

248,117

Net income

 

 

7,591

 

7,591

Other comprehensive loss, net

 

 

(11,753)

 

(11,753)

Cash dividends declared on common stock, $.28 per share

 

 

(4,272)

 

(4,272)

Shares issued for dividend reinvestment plan

 

 

(20,184)

(36)

457

 

421

Forfeiture of restricted stock

 

 

1,073

27

(27)

 

0

Stock-based compensation expense

 

 

320

 

320

Purchase of restricted stock for tax withholding

838

(16)

(16)

Treasury stock purchases

10,683

(203)

(203)

Balance, September 30, 2023

 

16,030,172

 

754,486

$

16,030

$

143,972

$

157,044

$

(59,826)

$

(17,015)

$

240,205

Three Months Ended September 30, 2022

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, June 30, 2022

 

16,030,172

 

530,958

$

16,030

$

143,417

$

148,187

$

(36,002)

$

(13,013)

$

258,619

Net income

 

 

 

 

 

4,455

 

 

 

4,455

Other comprehensive loss, net

 

 

 

 

 

 

(20,467)

 

 

(20,467)

Cash dividends declared on common stock, $.28 per share

 

 

 

 

 

(4,338)

 

 

 

(4,338)

Shares issued for dividend reinvestment plan

 

 

(16,019)

 

 

8

 

 

 

392

 

400

Forfeiture of restricted stock

 

 

3,638

 

 

81

 

 

 

(81)

 

0

Stock-based compensation expense

 

 

 

 

388

 

 

 

 

388

Purchase of restricted stock for tax withholding

910

(22)

(22)

Treasury stock purchases

10,269

(246)

(246)

Balance, September 30, 2022

 

16,030,172

 

529,756

$

16,030

$

143,894

$

148,304

$

(56,469)

$

(12,970)

$

238,789

    

    

    

    

    

    

Accumulated

    

    

Other

Common

Treasury

Common

Paid-in

Retained

Comprehensive

Treasury

Nine Months Ended September 30, 2023

Shares

Shares

Stock

Capital

Earnings

(Loss) Income

Stock

Total

Balance, December 31, 2022

 

16,030,172

 

511,353

$

16,030

$

143,950

$

151,743

$

(49,878)

$

(12,520)

$

249,325

Adoption of ASU 2016-13 (CECL)

(1,652)

(1,652)

Net income

 

 

19,887

 

19,887

Other comprehensive loss, net

 

 

(9,948)

 

(9,948)

Cash dividends declared on common stock, $.84 per share

 

 

(12,934)

 

(12,934)

Shares issued for dividend reinvestment plan

 

 

(60,871)

(182)

1,413

 

1,231

Restricted stock granted

 

 

(53,788)

(1,314)

1,314

 

0

Forfeiture of restricted stock

 

 

23,039

503

(503)

 

0

Stock-based compensation expense

 

 

1,015

 

1,015

Purchase of restricted stock for tax withholding

 

 

9,453

(219)

 

(219)

Treasury stock purchases

325,300

(6,500)

(6,500)

Balance, September 30, 2023

 

16,030,172

 

754,486

$

16,030

$

143,972

$

157,044

$

(59,826)

$

(17,015)

$

240,205

Nine Months Ended September 30, 2022

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2021

 

16,030,172

 

271,082

$

16,030

$

144,453

$

142,612

$

5,026

$

(6,716)

$

301,405

Net income

 

 

 

  

 

  

 

18,839

 

  

 

  

 

18,839

Other comprehensive loss, net

 

 

 

  

 

  

 

  

 

(61,495)

 

  

 

(61,495)

Cash dividends declared on common stock, $.84 per share

 

 

 

  

 

  

 

(13,147)

 

  

 

  

 

(13,147)

Shares issued for dividend reinvestment plan

 

 

(49,221)

 

 

10

 

  

 

  

 

1,216

 

1,226

Shares issued from treasury related to exercise of stock options

 

 

(7,024)

 

 

(34)

 

  

 

  

 

175

 

141

Restricted stock granted

 

 

(78,243)

 

 

(1,932)

 

  

 

  

 

1,932

 

0

Forfeiture of restricted stock

 

 

10,782

 

 

228

 

  

 

  

 

(228)

 

0

Stock-based compensation expense

 

 

 

  

 

1,169

 

  

 

  

 

  

 

1,169

Purchase of restricted stock for tax withholding

 

 

6,964

 

 

  

 

  

 

  

 

(175)

 

(175)

Treasury stock purchases

 

375,416

(9,174)

 

(9,174)

Balance, September 30, 2022

 

16,030,172

 

529,756

$

16,030

$

143,894

$

148,304

$

(56,469)

$

(12,970)

$

238,789

The accompanying notes are an integral part of these unaudited consolidated financial statements.

7

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION AND STATUS OF RECENT ACCOUNTING PRONOUNCEMENTS

The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”). The consolidated financial statements also include C&N Bank’s wholly-owned subsidiaries, C&N Financial Services, LLC and Northern Tier Holding LLC. C&N Bank is the sole member of C&N Financial Services, LLC and Northern Tier Holding LLC. All material intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 2022, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain 2022 information has been reclassified for consistency with the 2023 presentation.

Operating results reported for the nine-month period ended September 30, 2023 might not be indicative of the results for the year ending December 31, 2023. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on the consolidated financial statements issued in the near future.

Recent Accounting Pronouncements - Adopted

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 and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit deteriorated (“PCD”) loans will receive an initial allowance at the acquisition date that represents an adjustment to the amortized cost basis of the loan, with no impact to earnings.

In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Corporation adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale debt securities was not necessary.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). The following table illustrates the impact from the adoption of ASC 326:

    

As Reported

    

    

Under

Pre-ASC 326

Impact of

ASC 326

Adoption

ASC 326

(In Thousands)

January 1, 2023

December 31, 2022

Adoption

Loans receivable

$

1,740,846

$

1,740,040

$

806

Allowance for credit losses on loans

$

18,719

$

16,615

$

2,104

Allowance for credit losses on off-balance sheet exposures (included in accrued interest and other liabilities)

 

1,218

 

425

 

793

Deferred tax asset, net

 

21,323

 

20,884

 

439

Retained earnings

 

150,091

 

151,743

 

(1,652)

The Corporation adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchased credit impaired (“PCI”) under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of PCD assets was adjusted to establish the allowance for credit losses. Essentially all of the PCD loans were reported as nonaccrual loans at January 1, 2023 and September 30, 2023.

ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This update reduces the complexity of accounting for Troubled Debt Restructurings (“TDRs”) by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation adopted ASU 2022-02 on January 1, 2023. Changes in disclosure requirements in accordance with ASU 2022-02 are reflected in Note 6. The adoption of ASU 2022-02 did not have a material impact on the consolidated financial statements.

Accounting Policies

The Corporation’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited consolidated financial statements and notes for the year ended December 31, 2022 and are contained in the Corporation’s Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Allowance for Credit Losses – Available-for-Sale Debt Securities

For available-for-sale debt securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Corporation has the intent to sell the security or it is more likely than not that the Corporation will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Corporation evaluates whether the decline in fair value is the result of credit losses or other factors. The Corporation has elected the practical expedient of zero credit loss estimates for securities issued or guaranteed by U.S. Government entities or agencies. In making the credit loss assessment of securities not issued or guaranteed by U.S. Government entities or agencies, the Corporation may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income (loss).

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Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit losses when management believes an available-for-sale debt security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit losses related to the available-for-sale portfolio.

Accrued interest receivable on available-for-sale debt securities totaled $2,688,000 at September 30, 2023 and was excluded from the estimate of credit losses.

Allowance for Credit Losses on Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Accrued interest receivable on loans totaled $6,590,000 at September 30, 2023 and was excluded from the estimate of credit losses.

The allowance for credit losses (“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).

Evaluation of Expected Losses on Individual Loans

Loans evaluated on an individual basis are identified based on a detailed assessment of certain larger loan relationships, and their related credit risk ratings, by a management committee referred to as the Watch List Committee. The allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Corporation will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.

The scope of loans reviewed individually for credit loss each quarter includes all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Additionally, all PCD loans are evaluated individually for credit loss.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Collective Evaluation of Expected Losses – Pool Basis

The Corporation measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Corporation has identified the following portfolio segments and calculates the allowance for credit losses for each using the weighted-average remaining maturity (“WARM”) method:

Commercial real estate - nonowner occupied, further broken down into the following classes:

Nonowner occupied

Multi-family (5 or more) residential

1-4 Family - commercial purpose

Commercial real estate - owner occupied

All other commercial loans, further broken down into the following classes:

Commercial and industrial

Commercial lines of credit

Political subdivisions

Commercial construction and land

Other commercial loans

Residential mortgage loans, further broken down into the following classes:

1-4 Family – residential

1-4 Family residential construction and land

Consumer loans, further broken down into the following classes:

Consumer lines of credit (including HELOCs)

All other consumer

In determining the pools for collective evaluation, management uses a combination of loan purpose, collateral and payment type (for example, lines of credit vs. amortizing). The pools identified are similar to the loan classes used in the Corporation’s financial reporting for several years, with several exceptions including the following which are of the most significance:

Commercial real estate secured loans are broken out between non-owner occupied and owner-occupied
Loans secured by 1-4 family residential mortgages are broken out between consumer-purpose and commercial-purpose
Commercial lines of credit are broken out as an individual category

Each of these changes was made to better sort loans into pools with similar risk and cash flow characteristics.

Estimation Method - WARM (Weighted-Average Remaining Maturity Method)

In applying the WARM method, for each pool identified above, the Corporation determined the annual net charge-offs as a percentage of average total loan balances (net charge-off percentage). In the January 1, 2023 calculation, the Corporation used the annualized net charge-off percentage over the prior 5 calendar years. In the September 30, 2023 calculation, the Corporation used the net charge-off percentage for the 5.75-year period ended September 30, 2023. For each loan pool, the average annualized net charge-off percentage was multiplied by the estimated weighted-average remaining average life of the loans to calculate the loss rate.

The calculation of the estimated weighted-average remaining life of each loan pool was based on instrument-level data, with contractual principal payments adjusted for the estimated impact of prepayments. Commercial lines of credit and other revolving credit facilities were generally assumed to be repaid after 1 year. The estimated weighted-average remaining life of the entire portfolio was calculated to be 4.16 years at September 30, 2023 and 4.36 years at January 1, 2023. Management determined that use of the Corporation’s net charge-off experience over a 5.75-year period at September 30, 2023 and 5-year period at January 1, 2023 would provide a reasonable time period to include in the WARM expected loss rate calculations in relationship to the weighted-average life of the portfolio overall and to each of the pools.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Qualitative Factors

The allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are deemed likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments generally increase allowance levels and include adjustments for factors deemed relevant, including: the nature and volume of portfolio changes, including loan portfolio growth; concentrations of credit based on loan type (such as non-owner occupied commercial real estate) or industry; the volume and severity of past due, nonaccrual or adversely classified loans; trends in real estate or other collateral values; lending policies and procedures, including changes in underwriting and collections practices; credit review function; lending, credit and other relevant management experience and risk tolerance; external factors and economic conditions not already captured.

Economic Forecast

ASC Topic 326 requires management to consider forward-looking information that is both reasonable and supportable and relevant to the collectability of cash flows. Reasonable and supportable forecasts may extend over the entire contractual term of a financial asset or a period shorter than the contractual term. In that regard, management has selected a forecast period of 2 years, which is shorter than the estimated weighted-average remaining life of the loan portfolio.

The Corporation calculated an additional expected credit loss based on establishing a correlation between past loss experience and an economic statistic. This additional credit loss is added to the allowance calculation, conceptually for the first 2 years of the weighted-average remaining life of the portfolio after which time the credit loss for each pool is determined based on the WARM historical loss rate as adjusted for qualitative factors.

Allowance for Credit Losses on Off-Balance Sheet Exposures

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Corporation records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Corporation’s statements of income. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for off-balance sheet exposures is included in accrued interest and other liabilities in the Corporation’s unaudited consolidated balance sheets and the related credit expense is recorded in the provision for credit losses in the unaudited consolidated statements of income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

2. PER SHARE DATA

Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.

Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using weighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation’s common stock during the period.

(In Thousands, Except Share and Per Share Data)

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Basic

  

 

  

 

  

 

  

Net income

$

7,591

$

4,455

$

19,887

$

18,839

Less: Dividends and undistributed earnings allocated to participating securities

 

(57)

 

(39)

 

(156)

 

(169)

Net income attributable to common shares

$

7,534

$

4,416

$

19,731

$

18,670

Basic weighted-average common shares outstanding

 

15,154,797

 

15,364,075

 

15,264,391

 

15,482,672

Basic earnings per common share (a)

$

0.50

$

0.29

$

1.29

$

1.21

Diluted

 

  

 

  

 

  

 

  

Net income attributable to common shares

$

7,534

$

4,416

$

19,731

$

18,670

Basic weighted-average common shares outstanding

 

15,154,797

 

15,364,075

 

15,264,391

 

15,482,672

Dilutive effect of potential common stock arising from stock options

 

0

 

3,114

 

4

 

3,276

Diluted weighted-average common shares outstanding

 

15,154,797

 

15,367,189

 

15,264,395

 

15,485,948

Diluted earnings per common share (a)

$

0.50

$

0.29

$

1.29

$

1.21

Weighted-average nonvested restricted shares outstanding

 

113,328

 

136,040

 

120,632

 

139,761

(a)Basic and diluted earnings per share under the two-class method are determined on net income reported on the consolidated statements of income, less earnings allocated to non-vested restricted shares with nonforfeitable dividends (participating securities).

Anti-dilutive stock options are excluded from earnings per share calculations. The weighted-average number of anti-dilutive instruments outstanding was 8,934 in the three-month period ended September 30, 2023 and 0 in the nine-month period ended September 30, 2023. There were no anti-dilutive instruments outstanding in the three-month and nine-month periods ended September 30, 2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

3. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income (loss). The components of other comprehensive income (loss), and the related tax effects, are as follows:

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended September 30, 2023

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(14,865)

$

3,123

$

(11,742)

Reclassification adjustment for gains realized in income

0

0

0

Other comprehensive loss from available-for-sale debt securities

(14,865)

3,123

(11,742)

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

 

(14)

 

3

 

(11)

Other comprehensive loss on unfunded retirement obligations

(14)

3

(11)

Total other comprehensive loss

$

(14,879)

$

3,126

$

(11,753)

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended September 30, 2022

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(25,880)

$

5,437

$

(20,443)

Reclassification adjustment for (gains) realized in income

 

(20)

 

4

 

(16)

Other comprehensive loss from available-for-sale debt securities

(25,900)

5,441

(20,459)

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

 

(9)

 

1

 

(8)

Other comprehensive loss on unfunded retirement obligations

(9)

1

(8)

Total other comprehensive loss

$

(25,909)

$

5,442

$

(20,467)

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Nine Months Ended September 30, 2023

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(12,535)

$

2,632

$

(9,903)

Reclassification adjustment for (gains) realized in income

(6)

1

(5)

Other comprehensive loss from available-for-sale debt securities

(12,541)

2,633

(9,908)

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses

(8)

1

(7)

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

 

(42)

 

9

 

(33)

Other comprehensive loss on unfunded retirement obligations

(50)

10

(40)

Total other comprehensive loss

$

(12,591)

$

2,643

$

(9,948)

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Nine Months Ended September 30, 2022

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(77,923)

$

16,365

$

(61,558)

Reclassification adjustment for (gains) realized in income

(21)

4

(17)

Other comprehensive loss from available-for-sale debt securities

(77,944)

16,369

(61,575)

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses

133

(27)

106

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

 

(31)

 

5

 

(26)

Other comprehensive income on unfunded retirement obligations

102

(22)

80

Total other comprehensive loss

$

(77,842)

$

16,347

$

(61,495)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The amounts shown in the table immediately above are included in the following line items in the consolidated statements of income:

Affected Line Item in the

Description

 

Consolidated Statements of Income

Reclassification adjustment for (gains) realized in income (before-tax)

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

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost (before-tax)

 

Other noninterest expense

Income tax effect

Income tax provision

Changes in the components of accumulated other comprehensive (loss) income are as follows and are presented net of tax:

(In Thousands)

    

Unrealized

    

    

    

Accumulated

(Losses)

Unfunded

Other

Gains

Retirement

Comprehensive

on Securities

Obligations

(Loss) Income

Three Months Ended September 30, 2023

 

  

 

  

 

  

Balance, beginning of period

$

(48,536)

463

$

(48,073)

Other comprehensive loss during three months ended September 30, 2023

 

(11,742)

(11)

 

(11,753)

Balance, end of period

$

(60,278)

$

452

$

(59,826)

Three Months Ended September 30, 2022

 

  

 

  

 

  

Balance, beginning of period

$

(36,307)

$

305

$

(36,002)

Other comprehensive loss during three months ended September 30, 2022

 

(20,459)

 

(8)

 

(20,467)

Balance, end of period

$

(56,766)

$

297

$

(56,469)

(In Thousands)

    

Unrealized

    

    

Accumulated

(Losses)

Unfunded

Other

 

Gains

 

Retirement

 

Comprehensive

 

on Securities

 

Obligations

 

(Loss) Income

Nine Months Ended September 30, 2023

 

  

 

  

 

  

Balance, beginning of period

$

(50,370)

$

492

$

(49,878)

Other comprehensive loss during nine months ended September 30, 2023

 

(9,908)

 

(40)

 

(9,948)

Balance, end of period

$

(60,278)

$

452

$

(59,826)

Nine Months Ended September 30, 2022

 

  

 

  

 

  

Balance, beginning of period

$

4,809

$

217

$

5,026

Other comprehensive loss during nine months ended September 30, 2022

 

(61,575)

 

80

 

(61,495)

Balance, end of period

$

(56,766)

$

297

$

(56,469)

4. CASH AND DUE FROM BANKS

Cash and due from banks at September 30, 2023 and December 31, 2022 include the following:

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022

Cash and cash equivalents

$

48,308

$

47,698

Certificates of deposit

 

4,350

 

7,350

Total cash and due from banks

$

52,658

$

55,048

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.

5. SECURITIES

Amortized cost and fair value of available-for-sale debt securities at September 30, 2023 and December 31, 2022 are summarized as follows:

(In Thousands)

    

September 30, 2023

Gross

Gross

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

33,938

$

0

$

(3,381)

$

30,557

Obligations of U.S. Government agencies

21,372

0

(2,576)

18,796

Bank holding company debt securities

28,950

0

(6,639)

22,311

Obligations of states and political subdivisions:

 

 

 

 

  

Tax-exempt

 

123,598

114

 

(19,259)

 

104,453

Taxable

 

65,408

 

0

 

(11,951)

 

53,457

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

 

  

 

 

  

Residential pass-through securities

 

109,102

 

0

 

(14,633)

 

94,469

Residential collateralized mortgage obligations

 

38,267

 

0

 

(4,870)

 

33,397

Commercial mortgage-backed securities

 

76,627

 

0

 

(12,955)

 

63,672

Private label commercial mortgage-backed securities

8,178

 

0

 

(152)

 

8,026

Total available-for-sale debt securities

$

505,440

$

114

$

(76,416)

$

429,138

(In Thousands)

    

December 31, 2022

Gross

Gross

 

 

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

35,166

$

0

$

(3,330)

$

31,836

Obligations of U.S. Government agencies

25,938

0

(2,508)

23,430

Bank holding company debt securities

28,945

0

(3,559)

25,386

Obligations of states and political subdivisions:

 

 

 

 

  

Tax-exempt

 

146,149

 

319

 

(13,845)

 

132,623

Taxable

 

68,488

 

0

 

(11,676)

 

56,812

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

 

  

 

  

Residential pass-through securities

 

112,782

 

0

 

(12,841)

 

99,941

Residential collateralized mortgage obligations

 

44,868

 

0

 

(4,572)

 

40,296

Commercial mortgage-backed securities

 

91,388

 

0

 

(11,702)

 

79,686

Private label commercial mortgage-backed securities

8,070

2

(49)

8,023

Total available-for-sale debt securities

$

561,794

$

321

$

(64,082)

$

498,033

The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions aggregated by length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022:

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

September 30, 2023

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of the U.S. Treasury

$

0

0

$

30,557

(3,381)

$

30,557

$

(3,381)

Obligations of U.S. Government agencies

1,850

(8)

16,946

(2,568)

18,796

(2,576)

Bank holding company debt securities

0

0

22,311

(6,639)

22,311

(6,639)

Obligations of states and political subdivisions:

Tax-exempt

4,172

(268)

96,600

(18,991)

100,772

(19,259)

Taxable

 

0

0

 

53,457

(11,951)

 

53,457

 

(11,951)

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

 

 

  

 

  

Residential pass-through securities

9,304

(412)

83,619

(14,221)

92,923

(14,633)

Residential collateralized mortgage obligations

 

2,662

(130)

 

30,735

(4,740)

 

33,397

 

(4,870)

Commercial mortgage-backed securities

 

2,211

(130)

 

61,461

(12,825)

 

63,672

 

(12,955)

Private label commercial mortgage-backed securities

8,026

(152)

0

0

8,026

(152)

Total temporarily impaired available-for-sale debt securities

$

28,225

$

(1,100)

$

395,686

$

(75,316)

$

423,911

$

(76,416)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2022

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of the U.S. Treasury

$

20,192

$

(1,939)

$

11,644

$

(1,391)

$

31,836

$

(3,330)

Obligations of U.S. Government agencies

8,509

(430)

12,921

(2,078)

21,430

(2,508)

Bank holding company debt securities

14,248

(1,697)

11,138

(1,862)

25,386

(3,559)

Obligations of states and political subdivisions:

Tax-exempt

106,204

(11,023)

15,153

(2,822)

121,357

(13,845)

Taxable

 

28,901

 

(4,739)

 

27,761

 

(6,937)

 

56,662

 

(11,676)

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

 

 

  

 

  

 

  

Residential pass-through securities

45,410

(4,226)

54,531

(8,615)

99,941

(12,841)

Residential collateralized mortgage obligations

 

28,670

 

(2,042)

 

11,626

 

(2,530)

 

40,296

 

(4,572)

Commercial mortgage-backed securities

 

40,408

 

(2,585)

 

39,278

 

(9,117)

 

79,686

 

(11,702)

Private label commercial mortgage-backed securities

4,762

(49)

0

0

4,762

(49)

Total temporarily impaired available-for-sale debt securities

$

297,304

$

(28,730)

$

184,052

$

(35,352)

$

481,356

$

(64,082)

Gross realized gains and losses from available-for-sale debt securities were as follows:

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Gross realized gains from sales

$

0

$

44

$

89

$

48

Gross realized losses from sales

 

0

 

(24)

 

(83)

 

(27)

Net realized gains

$

0

$

20

$

6

$

21

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of September 30, 2023. 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.

(In Thousands)

September 30, 2023

Amortized

Fair

    

Cost

    

Value

Due in one year or less

$

10,899

$

10,672

Due from one year through five years

 

70,095

 

64,235

Due from five years through ten years

 

80,423

 

66,554

Due after ten years

 

111,849

 

88,113

Sub-total

 

273,266

 

229,574

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

Residential pass-through securities

 

109,102

 

94,469

Residential collateralized mortgage obligations

 

38,267

 

33,397

Commercial mortgage-backed securities

 

76,627

 

63,672

Private label commercial mortgage-backed securities

8,178

8,026

Total

$

505,440

$

429,138

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. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Investment securities carried at $242,190,000 at September 30, 2023 and $277,302,000 at December 31, 2022 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 8 for information concerning securities pledged to secure borrowing arrangements and Note 11 for information related to securities pledged against interest rate swap obligations.

A summary of information management considered in evaluating debt and equity securities for credit losses at September 30, 2023 and December 31, 2022 is provided below.

Debt Securities

As reflected in the table above, gross unrealized holding losses on available-for-sale debt securities totaled $76,416,000 at September 30, 2023 and $64,082,000 at December 31, 2022. At September 30, 2023, the Corporation does not have the intent to sell, nor is it more likely than not it will be required to sell, these securities before it is able to recover the amortized cost basis. The unrealized holding losses were consistent with significant increases in market interest rates that occurred in 2022 and 2023.

At September 30, 2023 and December 31, 2022, management performed an assessment for possible credit losses of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. At September 30, 2023 and December 31, 2022, all of the Corporation’s holdings of bank holding company debt securities, obligations of states and political subdivisions and private label commercial mortgage-backed securities were investment grade and there have been no payment defaults.

Based on the results of the assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at September 30, 2023 and December 31, 2022.

Equity Securities

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in other assets in the consolidated balance sheets, was $14,570,000 at September 30, 2023 and $14,168,000 at December 31, 2022. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at September 30, 2023 and December 31, 2022. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

In July 2023, C&N Bank became a member of the Federal Reserve System.  As a member, C&N Bank is required to purchase and maintain stock in the Federal Reserve Bank of Philadelphia. There is no active market for Federal Reserve Bank stock, and it must ordinarily be redeemed by the Federal Reserve Bank of Philadelphia in order to be liquidated. C&N Bank’s investment in Federal Reserve Bank stock, included in other assets in the consolidated balance sheets, was $6,243,000 at September 30, 2023.

The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of $832,000 at September 30, 2023 and $859,000 December 31, 2022, consisting exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $168,000 at September 30, 2023 and $141,000 at December 31, 2022. Changes in the unrealized gains or losses on this security, which are included in other noninterest income in the consolidated statements of income, were a loss of $27,000 in the third quarter 2023 and for the nine-month period ended September 30, 2023, a loss of $38,000 in the third quarter 2022 and a loss of $114,000 in the nine-month period ended September 30, 2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

6. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans receivable at September 30, 2023 and December 31, 2022 are summarized as follows:

Summary of Loans by Type

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022 (1)

Commercial real estate - non-owner occupied

$

737,287

$

675,597

Commercial real estate - owner occupied

231,112

205,910

All other commercial loans

395,703

410,077

Residential mortgage loans

410,013

393,582

Consumer loans

56,555

54,874

Total

1,830,670

1,740,040

Less: allowance for credit losses on loans

(18,085)

(16,615)

Loans, net

$

1,812,585

$

1,723,425

(1) Total loans at December 31, 2022 include purchased credit impaired loans of $1,027,000.

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $4,456,000 at September 30, 2023 and $4,725,000 at December 31, 2022.

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in Northcentral Pennsylvania, the Southern tier of New York State, Southeastern Pennsylvania and Southcentral Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region.

Acquired loans were initially recorded at fair value, with adjustments made to gross amortized cost based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequently, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on performing loans. For the three-month and nine-month periods ended September 30, 2023 and 2022, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

2023

2022

2023

2022

Market Rate Adjustment

 

  

 

  

 

  

 

  

Adjustments to gross amortized cost of loans at beginning of period

$

(1,000)

$

(866)

$

(916)

$

(637)

(Amortization) accretion recognized in interest income

(16)

5

(100)

(224)

Adjustments to gross amortized cost of loans at end of period

$

(1,016)

$

(861)

$

(1,016)

$

(861)

Credit Adjustment on Non-impaired Loans

Adjustments to gross amortized cost of loans at beginning of period

$

(1,446)

$

(2,403)

$

(1,840)

$

(3,335)

Accretion recognized in interest income

 

147

 

308

 

541

 

1,240

Adjustments to gross amortized cost of loans at end of period

$

(1,299)

$

(2,095)

$

(1,299)

$

(2,095)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents an analysis of past due loans as of September 30, 2023:

(In Thousands)

As of September 30, 2023

Past Due

Past Due

30-89

90+

Nonaccrual

Current

Total

Days

Days

Loans

Loans

Loans

Commercial real estate - non-owner occupied

$

4

$

132

$

9,031

$

728,120

$

737,287

Commercial real estate - owner occupied

 

151

 

0

 

1,586

 

229,375

 

231,112

All other commercial loans

1,438

162

1,390

392,713

395,703

Residential mortgage loans

1,569

892

3,244

404,308

410,013

Consumer loans

 

513

 

106

 

250

 

55,686

 

56,555

Total

$

3,675

$

1,292

$

15,501

$

1,810,202

$

1,830,670

The following table presents an analysis of past due loans as of December 31, 2022:

(In Thousands)

As of December 31, 2022

Past Due

Past Due

30-89

90+

Nonaccrual

Current

Total

Days

Days

Loans

Loans

Loans

Commercial real estate - non-owner occupied

$

644

$

947

$

6,350

$

667,656

$

675,597

Commercial real estate - owner occupied

 

723

 

141

 

19

 

204,099

 

204,982

All other commercial loans

537

151

11,528

397,762

409,978

Residential mortgage loans

4,540

866

3,974

384,202

393,582

Consumer loans

635

132

187

53,920

54,874

Purchased credit impaired

 

0

 

0

 

1,027

 

0

 

1,027

Total

$

7,079

$

2,237

$

23,085

$

1,707,639

$

1,740,040

In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” rows in the table that follows.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents the recorded investment in loans by credit quality indicators by year of origination as of September 30, 2023:

(In Thousands)

Term Loans by Year of Origination

2023

2022

2021

2020

2019

Prior

Revolving

Total

Commercial real estate - non-owner occupied

 

 

 

 

 

  

 

  

 

  

 

  

Pass

$

83,002

$

188,426

$

91,246

$

55,618

$

80,858

$

211,778

$

0

$

710,928

Special Mention

 

0

 

0

 

2,475

 

0

 

119

 

8,147

 

0

 

10,741

Substandard

0

0

0

2,577

610

12,431

0

15,618

Doubtful

0

0

0

0

0

0

0

0

Total commercial real estate - non-owner occupied

$

83,002

$

188,426

$

93,721

$

58,195

$

81,587

$

232,356

$

0

$

737,287

 

 

 

 

 

 

 

 

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

0

 

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

 

Pass

$

28,058

$

37,306

$

52,680

$

13,245

$

17,722

$

75,113

$

0

$

224,124

Special Mention

 

0

 

0

 

2,617

 

0

 

0

 

1,301

 

0

 

3,918

Substandard

0

0

0

0

0

3,070

0

3,070

Doubtful

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Total commercial real estate - owner occupied

$

28,058

$

37,306

$

55,297

$

13,245

$

17,722

$

79,484

$

0

$

231,112

 

 

 

 

 

 

 

 

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

0

 

 

 

 

 

 

 

 

All other commercial loans

 

 

 

 

 

 

 

 

Pass

$

39,638

$

94,942

$

53,556

$

29,097

$

17,364

$

25,489

$

112,698

$

372,784

Special Mention

 

0

 

0

 

4,642

 

0

 

0

 

805

 

400

 

5,847

Substandard

0

3,091

1,250

435

2,151

1,121

9,024

17,072

Doubtful

0

0

0

0

0

0

0

0

Total all other commercial loans

$

39,638

$

98,033

$

59,448

$

29,532

$

19,515

$

27,415

$

122,122

$

395,703

 

 

 

 

 

 

 

 

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

0

$

12

$

12

Residential mortgage loans

Pass

$

44,449

$

88,378

$

57,166

$

40,943

$

33,257

$

140,684

$

0

$

404,877

Special Mention

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Substandard

0

0

0

289

369

4,478

0

5,136

Doubtful

0

0

0

0

0

0

0

0

Total residential mortgage loans

$

44,449

$

88,378

$

57,166

$

41,232

$

33,626

$

145,162

$

0

$

410,013

 

 

 

 

 

 

 

 

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

33

$

0

$

33

Consumer loans

Pass

$

5,216

$

5,070

$

2,227

$

1,372

$

238

$

991

$

40,512

$

55,626

Special Mention

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Substandard

0

0

1

12

5

78

833

929

Doubtful

0

0

0

0

0

0

0

0

Total consumer loans

$

5,216

$

5,070

$

2,228

$

1,384

$

243

$

1,069

$

41,345

$

56,555

 

 

 

 

 

 

 

 

Year-to-date gross charge-offs

$

0

$

134

$

0

$

18

$

3

$

3

$

96

$

254

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents the recorded investment in loans by credit quality indicators as of December 31, 2022:

Special

(In Thousands)

Pass

Mention

Substandard

Doubtful

Total

Commercial real estate - non-owner occupied

$

654,430

$

9,486

$

11,681

$

0

$

675,597

Commercial real estate - owner occupied

 

202,702

 

1,909

 

371

 

0

 

204,982

All other commercial loans

383,846

2,516

23,616

0

409,978

Residential mortgage loans

387,944

0

5,638

0

393,582

Consumer loans

54,353

0

521

0

54,874

Purchased credit impaired

 

0

 

0

 

1,027

 

0

 

1,027

Total

$

1,683,275

$

13,911

$

42,854

$

0

$

1,740,040

The following table is a summary of the Corporation’s nonaccrual loans by major categories for the periods indicated.

September 30, 2023

December 31, 2022

Nonaccrual Loans with

Nonaccrual Loans

Total Nonaccrual

(In Thousands)

No Allowance

with an Allowance

Loans

Nonaccrual Loans

Commercial real estate - non-owner occupied

$

1,669

$

7,362

$

9,031

$

6,350

Commercial real estate - owner occupied

 

1,283

 

303

 

1,586

 

19

All other commercial loans

1,194

196

1,390

11,528

Residential mortgage loans

3,244

0

3,244

3,974

Consumer loans

 

250

 

0

 

250

 

187

Purchased credit impaired

 

0

 

0

 

0

 

1,027

Total

$

7,640

$

7,861

$

15,501

$

23,085

The Corporation recognized $317,000 and $744,000 of interest income on nonaccrual loans during the three months and nine months ended September 30, 2023, respectively.

The following table represents the accrued interest receivable written off by reversing interest income during the three-month and nine-month periods ended September 30, 2023:

Three Months Ended

Nine Months Ended

(In Thousands)

September 30, 2023

September 30, 2023

Commercial real estate - non-owner occupied

$

22

$

48

Residential mortgage loans

11

17

Consumer loans

 

0

 

2

Total

$

33

$

67

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.
All other commercial loans are typically secured by business assets including inventory, equipment and receivables.
Residential mortgage loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.
Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

The following table details the amortized cost of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses on loans allocated to these loans:

September 30, 2023

Amortized

(In Thousands)

Cost

Allowance

Commercial real estate - non-owner occupied

$

9,031

$

664

Commercial real estate - owner occupied

 

1,586

 

61

All other commercial loans

1,390

95

Total

$

12,007

$

820

The following table summarizes the activity related to the ACL for the three and nine months ended September 30, 2023 under the CECL methodology.

Commercial

Commercial

All

real estate -

real estate -

other

Residential

nonowner

owner

commercial

mortgage

Consumer

(In Thousands)

occupied

occupied

loans

loans

loans

Unallocated

Total

Balance, June 30, 2023

$

10,603

$

2,025

$

3,686

$

2,464

$

278

$

0

$

19,056

Charge-offs

0

0

(7)

0

(91)

0

(98)

Recoveries

0

0

34

8

18

0

60

(Credit) provision for credit losses on loans

 

(268)

 

(161)

 

(161)

 

(479)

 

136

 

0

 

(933)

Balance, September 30, 2023

$

10,335

$

1,864

$

3,552

$

1,993

$

341

$

0

$

18,085

Commercial

Commercial

All

real estate -

real estate -

other

Residential

nonowner

owner

commercial

mortgage

Consumer

(In Thousands)

occupied

occupied

loans

loans

loans

Unallocated

Total

Balance, December 31, 2022

$

6,305

$

1,942

$

4,142

$

2,751

$

475

$

1,000

$

16,615

Adoption of ASU 2016-13 (CECL)

3,763

7

(88)

(344)

(234)

(1,000)

2,104

Charge-offs

0

0

(12)

(33)

(254)

0

(299)

Recoveries

0

0

34

10

30

0

74

(Credit) provision for credit losses on loans

 

267

 

(85)

 

(524)

 

(391)

 

324

 

0

 

(409)

Balance, September 30, 2023

$

10,335

$

1,864

$

3,552

$

1,993

$

341

$

0

$

18,085

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Prior to the adoption of ASC 326 on January 1, 2023, the Corporation calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosed related to the allowance for loan losses in prior periods.

Three Months Ended September 30, 2022

June 30, 2022

    

    

    

    

    

    

    

September 30, 2022

(In Thousands)

    

Balance

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

Balance

Allowance for Loan Losses:

 

  

  

  

  

  

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

4,982

$

(2,160)

$

0

$

3,225

$

6,047

Commercial and industrial

 

2,792

 

0

 

0

 

31

 

2,823

Commercial construction and land

 

515

 

0

 

0

 

169

 

684

Loans secured by farmland

 

112

 

0

 

0

 

1

 

113

Multi-family (5 or more) residential

 

339

 

0

 

0

 

88

 

427

Agricultural loans

 

23

 

0

 

0

 

(1)

 

22

Other commercial loans

 

131

 

0

 

0

 

(9)

 

122

Total commercial

 

8,894

 

(2,160)

 

0

 

3,504

 

10,238

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

3,689

0

1

229

3,919

Residential mortgage loans - junior liens

 

180

 

0

 

0

 

14

 

194

Home equity lines of credit

 

308

 

0

 

0

 

25

 

333

1-4 Family residential construction

 

215

 

0

 

0

 

36

 

251

Total residential mortgage

 

4,392

 

0

 

1

 

304

4,697

Consumer

 

261

 

(36)

 

24

 

(14)

 

235

Unallocated

 

1,000

 

0

 

0

 

0

 

1,000

Total Allowance for Loan Losses

$

14,547

$

(2,196)

$

25

$

3,794

$

16,170

Nine Months Ended September 30, 2022

December 31, 2021

    

    

    

    

    

    

    

September 30, 2022

(In Thousands)

    

Balance

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

Balance

Allowance for Loan Losses:

 

  

  

  

  

  

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

4,405

$

(2,160)

$

0

$

3,802

$

6,047

Commercial and industrial

 

2,723

 

(150)

 

0

 

250

 

2,823

Commercial construction and land

 

637

 

0

 

0

 

47

 

684

Loans secured by farmland

 

115

 

0

 

0

 

(2)

 

113

Multi-family (5 or more) residential

 

215

 

0

 

0

 

212

 

427

Agricultural loans

 

25

 

0

 

0

 

(3)

 

22

Other commercial loans

 

173

 

0

 

0

 

(51)

 

122

Total commercial

 

8,293

 

(2,310)

 

0

 

4,255

 

10,238

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

3,650

0

3

266

3,919

Residential mortgage loans - junior liens

 

184

 

0

 

0

 

10

 

194

Home equity lines of credit

 

302

 

0

 

15

 

16

 

333

1-4 Family residential construction

 

202

 

0

 

0

 

49

 

251

Total residential mortgage

 

4,338

 

0

 

18

 

341

 

4,697

Consumer

 

235

 

(107)

 

39

 

68

 

235

Unallocated

 

671

 

0

 

0

 

329

 

1,000

Total Allowance for Loan Losses

$

13,537

$

(2,417)

$

57

$

4,993

$

16,170

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The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of December 31, 2022.

December 31, 2022

    

Loans:

Allowance for Loan Losses:

(In Thousands)

Individually

Collectively

Individually

Collectively

  

    

Evaluated

    

Evaluated

    

Totals

    

Evaluated

    

Evaluated

    

Totals

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

7,154

$

675,095

$

682,249

$

427

$

6,647

$

7,074

Commercial and industrial

 

11,223

 

167,048

 

178,271

 

26

 

2,883

 

2,909

Paycheck Protection Program - 1st Draw

 

0

 

5

 

5

 

0

 

0

 

0

Paycheck Protection Program - 2nd Draw

0

163

163

0

0

0

Political subdivisions

 

0

 

90,719

 

90,719

 

0

 

0

 

0

Commercial construction and land

 

244

 

73,719

 

73,963

 

0

 

647

 

647

Loans secured by farmland

 

76

 

12,874

 

12,950

 

0

 

112

 

112

Multi-family (5 or more) residential

 

0

 

55,886

 

55,886

 

0

 

411

 

411

Agricultural loans

 

57

 

2,378

 

2,435

 

0

 

21

 

21

Other commercial loans

 

0

 

14,857

 

14,857

 

0

 

124

 

124

Total commercial

 

18,754

 

1,092,744

 

1,111,498

 

453

 

10,845

 

11,298

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

506

509,276

509,782

0

3,413

3,413

Residential mortgage loans - junior liens

 

30

 

24,919

 

24,949

 

0

 

167

 

167

Home equity lines of credit

 

68

 

43,730

 

43,798

 

0

 

282

 

282

1-4 Family residential construction

 

0

 

30,577

 

30,577

 

0

 

211

 

211

Total residential mortgage

 

604

 

608,502

 

609,106

 

0

 

4,073

 

4,073

Consumer

 

0

 

19,436

 

19,436

 

0

 

244

 

244

Unallocated

 

 

 

 

 

 

1,000

Total

$

19,358

$

1,720,682

$

1,740,040

$

453

$

15,162

$

16,615

Prior to the adoption of ASU 2016-13, loans were classified as impaired when, based on current information and events, it was probable that the Corporation would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment was measured on a loan-by-loan basis for commercial loans by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.

The scope of loans reviewed individually each quarter to determine if they were impaired included all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there was at least one extension of credit graded Special Mention, Substandard or Doubtful. All loans classified as troubled debt restructurings and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, were individually evaluated for impairment.

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Summary information related to impaired loans at December 31, 2022 is provided in the table immediately below.

(In Thousands)

December 31, 2022

Unpaid

Principal

Recorded

Related

    

Balance

    

Investment

    

Allowance

With no related allowance recorded:

 

  

 

  

 

  

Commercial loans secured by real estate

$

8,563

$

3,754

$

0

Commercial and industrial

 

12,926

 

11,163

 

0

Residential mortgage loans - first liens

506

506

0

Residential mortgage loans - junior liens

 

68

 

30

 

0

Home equity lines of credit

68

 

68

 

0

Loans secured by farmland

 

76

 

76

 

0

Agricultural loans

57

57

0

Construction and other land loans

244

244

0

Total with no related allowance recorded

 

22,508

 

15,898

 

0

With a related allowance recorded:

 

 

 

Commercial loans secured by real estate

3,400

3,400

427

Commercial and industrial

 

60

 

60

 

26

Total with a related allowance recorded

 

3,460

 

3,460

 

453

Total

$

25,968

$

19,358

$

453

The average balance of impaired loans and interest income recognized on these impaired loans is as follows:

(In Thousands)

Interest Income Recognized on

Average Investment in Impaired Loans

Impaired Loans on a Cash Basis

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2022

2022

2022

2022

Commercial:

 

 

Commercial loans secured by real estate

$

9,710

$

9,804

$

143

$

483

Commercial and industrial

371

 

839

4

 

207

Commercial construction and land

47

 

47

0

 

1

Loans secured by farmland

79

 

81

0

 

0

Multi-family (5 or more) residential

0

263

0

1,156

Agricultural loans

59

 

61

0

 

2

Total commercial

10,266

 

11,095

147

 

1,849

Residential mortgage:

 

  

  

Residential mortgage loans - first lien

612

587

5

17

Residential mortgage loans - junior lien

31

 

33

0

 

6

Home equity lines of credit

68

 

34

1

 

3

Total residential mortgage

711

 

654

6

 

26

Total

$

10,977

$

11,749

$

153

$

1,875

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty, such as extensions of terms, insignificant payment delays and interest rate reductions, is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.

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Occasionally, the Corporation modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

There were no loans modified to borrowers experiencing financial difficulty in the three-month and nine-month periods ended September 30, 2023.

The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in foreclosed assets held for sale in the unaudited consolidated balance sheets) is as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022

Foreclosed residential real estate

$

202

$

0

The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022

Residential real estate in process of foreclosure

$

1,049

$

1,229

The Corporation maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse, when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. The allowance for credit losses for off-balance sheet exposures of $900,000 at September 30, 2023 and $425,000 at December 31, 2022, is included in accrued interest and other liabilities on the unaudited consolidated balance sheets.

The following table presents the balance and activity in the allowance for credit losses for off-balance sheet exposures for the three and nine months ended September 30, 2023.

Three Months

Nine Months

Ended

Ended

(In Thousands)

September 30, 2023

September 30, 2023

Beginning Balance

$

1,154

$

425

Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13

0

793

Recoveries

38

38

Credit for unfunded commitments

(292)

(356)

Balance, September 30, 2023

$

900

$

900

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At September 30, 2023 and December 31, 2022, the net carrying value of goodwill was $52,505,000.

Information related to core deposit intangibles is as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022

Gross amount

$

6,639

$

6,639

Accumulated amortization

 

(4,068)

 

(3,762)

Net

$

2,571

$

2,877

Amortization expense related to core deposit intangibles is included in other noninterest expense in the consolidated statements of income, as follows:

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Amortization expense

$

102

    

$

110

    

$

306

    

$

329

8. BORROWED FUNDS

SHORT-TERM BORROWINGS

Short-term borrowings (initial maturity within one year) include the following:

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022

FHLB-Pittsburgh borrowings

$

21,500

$

77,000

Customer repurchase agreements

 

1,753

 

3,062

Total short-term borrowings

$

23,253

$

80,062

The Corporation had available credit with other correspondent banks totaling $95,000,000 at September 30, 2023 and December 31, 2022. These lines of credit are primarily unsecured. No amounts were outstanding at September 30, 2023 or December 31, 2022.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At September 30, 2023, the Corporation had available credit in the amount of $20,766,000 on this line with no outstanding advances. At December 31, 2022, the Corporation had available credit in the amount of $23,107,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $21,731,000 at September 30, 2023 and $24,113,000 at December 31, 2022.

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10% at September 30, 2023 and December 31, 2022. The carrying value of the underlying securities was $1,770,000 at September 30, 2023 and $3,080,000 at December 31, 2022.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $1,321,417,000 at September 30, 2023 and $1,209,179,000 at December 31, 2022. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in other assets in the consolidated balance sheets) were $14,570,000 at September 30, 2023 and $14,168,000 at December 31, 2022. The Corporation’s total credit facility with FHLB-Pittsburgh was $918,798,000 at September 30, 2023, including an unused

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(available) amount of $752,847,000. At December 31, 2022, the Corporation’s total credit facility with FHLB-Pittsburgh was $839,378,000, including an unused (available) amount of $689,279,000.

At September 30, 2023, short-term borrowings included an overnight borrowing from FHLB-Pittsburgh of $6,500,000 at an interest rate of 5.68% and an advance of $15,000,000 maturing in October 2023 with an interest rate of 5.61%. At December 31, 2022, the overnight borrowing from FHLB-Pittsburgh was $77,000,000 at an interest rate of 4.45% with no other short-term advances.

LONG-TERM BORROWINGS – FHLB ADVANCES

Long-term borrowings from FHLB-Pittsburgh are as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022

Loan maturing in 2023 with a rate of 3.25%

$

2,290

$

9,303

Loans maturing in 2024 with a weighted-average rate of 2.89%

29,784

29,813

Loans maturing in 2025 with a weighted-average rate of 4.12%

35,653

23,231

Loans maturing in 2026 with a weighted-average rate of 4.44%

31,518

0

Loans maturing in 2027 with a weighted-average rate of 4.00%

24,031

0

Loan maturing in 2028 with a rate of 3.72%

2,000

0

Total long-term FHLB-Pittsburgh borrowings

$

125,276

$

62,347

Note: Weighted-average rates are presented as of September 30, 2023.

SENIOR NOTES

In 2021, the Corporation issued and sold $15.0 million in aggregate principal amount of 2.75% Fixed Rate Senior Unsecured Notes due 2026 (the "Senior Notes"). The Senior Notes mature on June 1, 2026 and bear interest at a fixed annual rate of 2.75%. The Corporation is not entitled to redeem the Senior Notes, in whole or in part, at any time prior to maturity and the Senior Notes are not subject to redemption by the holders. The Senior Notes are unsecured and unsubordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation.

The Senior Notes were recorded, net of debt issuance costs of $337,000, at an initial carrying amount of $14,663,000. Debt issuance costs are amortized over the term of the Senior Notes as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Senior Notes totaling $16,000 in the third quarter 2023 and $49,000 in the nine-month period ended September 30, 2023, and $16,000 in the third quarter 2022 and $48,000 in the nine month-period ended September 30, 2022, was included in interest expense in the unaudited consolidated statements of income.

At September 30, 2023 and December 31, 2022, outstanding Senior Notes are as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022

Senior Notes with an aggregate par value of $15,000,000; bearing interest at 2.75% with an effective interest rate of 3.23%; maturing in June 2026

$

14,814

$

14,765

Total carrying value

$

14,814

$

14,765

SUBORDINATED DEBT

In 2021, the Corporation issued and sold $25.0 million in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Subordinated Notes"). The Subordinated Notes mature on June 1, 2031 and bear interest at a fixed annual rate of 3.25%, to June 1, 2026. From June 1, 2026 to maturity or early redemption, the interest rate will reset quarterly to an interest rate per annum equal to the three-month Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York plus 259 basis points. The Corporation is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after June 1, 2026, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required.

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The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation. The Subordinated Notes rank junior in right to payment to the Corporation's current and future senior indebtedness, including the Senior Notes (described above). The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.

The Subordinated Notes were recorded, net of debt issuance costs of $563,000, at an initial carrying amount of $24,437,000. Debt issuance costs are amortized through June 1, 2026 as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Subordinated Notes totaling $28,000 in the third quarter 2023 and $82,000 in the nine-month period ended September 30, 2023, and $27,000 in the third quarter 2022 and $79,000 in the nine-month period ended September 30, 2022, was included in interest expense in the unaudited consolidated statements of income.

At September 30, 2023 and December 31, 2022, the carrying amounts of subordinated debt agreements are as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2023

2022

Agreements with a par value of $25,000,000; bearing interest at 3.25% with an effective interest rate of 3.74%; maturing in June 2031 and redeemable at par in June 2026

$

24,689

$

24,607

Total carrying value

$

24,689

$

24,607

9. STOCK-BASED COMPENSATION PLANS

The Corporation had a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. The 2023 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and the 2023 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. There were no restricted stock awards granted in the three-month periods ended September 30, 2023 and June 30, 2023. Following is a summary of restricted stock awards granted in the three-month period ended March 31, 2023:

(Dollars in Thousands)

    

    

Aggregate

Grant

Date

Number of

Fair

Shares

Value

1st quarter 2023 awards:

Time-based awards to independent directors

11,000

$

257

Time-based awards to employees

31,684

740

Performance-based awards to employees

11,104

259

Total

53,788

$

1,256

Effective April 20, 2023, the Corporation’s shareholders approved a new plan, the Citizens & Northern Corporation 2023 Equity Incentive Plan (the “2023 Equity Incentive Plan”). New awards to employees and independent directors will be governed under the 2023 Equity Incentive Plan, while outstanding awards under the prior plans (including the awards made in the first quarter 2023) will be governed under the prior plans.

Compensation cost related to restricted stock is recognized based on the fair value of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. Total annual stock-based compensation for the year ending December 31, 2023 is estimated to total $1,340,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $320,000 in the third quarter 2023 and $388,000 in the third quarter 2022. Total stock-based compensation expense attributable to restricted stock awards amount to $1,015,000 in the nine-month period ended September 30, 2023 and $1,169,000 in the nine-month period ended September 30, 2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

10. CONTINGENCIES

In the normal course of business, the Corporation is subject to pending and threatened litigation in which claims for monetary damages are asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of these legal proceedings.

11. DERIVATIVE FINANCIAL INSTRUMENTS

The Corporation is a party to derivative financial instruments. These financial instruments consist of interest rate swap agreements and risk participation agreements (RPAs) which contain master netting and collateral provisions designed to protect the party at risk.

Interest rate swaps with commercial loan banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party, such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures. These derivatives are not designated as hedges and are not speculative. Rather, these derivatives result from a service provided to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

The aggregate notional amount of interest rate swaps was $152,536,000 at September 30, 2023 and $155,214,000 at December 31, 2022. There were no interest rate swaps originated in the three or nine-month periods ended September 30, 2023 and 2022. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at September 30, 2023. The net impact on the consolidated statements of income from interest rate swaps was an increase in interest income on loans of $502,000 in the third quarter 2023 and $1,286,000 in the nine-month period ended September 30, 2023 as compared to a reduction in interest income on loans of $4,000 in third quarter 2022 and $541,000 in the nine months ended September 30, 2022.

The Corporation has entered into an RPA with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed.  This type of derivative is referred to as an “RPA In.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation purchased an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA Out.”  The net impact on the consolidated statements of income from RPAs was an increase in other noninterest income of $1,000 in the third quarter 2023 and $19,000 in the nine-month period ended September 30, 2023 with no comparable amount in the third quarter 2022 and in the nine months ended September 30, 2022.

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at September 30, 2023 and December 31, 2022:

(In Thousands)

At September 30, 2023

At December 31, 2022

Asset Derivatives

Liability Derivatives

Asset Derivatives

Liability Derivatives

Notional

Fair

Notional

Fair

Notional

Fair

Notional

Fair

Amount

Value (1)

Amount

Value (2)

Amount

Value (1)

Amount

Value (2)

Interest rate swap agreements

$

76,268

$

4,545

$

76,268

$

4,545

$

77,607

$

3,638

$

77,607

$

3,638

RPA Out

7,111

6

0

0

7,200

0

0

0

RPA In

0

0

10,000

6

0

0

10,000

19

(1)Included in other assets in the consolidated balance sheets.
(2)Included in accrued interest and other liabilities in the consolidated balance sheets.

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The Corporation’s agreements with its derivative counterparties provide that if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. Further, if the Corporation were to fail to maintain its status as a well or adequately capitalized institution, then the counterparties could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Available-for-sale securities with a carrying value of $2,251,000 were pledged as collateral against the Corporation’s obligations related to the interest rate swaps at September 30, 2023.

12. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other observable inputs.

Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset or liability becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

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At September 30, 2023 and December 31, 2022, assets and liabilities measured at fair value and the valuation methods used are as follows:

September 30, 2023

    

Quoted

    

    

    

Prices

Other

in Active

Observable

Unobservable

Total

Markets

Inputs

Inputs

Fair

(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Value

Recurring fair value measurements, assets:

 

  

 

  

 

  

 

  

AVAILABLE-FOR-SALE DEBT SECURITIES:

 

  

 

  

 

  

 

  

Obligations of the U.S. Treasury

$

30,557

$

0

$

0

$

30,557

Obligations of U.S. Government agencies

0

18,796

0

18,796

Bank holding company debt securities

0

22,311

0

22,311

Obligations of states and political subdivisions:

 

  

 

 

  

 

Tax-exempt

 

0

 

104,453

 

0

 

104,453

Taxable

 

0

 

53,457

 

0

 

53,457

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

 

  

 

  

Residential pass-through securities

 

0

 

94,469

 

0

 

94,469

Residential collateralized mortgage obligations

 

0

 

33,397

 

0

 

33,397

Commercial mortgage-backed securities

 

0

 

63,672

 

0

 

63,672

Private label commercial mortgage-backed securities

 

0

 

8,026

 

0

 

8,026

Total available-for-sale debt securities

 

30,557

 

398,581

 

0

 

429,138

Marketable equity security

 

832

 

0

 

0

 

832

Servicing rights

 

0

 

0

 

2,630

 

2,630

RPA Out

0

6

0

6

Interest rate swap agreements, assets

0

4,545

0

4,545

Total recurring fair value measurements, assets

$

31,389

$

403,132

$

2,630

$

437,151

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$

0

$

4,545

$

0

$

4,545

Nonrecurring fair value measurements, assets:

 

  

 

  

 

  

 

  

Loans individually evaluated for credit loss, net

$

0

$

0

$

7,041

$

7,041

Foreclosed assets held for sale

 

0

 

0

 

633

 

633

Total nonrecurring fair value measurements, assets

$

0

$

0

$

7,674

$

7,674

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December 31, 2022

    

Quoted

    

    

    

Prices

Other

in Active

Observable

Unobservable

Total

Markets

Inputs

Inputs

Fair

(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Value

Recurring fair value measurements, assets:

 

  

 

  

 

  

 

  

AVAILABLE-FOR-SALE DEBT SECURITIES:

 

  

 

  

 

  

 

  

Obligations of the U.S. Treasury

$

31,836

$

0

$

0

$

31,836

Obligations of U.S. Government agencies

0

23,430

0

23,430

Bank holding company debt securities

0

25,386

0

25,386

Obligations of states and political subdivisions:

 

  

 

 

  

 

Tax-exempt

 

0

 

132,623

 

0

 

132,623

Taxable

 

0

 

56,812

 

0

 

56,812

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

 

  

 

  

Residential pass-through securities

 

0

 

99,941

 

0

 

99,941

Residential collateralized mortgage obligations

 

0

 

40,296

 

0

 

40,296

Commercial mortgage-backed securities

 

0

 

79,686

 

0

 

79,686

Private label commercial mortgage-backed securities

 

0

 

8,023

 

0

 

8,023

Total available-for-sale debt securities

 

31,836

 

466,197

 

0

 

498,033

Marketable equity security

 

859

 

0

 

0

 

859

Servicing rights

 

0

 

0

 

2,653

 

2,653

Interest rate swap agreements, assets

0

3,638

0

3,638

Total recurring fair value measurements, assets

$

32,695

$

469,835

$

2,653

$

505,183

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$

0

$

3,638

$

0

$

3,638

Nonrecurring fair value measurements, assets:

 

  

 

  

 

  

 

  

Impaired loans, net

$

0

$

0

$

3,007

$

3,007

Foreclosed assets held for sale

 

0

 

0

 

275

 

275

Total nonrecurring fair value measurements, assets

$

0

$

0

$

3,282

$

3,282

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.

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At September 30, 2023 and December 31, 2022, quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:

    

Fair Value at

    

  

    

  

    

  

    

  

9/30/2023

Valuation

Unobservable

Method or Value As of

Asset

(In Thousands)

Technique

Input(s)

9/30/2023

Servicing rights

$

2,630

 

Discounted cash flow

 

Discount rate

 

13.00

%  

Rate used through modeling period

 

 

Loan prepayment speeds

129.00

%  

Weighted-average PSA

 

 

Servicing fees

0.25

%  

of loan balances

 

4.00

%  

of payments are late

 

5.00

%  

late fees assessed

$

1.94

Miscellaneous fees per account per month

 

 

Servicing costs

$

6.00

Monthly servicing cost per account

$

24.00

Additional monthly servicing cost per loan on loans more than 30 days delinquent

 

1.50

%  

of loans more than 30 days delinquent

 

 

3.00

%  

annual increase in servicing costs

    

Fair Value at

    

  

    

  

    

  

    

  

12/31/2022

Valuation

Unobservable

Method or Value As of

Asset

(In Thousands)

Technique

Input(s)

12/31/2022

Servicing rights

$

2,653

 

Discounted cash flow

 

Discount rate

 

13.00

%  

Rate used through modeling period

 

 

Loan prepayment speeds

133.00

%  

Weighted-average PSA

 

 

Servicing fees

0.25

%  

of loan balances

 

4.00

%  

of payments are late

 

5.00

%  

late fees assessed

$

1.94

Miscellaneous fees per account per month

 

 

Servicing costs

$

6.00

Monthly servicing cost per account

$

24.00

Additional monthly servicing cost per loan on loans more than 30 days delinquent

 

1.50

%  

of loans more than 30 days delinquent

 

 

3.00

%  

annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans. Unrealized gains (losses) in fair value of servicing rights are included in Loan servicing fees, net, in the unaudited consolidated statements of income.

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Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:

(In Thousands)

Three Months Ended

Nine Months Ended

    

September 30, 2023

    

September 30, 2022

    

September 30, 2023

    

September 30, 2022

Servicing rights balance, beginning of period

$

2,607

$

2,640

$

2,653

$

2,329

Originations of servicing rights

 

64

 

33

 

113

 

192

Unrealized (loss) gain included in earnings

 

(41)

 

(24)

 

(136)

 

128

Servicing rights balance, end of period

$

2,630

$

2,649

$

2,630

$

2,649

Loans are individually evaluated for credit loss when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For individually evaluated commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

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At September 30, 2023 and December 31, 2022, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:

(Dollars In Thousands)

    

    

  

    

  

    

  

    

  

    

Weighted

 

Valuation

  

  

  

Average

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

9/30/2023

9/30/2023

9/30/2023

Technique

Inputs

9/30/2023

Loans individually evaluated for credit loss:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate - nonowner occupied

$

7,362

$

664

$

6,698

 

Sales comparison

 

Discount to appraised value

 

25

%

Commercial real estate - owner occupied

303

61

242

Sales comparison & SBA guaranty

Discount to appraised value

57

%

All other commercial loans

196

95

101

Liquidation & SBA guaranty

Discount to appraised value

18

%

Total loans individually evaluated for credit loss

$

7,861

$

820

$

7,041

 

  

 

  

 

  

Foreclosed assets held for sale - real estate:

 

 

  

 

  

 

  

 

  

 

  

Residential (1-4 family)

$

202

$

0

$

202

 

Sales comparison

 

Discount to appraised value

 

38

%

Commercial real estate

431

0

431

Sales comparison

Discount to appraised value

45

%

Total foreclosed assets held for sale

$

633

$

0

$

633

 

  

 

  

 

(Dollars In Thousands)

    

    

  

    

  

    

  

    

  

    

Weighted  

 

Valuation

  

  

  

Average  

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

12/31/2022

12/31/2022

12/31/2022

Technique

Inputs

12/31/2022

 

Impaired loans:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial:

 

  

 

 

 

  

 

  

 

Commercial loans secured by real estate

$

3,400

$

427

$

2,973

 

Sales comparison

 

Discount to appraised value

 

25

%

Commercial and industrial

60

26

34

Liquidation of assets

Discount to appraised value

33

%

Total impaired loans

$

3,460

$

453

$

3,007

 

  

 

  

 

  

Foreclosed assets held for sale - real estate:

 

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

275

$

0

$

275

 

Sales comparison

 

Discount to appraised value

 

50

%

Total foreclosed assets held for sale

$

275

$

0

$

275

 

  

 

  

 

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.

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The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:

(In Thousands)

Fair Value

September 30, 2023

December 31, 2022

Hierarchy

Carrying

Fair

Carrying

Fair

    

Level

    

Amount

    

Value

    

Amount

    

Value

Financial assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

Level 1

$

48,308

$

48,308

$

47,698

$

47,698

Certificates of deposit

 

Level 2

 

4,350

 

4,033

 

7,350

 

6,956

Restricted equity securities (included in other assets)

 

Level 2

 

21,062

 

21,062

 

14,418

 

14,418

Loans, net

 

Level 3

 

1,812,585

 

1,732,232

 

1,723,425

 

1,674,002

Accrued interest receivable

 

Level 2

 

9,311

 

9,311

 

8,653

 

8,653

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits with no stated maturity

 

Level 2

 

1,603,033

 

1,603,033

 

1,702,404

 

1,702,404

Time deposits

 

Level 2

 

421,964

 

419,686

 

295,189

 

293,814

Short-term borrowings

 

Level 2

 

23,253

 

23,253

 

80,062

 

80,062

Long-term borrowings

 

Level 2

 

125,276

 

123,056

 

62,347

 

60,944

Senior debt

Level 2

14,814

12,870

14,765

9,712

Subordinated debt

Level 2

24,689

20,184

24,607

16,186

Accrued interest payable

 

Level 2

 

1,464

 

1,464

 

461

 

461

The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:

changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
changes in general economic conditions
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 (including potential increases in the cost of deposit insurance assessments)
the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses
legislative or regulatory changes
downturn in demand for loan, deposit and other financial services in the Corporation’s market area
increased competition from other banks and non-bank providers of financial services
technological changes and increased technology-related costs
information security breach or other technology difficulties or failures
changes in accounting principles, or the application of generally accepted accounting principles
failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions
the effect of the novel coronavirus (COVID-19) and related events

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

EARNINGS OVERVIEW

Third Quarter 2023 as Compared to Third Quarter 2022

Third quarter 2023 net income was $7,591,000, or $0.50 per diluted share, as compared to $4,455,000, or $0.29 per diluted share, in the third quarter 2022. Significant variances were as follows:

Net interest income of $19,663,000 in the third quarter 2023 was $1,216,000 lower than the third quarter 2022 reflecting an increase in interest expense of $6,624,000 (includes $5,292,000 interest on deposits and $1,332,000 interest on borrowings) and an increase of $5,408,000 in interest and dividend income. The interest rate spread decreased 0.73%, as the average rate on interest-bearing liabilities increased 1.49%, while the average yield on earning assets increased 0.76%. The net interest margin was 3.35% in the third quarter 2023, down from 3.69% in the third quarter 2022.  

The credit for credit losses was $1,225,000 in the third quarter 2023, as compared to a provision for credit losses of $3,794,000 in the third quarter 2022. The credit in the third quarter 2023 included the impact of reductions in the allowance for credit losses (ACL) from a reduction in estimated future net charge-offs related to an economic forecast, qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, and a reduction in the Corporation’s average net charge-off experience. The third quarter 2022

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provision included the impact of recognizing a partial charge-off of $2,160,000 on a commercial real estate secured participation loan.

Noninterest income of $6,489,000 in the third quarter 2023 increased $818,000 from the third quarter 2022 amount. Significant variances included the following:

oOther noninterest income of $1,084,000 increased $462,000 from the third quarter 2022, including dividends on FHLB-Pittsburgh stock totaling $323,000, an increase of $163,000 from the third quarter 2022 and dividends on Federal Reserve Bank stock of $63,000 with no comparable amount in 2022. Additionally, in the third quarter 2023, the Corporation recognized income of $64,000, 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.

oService charges on deposit accounts of $1,443,000 increased $338,000 from the third quarter 2022. In the third quarter 2022, income was reduced by $290,000 related to refunds of consumer overdraft fees as the result of updated regulatory guidance on certain overdraft fees with no comparable amount in 2023.

oTrust revenue of $1,919,000 increased $175,000, consistent with recent appreciation in the trading prices of many U.S. equity securities and includes an increase in fees from services provided to estates.

oNet gains from sale of loans of $237,000 increased $106,000 from the third quarter 2022, reflecting an increase in the volume of residential mortgage loans sold.

oBrokerage and insurance revenue of $394,000 decreased $302,000 from the third quarter 2022, due to a reduction in sales volume.

Noninterest expense of $17,940,000 in the third quarter 2023 increased $497,000 from the third quarter 2022 amount. Significant variances included the following:  

oOther noninterest expense of $2,577,000 increased $582,000 from the third quarter 2022. Within this category, significant variances included the following:
Other operational losses included $127,000 of expenses related to check fraud in the third quarter 2023 with no comparable amount in the third quarter 2022.
FDIC insurance expense increased $124,000 from the third quarter of 2022, reflecting the impact of an increase in base deposit insurance assessment rate applicable to all FDIC-insured banks.
In the third quarter 2023, there was no adjustment to the allowance for disallowed SBA claims compared to a decrease of $77,000 in the allowance for disallowed SBA claims in third quarter of 2022, resulting in a net increase in expense of $77,000.
Legal fees totaled $187,000 in the third quarter 2023, an increase of $66,000 over the third quarter 2022 total, mainly due to fees incurred related to non-litigation-related corporate matters.
Net recoveries of previously incurred collection expenses were $70,000 in the third quarter 2023 as compared to net collection expense of $16,000 in the third quarter 2022, a net decrease in expense of $86,000.
oAutomated teller machine and interchange expense of $504,000 increased $107,000 from the third quarter 2022, mainly due to a higher volume of interchange transactions processed.

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oData processing and telecommunications expense of $1,823,000 increased $104,000 from the third quarter 2022, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

oPennsylvania shares tax expense of $403,000 is lower by $84,000 from the third quarter 2022, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax.

oNet occupancy and equipment expense of $1,268,000 decreased $230,000 from the third quarter 2022 total, as 2022 included accelerated depreciation expense of $205,000 related to planned closures of two branches in November 2022.

The income tax provision of $1,846,000, or 19.6% of pre-tax income for the third quarter 2023 increased $988,000 from $858,000, or 16.1% of pre-tax income for the third quarter 2022. The higher provision in 2023 reflects the increase in pre-tax income of $4,124,000. The higher effective tax rate in the third quarter 2023 as compared to the third quarter 2022 reflects the impact of an increase in nondeductible interest expense associated with funding for tax-exempt securities and loans.

Nine Months Ended September 30, 2023 as Compared to Nine Months Ended September 30, 2022

Net income for the nine-month period ended September 30, 2023 was $19,887,000, or $1.29 per diluted share, as compared to $18,839,000, or $1.21 per diluted share, for the first nine months of 2022. Significant variances were as follows:

Net interest income totaled $60,806,000 in the nine months ended September 30, 2023, $30,000 lower than 2022, reflecting an increase in interest expense of $16,506,000 (includes $11,581,000 interest on deposits and $4,925,000 interest on borrowings) and an increase of $16,476,000 in interest and dividend income (includes $16,022,000 in interest and fees on loans). The interest rate spread decreased 0.56%, as the average rate on interest-bearing liabilities was higher by 1.29% while the average yield on earning assets increased 0.73%. The net interest margin was 3.53% for the first nine months of 2023, down from 3.72% in the corresponding period of 2022.

For the nine months ended September 30, 2023, there was a credit for credit losses (reduction in expense) of $765,000 compared to a provision of $4,993,000 for the first nine months of 2022, resulting in a net decrease in expense of $5,758,000. The credit for the first nine months of 2023 included a credit related to loans receivable of $409,000 and a credit related to off-balance sheet exposures of $356,000. The credit related to loans receivable and off-balance sheet exposures was mainly attributable to qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, as well as a reduction in  the Corporation’s average net charge-off experience, used in the calculation of the ACL. The ACL as a percentage of gross loans receivable was 0.99% at September 30, 2023 as compared to 1.08% at January 1, 2023 upon the initial adoption of CECL.

Noninterest income totaled $18,739,000 in the first nine months of 2023, up $416,000 from the total for the first nine months of 2022. Significant variances included the following:

oOther noninterest income of $3,442,000 increased $776,000 as dividends on FHLB-Pittsburgh stock totaled $830,000, an increase of $442,000. Additionally, in the first nine months of 2023, the Corporation recognized income of $63,000 from dividends on Federal Reserve Bank stock with no comparable amount in 2022 and income of $160,000, 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.

oService charges on deposit accounts of $4,121,000 increased $459,000 as the volume of consumer and business overdraft activity increased and included in first nine months of 2022 there 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.

oTrust revenue of $5,500,000 increased $255,000 reflecting an increase consistent with recent appreciation in the trading prices of many U.S. equity securities and an increase in fees from services provided to estates.

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oBrokerage and insurance revenue of $1,189,000 decreased $595,000 due to a reduction in sales volume.

oLoan servicing fees, net, of $466,000 decreased $291,000, as the fair value of servicing rights decreased $136,000 in the first nine months of 2023 as compared to an increase of $128,000 in the first nine months of 2022.

oNet gains from sale of loans of $450,000 decreased $283,000, reflecting a reduction in volume of residential mortgage loans sold.

Noninterest expense totaled $55,749,000 for the first nine months of 2023, an increase of $4,381,000 from the total for the first nine months of 2022. Significant variances included the following:  

oOther noninterest expense of $8,443,000 increased $2,133,000. Within this category, significant variances included the following:
Other operational losses included $168,000 of expense related to check fraud losses in 2023 with no corresponding amount in 2022 as well as a net increase in expense of $263,000 to $32,000 in other losses in the first month nine months of 2023 from a net reduction in expense of $231,000 in the first nine months of 2022. 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.
FDIC insurance expense increased $366,000, reflecting the impact of the increase in base deposit insurance assessment rate previously described.
Legal fees totaled $700,000 in the first nine months of 2023, an increase of $359,000, mainly due to fees incurred related to non-litigation-related corporate matters.
In the nine-month period ended September 30, 2023, the allowance for disallowed SBA claims decreased $35,000, resulting in a reduction in expense of the same amount, reflecting better than previously estimated claims experience. In comparison, the reduction in expense in the first nine months of 2022 was $367,000. At September 30, 2023, the allowance for disallowed SBA claims, which was included in other liabilities, was $55,000.
oSalaries and employee benefits expense of $33,082,000 increased $1,384,000, including an increase in base salaries expense of $1,363,000, or 6.5%.

oData processing and telecommunications expense of $5,659,000 increased $597,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

oProfessional fees of $1,988,000 increased $498,000, including $389,000 of conversion costs related to a change in wealth management platform for providing brokerage and investment advisory services.

oPennsylvania shares tax expense of $1,210,000 for the first nine months of 2023 is lower by $253,000, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax.

The income tax provision of $4,674,000, or 19.0% of pre-tax income for the nine months ended September 30, 2023 increased $715,000 from $3,959,000, or 17.4% of pre-tax income for the nine months ended September 30, 2022. The higher provision in 2023 reflects the increase in pre-tax income of $1,763,000. The higher effective rate in 2023 includes: (1) 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 the Corporation’s stock price; and (2) an increase in nondeductible interest expense.

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TABLE I – QUARTERLY FINANCIAL DATA

(Dollars In Thousands,

For the Three Months Ended :

Except Per Share Data)

September 30, 

June 30, 

March 31, 

December 31,

September 30, 

(Unaudited)

    

2023

2023

    

2023

2022

    

2022

Interest income

$

29,118

$

28,011

$

26,139

$

25,855

$

23,710

Interest expense

 

9,455

 

7,649

 

5,358

 

3,563

 

2,831

Net interest income

 

19,663

 

20,362

 

20,781

 

22,292

 

20,879

(Credit) provision for credit losses

 

(1,225)

 

812

 

(352)

 

2,262

 

3,794

Net interest income after (credit) provision for credit losses

 

20,888

 

19,550

 

21,133

 

20,030

 

17,085

Noninterest income

 

6,489

 

6,634

 

5,616

 

6,109

 

5,671

Noninterest expense

 

17,940

 

18,722

 

19,087

 

16,587

 

17,443

Income before income tax provision

 

9,437

 

7,462

 

7,662

 

9,552

 

5,313

Income tax provision

 

1,846

 

1,419

 

1,409

 

1,773

 

858

Net income

$

7,591

$

6,043

$

6,253

$

7,779

$

4,455

Net income attributable to common shares

$

7,534

$

5,996

$

6,201

$

7,711

$

4,416

Basic earnings per common share

$

0.50

$

0.39

$

0.40

$

0.50

$

0.29

Diluted earnings per common share

$

0.50

$

0.39

$

0.40

$

0.50

$

0.29

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NONINTEREST INCOME

TABLE II – COMPARISON OF NONINTEREST INCOME

(Dollars in Thousands)

Three Months Ended

 

September 30, 

$

%

 

    

2023

2022

    

Change

Change

 

Trust revenue

$

1,919

$

1,744

$

175

10.0

%

Brokerage and insurance revenue

 

394

696

(302)

(43.4)

%

Service charges on deposit accounts

 

1,443

1,105

338

30.6

%

Interchange revenue from debit card transactions

 

1,098

1,031

67

6.5

%

Net gains from sales of loans

 

237

131

106

80.9

%

Loan servicing fees, net

 

154

189

(35)

(18.5)

%

Increase in cash surrender value of life insurance

 

160

133

27

20.3

%

Other noninterest income

 

1,084

622

462

74.3

%

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

0

20

(20)

(100.0)

%

Total noninterest income

$

6,489

$

5,671

$

818

14.4

%

(Dollars in Thousands)

Nine Months Ended

 

September 30, 

$

%

 

    

2023

2022

    

Change

Change

 

Trust revenue

$

5,500

$

5,245

$

255

4.9

%

Brokerage and insurance revenue

 

1,189

1,784

(595)

(33.4)

%

Service charges on deposit accounts

 

4,121

3,662

459

12.5

%

Interchange revenue from debit card transactions

 

3,115

3,050

65

2.1

%

Net gains from sales of loans

 

450

733

(283)

(38.6)

%

Loan servicing fees, net

 

466

757

(291)

(38.4)

%

Increase in cash surrender value of life insurance

 

450

405

45

11.1

%

Other noninterest income

 

3,442

2,666

776

29.1

%

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

6

21

(15)

(71.4)

%

Total noninterest income

$

18,739

$

18,323

$

416

2.3

%

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NONINTEREST EXPENSE

TABLE III - COMPARISON OF NONINTEREST EXPENSE

(Dollars in Thousands)

 Three Months Ended 

 

September 30, 

 $ 

 % 

 

 

2023

 

2022

 

 Change 

 

 Change 

Salaries and employee benefits

    

$

10,878

    

$

10,826

    

$

52

    

0.5

%

Net occupancy and equipment expense

 

1,268

 

1,498

 

(230)

 

(15.4)

%

Data processing and telecommunications expense

 

1,823

 

1,719

 

104

 

6.1

%

Automated teller machine and interchange expense

 

504

 

397

 

107

 

27.0

%

Pennsylvania shares tax

 

403

 

487

 

(84)

 

(17.2)

%

Professional fees

 

487

 

521

 

(34)

 

(6.5)

%

Other noninterest expense

2,577

1,995

582

29.2

%

Total noninterest expense

$

17,940

$

17,443

$

497

 

2.8

%

(Dollars in Thousands)

Nine Months Ended

 

September 30, 

 $ 

 % 

 

 

2023

 

2022

 

 Change 

 

 Change 

Salaries and employee benefits

    

$

33,082

    

$

31,698

    

$

1,384

    

4.4

%

Net occupancy and equipment expense

 

3,993

 

4,217

 

(224)

 

(5.3)

%

Data processing and telecommunications expense

 

5,659

 

5,062

 

597

 

11.8

%

Automated teller machine and interchange expense

 

1,374

 

1,128

 

246

 

21.8

%

Pennsylvania shares tax

 

1,210

 

1,463

 

(253)

 

(17.3)

%

Professional fees

 

1,988

 

1,490

 

498

 

33.4

%

Other noninterest expense

8,443

6,310

2,133

33.8

%

Total noninterest expense

$

55,749

$

51,368

$

4,381

 

8.5

%

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

CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.

Allowance for Credit Losses on Loans – A material estimate that is particularly susceptible to significant change is the determination of the allowance for credit losses (ACL) on loans. The Corporation maintains an ACL on loans which represents management’s estimate of expected net charge-offs over the life of the loans. The ACL includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis). Management considers the determination of the ACL on loans to be critical because it requires significant judgment regarding estimates of expected credit losses based on the Corporation’s historical loss experience, current conditions and economic forecasts. Management’s evaluation is based upon a continuous review of the Corporation’s loans, with consideration given to evaluations resulting from examinations performed by regulatory authorities. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for determining the ACL, and additional discussion of the ACL is provided in a separate section of Management’s Discussion and Analysis.

The ACL may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables, including new information regarding existing problem loans, identification of additional problem loans, changes in the fair value of underlying collateral, unforeseen events such as natural disasters and pandemics, and other factors. Because current economic conditions and

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

Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.

NET INTEREST INCOME

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables IV, V and VI include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 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 related Tables.

Three-Month Periods Ended September 30, 2023 and 2022

For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $19,875,000 in 2023 was $1,313,000 (6.2%) lower than in 2022. The decrease in net interest income reflected an increase in interest expense of $6,624,000 (includes $5,292,000 interest on deposits and $1,332,000 in interest on borrowings) and an increase of $5,311,000 in total interest income. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income in the third quarter 2023 as compared to third quarter 2022 by $255,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $1,568,000. As presented in Table V, the Net Interest Margin was 3.35% in the third quarter 2023 as compared to 3.69% in the third quarter 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 2.73% in 2023 from 3.46% in 2022. The average yield on earning assets of 4.94% was 0.76% higher in 2023 as compared to 2022, and the average rate on interest-bearing liabilities of 2.21% in 2023 was 1.49% higher.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $29,330,000 in 2023, an increase of $5,311,000, or 22.1% from 2022.

Interest and fees from loans receivable increased $5,489,000 in 2023 as compared to 2022. The fully taxable equivalent yield on loans in 2023 increased to 5.72% from 4.91% in 2022, reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased $142,728,000 (8.5%) to $1,816,998,000 in 2023 from $1,674,270,000 in 2022. The Corporation has experienced growth in commercial real estate and residential mortgage loans over the last three quarters of 2022 and first nine months of 2023.

Income from interest-bearing due from banks totaled $345,000 in 2023, an increase of $169,000 from the total for 2022. The average yield on interest-bearing due from banks was 4.31% in 2023, up from 2.03% in 2022. The average balance of interest-bearing due from banks was $31,729,000 in 2023, down from $34,465,000 in 2022. Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with the Federal Reserve.

Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, totaled $2,758,000 in 2023, down $327,000 from 2022, as the average balance (at amortized cost) of available-for-sale debt securities decreased $60,776,000. The average yield on available-for-sale debt securities was 2.17% in 2023 and 2022.

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INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense increased $6,624,000 to $9,455,000 in 2023 from $2,831,000 in 2022.

Interest expense on deposits increased $5,292,000, as the average rate on interest-bearing deposits increased to 1.93% in 2023 from 0.54% in 2022. Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,990,092,000 for the third quarter 2023, down $8,491,000 (0.4%) from the third quarter 2022. Within average total deposits, average brokered deposits (primarily time and money market) were $60,829,000 with an average interest rate of 4.98% in the third quarter 2023, up from $39,074,000 with an average interest rate of 2.51% in the third quarter 2022. The deposit mix has changed significantly over the past several months as businesses and consumers have become more interest-rate sensitive in light of higher market rates.  Average time deposits increased $107,808,000 and average interest checking deposits increased $69,427,000, while the average total balance of money market accounts decreased $98,152,000, average noninterest-bearing demand deposits decreased $58,392,000 and average savings deposits decreased $29,182,000.

Interest expense on borrowed funds increased $1,332,000 in 2023 as compared to 2022, as the Corporation utilized higher levels of short-term and long-term FHLB borrowings to help provide funding for loan growth. Interest expense on short-term borrowings was $677,000 in 2023, up from $179,000 in 2022. The average balance of short-term borrowings increased to $49,157,000 in 2023 from $33,970,000 in 2022. The average rate on short-term borrowings was 5.46% in 2023 compared to 2.09% in 2022. Interest expense on long-term borrowings (FHLB advances) increased $832,000 to $1,164,000 in 2023 from $332,000 in 2022. The average balance of long-term borrowings was $119,395,000 at an average rate of 3.87% in 2023, up from an average balance of $51,628,000 at an average rate of 2.55% 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 total borrowed funds was 4.18% in 2023 compared to 2.73% in 2022.

Nine-Month Periods Ended September 30, 2023 and 2022

For the nine-month periods, fully taxable equivalent net interest income was $61,526,000 in 2023, which was $233,000 (0.4%) lower than in 2022. Similar to the discussion for the third quarter 2023, the decrease in net interest income reflected an increase in interest expense of $16,506,000 (includes $11,581,000 interest on deposits and $4,925,000 in interest on borrowings) and an increase of $16,273,000 in total interest income. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for the nine months ended September 30, 2023 over the nine months ended September 30, 2022 by $2,482,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $2,715,000. As presented in Table V, the Net Interest Margin was 3.53% in the first nine months of 2023 as compared to 3.72% in the first nine months of 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 2.99% in 2023 from 3.55% in 2022. The average yield on earning assets of 4.81% was 0.73% higher in 2023 as compared to 2022, while the average rate on interest-bearing liabilities of 1.82% in 2023 was 1.29% higher as compared to 2022.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $83,988,000 in 2023, an increase of $16,273,000 from 2022.

Interest and fees from loans receivable increased $16,058,000 in 2023 as compared to 2022. In the nine-month period ended September 30, 2023, the fully taxable equivalent yield on loans was 5.60%, up from 4.86% in the first nine months of 2022, reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased $173,103,000 (10.8%) to $1,777,238,000 in 2023 from $1,604,135,000 in 2022. As noted above, the Corporation has experienced growth in outstanding commercial real estate and residential mortgage loans over the last three quarters of 2022 and first nine months of 2023.

Income from interest-bearing due from banks was $932,000 in 2023, an increase of $597,000 from 2022. The average yield on interest-bearing due from banks was 4.01% in 2023, up from 0.81% in 2022. The average balance of interest-bearing due from banks was $31,076,000 in 2023, down from $55,154,000 in 2022. The reduction in interest-bearing due from bank balances reflects the use of funds to help support loan growth. Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with the Federal Reserve.

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Interest income from available-for-sale debt securities decreased $353,000 in 2023 from 2022. The average balance of available-for-sale debt securities (at amortized cost) decreased to $522,600,000 in 2023 from $557,155,000 in 2022, as net proceeds from maturities and sales of securities have been used to help fund loan growth. The average yield on available-for-sale debt securities was 2.20% for 2023 as compared to 2.15% in 2022.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the nine-month periods, interest expense increased $16,506,000 to $22,462,000 in 2023 from $5,956,000 in 2022.

Interest expense on deposits increased $11,581,000, as the average rate on interest-bearing deposits increased to 1.45% in 2023 from 0.38% in 2022. Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,956,757,000 for the first nine months of 2023, down $7,906,000 (0.4%) from the first nine months of 2022. Within average deposits, average brokered deposits were $40,910,000 at an average rate of 4.56% for the first nine months of 2023 as compared to $35,423,000 at an average rate of 1.36% in the first nine months of 2022.  As noted above, the deposit mix has changed significantly over the last several months.  Average time deposits increased $83,501,000 and average interest checking deposits increased $46,407,000, while the average total balance of money market accounts decreased $103,850,000, the average balances of noninterest bearing demand deposits decreased $24,014,000 and average savings deposits decreased $9,950,000.

Interest expense on borrowed funds increased $4,925,000 in 2023 as compared to 2022. Interest expense on short-term borrowings of $2,918,000 in 2023 was up from $302,000 in 2022 as the average balance of short-term borrowings increased to $75,978,000 in 2023 from $24,306,000 in 2022. The average rate on short-term borrowings was 5.13% in 2023 compared to 1.66% in 2022. Interest expense on long-term borrowings (FHLB advances) increased $2,465,000 to $2,901,000 in 2023 from $436,000 in 2022. The average balance of long-term borrowings was $103,817,000 in 2023, up from an average balance of $32,509,000 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 3.74% in 2023 compared to 1.79% in 2022. Interest expense on subordinated debt decreased $158,000 to $691,000 in 2023 from $849,000 in 2022. The average balance of subordinated debt decreased to $24,648,000 in 2023 from $27,966,000 in 2022, and the average rate on subordinated debt decreased to 3.75% in 2023 from 4.06% in 2022.

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TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE

Three Months Ended

Nine Months Ended

September 30, 

Increase/

.

September 30, 

Increase/

(In Thousands)

    

2023

    

2022

    

(Decrease)

    

2023

    

2022

    

(Decrease)

INTEREST INCOME

Interest-bearing due from banks

$

345

$

176

$

169

$

932

$

335

$

597

Available-for-sale debt securities:

 

 

 

 

 

 

Taxable

 

2,077

 

2,138

 

(61)

 

6,440

 

6,143

 

297

Tax-exempt

 

681

 

947

 

(266)

 

2,161

 

2,811

 

(650)

Total available-for-sale debt securities

 

2,758

 

3,085

 

(327)

 

8,601

 

8,954

 

(353)

Loans receivable:

 

 

 

 

 

 

Taxable

 

25,526

 

19,967

 

5,559

 

72,314

 

55,662

 

16,652

Paycheck Protection Program

3

118

(115)

8

899

(891)

Tax-exempt

 

680

 

635

 

45

 

2,093

 

1,796

 

297

Total loans receivable

 

26,209

 

20,720

 

5,489

 

74,415

 

58,357

 

16,058

Other earning assets

 

18

 

38

 

(20)

 

40

 

69

 

(29)

Total Interest Income

 

29,330

 

24,019

 

5,311

 

83,988

 

67,715

 

16,273

INTEREST EXPENSE

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

Interest checking

 

2,360

 

487

 

1,873

 

4,859

 

989

 

3,870

Money market

 

1,669

 

639

 

1,030

 

3,654

 

1,270

 

2,384

Savings

 

60

 

66

 

(6)

 

186

 

191

 

(5)

Time deposits

 

3,175

 

780

 

2,395

 

6,894

 

1,562

 

5,332

Total interest-bearing deposits

 

7,264

 

1,972

 

5,292

 

15,593

 

4,012

 

11,581

Borrowed funds:

 

 

 

 

 

 

Short-term

 

677

 

179

 

498

 

2,918

 

302

 

2,616

Long-term - FHLB advances

 

1,164

 

332

 

832

 

2,901

 

436

 

2,465

Senior notes, net

120

119

1

359

357

2

Subordinated debt, net

 

230

 

229

 

1

 

691

 

849

 

(158)

Total borrowed funds

 

2,191

 

859

 

1,332

 

6,869

 

1,944

 

4,925

Total Interest Expense

 

9,455

 

2,831

 

6,624

 

22,462

 

5,956

 

16,506

Net Interest Income

$

19,875

$

21,188

$

(1,313)

$

61,526

$

61,759

$

(233)

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis (a non-GAAP measure), using the Corporation’s marginal federal income tax rate of 21%. The following table is a reconciliation of net interest income under U.S. GAAP as compared to net interest income as adjusted to a fully taxable-equivalent basis.

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

Increase/

September 30, 

Increase/

2023

    

2022

    

(Decrease)

2023

    

2022

(Decrease)

Net Interest Income Under U.S. GAAP

$

19,663

$

20,879

$

(1,216)

$

60,806

$

60,836

$

(30)

Add: fully taxable-equivalent interest income adjustment from tax-exempt securities

84

179

(95)

314

553

(239)

Add: fully taxable-equivalent interest income adjustment from tax-exempt loans

128

130

(2)

406

370

36

Net Interest Income as adjusted to a fully taxable-equivalent basis

$

19,875

$

21,188

$

(1,313)

$

61,526

$

61,759

$

(233)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE V - Analysis of Average Daily Balances and Rates

(Dollars in Thousands)

Three Months

Three Months

 

Nine Months

Nine Months

 

Ended

Rate of

Ended

Rate of

 

Ended

Rate of

Ended

Rate of

 

9/30/2023

Return/

9/30/2022

Return/

 

9/30/2023

Return/

9/30/2022

Return/

 

Average

Cost of

Average

Cost of

 

Average

Cost of

Average

Cost of

 

    

Balance

    

Funds %

    

Balance

    

Funds %

 

    

Balance

    

Funds %

    

Balance

    

Funds %

 

EARNING ASSETS

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing due from banks

$

31,729

 

4.31

%  

$

34,465

 

2.03

%

 

$

31,076

4.01

%  

$

55,154

 

0.81

%

Available-for-sale debt securities, at amortized cost:

 

 

 

 

 

 

  

 

  

Taxable

379,709

 

2.17

%  

414,147

 

2.05

%

395,070

2.18

%  

408,178

 

2.01

%

Tax-exempt

 

124,435

 

2.17

%  

 

150,773

 

2.49

%

 

127,530

2.27

%  

 

148,977

 

2.52

%

Total available-for-sale debt securities

 

504,144

 

2.17

%  

 

564,920

 

2.17

%

 

522,600

 

2.20

%  

 

557,155

 

2.15

%

Loans receivable:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Taxable

 

1,729,835

 

5.85

%  

 

1,582,245

 

5.01

%

 

1,687,444

5.73

%  

 

1,507,756

 

4.94

%

Paycheck Protection Program

137

8.69

%  

4,695

9.97

%

149

7.18

%  

10,887

11.04

%  

Tax-exempt

 

87,026

 

3.10

%  

 

87,330

 

2.88

%

 

89,645

3.12

%  

 

85,492

 

2.81

%

Total loans receivable

 

1,816,998

 

5.72

%  

 

1,674,270

 

4.91

%

 

1,777,238

 

5.60

%  

 

1,604,135

 

4.86

%

Other earning assets

 

1,468

 

4.86

%  

 

3,925

 

3.84

%

 

1,332

 

4.02

%  

 

2,750

 

3.35

%

Total Earning Assets

 

2,354,339

 

4.94

%  

 

2,277,580

 

4.18

%

 

2,332,246

 

4.81

%  

 

2,219,194

 

4.08

%

Cash

 

22,068

 

  

 

23,731

 

  

 

22,475

 

  

 

22,527

 

  

Unrealized loss on securities

 

(63,110)

 

  

 

(44,559)

 

  

 

(59,921)

 

  

 

(28,068)

 

  

Allowance for credit losses

 

(19,540)

 

  

 

(14,914)

 

  

 

(18,472)

 

  

 

(14,406)

 

  

Bank-owned life insurance

31,559

30,991

31,413

30,857

Bank premises and equipment

 

21,132

 

  

 

21,874

 

  

 

21,262

 

  

 

21,494

 

  

Intangible assets

 

55,125

 

  

 

55,547

 

  

 

55,227

 

  

 

55,655

 

  

Other assets

 

74,483

 

  

 

57,012

 

  

 

70,369

 

  

 

52,610

 

  

Total Assets

$

2,476,056

 

  

$

2,407,262

 

  

$

2,454,599

 

  

$

2,359,863

 

  

 

  

 

 

  

 

 

  

 

  

 

  

 

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

$

512,074

 

1.83

%  

$

442,647

 

0.44

%

$

477,751

1.36

%  

$

431,344

 

0.31

%

Money market

 

340,618

 

1.94

%  

 

438,770

 

0.58

%

 

344,527

1.42

%  

 

448,377

 

0.38

%

Savings

 

232,240

 

0.10

%  

 

261,422

 

0.10

%

 

245,483

0.10

%  

 

255,433

 

0.10

%

Time deposits

 

406,436

 

3.10

%  

 

298,628

 

1.04

%

 

365,174

2.52

%  

 

281,673

 

0.74

%

Total interest-bearing deposits

 

1,491,368

 

1.93

%  

 

1,441,467

 

0.54

%

 

1,432,935

 

1.45

%  

 

1,416,827

 

0.38

%

Borrowed funds:

 

  

 

 

  

 

 

  

 

  

 

  

 

  

Short-term

 

49,157

 

5.46

%  

 

33,970

 

2.09

%

 

75,978

5.13

%  

 

24,306

 

1.66

%

Long-term - FHLB advances

 

119,395

 

3.87

%  

 

51,628

 

2.55

%

 

103,817

3.74

%  

 

32,509

 

1.79

%

Senior notes, net

14,808

3.22

%

14,741

3.20

%

14,790

3.25

%

14,725

3.24

%

Subordinated debt, net

 

24,676

 

3.70

%  

 

24,566

 

3.70

%

 

24,648

3.75

%  

 

27,966

 

4.06

%

Total borrowed funds

 

208,036

 

4.18

%  

 

124,905

 

2.73

%

 

219,233

 

4.19

%  

 

99,506

 

2.61

%

Total Interest-bearing Liabilities

 

1,699,404

 

2.21

%  

 

1,566,372

 

0.72

%

 

1,652,168

 

1.82

%  

 

1,516,333

 

0.53

%

Demand deposits

 

498,724

 

  

 

557,116

 

  

 

523,822

 

  

 

547,836

 

  

Other liabilities

 

30,749

 

  

 

23,588

 

  

 

28,091

 

  

 

22,565

 

  

Total Liabilities

 

2,228,877

 

  

 

2,147,076

 

  

 

2,204,081

 

  

 

2,086,734

 

  

Stockholders' equity, excluding accumulated other comprehensive loss

 

296,577

 

  

 

295,086

 

  

 

297,386

 

  

 

295,019

 

  

Accumulated other comprehensive loss

 

(49,398)

 

  

 

(34,900)

 

  

 

(46,868)

 

  

 

(21,890)

 

  

Total Stockholders' Equity

 

247,179

 

  

 

260,186

 

  

 

250,518

 

  

 

273,129

 

  

Total Liabilities and Stockholders' Equity

$

2,476,056

 

  

$

2,407,262

 

  

$

2,454,599

 

  

$

2,359,863

 

  

Interest Rate Spread

 

  

 

2.73

%  

 

  

 

3.46

%

 

  

 

2.99

%  

 

  

 

3.55

%

Net Interest Income/Earning Assets

 

  

 

3.35

%  

 

  

 

3.69

%

 

  

 

3.53

%  

 

  

 

3.72

%

 

  

 

  

 

  

 

  

 

  

 

 

  

 

  

Total Deposits (Interest-bearing and Demand)

$

1,990,092

 

  

$

1,998,583

 

  

$

1,956,757

 

  

$

1,964,663

 

  

(1)Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2)Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
(3)Rates of return on earning assets and costs of funds are presented on an annualized basis.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands)

Three Months Ended 9/30/2023 vs. 9/30/2022

.

Nine Months Ended 9/30/2023 vs. 9/30/2022

Change in

Change in

Total

 

Change in

Change in

Total

    

Volume

    

Rate

    

Change

 

Volume

    

Rate

    

Change

EARNING ASSETS

 

  

 

  

 

  

  

 

  

 

  

Interest-bearing due from banks

$

(76)

$

245

$

169

$

(203)

$

800

$

597

Available-for-sale debt securities:

 

 

 

 

 

 

Taxable

 

(180)

 

119

 

(61)

 

(202)

 

499

 

297

Tax-exempt

 

(154)

 

(112)

 

(266)

 

(380)

 

(270)

 

(650)

Total available-for-sale debt securities

 

(334)

 

7

 

(327)

 

(582)

 

229

 

(353)

Loans receivable:

 

  

 

  

 

 

 

 

Taxable

 

1,985

 

3,574

 

5,559

 

7,088

 

9,564

 

16,652

Paycheck Protection Program

(113)

(2)

(115)

(658)

(233)

(891)

Tax-exempt

 

(2)

 

47

 

45

 

90

 

207

 

297

Total loans receivable

 

1,870

 

3,619

 

5,489

 

6,520

 

9,538

 

16,058

Other earning assets

 

(26)

 

6

 

(20)

 

(41)

 

12

 

(29)

Total Interest Income

 

1,434

 

3,877

 

5,311

 

5,694

 

10,579

 

16,273

 

  

 

  

 

  

 

  

 

  

 

  

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

 

73

 

1,800

 

1,873

 

117

 

3,753

 

3,870

Money market

 

(175)

 

1,205

 

1,030

 

(357)

 

2,741

 

2,384

Savings

 

(8)

 

2

 

(6)

 

(8)

 

3

 

(5)

Time deposits

 

332

 

2,063

 

2,395

 

585

 

4,747

 

5,332

Total interest-bearing deposits

 

222

 

5,070

 

5,292

 

337

 

11,244

 

11,581

Borrowed funds:

 

 

 

 

 

 

Short-term

 

151

 

347

 

498

 

1,319

 

1,297

 

2,616

Long-term - FHLB advances

 

802

 

30

 

832

 

1,650

 

815

 

2,465

Senior notes, net

1

0

1

2

0

2

Subordinated debt, net

 

3

 

(2)

 

1

 

(96)

 

(62)

 

(158)

Total borrowed funds

 

957

 

375

 

1,332

 

2,875

 

2,050

 

4,925

Total Interest Expense

 

1,179

 

5,445

 

6,624

 

3,212

 

13,294

 

16,506

 

 

 

 

 

 

Net Interest Income

$

255

$

(1,568)

$

(1,313)

$

2,482

$

(2,715)

$

(233)

(1)Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2)The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.

INCOME TAXES

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. Due to higher levels of pre-tax income in 2023, the income tax provision for the third quarter 2023 of $1,846,000 was $988,000 higher than the provision for the third quarter 2022 and the provision for the nine months ended September 30, 2023 of $4,674,000 was $715,000 higher than the amount for the first nine months of 2022. The effective tax rate (tax provision as a percentage of pre-tax income) was 19.6% in the third quarter 2023 compared to 16.1% in the third quarter 2022 and 19.0% for the first nine months of 2023 as compared to 17.4% for the first nine months of 2022. The Corporation’s effective tax rates differ from the statutory rate of 21% principally because of the effects of tax-exempt interest income, nondeductible interest expense, state income taxes and other permanent differences.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at September 30, 2023 and December 31, 2022 represents the following temporary difference components:

    

September 30, 

    

December 31, 

(In Thousands)

2023

2022

Deferred tax assets:

 

  

 

  

Unrealized holding losses on securities

$

16,024

$

13,391

Allowance for credit losses on loans

3,982

3,648

Purchase accounting adjustments on loans

 

510

 

938

Deferred compensation

1,300

1,149

Operating leases liability

 

818

 

907

Deferred loan origination fees

 

715

 

779

Net operating loss carryforward

571

659

Accrued incentive compensation

390

354

Other deferred tax assets

 

1,308

 

1,115

Total deferred tax assets

 

25,618

 

22,940

 

  

 

  

Deferred tax liabilities:

 

  

 

  

Defined benefit plans - ASC 835

 

119

 

129

Bank premises and equipment

 

280

 

298

Core deposit intangibles

 

566

 

633

Right-of-use assets from operating leases

 

818

 

907

Other deferred tax liabilities

 

104

 

89

Total deferred tax liabilities

 

1,887

 

2,056

Deferred tax asset, net

$

23,731

$

20,884

The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income.

Management believes the recorded net deferred tax asset at September 30, 2023 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

SECURITIES

Management continually evaluates several objectives in determining the size, securities mix and other characteristics of the available-for-sale debt securities (investment) portfolio. Key objectives include supporting liquidity needs and maximizing return on earning assets within reasonable risk parameters.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(Dollars In Thousands)

September 30, 2023

December 31, 2022

 

December 31, 2021

Amortized

Fair

Amortized

Fair

 

Amortized

Fair

 

Cost

 

Value

 

Cost

 

Value

Cost

 

Value

Obligations of the U.S. Treasury

$

33,938

$

30,557

$

35,166

$

31,836

$

25,058

$

24,912

Obligations of U.S. Government agencies

21,372

18,796

25,938

23,430

23,936

24,091

Bank holding company debt securities

28,950

22,311

28,945

25,386

18,000

17,987

Obligations of states and political subdivisions:

 

 

 

 

 

 

Tax-exempt

 

123,598

 

104,453

 

146,149

 

132,623

 

143,427

 

148,028

Taxable

 

65,408

 

53,457

 

68,488

 

56,812

 

72,182

 

72,765

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

 

 

  

 

  

 

  

 

  

Residential pass-through securities

 

109,102

 

94,469

 

112,782

 

99,941

 

98,048

 

98,181

Residential collateralized mortgage obligations

 

38,267

 

33,397

 

44,868

 

40,296

 

44,015

 

44,247

Commercial mortgage-backed securities

 

76,627

 

63,672

 

91,388

 

79,686

 

86,926

 

87,468

Private label commercial mortgage-backed securities

8,178

8,026

8,070

8,023

0

0

Total Available-for-Sale Debt Securities

$

505,440

$

429,138

$

561,794

$

498,033

$

511,592

$

517,679

Aggregate Unrealized (Loss) Gain

$

(76,302)

$

(63,761)

$

6,087

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

(15.1)

%

(11.3)

%

1.2

%

Market Yield on 5-Year U.S. Treasury Obligations (a)

4.60

%

3.99

%

1.26

%

(a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates)

As reflected in the table above, the fair value of available-for-sale securities was lower than the amortized cost basis by $76,302,000, or 15.1% at September 30, 2023 and $63,761,000 (11.3%) at December 31, 2022. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021. 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 0.61% higher at September 30, 2023 in comparison to December 31, 2022, and 3.34% higher than at December 31, 2021.

Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 3, Quantitative and Qualitative Disclosures about Market Risk.

As described in Note 5 to the unaudited consolidated financial statements, management determined the Corporation does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at September 30, 2023 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of September 30, 2023 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at September 30, 2023, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Bank holding company debt securities – All of the Corporation’s holdings of bank holding company debt securities were investment grade and there have been no payment defaults. There were seven securities with face amounts ranging from $3 million to $5 million, including one senior security and six subordinated securities. All of the issuers have publicly traded common stock. At September 30, 2023, 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 September 30, 2023, 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 – 23% of the portfolio; AA – 71%; A – 6%.
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 September 30, 2023.

FINANCIAL CONDITION

This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for credit losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. Management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2023.

Table VII shows the composition of the loan portfolio at September 30, 2023 and at year-end from 2018 through 2022. 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 September 30, 2023 of $1,830,670,000 was more than double the corresponding total at December 31, 2018. The increase in loans outstanding includes the impact of acquisitions of banks located in Southeastern Pennsylvania in 2019 and 2020. 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. At September 30, 2023, commercial loans represented 75% of the portfolio while residential loans totaled 22% of the portfolio; in comparison, commercial loans totaled 48% and residential loans totaled 47% of the portfolio at December 31, 2018.

Table VII shows an increase in commercial and industrial loans to $222,923,000 at December 31, 2020 followed by reductions in 2021, 2022 and the first nine months of 2023. The elevated balance of commercial and industrial loans at December 31, 2020 included Paycheck Protection Program (PPP) loans of $132,269,000, a substantial portion of which were subsequently repaid. The outstanding balance of PPP loans was $130,000 at September 30, 2023.

At September 30, 2023, gross loans outstanding increased $90,630,000 from December 31, 2022. Gross loans outstanding at December 31, 2022 increased $175,191,000, or 11.2%, from the total at December 31, 2021. The pace of loan growth in the fourth quarter of 2023 and in future periods will depend on the impact of the increases in interest rates that have occurred in 2022 and 2023, potential further increases in interest rates, potential deterioration in economic conditions and other factors.

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Total participation loans outstanding amounted to $38,995,000 at September 30, 2023, down from $44,723,000 at December 31, 2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2023, the total recorded investment in non-owner occupied commercial real estate loans for which the primary purpose is utilization of office space by third parties was $94,729,000, or 5.2% of total gross loans receivable. Within this segment, at September 30, 2023, there were two loans with a recorded investment of $3,963,000 risk rated as substandard and nonaccrual with specific allowance for credit losses totaling  $540,000. The remainder of the non-owner occupied commercial real estate loans for the primary purpose of office space utilization totaling $90,766,000 were accruing interest and risk rated Pass at September 30, 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. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through September 30, 2023, 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 September 30, 2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,472,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2022 was $1,515,000.

At September 30, 2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $318,526,000, including loans sold through the MPF Xtra program of $151,094,000 and loans sold through the Original program of $167,432,000. At December 31, 2022, outstanding balances of loans sold and serviced through the two programs totaled $325,677,000, including loans sold through the MPF Xtra program of $155,506,000 and loans sold through the Original Program of $170,171,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, 2023 and December 31, 2022.

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TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)

September 30, 

December 31, 

    

2023

    

2022

    

2021

    

2020

    

2019

    

2018

Commercial real estate - non-owner occupied:

 

 

  

 

  

 

  

 

  

 

  

Non-owner occupied

$

503,434

$

454,386

$

358,352

$

328,662

$

208,579

$

115,128

Multi-family (5 or more) residential

61,061

55,406

49,054

54,893

30,474

7,104

1-4 Family - commercial purpose

172,792

165,805

175,027

198,918

147,121

35,176

Total commercial real estate - non-owner occupied

737,287

675,597

582,433

582,473

386,174

157,408

Commercial real estate - owner occupied

231,112

205,910

196,083

191,075

78,729

38,478

All other commercial loans:

Commercial and industrial

80,960

95,368

118,488

222,923

67,288

49,947

Commercial lines of credit

122,189

141,444

106,338

105,802

92,509

65,492

Political subdivisions

80,415

86,663

75,401

46,295

46,054

49,037

Commercial construction and land

91,014

60,892

59,505

41,000

32,717

11,126

Other commercial loans

21,125

25,710

26,498

29,310

28,735

23,130

Total all other commercial loans

395,703

410,077

386,230

445,330

267,303

198,732

Residential mortgage loans:

1-4 Family - residential

385,777

363,005

327,593

356,532

388,415

360,195

1-4 Family residential construction

24,236

30,577

23,151

18,736

14,640

24,698

Total residential mortgage

410,013

393,582

350,744

375,268

403,055

384,893

Consumer loans:

Consumer lines of credit (including HELOCs)

37,736

36,650

33,522

34,566

30,810

31,955

All other consumer

18,819

18,224

15,837

15,497

16,151

16,097

Total consumer

56,555

54,874

49,359

50,063

46,961

48,052

Total

1,830,670

1,740,040

1,564,849

1,644,209

1,182,222

827,563

Less: allowance for credit losses on loans

(18,085)

(16,615)

(13,537)

 

(11,385)

 

(9,836)

 

(9,309)

Loans, net

$

1,812,585

$

1,723,425

$

1,551,312

$

1,632,824

$

1,172,386

$

818,254

Additional details regarding the composition of the non-owner occupied commercial real estate loan portfolio at September 30, 2023 is as follows:

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE

(In Thousands)

September 30, 

% of Non-owner

% of

2023

Occupied CRE

Total Loans

Industrial

$

107,268

21.3

%

5.9

%

Office

94,729

18.8

%

5.2

%

Retail

94,542

18.8

%

5.2

%

Hotels

73,511

14.6

%

4.0

%

Mixed Use

59,702

11.9

%

3.3

%

Other

73,682

14.6

%

4.0

%

Total Non-owner Occupied CRE Loans

$

503,434

Total Gross Loans

$

1,830,670

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 unaudited 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 reporting periods beginning after January 1, 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 credit for credit losses for the third quarter 2023 and for the nine-month period ended September 30, 2023 is as follows:

(In Thousands)

3 Months

9 Months

Ended

Ended

September 30, 

September 30, 

2023

2023

(Credit) for credit losses:

Loans receivable

$

(933)

$

(409)

Off-balance sheet exposures (1)

 

(292)

 

(356)

Total (credit) for credit losses

$

(1,225)

$

(765)

(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.

In the third quarter 2023, the credit for credit losses included the impact of reductions in the ACL from a reduction in estimated future net charge-offs related to an economic forecast, qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, and a reduction in the Corporation’s average net charge-off experience.  Similarly, the credit for credit losses for the first nine months of 2023 included the impact of reductions in the ACL related to the qualitative adjustments described above and a reduction in the Corporation’s average net charge-off experience; however, the net impact of changes in the economic forecast was not significant. The ACL as a percentage of gross loans receivable was 0.99% at September 30, 2023 and 1.05% at June 30, 2023 as compared to 1.08% at January 1, 2023 upon initial adoption of CECL. Within the credit for

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credit losses on loans in the first nine months of 2023, the net provision related to specific loans was $294,000, including net charge-offs of $225,000 and a net increase in specific allowances on loans of $69,000. In comparison, the provision for loan losses in the first nine months of 2022 included $2,047,000 related to specific loans (net decrease in specific allowances on loans of $313,000 and net charge-offs of $2,360,000), an increase of $2,617,000 in the collectively determined portion of the allowance and a $329,000 increase in the unallocated portion.

Table X shows that total nonperforming assets as a percentage of total assets was 0.70% at September 30, 2023, down from 1.04% at December 31, 2022 and lower than that at year-end 2018 through 2021. Total nonperforming assets were $17.4 million at September 30, 2023, down from $25.6 million at December 31, 2022. Similarly, total loans individually evaluated for credit loss decreased to $12.0 million at September 30, 2023 from $19.4 million at December 31, 2022. The net decrease in nonperforming assets at September 30, 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 $2,262,000 in the first nine months of 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 $392,000 at September 30, 2023. These reductions were partially offset by the addition to nonaccrual of two commercial loan relationships totaling $4,512,000, including two commercial real estate loans with a primary purpose of office space utilization totaling $3,963,000, at September 30, 2023.

In the first nine months of 2023, net charge-offs were low by historical standards, totaling $225,000, or 0.01% of average outstanding loans. Table VIII shows annual average net charge-off rates ranging from a high of 0.26% in 2022 to a low of 0.02% in 2018.

Over the period 2018-2022 and the first nine months of 2023, 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 September 30, 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.

Tables VIII through X present historical data related to loans and the allowance for credit losses.

TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES

(Dollars In Thousands)

Nine Months Ended

 

September 30, 

September 30, 

Years Ended December 31, 

    

2023

    

2022

  

  

2022

    

2021

    

2020

    

2019

    

2018

 

Balance, beginning of year

$

16,615

$

13,537

$

13,537

$

11,385

$

9,836

$

9,309

$

8,856

Increase due to adoption of CECL

 

2,104

 

0

 

0

 

0

 

0

 

0

 

0

Charge-offs

 

(299)

 

(2,417)

 

(4,245)

 

(1,575)

 

(2,465)

 

(379)

 

(497)

Recoveries

 

74

 

57

 

68

 

66

 

101

 

57

 

366

Net charge-offs

 

(225)

 

(2,360)

 

(4,177)

 

(1,509)

 

(2,364)

 

(322)

 

(131)

(Credit) provision for credit losses

 

(409)

 

4,993

 

7,255

 

3,661

 

3,913

 

849

 

584

Balance, end of period

$

18,085

$

16,170

$

16,615

$

13,537

$

11,385

$

9,836

$

9,309

Net charge-offs as a % of average loans

 

0.01

%  

 

0.15

%  

 

0.26

%  

 

0.09

%  

 

0.16

%  

 

0.03

%  

 

0.02

%

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TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES

UPON ADOPTION OF CECL

(In Thousands)

September 30, 

January 1,

2023

2023

Loans individually evaluated

$

820

$

751

Loans collectively evaluated:

Commercial real estate - nonowner occupied

9,671

9,641

Commercial real estate - owner occupied

1,803

1,765

All other commercial loans

3,457

3,914

Residential mortgage

1,993

2,407

Consumer

341

241

Total Allowance

$

18,085

$

18,719

PRIOR TO CECL ADOPTION

(In Thousands)

As of December 31, 

2022

    

2021

    

2020

    

2019

    

2018

ASC 310 - Impaired loans - individually evaluated

$

453

$

740

$

925

$

1,051

$

1,605

ASC 450 - Collectively evaluated:

 

  

 

  

 

  

 

  

 

  

Commercial

 

10,845

 

7,553

 

5,545

 

3,913

 

3,102

Residential mortgage

 

4,073

 

4,338

 

4,091

 

4,006

 

3,870

Consumer

 

244

 

235

 

239

 

281

 

233

Unallocated

 

1,000

 

671

 

585

 

585

 

499

Total Allowance

$

16,615

$

13,537

$

11,385

$

9,836

$

9,309

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TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS

(Dollars In Thousands)

September 30, 

As of December 31, 

 

    

2023

    

2022

    

2021

    

2020

    

2019

    

2018

 

Loans individually evaluated with a valuation allowance

$

7,861

$

3,460

$

6,540

$

8,082

$

3,375

$

4,851

Loans individually evaluated without a valuation allowance

 

4,146

 

14,871

 

2,636

 

2,895

 

1,670

 

4,923

Purchased credit impaired loans

0

1,027

6,558

6,841

441

0

Total individually evaluated loans

$

12,007

$

19,358

$

15,734

$

17,818

$

5,486

$

9,774

Total loans past due 30-89 days and still accruing

$

3,675

$

7,079

$

5,106

$

5,918

$

8,889

$

7,142

Nonperforming assets:

 

 

  

 

  

 

  

 

  

 

  

Purchased credit impaired loans

$

0

$

1,027

$

6,558

$

6,841

$

441

$

0

Other nonaccrual loans

15,501

22,058

12,441

14,575

8,777

13,113

Total nonaccrual loans

15,501

23,085

18,999

21,416

9,218

13,113

Total loans past due 90 days or more and still accruing

 

1,292

 

2,237

 

2,219

 

1,975

 

1,207

 

2,906

Total nonperforming loans

 

16,793

 

25,322

 

21,218

 

23,391

 

10,425

 

16,019

Foreclosed assets held for sale (real estate)

 

633

 

275

 

684

 

1,338

 

2,886

 

1,703

Total nonperforming assets

$

17,426

$

25,597

$

21,902

$

24,729

$

13,311

$

17,722

Total nonperforming loans as a % of loans

 

0.92

%  

 

1.46

%  

 

1.36

%  

 

1.42

%  

 

0.88

%  

 

1.94

%

Total nonperforming assets as a % of assets

 

0.70

%  

 

1.04

%  

 

0.94

%  

 

1.10

%  

 

0.80

%  

 

1.37

%

Allowance for credit losses as a % of total loans

 

0.99

%  

 

0.95

%  

 

0.87

%  

 

0.69

%  

 

0.83

%  

 

1.12

%

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LIQUIDITY

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand.

The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $21,731,000 at September 30, 2023.

The Corporation’s outstanding, available, and total credit facilities at September 30, 2023 and December 31, 2022 are as follows:

Outstanding

Available

Total Credit

(In Thousands)

    

September 30, 

    

December 31, 

    

September 30, 

    

December 31, 

    

September 30, 

    

December 31, 

2023

2022

2023

2022

2023

2022

Federal Home Loan Bank of Pittsburgh

$

165,951

$

150,099

$

752,847

$

689,279

$

918,798

$

839,378

Federal Reserve Bank Discount Window

 

0

 

0

 

20,766

 

23,107

 

20,766

 

23,107

Other correspondent banks

 

0

 

0

 

95,000

 

95,000

 

95,000

 

95,000

Total credit facilities

$

165,951

$

150,099

$

868,613

$

807,386

$

1,034,564

$

957,485

At September 30, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term advances of $21,500,000, long-term borrowings of $125,243,000 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. Additional information regarding borrowed funds is included in Note 8 to the unaudited consolidated financial statements.

Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. In light of the unrealized loss at September 30, 2023 resulting from increases in interest rates, as described in more detail in the Securities section of Management’s Discussion and Analysis, management would be more likely in the near term to utilize securities as collateral for borrowings than to sell securities in such an emergency situation. At September 30, 2023, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $227,667,000.

Deposits totaled $2,024,997,000 at September 30, 2023, up $27,404,000 (1.4%) from $1,997,593,000 at December 31, 2022. Excluding brokered deposits, adjusted total deposits at September 30, 2023 were lower by $14,125,000 (0.7%) as compared to December 31, 2022. Brokered deposits, consisting mainly of short-term certificates of deposit, totaled $62,512,000 at September 30, 2023, an increase of $41,529,000 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 $86.4 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 $220.6 million at September 30, 2023, up $120.8 million from December 31, 2022.

As shown in the table below, at September 30, 2023, estimated uninsured deposits totaled $603.0 million, or 29.5% of total deposits, down from $689.4 million or 34.2% of total deposits at December 31, 2022. Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling $188.9 million at September 30, 2023. As shown in the table below, total

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uninsured and uncollateralized deposits amounted to 20.3% of total deposits at September 30, 2023, down from 24.0% at December 31, 2022.

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 September 30, 2023. Available funding from these sources totaled 181.8% of uninsured deposits and 264.8% of total uninsured and uncollateralized deposits at September 30, 2023.

Uninsured Deposits Information

September 30, 

December 31, 

2023

2022

Total Deposits - C&N Bank

$

2,040,506

$

2,016,666

Estimated Total Uninsured Deposits

$

602,957

$

689,435

Portion of Uninsured Deposits that are

Collateralized

188,927

205,886

Uninsured and Uncollateralized Deposits

$

414,030

$

483,549

Uninsured and Uncollateralized Deposits as

a % of Total Deposits

20.3

%  

24.0

%  

Available Funding from Credit Facilities

$

868,613

$

807,386

Fair Value of Available-for-sale Debt

Securities in Excess of Pledging Obligations

227,667

272,475

Highly Liquid Available Funding

$

1,096,280

$

1,079,861

Highly Liquid Available Funding as a % of

Uninsured Deposits

181.8

%  

156.6

%  

Highly Liquid Available Funding as a % of

Uninsured and Uncollateralized Deposits

264.8

%  

223.3

%  

Despite the reduction in deposits, excluding brokered deposits, in the first nine months of 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.

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, 2023; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

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Details concerning capital ratios at September 30, 2023 and December 31, 2022 are presented below. Management believes, as of September 30, 2023, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at September 30, 2023 and December 31, 2022 exceed the Corporation’s Board policy threshold levels.

(Dollars in Thousands)

Minimum To Be

 

Minimum To Maintain

Well

 

Minimum

Capital Conservation

Capitalized Under

Minimum To Meet

 

Capital

Buffer at Reporting

Prompt Corrective

the Corporation's

 

Actual

Requirement

Date

Action Provisions

Policy Thresholds

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

September 30, 2023:

  

  

  

  

  

  

  

  

  

  

 

Total capital to risk-weighted assets:

  

  

  

  

  

  

  

  

  

  

 

Consolidated

$

288,587

 

15.81

%  

N/A

N/A

N/A

N/A

N/A

N/A

$

200,756

≥11

%

C&N Bank

 

274,474

 

15.07

%  

145,695

 

≥8

%

191,225

 

≥10.5

%

182,119

 

≥10

%

200,331

 

≥11

%

Tier 1 capital to risk-weighted assets:

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Consolidated

 

244,913

 

13.42

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

164,255

 

≥9

%

C&N Bank

 

255,489

 

14.03

%  

109,271

 

≥6

%

154,801

 

≥8.5

%

145,695

 

≥8

%

163,907

 

≥9

%

Common equity tier 1 capital to risk-weighted assets:

 

 

 

 

  

 

 

  

 

 

  

 

  

Consolidated

 

244,913

 

13.42

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

136,879

 

≥7.5

%

C&N Bank

 

255,489

 

14.03

%  

81,954

 

≥4.5

%

127,483

 

≥7.0

%

118,377

 

≥6.5

%

136,589

 

≥7.5

%

Tier 1 capital to average assets:

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Consolidated

 

244,913

 

9.91

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

197,691

 

≥8

%

C&N Bank

 

255,489

 

10.40

%  

98,244

 

≥4

%

N/A

 

N/A

 

122,805

 

≥5

%

196,488

 

≥8

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

December 31, 2022:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

$

285,397

 

15.72

%  

N/A

 

N/A

N/A

 

N/A

 

N/A

 

N/A

$

190,590

 

≥10.5

%

C&N Bank

 

265,784

 

14.68

%  

144,873

 

≥8

%

190,145

 

≥10.5

%

181,091

 

≥10

%

 

190,145

 

≥10.5

%

Tier 1 capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

243,750

 

13.43

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

154,287

 

≥8.5

%

C&N Bank

 

248,744

 

13.74

%  

108,654

 

≥6

%

153,927

 

≥8.5

%

144,873

 

≥8

%

 

153,927

 

≥8.5

%

Common equity tier 1 capital to risk-weighted assets:

 

 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

243,750

 

13.43

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

127,060

 

≥7

%

C&N Bank

 

248,744

 

13.74

%  

81,491

 

≥4.5

%

126,764

 

≥7.0

%

117,709

 

≥6.5

%

 

126,764

 

≥7

%

Tier 1 capital to average assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

243,750

 

10.11

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

192,941

 

≥8

%

C&N Bank

 

248,744

 

10.38

%  

95,826

 

≥4

%

N/A

 

N/A

 

119,783

 

≥5

%

 

191,652

 

≥8

%

In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation was authorized to repurchase up to 1,000,000 shares of its common stock. On July 11, 2023, C&N announced that it had completed the treasury stock repurchase program that began in February 2021. Cumulatively, C&N repurchased 1,000,000 shares of common stock for a total cost of $23,086,000, at an average price of $23.09 per share. For the three months ended September 30, 2023, 10,683 shares were repurchased for a total cost of $203,000, at an average price of $19.01 per share. For the nine months ended September 30, 2023, 325,300 shares were repurchased for a total cost of $6,500,000, at an average price of $19.98 per share.

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 September 30, 2023, no shares were repurchased under the new program.

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Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities.  Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile.

To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At September 30, 2023, 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 September 30, 2023, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 7.07%.

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive (loss) income within stockholders’ equity. Accumulated other comprehensive (loss) income is excluded from the Bank’s and Corporation’s regulatory capital ratios. The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $60,278,000 at September 30, 2023 and $50,370,000 at December 31, 2022. The decrease in stockholders’ equity in the first nine months of 2023 from the change in accumulated other comprehensive loss resulted from an increase in interest rates. Changes in accumulated other comprehensive loss are excluded from earnings and directly increase or decrease stockholders’ equity. To the extent unrealized losses on available-for-sale debt securities result from credit losses, unrealized losses are recorded as a charge against earnings. The securities section of Management’s Discussion and Analysis and Notes 1 and 5 to the unaudited consolidated financial statements provide additional information concerning management’s evaluation of available-for-sale debt securities for credit losses at September 30, 2023.

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ITEM 3. QUANTITATIVE 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. 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 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 economic value of equity. 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.

Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of September 30, 2023 and December 31, 2022. In the analysis based on September 30, 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 the rising rate scenarios and in all of the falling rate scenarios except -200 basis points for which the economic value of equity is modeled to increase 0.2%. The results based on September 30, 2023 data as presented in Table XI 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 September 30, 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 year-to-date in 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 $99.4 million lower at September 30, 2023 as compared to December 31, 2022, while time deposits were higher by $126.8 million. 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.

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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 $60.3 million at September 30, 2023. In contrast, most of the Corporation’s other financial instruments, including loans receivable (held for investment), deposits and borrowed funds are carried on the balance sheet at historical cost without adjustment for the impact of changes in interest rates.

TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

September 30, 2023 Data

(In Thousands)

Period Ending September 30, 2024

Basis Point

Interest

Interest

Net Interest

NII

NII

Change in Rates

Income

Expense

Income (NII)

% Change

Risk Limit

+400

$

145,051

$

78,526

$

66,525

(21.1)

%

25.0

%

+300

140,116

67,183

72,933

(13.5)

%

20.0

%

+200

135,219

57,108

78,111

(7.4)

%

15.0

%

+100

130,286

48,302

81,984

(2.8)

%

10.0

%

0

125,123

40,771

84,352

0.0

%

0.0

%

-100

119,799

35,837

83,962

(0.5)

%

10.0

%

-200

114,410

30,942

83,468

(1.0)

%

15.0

%

-300

108,555

26,543

82,012

(2.8)

%

20.0

%

-400

102,316

22,255

80,061

(5.1)

%

25.0

%

Economic Value of Equity at September 30, 2023

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$

346,292

(23.8)

%

50.0

%

+300

379,784

(16.5)

%

45.0

%

+200

410,450

(9.7)

%

35.0

%

+100

436,196

(4.1)

%

25.0

%

0

454,742

0.0

%

0.0

%

-100

453,578

(0.3)

%

25.0

%

-200

455,691

0.2

%

35.0

%

-300

443,816

(2.4)

%

45.0

%

-400

428,885

(5.7)

%

50.0

%

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December 31, 2022 Data

(In Thousands)

Period Ending December 31, 2023

Basis Point

Interest

Interest

Net Interest

NII

NII

Change in Rates

Income

Expense

Income (NII)

% Change

Risk Limit

+400

$

131,145

$

34,767

$

96,378

8.9

%

25.0

%

+300

125,127

30,816

94,311

6.6

%

20.0

%

+200

119,561

26,864

92,697

4.8

%

15.0

%

+100

113,703

22,912

90,791

2.6

%

10.0

%

0

107,451

18,961

88,490

0.0

%

0.0

%

-100

101,048

15,516

85,532

(3.3)

%

10.0

%

-200

94,854

13,240

81,614

(7.8)

%

15.0

%

-300

89,405

11,325

78,080

(11.8)

%

20.0

%

-400

85,076

9,439

75,637

(14.5)

%

25.0

%

Economic Value of Equity at December 31, 2022

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$

498,368

0.3

%

50.0

%

+300

496,186

(0.1)

%

45.0

%

+200

501,422

1.0

%

35.0

%

+100

501,991

1.1

%

25.0

%

0

496,650

0.0

%

0.0

%

-100

485,332

(2.3)

%

25.0

%

-200

468,195

(5.7)

%

35.0

%

-300

445,129

(10.4)

%

45.0

%

-400

417,505

(15.9)

%

50.0

%

ITEM 4. CONTROLS AND PROCEDURES

The Corporation’s management, under the supervision of and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensure that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no significant changes made to the Corporation’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.       Legal Proceedings

The Corporation and C&N Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material, adverse effect on the Corporation’s financial condition or results of operations.

Item 1A.    Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed March 16, 2023 except for the following:

Risks Related to Recent Banking Industry Turmoil

The Corporation is exposed to the risk that when a bank or other financial institution experiences financial difficulties, there could be an adverse “contagion” impact on other banking institutions. The recent failures of Silicon Valley Bank in California, Signature Bank in New York and First Republic Bank in California during the first and second quarters of 2023 have caused an element of panic and uncertainty in the investor community and among bank customers generally, including, specifically, deposit customers. While the Corporation does not believe that the circumstances of these three failures are necessarily indicators of broader issues for concern with all other banks or with the banking system itself, the failures are likely to reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have negative reputational ramifications for institutions in the banking industry, including, possibly, the Corporation. The Corporation will continue to closely monitor the ongoing events and volatility in the financial services industry, together with any responsive measures taken by the banking regulators to mitigate or manage the turmoil.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Effective February 18, 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation was authorized to repurchase up to 1,000,000 shares of the Corporation’s common stock, or 6.25% of the Corporation’s issued and outstanding shares at February 18, 2021. On July 11, 2023, the Corporation announced that 1,000,000 shares had been repurchased and that it had completed the treasury stock repurchase program.

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. As of September 30, 2023, no shares had been repurchased under this repurchase program.

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The following table sets forth a summary of the purchases by the Corporation of its common stock during the third quarter 2023.

    

    

    

Total Number of

    

Maximum

Shares

Number of

Purchased

Shares that May

as Part of

Yet

Publicly

be Purchased

Total Number

Average

Announced

Under

of Shares

Price Paid

Plans

the Plans or

Period

Purchased

per Share

or Programs

Programs

July 1 - 31, 2023

 

10,683

$

19.01

 

1,000,000

 

0

August 1 - 31, 2023

 

0

$

0.00

 

0

 

0

September 1 - 30, 2023

 

0

$

0.00

 

0

 

750,000

Item 3.       Defaults Upon Senior Securities

None

Item 4.       Mine Safety Disclosures

Not applicable

Item 5.     Other Information

During the three months ended September 30, 2023, no director or officer of the Corporation adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement”, as each term is defined in Item 408(a) of Regulation S-K.

On September 25, 2023, the Corporation entered into Rule 10b5-1 Issuer Repurchase Plan with a registered broker to effect repurchases of the Corporation’s common stock under the Corporation’s treasury stock repurchase program, which was announced on September 25, 2023 and which is described under Item 2 of this Form 10-Q. The 10b5-1 issuer repurchase plan will terminate upon the earlier of all 750,000 shares of common stock authorized for repurchase having been repurchased or September 22, 2026.

.

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Item 6.       Exhibits

3.1

Articles of Incorporation

    

Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 10-Q filed May 6, 2022

 

 

3.2

By-laws

 

Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 8-K filed February 18, 2022

 

 

4.

Instruments defining the rights of Security holders, including Indentures

 

 

 

4.1

Indenture, dated May 19, 2021 between Citizens & Northern Corporation and UMB Bank, National Association, as trustee

Incorporated by reference to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021

4.2

Form of Subordinated Note

Incorporated by reference to Exhibit A-2 to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021

4.3

Form of Senior Note

Incorporated by reference to Exhibit 4.3 of the Corporation’s Form 8-K filed May 19, 2021

 

 

31.

Rule 13a-14(a)/15d-14(a) certifications:

 

 

31.1

Certification of Chief Executive Officer

 

Filed herewith

31.2

Certification of Chief Financial Officer

 

Filed herewith

 

 

 

32.

Section 1350 certifications

 

Filed herewith

 

 

 

101.INS

Inline XBRL Instance Document.

 

Filed herewith

 

 

 

101.SCH

Inline XBRL Schema Document.

Filed herewith

 

101.CAL

Inline XBRL Calculation Linkbase Document.

Filed herewith

101.DEF

Inline XBRL Definition Linkbase Document.

Filed herewith

101.LAB

Inline XBRL Label Linkbase Document.

Filed herewith

101.PRE

Inline XBRL Presentation Linkbase Document.

Filed herewith

104

The cover page of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (contained in Exhibit 101).

Filed herewith

71

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CITIZENS & NORTHERN CORPORATION

 

 

 

 

 

November 6, 2023

 

By: /s/ J. Bradley Scovill

Date

 

President and Chief Executive Officer

 

 

 

 

 

 

 

November 6, 2023

 

By: /s/ Mark A. Hughes

Date

 

Treasurer and Chief Financial Officer

 

 

72