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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 June 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)
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PENNSYLVANIA |
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23-2451943 |
(State or other jurisdiction of |
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(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:
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Title of Each Class |
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Trading Symbol |
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Name of Each Exchange on Which Registered |
Common Stock Par Value $1.00 |
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CZNC |
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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) |
15,256,575 Shares Outstanding on August 4, 2023 |
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information |
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Consolidated Balance Sheets (Unaudited) – June 30, 2023 and December 31, 2022 |
Page 3 |
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Page 4 |
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Page 5 |
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Consolidated Statements of Cash Flows (Unaudited) – Six-month Periods Ended June 30, 2023 and 2022 |
Page 6 |
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Page 7 |
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Pages 8 – 38 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Pages 39 – 62 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
Pages 63 – 65 |
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Page 65 |
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Pages 66 – 68 |
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Page 69 |
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2
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data) (Unaudited)
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June 30, |
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December 31, |
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2023 |
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2022 |
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ASSETS |
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Cash and due from banks: |
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|
|
|
Noninterest-bearing |
|
$ |
24,620 |
|
$ |
25,811 |
Interest-bearing |
|
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27,142 |
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|
29,237 |
Total cash and due from banks |
|
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51,762 |
|
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55,048 |
Available-for-sale debt securities, at fair value |
|
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445,695 |
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498,033 |
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|
|
|
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Loans receivable |
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1,814,510 |
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1,740,040 |
Allowance for credit losses on loans |
|
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(19,056) |
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(16,615) |
Loans, net |
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1,795,454 |
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1,723,425 |
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|
|
|
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|
Bank-owned life insurance |
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31,504 |
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31,214 |
Accrued interest receivable |
|
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8,439 |
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8,653 |
Bank premises and equipment, net |
|
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20,970 |
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21,574 |
Foreclosed assets held for sale |
|
|
459 |
|
|
275 |
Deferred tax asset, net |
|
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20,687 |
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|
20,884 |
Goodwill |
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52,505 |
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52,505 |
Core deposit intangibles, net |
|
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2,673 |
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|
2,877 |
Other assets |
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40,632 |
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|
39,819 |
TOTAL ASSETS |
|
$ |
2,470,780 |
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$ |
2,454,307 |
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LIABILITIES |
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Deposits: |
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|
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Noninterest-bearing |
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$ |
509,657 |
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$ |
563,843 |
Interest-bearing |
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1,500,461 |
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1,433,750 |
Total deposits |
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2,010,118 |
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1,997,593 |
Short-term borrowings |
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31,431 |
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80,062 |
Long-term borrowings - FHLB advances |
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115,263 |
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62,347 |
Senior notes, net |
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14,798 |
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14,765 |
Subordinated debt, net |
|
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24,661 |
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24,607 |
Accrued interest and other liabilities |
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26,392 |
|
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25,608 |
TOTAL LIABILITIES |
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2,222,663 |
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2,204,982 |
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STOCKHOLDERS' EQUITY |
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Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation |
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preference per share; no shares issued |
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0 |
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0 |
Common stock, par value $1.00 per share; authorized 30,000,000 shares; |
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issued 16,030,172 and outstanding 15,268,096 at June 30, 2023; |
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issued 16,030,172 and outstanding 15,518,819 at December 31, 2022 |
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16,030 |
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16,030 |
Paid-in capital |
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143,661 |
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143,950 |
Retained earnings |
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153,725 |
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151,743 |
Treasury stock, at cost; 762,076 shares at June 30, 2023 and 511,353 |
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shares at December 31, 2022 |
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(17,226) |
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(12,520) |
Accumulated other comprehensive loss |
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(48,073) |
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(49,878) |
TOTAL STOCKHOLDERS' EQUITY |
|
|
248,117 |
|
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249,325 |
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY |
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$ |
2,470,780 |
|
$ |
2,454,307 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Income
(In Thousands Except Per Share Data) (Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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June 30, |
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June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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INTEREST INCOME |
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Interest and fees on loans: |
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Taxable |
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$ |
24,362 |
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$ |
17,927 |
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$ |
46,793 |
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$ |
36,476 |
Tax-exempt |
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564 |
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467 |
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1,135 |
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|
921 |
Income from available-for-sale debt securities: |
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Taxable |
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2,152 |
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2,036 |
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4,363 |
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4,005 |
Tax-exempt |
|
|
610 |
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|
768 |
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1,250 |
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1,490 |
Other interest and dividend income |
|
|
323 |
|
|
111 |
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|
609 |
|
|
190 |
Total interest and dividend income |
|
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28,011 |
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21,309 |
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54,150 |
|
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43,082 |
INTEREST EXPENSE |
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Interest on deposits |
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5,099 |
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1,130 |
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8,329 |
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|
2,040 |
Interest on short-term borrowings |
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1,144 |
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122 |
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2,241 |
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123 |
Interest on long-term borrowings - FHLB advances |
|
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1,056 |
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55 |
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1,737 |
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|
104 |
Interest on senior notes, net |
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119 |
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120 |
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|
239 |
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|
238 |
Interest on subordinated debt, net |
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231 |
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|
257 |
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|
461 |
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|
620 |
Total interest expense |
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7,649 |
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1,684 |
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|
13,007 |
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|
3,125 |
Net interest income |
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20,362 |
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19,625 |
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|
41,143 |
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39,957 |
Provision for credit losses |
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|
812 |
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|
308 |
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|
460 |
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|
1,199 |
Net interest income after provision for credit losses |
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19,550 |
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19,317 |
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40,683 |
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38,758 |
NONINTEREST INCOME |
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Trust revenue |
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1,804 |
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1,715 |
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3,581 |
|
|
3,501 |
Brokerage and insurance revenue |
|
|
365 |
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|
566 |
|
|
795 |
|
|
1,088 |
Service charges on deposit accounts |
|
|
1,388 |
|
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1,322 |
|
|
2,678 |
|
|
2,557 |
Interchange revenue from debit card transactions |
|
|
1,010 |
|
|
1,056 |
|
|
2,017 |
|
|
2,019 |
Net gains from sale of loans |
|
|
139 |
|
|
220 |
|
|
213 |
|
|
602 |
Loan servicing fees, net |
|
|
190 |
|
|
358 |
|
|
312 |
|
|
568 |
Increase in cash surrender value of life insurance |
|
|
152 |
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|
137 |
|
|
290 |
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|
272 |
Other noninterest income |
|
|
1,587 |
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|
1,456 |
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|
2,358 |
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|
2,044 |
Realized (losses) gains on available-for-sale debt securities, net |
|
|
(1) |
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(1) |
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6 |
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|
1 |
Total noninterest income |
|
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6,634 |
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6,829 |
|
|
12,250 |
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|
12,652 |
NONINTEREST EXPENSE |
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|
|
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|
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Salaries and employee benefits |
|
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10,777 |
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10,265 |
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22,204 |
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20,872 |
Net occupancy and equipment expense |
|
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1,323 |
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1,308 |
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2,725 |
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2,719 |
Data processing and telecommunications expense |
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1,900 |
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1,720 |
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3,836 |
|
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3,343 |
Automated teller machine and interchange expense |
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395 |
|
|
347 |
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|
870 |
|
|
731 |
Pennsylvania shares tax |
|
|
404 |
|
|
488 |
|
|
807 |
|
|
976 |
Professional fees |
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|
564 |
|
|
480 |
|
|
1,501 |
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|
969 |
Other noninterest expense |
|
|
3,359 |
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2,431 |
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|
5,866 |
|
|
4,315 |
Total noninterest expense |
|
|
18,722 |
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17,039 |
|
|
37,809 |
|
|
33,925 |
Income before income tax provision |
|
|
7,462 |
|
|
9,107 |
|
|
15,124 |
|
|
17,485 |
Income tax provision |
|
|
1,419 |
|
|
1,618 |
|
|
2,828 |
|
|
3,101 |
NET INCOME |
|
$ |
6,043 |
|
$ |
7,489 |
|
$ |
12,296 |
|
$ |
14,384 |
EARNINGS PER COMMON SHARE - BASIC |
|
$ |
0.39 |
|
$ |
0.48 |
|
$ |
0.80 |
|
$ |
0.92 |
EARNINGS PER COMMON SHARE - DILUTED |
|
$ |
0.39 |
|
$ |
0.48 |
|
$ |
0.80 |
|
$ |
0.92 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands) (Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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June 30, |
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June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Net income |
|
$ |
6,043 |
|
$ |
7,489 |
|
$ |
12,296 |
|
$ |
14,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains on available-for-sale debt securities |
|
|
(6,663) |
|
|
(20,018) |
|
|
2,330 |
|
|
(52,043) |
Reclassification adjustment for losses (gains) realized in income |
|
|
1 |
|
|
1 |
|
|
(6) |
|
|
(1) |
Other comprehensive (loss) income on available-for-sale debt securities |
|
|
(6,662) |
|
|
(20,017) |
|
|
2,324 |
|
|
(52,044) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded pension and postretirement obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes from plan amendments and actuarial gains and losses |
|
|
0 |
|
|
0 |
|
|
(8) |
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|
133 |
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost |
|
|
(14) |
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|
(11) |
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|
(28) |
|
|
(22) |
Other comprehensive (loss) income on pension and postretirement obligations |
|
|
(14) |
|
|
(11) |
|
|
(36) |
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income before income tax |
|
|
(6,676) |
|
|
(20,028) |
|
|
2,288 |
|
|
(51,933) |
Income tax related to other comprehensive loss (income) |
|
|
1,400 |
|
|
4,204 |
|
|
(483) |
|
|
10,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive (loss) income |
|
|
(5,276) |
|
|
(15,824) |
|
|
1,805 |
|
|
(41,028) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
767 |
|
$ |
(8,335) |
|
$ |
14,101 |
|
$ |
(26,644) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
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Six Months Ended |
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June 30, |
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June 30, |
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2023 |
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2022 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net income |
|
$ |
12,296 |
|
$ |
14,384 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Provision for credit losses |
|
|
460 |
|
|
1,199 |
Realized gains on available-for-sale debt securities, net |
|
|
(6) |
|
|
(1) |
Net amortization of securities |
|
|
1,038 |
|
|
1,394 |
Increase in cash surrender value of life insurance |
|
|
(290) |
|
|
(272) |
Depreciation and amortization of bank premises and equipment |
|
|
1,104 |
|
|
1,013 |
Net accretion of purchase accounting adjustments |
|
|
(158) |
|
|
(727) |
Stock-based compensation |
|
|
695 |
|
|
781 |
Deferred income taxes |
|
|
153 |
|
|
461 |
Decrease (increase) in fair value of servicing rights |
|
|
95 |
|
|
(152) |
Gains on sales of loans, net |
|
|
(213) |
|
|
(602) |
Origination of loans held for sale |
|
|
(6,552) |
|
|
(22,526) |
Proceeds from sales of loans held for sale |
|
|
6,768 |
|
|
22,122 |
Increase in accrued interest receivable and other assets |
|
|
(351) |
|
|
(2,151) |
Increase (decrease) in accrued interest payable and other liabilities |
|
|
2,291 |
|
|
(986) |
Other |
|
|
13 |
|
|
80 |
Net Cash Provided by Operating Activities |
|
|
17,343 |
|
|
14,017 |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
Proceeds from maturities of certificates of deposit |
|
|
1,750 |
|
|
250 |
Proceeds from sales of available-for-sale debt securities |
|
|
18,357 |
|
|
0 |
Proceeds from calls and maturities of available-for-sale debt securities |
|
|
35,273 |
|
|
30,066 |
Purchase of available-for-sale debt securities |
|
|
(2,000) |
|
|
(92,661) |
Redemption of Federal Home Loan Bank of Pittsburgh stock |
|
|
12,975 |
|
|
4,763 |
Purchase of Federal Home Loan Bank of Pittsburgh stock |
|
|
(13,577) |
|
|
(8,893) |
Net increase in loans |
|
|
(73,725) |
|
|
(92,292) |
Purchase of premises and equipment |
|
|
(551) |
|
|
(2,161) |
Proceeds from sale of foreclosed assets |
|
|
0 |
|
|
290 |
Other |
|
|
109 |
|
|
100 |
Net Cash Used in Investing Activities |
|
|
(21,389) |
|
|
(160,538) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
Net increase in deposits |
|
|
12,545 |
|
|
39,309 |
Net (decrease) increase in short-term borrowings |
|
|
(48,631) |
|
|
88,239 |
Proceeds from long-term borrowings - FHLB advances |
|
|
60,000 |
|
|
20,290 |
Repayments of long-term borrowings - FHLB advances |
|
|
(7,052) |
|
|
(11,405) |
Redemption of subordinated debt |
|
|
0 |
|
|
(8,500) |
Sale of treasury stock |
|
|
0 |
|
|
141 |
Purchases of treasury stock |
|
|
(6,500) |
|
|
(9,081) |
Common dividends paid |
|
|
(7,852) |
|
|
(7,983) |
Net Cash Provided by Financing Activities |
|
|
2,510 |
|
|
111,010 |
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(1,536) |
|
|
(35,511) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
47,698 |
|
|
95,848 |
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
46,162 |
|
$ |
60,337 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
Decrease in accrued purchase of available-for-sale debt securities |
|
$ |
(2,000) |
|
$ |
0 |
Assets acquired through foreclosure of real estate loans |
|
$ |
184 |
|
$ |
51 |
Leased assets obtained in exchange for new operating lease liabilities |
|
$ |
3 |
|
$ |
904 |
Interest paid |
|
$ |
12,379 |
|
$ |
3,310 |
Income taxes paid |
|
$ |
2,807 |
|
$ |
2,276 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
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 June 30, 2023 |
|
Shares |
|
Shares |
|
Stock |
|
Capital |
|
Earnings |
|
Loss |
|
Stock |
|
Total |
||||||
Balance, March 31, 2023 |
|
16,030,172 |
|
545,137 |
|
$ |
16,030 |
|
$ |
143,395 |
|
$ |
151,990 |
|
$ |
(42,797) |
|
$ |
(13,050) |
|
$ |
255,568 |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
6,043 |
|
|
|
|
|
|
|
|
6,043 |
Other comprehensive loss, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,276) |
|
|
|
|
|
(5,276) |
Cash dividends declared on common stock, $.28 per share |
|
|
|
|
|
|
|
|
|
|
|
|
(4,308) |
|
|
|
|
|
|
|
|
(4,308) |
Shares issued for dividend reinvestment plan |
|
|
|
(22,992) |
|
|
|
|
|
(117) |
|
|
|
|
|
|
|
|
524 |
|
|
407 |
Forfeiture of restricted stock |
|
|
|
2,744 |
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
(65) |
|
|
0 |
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
318 |
Treasury stock purchases |
|
|
|
237,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,635) |
|
|
(4,635) |
Balance, June 30, 2023 |
|
16,030,172 |
|
762,076 |
|
$ |
16,030 |
|
$ |
143,661 |
|
$ |
153,725 |
|
$ |
(48,073) |
|
$ |
(17,226) |
|
$ |
248,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2022 |
|
16,030,172 |
|
311,449 |
|
$ |
16,030 |
|
$ |
142,991 |
|
$ |
145,073 |
|
$ |
(20,178) |
|
$ |
(7,708) |
|
$ |
276,208 |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
7,489 |
|
|
|
|
|
|
|
|
7,489 |
Other comprehensive loss, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,824) |
|
|
|
|
|
(15,824) |
Cash dividends declared on common stock, $.28 per share |
|
|
|
|
|
|
|
|
|
|
|
|
(4,375) |
|
|
|
|
|
|
|
|
(4,375) |
Shares issued for dividend reinvestment plan |
|
|
|
(17,068) |
|
|
|
|
|
(10) |
|
|
|
|
|
|
|
|
419 |
|
|
409 |
Forfeiture of restricted stock |
|
|
|
1,072 |
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
(23) |
|
|
0 |
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
413 |
Treasury stock purchases |
|
|
|
235,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,701) |
|
|
(5,701) |
Balance, June 30, 2022 |
|
16,030,172 |
|
530,958 |
|
$ |
16,030 |
|
$ |
143,417 |
|
$ |
148,187 |
|
$ |
(36,002) |
|
$ |
(13,013) |
|
$ |
258,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common |
|
Treasury |
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury |
|
|
|
|||||
Six Months Ended June 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 |
|
|
|
|
|
|
|
|
|
|
|
|
12,296 |
|
|
|
|
|
|
|
|
12,296 |
Other comprehensive income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,805 |
|
|
|
|
|
1,805 |
Cash dividends declared on common stock, $.56 per share |
|
|
|
|
|
|
|
|
|
|
|
|
(8,662) |
|
|
|
|
|
|
|
|
(8,662) |
Shares issued for dividend reinvestment plan |
|
|
|
(40,687) |
|
|
|
|
|
(146) |
|
|
|
|
|
|
|
|
956 |
|
|
810 |
Restricted stock granted |
|
|
|
(53,788) |
|
|
|
|
|
(1,314) |
|
|
|
|
|
|
|
|
1,314 |
|
|
0 |
Forfeiture of restricted stock |
|
|
|
21,966 |
|
|
|
|
|
476 |
|
|
|
|
|
|
|
|
(476) |
|
|
0 |
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
695 |
|
|
|
|
|
|
|
|
|
|
|
695 |
Purchase of restricted stock for tax withholding |
|
|
|
8,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203) |
|
|
(203) |
Treasury stock purchases |
|
|
|
314,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,297) |
|
|
(6,297) |
Balance, June 30, 2023 |
|
16,030,172 |
|
762,076 |
|
$ |
16,030 |
|
$ |
143,661 |
|
$ |
153,725 |
|
$ |
(48,073) |
|
$ |
(17,226) |
|
$ |
248,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 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 |
|
|
|
|
|
|
|
|
|
|
|
|
14,384 |
|
|
|
|
|
|
|
|
14,384 |
Other comprehensive loss, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,028) |
|
|
|
|
|
(41,028) |
Cash dividends declared on common stock, $.56 per share |
|
|
|
|
|
|
|
|
|
|
|
|
(8,809) |
|
|
|
|
|
|
|
|
(8,809) |
Shares issued for dividend reinvestment plan |
|
|
|
(33,202) |
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
824 |
|
|
826 |
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 |
|
|
|
7,144 |
|
|
|
|
|
147 |
|
|
|
|
|
|
|
|
(147) |
|
|
0 |
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
781 |
|
|
|
|
|
|
|
|
|
|
|
781 |
Purchase of restricted stock for tax withholding |
|
|
|
6,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153) |
|
|
(153) |
Treasury stock purchases |
|
|
|
365,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,928) |
|
|
(8,928) |
Balance, June 30, 2022 |
|
16,030,172 |
|
530,958 |
|
$ |
16,030 |
|
$ |
143,417 |
|
$ |
148,187 |
|
$ |
(36,002) |
|
$ |
(13,013) |
|
$ |
258,619 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
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 six-month period ended June 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.
8
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 June 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.
9
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 June 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 $2,202,000 at June 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 $6,217,000 at June 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.
10
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 June 30, 2023 calculation, the Corporation used the net charge-off percentage for the 5.5-year period ended June 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 4.20 years at June 30, 2023 and 4.36 years at January 1, 2023. Management determined that use of the Corporation’s net charge-off experience over a 5.5-year period at June 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.
11
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.
12
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 |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
||||
|
|
2023 |
|
2022 |
|
2023 |
|
2022 |
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,043 |
|
$ |
7,489 |
|
$ |
12,296 |
|
$ |
14,384 |
Less: Dividends and undistributed earnings allocated to participating securities |
|
|
(47) |
|
|
(70) |
|
|
(99) |
|
|
(130) |
Net income attributable to common shares |
|
$ |
5,996 |
|
$ |
7,419 |
|
$ |
12,197 |
|
$ |
14,254 |
Basic weighted-average common shares outstanding |
|
|
15,231,505 |
|
|
15,441,564 |
|
|
15,320,101 |
|
|
15,542,959 |
Basic earnings per common share (a) |
|
$ |
0.39 |
|
$ |
0.48 |
|
$ |
0.80 |
|
$ |
0.92 |
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shares |
|
$ |
5,996 |
|
$ |
7,419 |
|
$ |
12,197 |
|
$ |
14,254 |
Basic weighted-average common shares outstanding |
|
|
15,231,505 |
|
|
15,441,564 |
|
|
15,320,101 |
|
|
15,542,959 |
Dilutive effect of potential common stock arising from stock options |
|
|
0 |
|
|
3,009 |
|
|
265 |
|
|
3,360 |
Diluted weighted-average common shares outstanding |
|
|
15,231,505 |
|
|
15,444,573 |
|
|
15,320,366 |
|
|
15,546,319 |
Diluted earnings per common share (a) |
|
$ |
0.39 |
|
$ |
0.48 |
|
$ |
0.80 |
|
$ |
0.92 |
Weighted-average nonvested restricted shares outstanding |
|
|
120,300 |
|
|
145,132 |
|
|
124,343 |
|
|
141,656 |
| (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 8,988 in the three-month period ended June 30, 2023 and 0 in the six-month period ended June 30, 2023. There were no anti-dilutive instruments outstanding in the three-month and six-month periods ended June 30, 2022.
13
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 June 30, 2023 |
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
Unrealized holding losses on available-for-sale debt securities |
|
$ |
(6,663) |
|
$ |
1,397 |
|
$ |
(5,266) |
Reclassification adjustment for losses realized in income |
|
|
1 |
|
|
0 |
|
|
1 |
Other comprehensive loss from available-for-sale debt securities |
|
|
(6,662) |
|
|
1,397 |
|
|
(5,265) |
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 |
|
$ |
(6,676) |
|
$ |
1,400 |
|
$ |
(5,276) |
(In Thousands) |
|
Before-Tax |
|
Income Tax |
|
Net-of-Tax |
|||
|
|
Amount |
|
Effect |
|
Amount |
|||
Three Months Ended June 30, 2022 |
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
Unrealized holding losses on available-for-sale debt securities |
|
$ |
(20,018) |
|
$ |
4,202 |
|
$ |
(15,816) |
Reclassification adjustment for losses realized in income |
|
|
1 |
|
|
0 |
|
|
1 |
Other comprehensive loss from available-for-sale debt securities |
|
|
(20,017) |
|
|
4,202 |
|
|
(15,815) |
Unfunded pension and postretirement obligations: |
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost |
|
|
(11) |
|
|
2 |
|
|
(9) |
Other comprehensive loss on unfunded retirement obligations |
|
|
(11) |
|
|
2 |
|
|
(9) |
Total other comprehensive loss |
|
$ |
(20,028) |
|
$ |
4,204 |
|
$ |
(15,824) |
(In Thousands) |
|
Before-Tax |
|
Income Tax |
|
Net-of-Tax |
|||
|
|
Amount |
|
Effect |
|
Amount |
|||
Six Months Ended June 30, 2023 |
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
Unrealized holding gains on available-for-sale debt securities |
|
$ |
2,330 |
|
$ |
(491) |
|
$ |
1,839 |
Reclassification adjustment for (gains) realized in income |
|
|
(6) |
|
|
1 |
|
|
(5) |
Other comprehensive income from available-for-sale debt securities |
|
|
2,324 |
|
|
(490) |
|
|
1,834 |
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 |
|
|
(28) |
|
|
6 |
|
|
(22) |
Other comprehensive loss on unfunded retirement obligations |
|
|
(36) |
|
|
7 |
|
|
(29) |
Total other comprehensive income |
|
$ |
2,288 |
|
$ |
(483) |
|
$ |
1,805 |
(In Thousands) |
|
Before-Tax |
|
Income Tax |
|
Net-of-Tax |
|||
|
|
Amount |
|
Effect |
|
Amount |
|||
Six Months Ended June 30, 2022 |
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
Unrealized holding losses on available-for-sale debt securities |
|
$ |
(52,043) |
|
$ |
10,928 |
|
$ |
(41,115) |
Reclassification adjustment for (gains) realized in income |
|
|
(1) |
|
|
0 |
|
|
(1) |
Other comprehensive loss from available-for-sale debt securities |
|
|
(52,044) |
|
|
10,928 |
|
|
(41,116) |
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 |
|
|
(22) |
|
|
4 |
|
|
(18) |
Other comprehensive income on unfunded retirement obligations |
|
|
111 |
|
|
(23) |
|
|
88 |
Total other comprehensive loss |
|
$ |
(51,933) |
|
$ |
10,905 |
|
$ |
(41,028) |
|
|
|
|
|
|
|
|
|
|
14
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 losses (gains) realized in income (before-tax) |
|
Realized (losses) 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 June 30, 2023 |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
(43,271) |
|
$ |
474 |
|
$ |
(42,797) |
Other comprehensive loss during three months ended June 30, 2023 |
|
|
(5,265) |
|
|
(11) |
|
|
(5,276) |
Balance, end of period |
|
$ |
(48,536) |
|
$ |
463 |
|
$ |
(48,073) |
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2022 |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
(20,492) |
|
$ |
314 |
|
$ |
(20,178) |
Other comprehensive loss during three months ended June 30, 2022 |
|
|
(15,815) |
|
|
(9) |
|
|
(15,824) |
Balance, end of period |
|
$ |
(36,307) |
|
$ |
305 |
|
$ |
(36,002) |
(In Thousands) |
|
Unrealized |
|
|
|
Accumulated |
|||
|
|
(Losses) |
|
Unfunded |
|
Other |
|||
|
|
Gains |
|
Retirement |
|
Comprehensive |
|||
|
|
on Securities |
|
Obligations |
|
(Loss) Income |
|||
Six Months Ended June 30, 2023 |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
(50,370) |
|
$ |
492 |
|
$ |
(49,878) |
Other comprehensive income during six months ended June 30, 2023 |
|
|
1,834 |
|
|
(29) |
|
|
1,805 |
Balance, end of period |
|
$ |
(48,536) |
|
$ |
463 |
|
$ |
(48,073) |
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2022 |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
4,809 |
|
$ |
217 |
|
$ |
5,026 |
Other comprehensive loss during six months ended June 30, 2022 |
|
|
(41,116) |
|
|
88 |
|
|
(41,028) |
Balance, end of period |
|
$ |
(36,307) |
|
$ |
305 |
|
$ |
(36,002) |
15
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
4. CASH AND DUE FROM BANKS
Cash and due from banks at June 30, 2023 and December 31, 2022 include the following:
|
|
|
|
|
|
|
(In Thousands) |
|
June 30, |
|
December 31, |
||
|
|
2023 |
|
2022 |
||
Cash and cash equivalents |
|
$ |
46,162 |
|
$ |
47,698 |
Certificates of deposit |
|
|
5,600 |
|
|
7,350 |
Total cash and due from banks |
|
$ |
51,762 |
|
$ |
55,048 |
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 June 30, 2023 and December 31, 2022 are summarized as follows:
(In Thousands) |
|
June 30, 2023 |
||||||||||
|
|
|
|
|
Gross |
|
Gross |
|
|
|
||
|
|
|
|
|
Unrealized |
|
Unrealized |
|
|
|
||
|
|
Amortized |
|
Holding |
|
Holding |
|
Fair |
||||
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of the U.S. Treasury |
|
$ |
33,931 |
|
$ |
0 |
|
$ |
(3,188) |
|
$ |
30,743 |
Obligations of U.S. Government agencies |
|
|
22,899 |
|
|
0 |
|
|
(2,347) |
|
|
20,552 |
Bank holding company debt securities |
|
|
28,948 |
|
|
0 |
|
|
(5,623) |
|
|
23,325 |
Obligations of states and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt |
|
|
125,247 |
|
|
245 |
|
|
(12,322) |
|
|
113,170 |
Taxable |
|
|
65,715 |
|
|
0 |
|
|
(10,013) |
|
|
55,702 |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities |
|
|
105,027 |
|
|
0 |
|
|
(12,232) |
|
|
92,795 |
Residential collateralized mortgage obligations |
|
|
40,444 |
|
|
0 |
|
|
(4,547) |
|
|
35,897 |
Commercial mortgage-backed securities |
|
|
76,780 |
|
|
0 |
|
|
(11,263) |
|
|
65,517 |
Private label commercial mortgage-backed securities |
|
|
8,141 |
|
|
0 |
|
|
(147) |
|
|
7,994 |
Total available-for-sale debt securities |
|
$ |
507,132 |
|
$ |
245 |
|
$ |
(61,682) |
|
$ |
445,695 |
16
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
(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 June 30, 2023 and December 31, 2022:
June 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 |
|
$ |
30,743 |
|
$ |
(3,188) |
|
$ |
30,743 |
|
$ |
(3,188) |
Obligations of U.S. Government agencies |
|
|
6,315 |
|
|
(334) |
|
|
14,237 |
|
|
(2,013) |
|
|
20,552 |
|
|
(2,347) |
Bank holding company debt securities |
|
|
0 |
|
|
0 |
|
|
23,325 |
|
|
(5,623) |
|
|
23,325 |
|
|
(5,623) |
Obligations of states and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt |
|
|
11,923 |
|
|
(306) |
|
|
97,304 |
|
|
(12,016) |
|
|
109,227 |
|
|
(12,322) |
Taxable |
|
|
2,657 |
|
|
(93) |
|
|
53,045 |
|
|
(9,920) |
|
|
55,702 |
|
|
(10,013) |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities |
|
|
14,150 |
|
|
(667) |
|
|
78,645 |
|
|
(11,565) |
|
|
92,795 |
|
|
(12,232) |
Residential collateralized mortgage obligations |
|
|
2,780 |
|
|
(101) |
|
|
33,117 |
|
|
(4,446) |
|
|
35,897 |
|
|
(4,547) |
Commercial mortgage-backed securities |
|
|
10,755 |
|
|
(519) |
|
|
54,762 |
|
|
(10,744) |
|
|
65,517 |
|
|
(11,263) |
Private label commercial mortgage-backed securities |
|
|
7,994 |
|
|
(147) |
|
|
0 |
|
|
0 |
|
|
7,994 |
|
|
(147) |
Total temporarily impaired available-for-sale debt securities |
|
$ |
56,574 |
|
$ |
(2,167) |
|
$ |
385,178 |
|
$ |
(59,515) |
|
$ |
441,752 |
|
$ |
(61,682) |
17
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 |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
||||
|
|
2023 |
|
2022 |
|
2023 |
|
2022 |
||||
Gross realized gains from sales |
|
$ |
9 |
|
$ |
2 |
|
$ |
89 |
|
$ |
4 |
Gross realized losses from sales |
|
|
(10) |
|
|
(3) |
|
|
(83) |
|
|
(3) |
Net realized (losses) gains |
|
$ |
(1) |
|
$ |
(1) |
|
$ |
6 |
|
$ |
1 |
The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of June 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) |
|
June 30, 2023 |
||||
|
|
Amortized |
|
Fair |
||
|
|
Cost |
|
Value |
||
Due in one year or less |
|
$ |
10,074 |
|
$ |
9,912 |
Due from one year through five years |
|
|
71,016 |
|
|
65,803 |
Due from five years through ten years |
|
|
78,731 |
|
|
67,990 |
Due after ten years |
|
|
116,919 |
|
|
99,787 |
Sub-total |
|
|
276,740 |
|
|
243,492 |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
Residential pass-through securities |
|
|
105,027 |
|
|
92,795 |
Residential collateralized mortgage obligations |
|
|
40,444 |
|
|
35,897 |
Commercial mortgage-backed securities |
|
|
76,780 |
|
|
65,517 |
Private label commercial mortgage-backed securities |
|
|
8,141 |
|
|
7,994 |
Total |
|
$ |
507,132 |
|
$ |
445,695 |
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.
18
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Investment securities carried at $213,954,000 at June 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 June 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 $61,682,000 at June 30, 2023 and $64,082,000 at December 31, 2022. At June 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 June 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 June 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 June 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 $14,770,000 at June 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 June 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.
The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of $859,000 at June 30, 2023 and December 31, 2022, consisting exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $141,000 at June 30, 2023 and 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 $14,000 in the second quarter 2023 and no net gain or loss in the six-month period ended June 30, 2023, and a loss of $31,000 in the second quarter 2022 and a loss of $76,000 in the six-month period ended June 30, 2022.
19
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
6. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable at June 30, 2023 and December 31, 2022 are summarized as follows:
Summary of Loans by Type
(In Thousands)
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
|
2023 |
|
2022 (1) |
||
Commercial real estate - nonowner occupied |
|
$ |
733,783 |
|
$ |
675,597 |
Commercial real estate - owner occupied |
|
|
227,801 |
|
|
205,910 |
All other commercial loans |
|
|
392,684 |
|
|
410,077 |
Residential mortgage loans |
|
|
404,233 |
|
|
393,582 |
Consumer loans |
|
|
56,009 |
|
|
54,874 |
Total |
|
|
1,814,510 |
|
|
1,740,040 |
Less: allowance for credit losses on loans |
|
|
(19,056) |
|
|
(16,615) |
Loans, net |
|
$ |
1,795,454 |
|
$ |
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 $4,639,000 at June 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 six-month periods ended June 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 |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
||||
|
|
2023 |
|
2022 |
|
2023 |
|
2022 |
||||
Market Rate Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to gross amortized cost of loans at beginning of period |
|
$ |
(968) |
|
$ |
(885) |
|
$ |
(916) |
|
$ |
(637) |
(Amortization) accretion recognized in interest income |
|
|
(32) |
|
|
19 |
|
|
(84) |
|
|
(229) |
Adjustments to gross amortized cost of loans at end of period |
|
$ |
(1,000) |
|
$ |
(866) |
|
$ |
(1,000) |
|
$ |
(866) |
Credit Adjustment on Non-impaired Loans |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to gross amortized cost of loans at beginning of period |
|
$ |
(1,642) |
|
$ |
(2,782) |
|
$ |
(1,840) |
|
$ |
(3,335) |
Accretion recognized in interest income |
|
|
196 |
|
|
379 |
|
|
394 |
|
|
932 |
Adjustments to gross amortized cost of loans at end of period |
|
$ |
(1,446) |
|
$ |
(2,403) |
|
$ |
(1,446) |
|
$ |
(2,403) |
20
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The following table presents an analysis of past due loans as of June 30, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
As of June 30, 2023 |
|||||||||||||
|
|
Past Due |
|
Past Due |
|
|
|
|
|
|
|
||||
|
|
30-89 |
|
90+ |
|
Nonaccrual |
|
Current |
|
Total |
|||||
|
|
Days |
|
Days |
|
Loans |
|
Loans |
|
Loans |
|||||
Commercial real estate - nonowner occupied |
|
$ |
2,422 |
|
$ |
272 |
|
$ |
5,973 |
|
$ |
725,116 |
|
$ |
733,783 |
Commercial real estate - owner occupied |
|
|
0 |
|
|
141 |
|
|
1,598 |
|
|
226,062 |
|
|
227,801 |
All other commercial loans |
|
|
114 |
|
|
145 |
|
|
1,528 |
|
|
390,897 |
|
|
392,684 |
Residential mortgage loans |
|
|
1,302 |
|
|
512 |
|
|
3,471 |
|
|
398,948 |
|
|
404,233 |
Consumer loans |
|
|
871 |
|
|
94 |
|
|
257 |
|
|
54,787 |
|
|
56,009 |
Total |
|
$ |
4,709 |
|
$ |
1,164 |
|
$ |
12,827 |
|
$ |
1,795,810 |
|
$ |
1,814,510 |
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 - nonowner 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.
21
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 June 30, 2023:
(In Thousands) |
|
Term Loans by Year of Origination |
|
|
|
|
|
|
||||||||||||||||
|
|
2023 |
|
2022 |
|
2021 |
|
2020 |
|
2019 |
|
Prior |
|
Revolving |
|
Total |
||||||||
Commercial real estate - nonowner occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
67,743 |
|
$ |
189,214 |
|
$ |
94,135 |
|
$ |
56,150 |
|
$ |
81,629 |
|
$ |
219,042 |
|
$ |
0 |
|
$ |
707,913 |
Special Mention |
|
|
0 |
|
|
0 |
|
|
1,509 |
|
|
0 |
|
|
121 |
|
|
11,124 |
|
|
0 |
|
|
12,754 |
Substandard |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
2,603 |
|
|
654 |
|
|
9,859 |
|
|
0 |
|
|
13,116 |
Doubtful |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
Total commercial real estate - nonowner occupied |
|
$ |
67,743 |
|
$ |
189,214 |
|
$ |
95,644 |
|
$ |
58,753 |
|
$ |
82,404 |
|
$ |
240,025 |
|
$ |
0 |
|
$ |
733,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period gross charge-offs |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate - owner occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
23,074 |
|
$ |
37,121 |
|
$ |
51,575 |
|
$ |
13,599 |
|
$ |
17,942 |
|
$ |
78,363 |
|
$ |
0 |
|
$ |
221,674 |
Special Mention |
|
|
0 |
|
|
0 |
|
|
2,667 |
|
|
0 |
|
|
0 |
|
|
223 |
|
|
0 |
|
|
2,890 |
Substandard |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
3,237 |
|
|
0 |
|
|
3,237 |
Doubtful |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
Total commercial real estate - owner occupied |
|
$ |
23,074 |
|
$ |
37,121 |
|
$ |
54,242 |
|
$ |
13,599 |
|
$ |
17,942 |
|
$ |
81,823 |
|
$ |
0 |
|
$ |
227,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period gross charge-offs |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
28,723 |
|
$ |
94,383 |
|
$ |
59,295 |
|
$ |
30,016 |
|
$ |
17,947 |
|
$ |
30,125 |
|
$ |
111,591 |
|
$ |
372,080 |
Special Mention |
|
|
0 |
|
|
0 |
|
|
4,014 |
|
|
0 |
|
|
0 |
|
|
506 |
|
|
343 |
|
|
4,863 |
Substandard |
|
|
0 |
|
|
1,926 |
|
|
60 |
|
|
444 |
|
|
2,292 |
|
|
1,166 |
|
|
9,853 |
|
|
15,741 |
Doubtful |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
Total all other commercial loans |
|
$ |
28,723 |
|
$ |
96,309 |
|
$ |
63,369 |
|
$ |
30,460 |
|
$ |
20,239 |
|
$ |
31,797 |
|
$ |
121,787 |
|
$ |
392,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period gross charge-offs |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
5 |
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
30,740 |
|
$ |
89,266 |
|
$ |
57,871 |
|
$ |
41,629 |
|
$ |
34,324 |
|
$ |
145,357 |
|
$ |
0 |
|
$ |
399,187 |
Special Mention |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
Substandard |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
291 |
|
|
371 |
|
|
4,384 |
|
|
0 |
|
|
5,046 |
Doubtful |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
Total residential mortgage loans |
|
$ |
30,740 |
|
$ |
89,266 |
|
$ |
57,871 |
|
$ |
41,920 |
|
$ |
34,695 |
|
$ |
149,741 |
|
$ |
0 |
|
$ |
404,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period gross charge-offs |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
33 |
|
$ |
0 |
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
8,323 |
|
$ |
14,132 |
|
$ |
2,637 |
|
$ |
1,507 |
|
$ |
329 |
|
$ |
1,128 |
|
$ |
27,021 |
|
$ |
55,077 |
Special Mention |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
Substandard |
|
|
262 |
|
|
0 |
|
|
1 |
|
|
8 |
|
|
10 |
|
|
79 |
|
|
572 |
|
|
932 |
Doubtful |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
Total consumer loans |
|
$ |
8,585 |
|
$ |
14,132 |
|
$ |
2,638 |
|
$ |
1,515 |
|
$ |
339 |
|
$ |
1,207 |
|
$ |
27,593 |
|
$ |
56,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period gross charge-offs |
|
$ |
0 |
|
$ |
84 |
|
$ |
0 |
|
$ |
18 |
|
$ |
3 |
|
$ |
3 |
|
$ |
55 |
|
$ |
163 |
22
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 - nonowner 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 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 - nonowner occupied |
|
$ |
1,192 |
|
$ |
4,781 |
|
$ |
5,973 |
|
$ |
6,350 |
Commercial real estate - owner occupied |
|
|
797 |
|
|
801 |
|
|
1,598 |
|
|
19 |
All other commercial loans |
|
|
1,325 |
|
|
203 |
|
|
1,528 |
|
|
11,528 |
Residential mortgage loans |
|
|
3,471 |
|
|
0 |
|
|
3,471 |
|
|
3,974 |
Consumer loans |
|
|
257 |
|
|
0 |
|
|
257 |
|
|
187 |
Purchased credit impaired |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
1,027 |
Total |
|
$ |
7,042 |
|
$ |
5,785 |
|
$ |
12,827 |
|
$ |
23,085 |
The Corporation recognized $196,000 and $427,000 of interest income on nonaccrual loans during the three months and six months ended June 30, 2023, respectively.
The following table represents the accrued interest receivable written off by reversing interest income during the three-month and six-month periods ended June 30, 2023:
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||
(In Thousands) |
|
June 30, 2023 |
|
June 30, 2023 |
||
Commercial real estate - nonowner occupied |
|
$ |
0 |
|
$ |
26 |
Residential mortgage loans |
|
|
3 |
|
|
6 |
Consumer loans |
|
|
0 |
|
|
2 |
Total |
|
$ |
3 |
|
$ |
34 |
23
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:
|
|
|
|
|
|
|
|
|
June 30, 2023 |
||||
|
|
Amortized |
|
|
||
(In Thousands) |
|
Cost |
|
Allowance |
||
Commercial real estate - nonowner occupied |
|
$ |
5,973 |
|
$ |
465 |
Commercial real estate - owner occupied |
|
|
1,598 |
|
|
156 |
All other commercial loans |
|
|
1,528 |
|
|
99 |
Total |
|
$ |
9,099 |
|
$ |
720 |
The following table summarizes the activity related to the allowance for credit losses for the three and six months ended June 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, March 31, 2023 |
$ |
9,654 |
|
$ |
1,942 |
|
$ |
3,580 |
|
$ |
2,864 |
|
$ |
306 |
|
$ |
0 |
|
$ |
18,346 |
Charge-offs |
|
0 |
|
|
0 |
|
|
0 |
|
|
(14) |
|
|
(120) |
|
|
0 |
|
|
(134) |
Recoveries |
|
0 |
|
|
0 |
|
|
0 |
|
|
1 |
|
|
7 |
|
|
0 |
|
|
8 |
Provision (credit) for credit losses on loans |
|
949 |
|
|
83 |
|
|
106 |
|
|
(387) |
|
|
85 |
|
|
0 |
|
|
836 |
Balance, June 30, 2023 |
$ |
10,603 |
|
$ |
2,025 |
|
$ |
3,686 |
|
$ |
2,464 |
|
$ |
278 |
|
$ |
0 |
|
$ |
19,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
(5) |
|
|
(33) |
|
|
(163) |
|
|
0 |
|
|
(201) |
Recoveries |
|
0 |
|
|
0 |
|
|
0 |
|
|
2 |
|
|
12 |
|
|
0 |
|
|
14 |
Provision (credit) for credit losses on loans |
|
535 |
|
|
76 |
|
|
(363) |
|
|
88 |
|
|
188 |
|
|
0 |
|
|
524 |
Balance, June 30, 2023 |
$ |
10,603 |
|
$ |
2,025 |
|
$ |
3,686 |
|
$ |
2,464 |
|
$ |
278 |
|
$ |
0 |
|
$ |
19,056 |
24
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 June 30, 2022 |
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
||
(In Thousands) |
|
Balance |
|
Charge-offs |
|
Recoveries |
|
Provision (Credit) |
|
Balance |
|||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate |
|
$ |
5,017 |
|
$ |
0 |
|
$ |
0 |
|
$ |
(35) |
|
$ |
4,982 |
Commercial and industrial |
|
|
2,841 |
|
|
0 |
|
|
0 |
|
|
(49) |
|
|
2,792 |
Commercial construction and land |
|
|
391 |
|
|
0 |
|
|
0 |
|
|
124 |
|
|
515 |
Loans secured by farmland |
|
|
129 |
|
|
0 |
|
|
0 |
|
|
(17) |
|
|
112 |
Multi-family (5 or more) residential |
|
|
367 |
|
|
0 |
|
|
0 |
|
|
(28) |
|
|
339 |
Agricultural loans |
|
|
27 |
|
|
0 |
|
|
0 |
|
|
(4) |
|
|
23 |
Other commercial loans |
|
|
150 |
|
|
0 |
|
|
0 |
|
|
(19) |
|
|
131 |
Total commercial |
|
|
8,922 |
|
|
0 |
|
|
0 |
|
|
(28) |
|
|
8,894 |
Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens |
|
|
3,810 |
|
|
0 |
|
|
1 |
|
|
(122) |
|
|
3,689 |
Residential mortgage loans - junior liens |
|
|
181 |
|
|
0 |
|
|
0 |
|
|
(1) |
|
|
180 |
Home equity lines of credit |
|
|
306 |
|
|
0 |
|
|
0 |
|
|
2 |
|
|
308 |
1-4 Family residential construction |
|
|
148 |
|
|
0 |
|
|
0 |
|
|
67 |
|
|
215 |
Total residential mortgage |
|
|
4,445 |
|
|
0 |
|
|
1 |
|
|
(54) |
|
|
4,392 |
Consumer |
|
|
237 |
|
|
(41) |
|
|
8 |
|
|
57 |
|
|
261 |
Unallocated |
|
|
667 |
|
|
0 |
|
|
0 |
|
|
333 |
|
|
1,000 |
Total Allowance for Loan Losses |
|
$ |
14,271 |
|
$ |
(41) |
|
$ |
9 |
|
$ |
308 |
|
$ |
14,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2022 |
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
||
(In Thousands) |
|
Balance |
|
Charge-offs |
|
Recoveries |
|
Provision (Credit) |
|
Balance |
|||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate |
|
$ |
4,405 |
|
$ |
0 |
|
$ |
0 |
|
$ |
577 |
|
$ |
4,982 |
Commercial and industrial |
|
|
2,723 |
|
|
(150) |
|
|
0 |
|
|
219 |
|
|
2,792 |
Commercial construction and land |
|
|
637 |
|
|
0 |
|
|
0 |
|
|
(122) |
|
|
515 |
Loans secured by farmland |
|
|
115 |
|
|
0 |
|
|
0 |
|
|
(3) |
|
|
112 |
Multi-family (5 or more) residential |
|
|
215 |
|
|
0 |
|
|
0 |
|
|
124 |
|
|
339 |
Agricultural loans |
|
|
25 |
|
|
0 |
|
|
0 |
|
|
(2) |
|
|
23 |
Other commercial loans |
|
|
173 |
|
|
0 |
|
|
0 |
|
|
(42) |
|
|
131 |
Total commercial |
|
|
8,293 |
|
|
(150) |
|
|
0 |
|
|
751 |
|
|
8,894 |
Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first liens |
|
|
3,650 |
|
|
0 |
|
|
2 |
|
|
37 |
|
|
3,689 |
Residential mortgage loans - junior liens |
|
|
184 |
|
|
0 |
|
|
0 |
|
|
(4) |
|
|
180 |
Home equity lines of credit |
|
|
302 |
|
|
0 |
|
|
15 |
|
|
(9) |
|
|
308 |
1-4 Family residential construction |
|
|
202 |
|
|
0 |
|
|
0 |
|
|
13 |
|
|
215 |
Total residential mortgage |
|
|
4,338 |
|
|
0 |
|
|
17 |
|
|
37 |
|
|
4,392 |
Consumer |
|
|
235 |
|
|
(71) |
|
|
15 |
|
|
82 |
|
|
261 |
Unallocated |
|
|
671 |
|
|
0 |
|
|
0 |
|
|
329 |
|
|
1,000 |
Total Allowance for Loan Losses |
|
$ |
13,537 |
|
$ |
(221) |
|
$ |
32 |
|
$ |
1,199 |
|
$ |
14,547 |
25
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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.
26
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 |
|
Six Months Ended |
|
Three Months Ended |
|
Six Months Ended |
||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
||||
|
|
2022 |
|
2022 |
|
2022 |
|
2022 |
||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans secured by real estate |
|
$ |
8,967 |
|
$ |
9,851 |
|
$ |
165 |
|
$ |
340 |
Commercial and industrial |
|
|
519 |
|
|
1,073 |
|
|
6 |
|
|
203 |
Commercial construction and land |
|
|
47 |
|
|
47 |
|
|
0 |
|
|
1 |
Loans secured by farmland |
|
|
80 |
|
|
81 |
|
|
0 |
|
|
0 |
Multi-family (5 or more) residential |
|
|
0 |
|
|
395 |
|
|
0 |
|
|
1,156 |
Agricultural loans |
|
|
60 |
|
|
61 |
|
|
0 |
|
|
2 |
Total commercial |
|
|
9,673 |
|
|
11,508 |
|
|
171 |
|
|
1,702 |
Residential mortgage: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans - first lien |
|
|
585 |
|
|
575 |
|
|
5 |
|
|
12 |
Residential mortgage loans - junior lien |
|
|
33 |
|
|
35 |
|
|
3 |
|
|
6 |
Home equity lines of credit |
|
|
34 |
|
|
17 |
|
|
1 |
|
|
2 |
Total residential mortgage |
|
|
652 |
|
|
627 |
|
|
9 |
|
|
20 |
Total |
|
$ |
10,325 |
|
$ |
12,135 |
|
$ |
180 |
|
$ |
1,722 |
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.
27
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 six-month periods ended June 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) |
|
June 30, |
|
December 31, |
||
|
|
2023 |
|
2022 |
||
Foreclosed residential real estate |
|
$ |
184 |
|
$ |
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) |
|
June 30, |
|
December 31, |
||
|
|
2023 |
|
2022 |
||
Residential real estate in process of foreclosure |
|
$ |
1,366 |
|
$ |
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 $1,154,000 at June 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 six months ended June 30, 2023.
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
||
|
|
Ended |
|
Ended |
||
(In Thousands) |
|
June 30, 2023 |
|
June 30, 2023 |
||
Beginning Balance |
|
$ |
1,178 |
|
$ |
425 |
Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13 |
|
|
0 |
|
|
793 |
Credit for unfunded commitments |
|
|
(24) |
|
|
(64) |
Balance, June 30, 2023 |
|
$ |
1,154 |
|
$ |
1,154 |
28
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 June 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) |
|
June 30, |
|
December 31, |
||
|
|
2023 |
|
2022 |
||
Gross amount |
|
$ |
6,639 |
|
$ |
6,639 |
Accumulated amortization |
|
|
(3,966) |
|
|
(3,762) |
Net |
|
$ |
2,673 |
|
$ |
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 |
|
Six Months Ended |
||||||||
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
||||
|
|
2023 |
|
2022 |
|
2023 |
|
2022 |
||||
Amortization expense |
|
$ |
102 |
|
$ |
109 |
|
$ |
204 |
|
$ |
219 |
8. BORROWED FUNDS
SHORT-TERM BORROWINGS
Short-term borrowings (initial maturity within one year) include the following:
|
|
|
|
|
|
|
(In Thousands) |
|
June 30, |
|
December 31, |
||
|
|
2023 |
|
2022 |
||
FHLB-Pittsburgh borrowings |
|
$ |
30,500 |
|
$ |
77,000 |
Customer repurchase agreements |
|
|
931 |
|
|
3,062 |
Total short-term borrowings |
|
$ |
31,431 |
|
$ |
80,062 |
The Corporation had available credit with other correspondent banks totaling $95,000,000 at June 30, 2023 and December 31, 2022. These lines of credit are primarily unsecured. No amounts were outstanding at June 30, 2023 or December 31, 2022.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At June 30, 2023, the Corporation had available credit in the amount of $21,903,000 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 $22,814,000 at June 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 June 30, 2023 and December 31, 2022. The carrying value of the underlying securities was $940,000 at June 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 $1,309,714,000 at June 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 $14,770,000 at June 30, 2023 and $14,168,000 at December 31, 2022. The Corporation’s total credit facility with FHLB-Pittsburgh was $882,845,000 at June 30, 2023, including an unused (available) amount of $725,417,000.
29
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 June 30, 2023, short-term borrowings included an overnight borrowing from FHLB-Pittsburgh of $5,500,000 at an interest rate of 5.39% and an advance of $25,000,000 maturing in July 2023 with an interest rate of 5.39%. 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) |
|
June 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% |
|
|
29,794 |
|
|
29,813 |
Loans maturing in 2025 with a weighted-average rate of 4.05% |
|
|
33,179 |
|
|
23,231 |
Loans maturing in 2026 with a weighted-average rate of 4.30% |
|
|
23,969 |
|
|
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 |
|
$ |
115,263 |
|
$ |
62,347 |
Note: Weighted-average rates are presented as of June 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 $17,000 in the second quarter 2023 and $33,000 in the six-month period ended June 30, 2023, and $16,000 in the second quarter 2022 and $32,000 in the six month-period ended June 30, 2022, was included in interest expense in the unaudited consolidated statements of income.
At June 30, 2023 and December 31, 2022, outstanding Senior Notes are as follows:
(In Thousands) |
|
June 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 |
|
$ |
14,798 |
|
$ |
14,765 |
Total carrying value |
|
$ |
14,798 |
|
$ |
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.
30
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 $27,000 in the second quarter 2023 and $54,000 in the six-month period ended June 30, 2023, and $26,000 in the second quarter 2022 and $52,000 in the six-month period ended June 30, 2022, was included in interest expense in the unaudited consolidated statements of income.
At June 30, 2023 and December 31, 2022, the carrying amounts of subordinated debt agreements are as follows:
(In Thousands) |
|
June 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 |
|
$ |
24,661 |
|
$ |
24,607 |
Total carrying value |
|
$ |
24,661 |
|
$ |
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 period ended 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 $1,352,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $318,000 in the second quarter 2023 and $413,000 in the second quarter 2022. Total stock-based compensation expense attributable to restricted stock awards amount to $695,000 in the six-month period ended June 30, 2023 and $781,000 in the six-month period ended June 30, 2022.
31
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 $153,714,000 at June 30, 2023 and $155,214,000 at December 31, 2022. There were no interest rate swaps originated in the three or six-month periods ended June 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 June 30, 2023. The net impact on the consolidated statements of income from interest rate swaps was an increase in interest income on loans of $439,000 in the second quarter 2023 and $784,000 in the six-month period ended June 30, 2023 as compared to a reduction in interest income on loans of $220,000 in second quarter 2022 and $537,000 in the six months ended June 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 $2,000 in the second quarter 2023 and $18,000 in the six-month period ended June 30, 2023 with no comparable amount in the second quarter 2022 and in the six months ended June 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 June 30, 2023 and December 31, 2022:
(In Thousands) |
At June 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 |
$ |
76,857 |
|
$ |
3,645 |
|
$ |
76,857 |
|
$ |
3,645 |
|
$ |
77,607 |
|
$ |
3,638 |
|
$ |
77,607 |
|
$ |
3,638 |
RPA Out |
|
7,141 |
|
|
12 |
|
|
0 |
|
|
0 |
|
|
7,200 |
|
|
0 |
|
|
0 |
|
|
0 |
RPA In |
|
0 |
|
|
0 |
|
|
10,000 |
|
|
14 |
|
|
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. |
32
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 $2,265,000 were pledged as collateral against the Corporation’s obligations related to the interest rate swaps at June 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.
33
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
At June 30, 2023 and December 31, 2022, assets and liabilities measured at fair value and the valuation methods used are as follows:
|
|
June 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 |
|
$ |
30,743 |
|
$ |
0 |
|
$ |
0 |
|
$ |
30,743 |
Obligations of U.S. Government agencies |
|
|
0 |
|
|
20,552 |
|
|
0 |
|
|
20,552 |
Bank holding company debt securities |
|
|
0 |
|
|
23,325 |
|
|
0 |
|
|
23,325 |
Obligations of states and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt |
|
|
0 |
|
|
113,170 |
|
|
0 |
|
|
113,170 |
Taxable |
|
|
0 |
|
|
55,702 |
|
|
0 |
|
|
55,702 |
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential pass-through securities |
|
|
0 |
|
|
92,795 |
|
|
0 |
|
|
92,795 |
Residential collateralized mortgage obligations |
|
|
0 |
|
|
35,897 |
|
|
0 |
|
|
35,897 |
Commercial mortgage-backed securities |
|
|
0 |
|
|
65,517 |
|
|
0 |
|
|
65,517 |
Private label commercial mortgage-backed securities |
|
|
0 |
|
|
7,994 |
|
|
0 |
|
|
7,994 |
Total available-for-sale debt securities |
|
|
30,743 |
|
|
414,952 |
|
|
0 |
|
|
445,695 |
Marketable equity security |
|
|
859 |
|
|
0 |
|
|
0 |
|
|
859 |
Servicing rights |
|
|
0 |
|
|
0 |
|
|
2,607 |
|
|
2,607 |
RPA Out |
|
|
0 |
|
|
12 |
|
|
0 |
|
|
12 |
Interest rate swap agreements, assets |
|
|
0 |
|
|
3,645 |
|
|
0 |
|
|
3,645 |
Total recurring fair value measurements, assets |
|
$ |
31,602 |
|
$ |
418,609 |
|
$ |
2,607 |
|
$ |
452,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements, liabilities, |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements, liabilities |
|
$ |
0 |
|
$ |
3,645 |
|
$ |
0 |
|
$ |
3,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements, assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for credit loss, net |
|
$ |
0 |
|
$ |
0 |
|
$ |
5,065 |
|
$ |
5,065 |
Foreclosed assets held for sale |
|
|
0 |
|
|
0 |
|
|
459 |
|
|
459 |
Total nonrecurring fair value measurements, assets |
|
$ |
0 |
|
$ |
0 |
|
$ |
5,524 |
|
$ |
5,524 |
34
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
35
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
At June 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 |
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2023 |
|
Valuation |
|
Unobservable |
|
|
|
|
Method or Value As of |
|
Asset |
|
(In Thousands) |
|
Technique |
|
Input(s) |
|
|
|
|
6/30/2023 |
|
Servicing rights |
|
$ |
2,607 |
|
Discounted cash flow |
|
Discount rate |
|
|
13.00 |
% |
Rate used through modeling period |
|
|
|
|
|
|
|
Loan prepayment speeds |
|
|
130.00 |
% |
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.
Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:
(In Thousands) |
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
June 30, 2023 |
|
June 30, 2022 |
|
June 30, 2023 |
|
June 30, 2022 |
||||
Servicing rights balance, beginning of period |
|
$ |
2,585 |
|
$ |
2,429 |
|
$ |
2,653 |
|
$ |
2,329 |
Originations of servicing rights |
|
|
34 |
|
|
61 |
|
|
49 |
|
|
159 |
Unrealized (loss) gain included in earnings |
|
|
(12) |
|
|
150 |
|
|
(95) |
|
|
152 |
Servicing rights balance, end of period |
|
$ |
2,607 |
|
$ |
2,640 |
|
$ |
2,607 |
|
$ |
2,640 |
36
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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.
At June 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 |
|
6/30/2023 |
|
6/30/2023 |
|
6/30/2023 |
|
Technique |
|
Inputs |
|
6/30/2023 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for credit loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate - nonowner occupied |
|
$ |
4,781 |
|
$ |
465 |
|
$ |
4,316 |
|
Sales comparison |
|
Discount to appraised value |
|
27 |
% |
Commercial real estate - owner occupied |
|
|
801 |
|
|
156 |
|
|
645 |
|
Sales comparison & SBA guaranty |
|
Discount to appraised value |
|
56 |
% |
All other commercial loans |
|
|
203 |
|
|
99 |
|
|
104 |
|
Liquidation & SBA guaranty |
|
Discount to appraised value |
|
19 |
% |
Total loans individually evaluated for credit loss |
|
$ |
5,785 |
|
$ |
720 |
|
$ |
5,065 |
|
|
|
|
|
|
|
Foreclosed assets held for sale - real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1-4 family) |
|
$ |
184 |
|
$ |
0 |
|
$ |
184 |
|
Sales comparison |
|
Discount to appraised value |
|
36 |
% |
Commercial real estate |
|
|
275 |
|
|
0 |
|
|
275 |
|
Sales comparison |
|
Discount to appraised value |
|
50 |
% |
Total foreclosed assets held for sale |
|
$ |
459 |
|
$ |
0 |
|
$ |
459 |
|
|
|
|
|
|
|
(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.
37
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 |
|
June 30, 2023 |
|
December 31, 2022 |
||||||||
|
|
Hierarchy |
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
||||
|
|
Level |
|
Amount |
|
Value |
|
Amount |
|
Value |
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
Level 1 |
|
$ |
46,162 |
|
$ |
46,162 |
|
$ |
47,698 |
|
$ |
47,698 |
Certificates of deposit |
|
Level 2 |
|
|
5,600 |
|
|
5,244 |
|
|
7,350 |
|
|
6,956 |
Restricted equity securities (included in other assets) |
|
Level 2 |
|
|
15,020 |
|
|
15,020 |
|
|
14,418 |
|
|
14,418 |
Loans, net |
|
Level 3 |
|
|
1,795,454 |
|
|
1,733,521 |
|
|
1,723,425 |
|
|
1,674,002 |
Accrued interest receivable |
|
Level 2 |
|
|
8,439 |
|
|
8,439 |
|
|
8,653 |
|
|
8,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated maturity |
|
Level 2 |
|
|
1,600,553 |
|
|
1,600,553 |
|
|
1,702,404 |
|
|
1,702,404 |
Time deposits |
|
Level 2 |
|
|
409,565 |
|
|
407,332 |
|
|
295,189 |
|
|
293,814 |
Short-term borrowings |
|
Level 2 |
|
|
31,431 |
|
|
31,431 |
|
|
80,062 |
|
|
80,062 |
Long-term borrowings |
|
Level 2 |
|
|
115,263 |
|
|
113,606 |
|
|
62,347 |
|
|
60,944 |
Senior debt |
|
Level 2 |
|
|
14,798 |
|
|
12,644 |
|
|
14,765 |
|
|
9,712 |
Subordinated debt |
|
Level 2 |
|
|
24,661 |
|
|
21,529 |
|
|
24,607 |
|
|
16,186 |
Accrued interest payable |
|
Level 2 |
|
|
1,054 |
|
|
1,054 |
|
|
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.
38
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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
Second Quarter 2023 as Compared to Second Quarter 2022
Second quarter 2023 net income was $6,043,000, or $0.39 per diluted share, as compared to $7,489,000, or $0.48 per diluted share, in the second quarter 2022. Significant variances were as follows:
| ● | Net interest income of $20,362,000 in the second quarter 2023 was higher than the second quarter 2022 total by $737,000. The increase in net interest income was mainly driven by loan growth, as average earning assets increased $131,391,000, with an increase in average loans of $198,967,000, or 12.5%, while the average amortized cost balance of available-for-sale debt securities decreased $49,013,000 and average interest-bearing due from banks decreased $17,567,000. Average total deposits decreased $14,586,000, or 0.7%, while average total borrowed funds increased $140,333,000. The net interest margin was 3.53% in the second quarter 2023, down from 3.62% in the second quarter 2022. The interest rate spread decreased 0.49%, as the average rate on interest-bearing liabilities increased 1.41%, while the average yield on earning assets increased 0.92%. |
| ● | The provision for credit losses of $812,000 in the second quarter 2023 exceeded the second quarter 2022 amount by $504,000. The provision in the second quarter 2023 resulted mainly from an increase in the allowance for credit losses |
39
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| (“ACL”) attributable to commercial loan growth, while the lower second quarter 2022 provision included the impact of a net reduction related to specific loans of $271,000. |
| ● | Noninterest income of $6,634,000 in the second quarter 2023 decreased $195,000 from the second quarter 2022 amount. Significant variances included the following: |
| o | Brokerage and insurance revenue of $365,000 decreased $201,000 from the second quarter 2022, due to lower volume of new transactions. |
| o | Loan servicing fees, net, of $190,000 decreased $168,000, as the fair value of servicing rights decreased $12,000 in the second quarter 2023 as compared to an increase of $150,000 in the second quarter 2022. |
| o | Net gains from sale of loans of $139,000 decreased $81,000 from the second quarter 2022, reflecting a reduction in volume of residential mortgage loans sold. |
| o | Other noninterest income of $1,587,000 increased $131,000 from the second quarter 2022, including dividends on FHLB-Pittsburgh stock totaling $290,000, an increase of $131,000 from the second quarter 2022. |
| o | Trust revenue of $1,804,000 increased $89,000, consistent with recent appreciation in the trading prices of many U.S. equity securities. |
| ● | Noninterest expense of $18,722,000 in the second quarter 2023 increased $1,683,000 from the second quarter 2022 amount. Significant variances included the following: |
| o | Other noninterest expense of $3,359,000 increased $928,000 from the second quarter 2022. Within this category, significant variances included the following: |
| ● | Legal fees totaled $327,000 in the second quarter 2023, an increase of $236,000 over the second quarter 2022 total, mainly due to fees incurred related to non-litigation-related corporate matters. |
| ● | FDIC insurance expense increased $224,000, reflecting the impact of an increase in the base deposit insurance assessment rate schedules applicable to all FDIC-insured banks. |
| ● | The reduction in expense related to other operational losses of $82,000 in the second quarter 2023, as previously described, was a lesser benefit by $158,000 as compared to a reduction in other operational losses of $240,000 in the second quarter 2022. The reduction in expense in the second quarter 2023 was related to check fraud and Trust Department tax-related compliance matters while most of the reduction in the second quarter 2022 was related to Trust Department tax compliance matters. |
| o | Salaries and employee benefits expense of $10,777,000 increased $512,000 from the second quarter 2022, including an increase in base salaries expense of $555,000, or 8.0%. The increase in base salaries expense includes the effects of annual merit-based increases and an increase of 7 full-time employees to 412 at June 30, 2023 from 405 at June 30, 2022. |
| o | Data processing and telecommunications of $1,900,000 increased $180,000 from the second quarter 2022, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities. |
| o | Professional fees of $564,000 increased $84,000, mainly due to increased costs related to commercial loan-related external credit reviews. |
40
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Six Months Ended June 30, 2023 as Compared to Six Months Ended June 30, 2022
Net income for the six-month period ended June 30, 2023 was $12,296,000, or $0.80 per diluted share, as compared to $14,384,000, or $0.92 per diluted share, for the first six months of 2022. Significant variances were as follows:
| ● | Net interest income totaled $41,143,000 in the six months ended June 30, 2023, an increase of $1,186,000 over the total for the first six months of 2022. Average earning assets increased $131,499,000, with an increase in average loans of $188,542,000, or 12.0%, while interest-bearing due from banks decreased $34,926,000 and the average amortized cost balance of available-for-sale debt securities decreased $21,227,000. Average total deposits decreased $7,609,000, or 0.4%, while average total borrowed funds increased $138,329,000. The net interest margin was 3.62% for the first six months of 2023, down from 3.74% in the corresponding period of 2022. The interest rate spread decreased 0.46%, as the average rate on interest-bearing liabilities was higher by 1.19% while the average yield on earning assets increased 0.73%. |
| ● | Effective January 1, 2023, the Corporation adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, that required a change in accounting for credit losses on loans receivable from an incurred loss methodology to an expected credit loss methodology commonly referred to as “CECL.” Effective January 1, 2023, the Corporation recorded adjustments resulting from adopting CECL which increased the ACL on loans $2,104,000, increased the allowance for credit losses on off-balance sheet exposures $793,000, increased loans receivable $806,000, and decreased retained earnings (stockholders’ equity) $1,652,000. For the six months ended June 30, 2023, the provision for credit losses was $460,000, a reduction in expense of $739,000 from the first six months of 2022. The provision for the first six months of 2023 included a provision related to loans receivable of $524,000, partially offset by a credit related to off-balance sheet exposures of $64,000. The provision related to loans receivable was mainly attributable to loan growth, as the ACL as a percentage of gross loans receivable was 1.05% at June 30, 2023 as compared to 1.08% at January 1, 2023 upon the initial adoption of CECL. |
| ● | Noninterest income totaled $12,250,000 in the first six months of 2023, down $407,000 from the total for the first six months of 2022. Significant variances included the following: |
| o | Net gains from sale of loans of $213,000 decreased $389,000, reflecting a reduction in volume of residential mortgage loans sold. |
| o | Brokerage and insurance revenue of $795,000 decreased $293,000 due to lower volume of new transactions. |
| o | Loan servicing fees, net, of $312,000 decreased $256,000, as the fair value of servicing rights decreased $95,000 in the first six months of 2023 as compared to an increase of $152,000 in the first six months of 2022. |
| o | Other noninterest income of $2,358,000 increased $314,000 as dividends on FHLB-Pittsburgh stock totaled $507,000, an increase of $279,000. |
| ● | Noninterest expense totaled $37,809,000 for the first six months of 2023, an increase of $3,884,000 from the total for the first six months of 2022. Significant variances included the following: |
| o | Other noninterest expense of $5,886,000 increased $1,551,000. Within this category, significant variances included the following: |
| ● | Other operational losses totaled $171,000 in the first six months of 2023 as compared to a net reduction in expense of $182,000 in the first six months of 2022. Most of the reduction in expense in 2022 was related to Trust Department tax compliance matters. |
| ● | Legal fees totaled $513,000 in the first six months of 2023, an increase of $293,000, mainly due to fees incurred related to non-litigation-related corporate matters. |
41
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| ● | In the six-month period ended June 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, in the first six months of 2022, the allowance for disallowed SBA claims decreased $290,000, resulting in a decrease in expense of $290,000. At June 30, 2023, the allowance for disallowed SBA claims, which was included in accrued interest and other liabilities in the unaudited consolidated balance sheets, was $55,000. |
| ● | FDIC insurance expense increased $242,000, reflecting the impact of the increase in base deposit insurance assessment rate previously described. |
| o | Salaries and employee benefits expense of $22,204,000 increased $1,332,000, including an increase in base salaries expense of $1,168,000, or 8.6%. |
| o | Professional fees of $1,501,000 increased $532,000, including $389,000 of conversion costs related to a change in Wealth Management platform for providing brokerage and investment advisory services. |
| o | Data processing and telecommunications of $3,836,000 increased $493,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities. |
| o | Pennsylvania shares tax expense of $807,000 for the first six months of 2023 is lower by $169,000, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax. |
TABLE I – QUARTERLY FINANCIAL DATA
(Dollars In Thousands, |
|
For the Three Months Ended : |
|||||||||||||
Except Per Share Data) |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|||||
(Unaudited) |
|
2023 |
|
2023 |
|
2022 |
|
2022 |
|
2022 |
|||||
Interest income |
|
$ |
28,011 |
|
$ |
26,139 |
|
$ |
25,855 |
|
$ |
23,710 |
|
$ |
21,309 |
Interest expense |
|
|
7,649 |
|
|
5,358 |
|
|
3,563 |
|
|
2,831 |
|
|
1,684 |
Net interest income |
|
|
20,362 |
|
|
20,781 |
|
|
22,292 |
|
|
20,879 |
|
|
19,625 |
Provision (credit) for credit losses |
|
|
812 |
|
|
(352) |
|
|
2,262 |
|
|
3,794 |
|
|
308 |
Net interest income after provision (credit) for credit losses |
|
|
19,550 |
|
|
21,133 |
|
|
20,030 |
|
|
17,085 |
|
|
19,317 |
Noninterest income |
|
|
6,634 |
|
|
5,616 |
|
|
6,109 |
|
|
5,671 |
|
|
6,829 |
Noninterest expense |
|
|
18,722 |
|
|
19,087 |
|
|
16,587 |
|
|
17,443 |
|
|
17,039 |
Income before income tax provision |
|
|
7,462 |
|
|
7,662 |
|
|
9,552 |
|
|
5,313 |
|
|
9,107 |
Income tax provision |
|
|
1,419 |
|
|
1,409 |
|
|
1,773 |
|
|
858 |
|
|
1,618 |
Net income |
|
$ |
6,043 |
|
$ |
6,253 |
|
$ |
7,779 |
|
$ |
4,455 |
|
$ |
7,489 |
Net income attributable to common shares |
|
$ |
5,996 |
|
$ |
6,201 |
|
$ |
7,711 |
|
$ |
4,416 |
|
$ |
7,419 |
Basic earnings per common share |
|
$ |
0.39 |
|
$ |
0.40 |
|
$ |
0.50 |
|
$ |
0.29 |
|
$ |
0.48 |
Diluted earnings per common share |
|
$ |
0.39 |
|
$ |
0.40 |
|
$ |
0.50 |
|
$ |
0.29 |
|
$ |
0.48 |
42
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
NONINTEREST INCOME
TABLE II – COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands) |
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
June 30, |
|
|
$ |
|
% |
|
||||
|
|
2023 |
|
2022 |
|
|
Change |
|
Change |
|
||
Trust revenue |
|
$ |
1,804 |
|
$ |
1,715 |
|
$ |
89 |
|
5.2 |
% |
Brokerage and insurance revenue |
|
|
365 |
|
|
566 |
|
|
(201) |
|
(35.5) |
% |
Service charges on deposit accounts |
|
|
1,388 |
|
|
1,322 |
|
|
66 |
|
5.0 |
% |
Interchange revenue from debit card transactions |
|
|
1,010 |
|
|
1,056 |
|
|
(46) |
|
(4.4) |
% |
Net gains from sales of loans |
|
|
139 |
|
|
220 |
|
|
(81) |
|
(36.8) |
% |
Loan servicing fees, net |
|
|
190 |
|
|
358 |
|
|
(168) |
|
(46.9) |
% |
Increase in cash surrender value of life insurance |
|
|
152 |
|
|
137 |
|
|
15 |
|
10.9 |
% |
Other noninterest income |
|
|
1,587 |
|
|
1,456 |
|
|
131 |
|
9.0 |
% |
Realized losses on available-for-sale debt securities, net |
|
|
(1) |
|
|
(1) |
|
|
— |
|
0.0 |
% |
Total noninterest income |
|
$ |
6,634 |
|
$ |
6,829 |
|
$ |
(195) |
|
(2.9) |
% |
(Dollars in Thousands) |
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
June 30, |
|
|
$ |
|
% |
|
||||
|
|
2023 |
|
2022 |
|
|
Change |
|
Change |
|
||
Trust revenue |
|
$ |
3,581 |
|
$ |
3,501 |
|
$ |
80 |
|
2.3 |
% |
Brokerage and insurance revenue |
|
|
795 |
|
|
1,088 |
|
|
(293) |
|
(26.9) |
% |
Service charges on deposit accounts |
|
|
2,678 |
|
|
2,557 |
|
|
121 |
|
4.7 |
% |
Interchange revenue from debit card transactions |
|
|
2,017 |
|
|
2,019 |
|
|
(2) |
|
(0.1) |
% |
Net gains from sales of loans |
|
|
213 |
|
|
602 |
|
|
(389) |
|
(64.6) |
% |
Loan servicing fees, net |
|
|
312 |
|
|
568 |
|
|
(256) |
|
(45.1) |
% |
Increase in cash surrender value of life insurance |
|
|
290 |
|
|
272 |
|
|
18 |
|
6.6 |
% |
Other noninterest income |
|
|
2,358 |
|
|
2,044 |
|
|
314 |
|
15.4 |
% |
Realized gains on available-for-sale debt securities, net |
|
|
6 |
|
|
1 |
|
|
5 |
|
500.0 |
% |
Total noninterest income |
|
$ |
12,250 |
|
$ |
12,652 |
|
$ |
(402) |
|
(3.2) |
% |
43
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
NONINTEREST EXPENSE
TABLE III - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands) |
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
June 30, |
|
$ |
|
% |
|
|||||
|
|
2023 |
|
2022 |
|
Change |
|
Change |
|
|||
Salaries and employee benefits |
|
$ |
10,777 |
|
$ |
10,265 |
|
$ |
512 |
|
5.0 |
% |
Net occupancy and equipment expense |
|
|
1,323 |
|
|
1,308 |
|
|
15 |
|
1.1 |
% |
Data processing and telecommunications expense |
|
|
1,900 |
|
|
1,720 |
|
|
180 |
|
10.5 |
% |
Automated teller machine and interchange expense |
|
|
395 |
|
|
347 |
|
|
48 |
|
13.8 |
% |
Pennsylvania shares tax |
|
|
404 |
|
|
488 |
|
|
(84) |
|
(17.2) |
% |
Professional fees |
|
|
564 |
|
|
480 |
|
|
84 |
|
17.5 |
% |
Other noninterest expense |
|
|
3,359 |
|
|
2,431 |
|
|
928 |
|
38.2 |
% |
Total noninterest expense |
|
$ |
18,722 |
|
$ |
17,039 |
|
$ |
1,683 |
|
9.9 |
% |
(Dollars in Thousands) |
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
June 30, |
|
$ |
|
% |
|
|||||
|
|
2023 |
|
2022 |
|
Change |
|
Change |
|
|||
Salaries and employee benefits |
|
$ |
22,204 |
|
$ |
20,872 |
|
$ |
1,332 |
|
6.4 |
% |
Net occupancy and equipment expense |
|
|
2,725 |
|
|
2,719 |
|
|
6 |
|
0.2 |
% |
Data processing and telecommunications expense |
|
|
3,836 |
|
|
3,343 |
|
|
493 |
|
14.7 |
% |
Automated teller machine and interchange expense |
|
|
870 |
|
|
731 |
|
|
139 |
|
19.0 |
% |
Pennsylvania shares tax |
|
|
807 |
|
|
976 |
|
|
(169) |
|
(17.3) |
% |
Professional fees |
|
|
1,501 |
|
|
969 |
|
|
532 |
|
54.9 |
% |
Other noninterest expense |
|
|
5,866 |
|
|
4,315 |
|
|
1,551 |
|
35.9 |
% |
Total noninterest expense |
|
$ |
37,809 |
|
$ |
33,925 |
|
$ |
3,884 |
|
11.4 |
% |
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 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.
44
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 six-month periods ended June 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 June 30, 2023 and 2022
For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $20,601,000 in 2023 was $664,000 (3.3%) higher than in 2022. The increase in net interest income reflected the impact of growth in average earning assets of $131,391,000 (5.9%) in the second quarter 2023 as compared to the second quarter 2022, mainly attributable to loan growth. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income in the second quarter 2023 as compared to second quarter 2022 by $1,106,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $442,000. As presented in Table V, the Net Interest Margin was 3.53% in the second 2023 as compared to 3.62% in the second 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 2.98% in 2023 from 3.47% in 2022. The average yield on earning assets of 4.84% was 0.92% higher in 2023 as compared to 2022, and the average rate on interest-bearing liabilities of 1.86% in 2023 was 1.41% higher.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $28,250,000 in 2023, an increase of $6,629,000, or 30.7% from 2022.
Interest and fees from loans receivable increased $6,547,000 in 2023 as compared to 2022. The fully taxable equivalent yield on loans in 2023 increased to 5.62% from 4.67% in 2022, reflecting the effects of rising interest rates on new loan originations. Average outstanding loans receivable increased $198,967,000 (12.5%) to $1,787,851,000 in 2023 from $1,588,884,000 in 2022. The Corporation has experienced robust loan growth over the last three quarters of 2022 and first six months of 2023, including growth in commercial real estate and residential mortgage loans.
Income from interest-bearing due from banks totaled $309,000 in 2023, an increase of $217,000 from the total for 2022. The average yield on interest-bearing due from banks was 4.15% in 2023, up from 0.78% in 2022. The average balance of interest-bearing due from banks was $29,861,000 in 2023, down from $47,428,000 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 $2,865,000 in 2023, down $130,000 from 2022, as the average balance (at amortized cost) of available-for-sale debt securities decreased $49,013,000. The average yield on available-for-sale debt securities was 2.20% for 2023, up from 2.10% in 2022.
45
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $5,965,000 to $7,649,000 in 2023 from $1,684,000 in 2022.
Interest expense on deposits increased $3,969,000, as the average rate on interest-bearing deposits increased to 1.45% in 2023 from 0.32% in 2022. Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,948,405,000 for the second quarter 2023, down $14,586,000 (0.7%) from the second quarter 2022. Average time deposits increased $106,804,000 and average interest checking deposits increased $31,303,000, while the average total balance of money market accounts decreased $121,075,000 and average noninterest-bearing demand deposits decreased $23,474,000.
Interest expense on borrowed funds increased $1,996,000 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 $1,144,000 in 2023, up from $122,000 in 2022. The average balance of short-term borrowings increased to $87,479,000 in 2023 from $36,848,000 in 2022. The average rate on short-term borrowings was 5.25% in 2023 compared to 1.33% in 2022. Interest expense on long-term borrowings (FHLB advances) increased $1,001,000 to $1,056,000 in 2023 from $55,000 in 2022. The average balance of long-term borrowings was $110,982,000 in 2023, up from an average balance of $19,516,000 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 3.82% in 2023 compared to 1.13% in 2022.
Six-Month Periods Ended June 30, 2023 and 2022
For the six-month periods, fully taxable equivalent net interest income was $41,651,000 in 2023, which was $1,080,000 (2.7%) higher than in 2022. Similar to the discussion for the second quarter 2023, the increase in net interest income reflected the impact of growth in average earning assets of $131,499,000 (6.0%) for the first six months of 2023 as compared to the first six months of 2022, including significant loan growth. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for the six months ended June 30, 2023 over the six months ended June 30, 2022 by $2,227,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $1,147,000. As presented in Table V, the Net Interest Margin was 3.62% in the first six months of 2023 as compared to 3.74% in the first six 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 3.14% in 2023 from 3.60% in 2022. The average yield on earning assets of 4.75% was 0.73% higher in 2023 as compared to 2022, while the average rate on interest-bearing liabilities of 1.61% in 2023 was 1.19% higher.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $54,658,000 in 2023, an increase of $10,962,000 from 2022.
Interest and fees from loans receivable increased $10,569,000 in 2023 as compared to 2022. In the six-month period ended June 30, 2023, the fully taxable equivalent yield on loans was 5.53%, up from 4.84% in the first half of 2022, reflecting the effects of rising interest rates on new loan originations. Average outstanding loans receivable increased $188,542,000 (12.0%) to $1,757,028,000 in 2023 from $1,568,486,000 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 six months of 2023.
Income from interest-bearing due from banks totaled $587,000 in 2023, an increase of $428,000 from 2022. The average yield on interest-bearing due from banks was 3.85% in 2023, up from 0.49% in 2022. The average balance of interest-bearing due from banks was $30,744,000 in 2023, down from $65,670,000 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.
Interest income from available-for-sale debt securities decreased $26,000 in 2023 from 2022. The average balance of available-for-sale debt securities (at amortized cost) decreased to $531,981,000 in 2023 from $553,208,000 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 2.21% for 2023 as compared to 2.14% in 2022.
46
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
For the six-month periods, interest expense increased $9,882,000 to $13,007,000 in 2023 from $3,125,000 in 2022.
Interest expense on deposits increased $6,289,000, as the average rate on interest-bearing deposits increased to 1.20% in 2023 from 0.29% in 2022. Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,939,813,000 for the first six months of 2023, down $7,609,000 (0.3%) from the first six months of 2022. Average time deposits increased $71,146,000 and average interest checking deposits increased $34,706,000, while the average total balance of money market accounts decreased $106,746,000.
Interest expense on borrowed funds increased $3,593,000 in 2023 as compared to 2022. Interest expense on short-term borrowings of $2,241,000 in 2023 was up from $123,000 in 2022 as the average balance of short-term borrowings increased to $89,611,000 in 2023 from $19,394,000 in 2022. The average rate on short-term borrowings was 5.04% in 2023 compared to 1.28% in 2022. Interest expense on long-term borrowings (FHLB advances) increased $1,633,000 to $1,737,000 in 2023 from $104,000 in 2022. The average balance of long-term borrowings was $95,899,000 in 2023, up from an average balance of $22,791,000 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 3.65% in 2023 compared to 0.92% in 2022. Interest expense on subordinated debt decreased $159,000 to $461,000 in 2023 from $620,000 in 2022. The average balance of subordinated debt decreased to $24,634,000 in 2023 from $29,694,000 in 2022, and the average rate on subordinated debt decreased to 3.77% in 2023 from 4.21% in 2022. In the second quarter 2022, the Corporation redeemed subordinated debt with aggregate par values of $8.5 million and a weighted-average interest rate of 6.29%.
47
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE
|
|
Three Months Ended |
|
|
|
|
|
Six Months Ended |
|
|
|
||||||||
|
|
June 30, |
|
Increase/ |
. |
|
June 30, |
|
Increase/ |
||||||||||
(In Thousands) |
|
2023 |
|
2022 |
|
(Decrease) |
|
|
2023 |
|
2022 |
|
(Decrease) |
||||||
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing due from banks |
|
$ |
309 |
|
$ |
92 |
|
$ |
217 |
|
|
$ |
587 |
|
$ |
159 |
|
$ |
428 |
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
2,152 |
|
|
2,036 |
|
|
116 |
|
|
|
4,363 |
|
|
4,005 |
|
|
358 |
Tax-exempt |
|
|
713 |
|
|
959 |
|
|
(246) |
|
|
|
1,480 |
|
|
1,864 |
|
|
(384) |
Total available-for-sale debt securities |
|
|
2,865 |
|
|
2,995 |
|
|
(130) |
|
|
|
5,843 |
|
|
5,869 |
|
|
(26) |
Loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
24,360 |
|
|
17,721 |
|
|
6,639 |
|
|
|
46,788 |
|
|
35,695 |
|
|
11,093 |
Paycheck Protection Program |
|
|
2 |
|
|
206 |
|
|
(204) |
|
|
|
5 |
|
|
781 |
|
|
(776) |
Tax-exempt |
|
|
700 |
|
|
588 |
|
|
112 |
|
|
|
1,413 |
|
|
1,161 |
|
|
252 |
Total loans receivable |
|
|
25,062 |
|
|
18,515 |
|
|
6,547 |
|
|
|
48,206 |
|
|
37,637 |
|
|
10,569 |
Other earning assets |
|
|
14 |
|
|
19 |
|
|
(5) |
|
|
|
22 |
|
|
31 |
|
|
(9) |
Total Interest Income |
|
|
28,250 |
|
|
21,621 |
|
|
6,629 |
|
|
|
54,658 |
|
|
43,696 |
|
|
10,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
|
1,512 |
|
|
308 |
|
|
1,204 |
|
|
|
2,499 |
|
|
502 |
|
|
1,997 |
Money market |
|
|
1,112 |
|
|
369 |
|
|
743 |
|
|
|
1,985 |
|
|
631 |
|
|
1,354 |
Savings |
|
|
63 |
|
|
64 |
|
|
(1) |
|
|
|
126 |
|
|
125 |
|
|
1 |
Time deposits |
|
|
2,412 |
|
|
389 |
|
|
2,023 |
|
|
|
3,719 |
|
|
782 |
|
|
2,937 |
Total interest-bearing deposits |
|
|
5,099 |
|
|
1,130 |
|
|
3,969 |
|
|
|
8,329 |
|
|
2,040 |
|
|
6,289 |
Borrowed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
|
1,144 |
|
|
122 |
|
|
1,022 |
|
|
|
2,241 |
|
|
123 |
|
|
2,118 |
Long-term - FHLB advances |
|
|
1,056 |
|
|
55 |
|
|
1,001 |
|
|
|
1,737 |
|
|
104 |
|
|
1,633 |
Senior notes, net |
|
|
119 |
|
|
120 |
|
|
(1) |
|
|
|
239 |
|
|
238 |
|
|
1 |
Subordinated debt, net |
|
|
231 |
|
|
257 |
|
|
(26) |
|
|
|
461 |
|
|
620 |
|
|
(159) |
Total borrowed funds |
|
|
2,550 |
|
|
554 |
|
|
1,996 |
|
|
|
4,678 |
|
|
1,085 |
|
|
3,593 |
Total Interest Expense |
|
|
7,649 |
|
|
1,684 |
|
|
5,965 |
|
|
|
13,007 |
|
|
3,125 |
|
|
9,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
20,601 |
|
$ |
19,937 |
|
$ |
664 |
|
|
$ |
41,651 |
|
$ |
40,571 |
|
$ |
1,080 |
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 |
|
|
|
|
|
Six Months Ended |
|
|
|
||||||||
|
|
June 30, |
|
Increase/ |
|
|
June 30, |
|
Increase/ |
||||||||||
|
|
2023 |
|
2022 |
|
(Decrease) |
|
|
2023 |
|
2022 |
|
(Decrease) |
||||||
Net Interest Income Under U.S. GAAP |
|
$ |
20,362 |
|
$ |
19,625 |
|
$ |
737 |
|
|
$ |
41,143 |
|
$ |
39,957 |
|
$ |
1,186 |
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities |
|
|
103 |
|
|
191 |
|
|
(88) |
|
|
|
230 |
|
|
374 |
|
|
(144) |
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans |
|
|
136 |
|
|
121 |
|
|
15 |
|
|
|
278 |
|
|
240 |
|
|
38 |
Net Interest Income as adjusted to a fully taxable-equivalent basis |
|
$ |
20,601 |
|
$ |
19,937 |
|
$ |
664 |
|
|
$ |
41,651 |
|
$ |
40,571 |
|
$ |
1,080 |
48
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE V - Analysis of Average Daily Balances and Rates
(Dollars in Thousands) |
|
Three Months |
|
|
|
Three Months |
|
|
|
|
Six Months |
|
|
|
Six Months |
|
|
|
||||
|
|
Ended |
|
Rate of |
|
Ended |
|
Rate of |
|
|
Ended |
|
Rate of |
|
Ended |
|
Rate of |
|
||||
|
|
6/30/2023 |
|
Return/ |
|
6/30/2022 |
|
Return/ |
|
|
6/30/2023 |
|
Return/ |
|
6/30/2022 |
|
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 |
|
$ |
29,861 |
|
4.15 |
% |
$ |
47,428 |
|
0.78 |
% |
|
$ |
30,744 |
|
3.85 |
% |
$ |
65,670 |
|
0.49 |
% |
Available-for-sale debt securities, at amortized cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
395,725 |
|
2.18 |
% |
|
419,824 |
|
1.95 |
% |
|
|
402,878 |
|
2.18 |
% |
|
405,144 |
|
1.99 |
% |
Tax-exempt |
|
|
126,839 |
|
2.25 |
% |
|
151,753 |
|
2.53 |
% |
|
|
129,103 |
|
2.31 |
% |
|
148,064 |
|
2.54 |
% |
Total available-for-sale debt securities |
|
|
522,564 |
|
2.20 |
% |
|
571,577 |
|
2.10 |
% |
|
|
531,981 |
|
2.21 |
% |
|
553,208 |
|
2.14 |
% |
Loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,697,592 |
|
5.76 |
% |
|
1,494,165 |
|
4.76 |
% |
|
|
1,665,897 |
|
5.66 |
% |
|
1,469,894 |
|
4.90 |
% |
Paycheck Protection Program |
|
|
148 |
|
5.42 |
% |
|
9,272 |
|
8.91 |
% |
|
|
155 |
|
6.51 |
% |
|
14,034 |
|
11.22 |
% |
Tax-exempt |
|
|
90,111 |
|
3.12 |
% |
|
85,447 |
|
2.76 |
% |
|
|
90,976 |
|
3.13 |
% |
|
84,558 |
|
2.77 |
% |
Total loans receivable |
|
|
1,787,851 |
|
5.62 |
% |
|
1,588,884 |
|
4.67 |
% |
|
|
1,757,028 |
|
5.53 |
% |
|
1,568,486 |
|
4.84 |
% |
Other earning assets |
|
|
1,325 |
|
4.24 |
% |
|
2,321 |
|
3.28 |
% |
|
|
1,263 |
|
3.51 |
% |
|
2,153 |
|
2.90 |
% |
Total Earning Assets |
|
|
2,341,601 |
|
4.84 |
% |
|
2,210,210 |
|
3.92 |
% |
|
|
2,321,016 |
|
4.75 |
% |
|
2,189,517 |
|
4.02 |
% |
Cash |
|
|
23,084 |
|
|
|
|
23,114 |
|
|
|
|
|
22,682 |
|
|
|
|
21,915 |
|
|
|
Unrealized loss on securities |
|
|
(56,564) |
|
|
|
|
(36,675) |
|
|
|
|
|
(58,300) |
|
|
|
|
(19,686) |
|
|
|
Allowance for credit losses |
|
|
(18,795) |
|
|
|
|
(14,509) |
|
|
|
|
|
(17,929) |
|
|
|
|
(14,148) |
|
|
|
Bank-owned life insurance |
|
|
31,410 |
|
|
|
|
30,857 |
|
|
|
|
|
31,339 |
|
|
|
|
30,789 |
|
|
|
Bank premises and equipment |
|
|
21,140 |
|
|
|
|
21,556 |
|
|
|
|
|
21,328 |
|
|
|
|
21,301 |
|
|
|
Intangible assets |
|
|
55,228 |
|
|
|
|
55,656 |
|
|
|
|
|
55,279 |
|
|
|
|
55,710 |
|
|
|
Other assets |
|
|
69,213 |
|
|
|
|
55,735 |
|
|
|
|
|
68,278 |
|
|
|
|
50,373 |
|
|
|
Total Assets |
|
$ |
2,466,317 |
|
|
|
$ |
2,345,944 |
|
|
|
|
$ |
2,443,693 |
|
|
|
$ |
2,335,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
$ |
463,300 |
|
1.31 |
% |
$ |
431,997 |
|
0.29 |
% |
|
$ |
460,305 |
|
1.09 |
% |
$ |
425,599 |
|
0.24 |
% |
Money market |
|
|
328,581 |
|
1.36 |
% |
|
449,656 |
|
0.33 |
% |
|
|
346,514 |
|
1.16 |
% |
|
453,260 |
|
0.28 |
% |
Savings |
|
|
247,434 |
|
0.10 |
% |
|
255,578 |
|
0.10 |
% |
|
|
252,214 |
|
0.10 |
% |
|
252,389 |
|
0.10 |
% |
Time deposits |
|
|
375,557 |
|
2.58 |
% |
|
268,753 |
|
0.58 |
% |
|
|
344,201 |
|
2.18 |
% |
|
273,055 |
|
0.58 |
% |
Total interest-bearing deposits |
|
|
1,414,872 |
|
1.45 |
% |
|
1,405,984 |
|
0.32 |
% |
|
|
1,403,234 |
|
1.20 |
% |
|
1,404,303 |
|
0.29 |
% |
Borrowed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
|
87,479 |
|
5.25 |
% |
|
36,848 |
|
1.33 |
% |
|
|
89,611 |
|
5.04 |
% |
|
19,394 |
|
1.28 |
% |
Long-term - FHLB advances |
|
|
110,982 |
|
3.82 |
% |
|
19,516 |
|
1.13 |
% |
|
|
95,899 |
|
3.65 |
% |
|
22,791 |
|
0.92 |
% |
Senior notes, net |
|
|
14,789 |
|
3.23 |
% |
|
14,725 |
|
3.27 |
% |
|
|
14,781 |
|
3.26 |
% |
|
14,717 |
|
3.26 |
% |
Subordinated debt, net |
|
|
24,648 |
|
3.76 |
% |
|
26,476 |
|
3.89 |
% |
|
|
24,634 |
|
3.77 |
% |
|
29,694 |
|
4.21 |
% |
Total borrowed funds |
|
|
237,898 |
|
4.30 |
% |
|
97,565 |
|
2.28 |
% |
|
|
224,925 |
|
4.19 |
% |
|
86,596 |
|
2.53 |
% |
Total Interest-bearing Liabilities |
|
|
1,652,770 |
|
1.86 |
% |
|
1,503,549 |
|
0.45 |
% |
|
|
1,628,159 |
|
1.61 |
% |
|
1,490,899 |
|
0.42 |
% |
Demand deposits |
|
|
533,533 |
|
|
|
|
557,007 |
|
|
|
|
|
536,579 |
|
|
|
|
543,119 |
|
|
|
Other liabilities |
|
|
28,217 |
|
|
|
|
20,066 |
|
|
|
|
|
26,740 |
|
|
|
|
22,045 |
|
|
|
Total Liabilities |
|
|
2,214,520 |
|
|
|
|
2,080,622 |
|
|
|
|
|
2,191,478 |
|
|
|
|
2,056,063 |
|
|
|
Stockholders' equity, excluding accumulated other comprehensive loss |
|
|
296,015 |
|
|
|
|
293,985 |
|
|
|
|
|
297,797 |
|
|
|
|
294,985 |
|
|
|
Accumulated other comprehensive loss |
|
|
(44,218) |
|
|
|
|
(28,663) |
|
|
|
|
|
(45,582) |
|
|
|
|
(15,277) |
|
|
|
Total Stockholders' Equity |
|
|
251,797 |
|
|
|
|
265,322 |
|
|
|
|
|
252,215 |
|
|
|
|
279,708 |
|
|
|
Total Liabilities and Stockholders' Equity |
|
$ |
2,466,317 |
|
|
|
$ |
2,345,944 |
|
|
|
|
$ |
2,443,693 |
|
|
|
$ |
2,335,771 |
|
|
|
Interest Rate Spread |
|
|
|
|
2.98 |
% |
|
|
|
3.47 |
% |
|
|
|
|
3.14 |
% |
|
|
|
3.60 |
% |
Net Interest Income/Earning Assets |
|
|
|
|
3.53 |
% |
|
|
|
3.62 |
% |
|
|
|
|
3.62 |
% |
|
|
|
3.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits (Interest-bearing and Demand) |
|
$ |
1,948,405 |
|
|
|
$ |
1,962,991 |
|
|
|
|
$ |
1,939,813 |
|
|
|
$ |
1,947,422 |
|
|
|
| (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. |
49
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands) |
|
Three Months Ended 6/30/2023 vs. 6/30/2022 |
. |
|
Six Months Ended 6/30/2023 vs. 6/30/2022 |
||||||||||||||
|
|
Change in |
|
Change in |
|
Total |
|
|
Change in |
|
Change in |
|
Total |
||||||
|
|
Volume |
|
Rate |
|
Change |
|
|
Volume |
|
Rate |
|
Change |
||||||
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing due from banks |
|
$ |
(60) |
|
$ |
277 |
|
$ |
217 |
|
|
$ |
(127) |
|
$ |
555 |
|
$ |
428 |
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(125) |
|
|
241 |
|
|
116 |
|
|
|
(22) |
|
|
380 |
|
|
358 |
Tax-exempt |
|
|
(148) |
|
|
(98) |
|
|
(246) |
|
|
|
(226) |
|
|
(158) |
|
|
(384) |
Total available-for-sale debt securities |
|
|
(273) |
|
|
143 |
|
|
(130) |
|
|
|
(248) |
|
|
222 |
|
|
(26) |
Loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
2,623 |
|
|
4,016 |
|
|
6,639 |
|
|
|
5,103 |
|
|
5,990 |
|
|
11,093 |
Paycheck Protection Program |
|
|
(135) |
|
|
(69) |
|
|
(204) |
|
|
|
(545) |
|
|
(231) |
|
|
(776) |
Tax-exempt |
|
|
33 |
|
|
79 |
|
|
112 |
|
|
|
92 |
|
|
160 |
|
|
252 |
Total loans receivable |
|
|
2,521 |
|
|
4,026 |
|
|
6,547 |
|
|
|
4,650 |
|
|
5,919 |
|
|
10,569 |
Other earning assets |
|
|
(10) |
|
|
5 |
|
|
(5) |
|
|
|
(15) |
|
|
6 |
|
|
(9) |
Total Interest Income |
|
|
2,178 |
|
|
4,451 |
|
|
6,629 |
|
|
|
4,260 |
|
|
6,702 |
|
|
10,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
|
24 |
|
|
1,180 |
|
|
1,204 |
|
|
|
44 |
|
|
1,953 |
|
|
1,997 |
Money market |
|
|
(119) |
|
|
862 |
|
|
743 |
|
|
|
(182) |
|
|
1,536 |
|
|
1,354 |
Savings |
|
|
(2) |
|
|
1 |
|
|
(1) |
|
|
|
0 |
|
|
1 |
|
|
1 |
Time deposits |
|
|
197 |
|
|
1,826 |
|
|
2,023 |
|
|
|
253 |
|
|
2,684 |
|
|
2,937 |
Total interest-bearing deposits |
|
|
100 |
|
|
3,869 |
|
|
3,969 |
|
|
|
115 |
|
|
6,174 |
|
|
6,289 |
Borrowed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
|
376 |
|
|
646 |
|
|
1,022 |
|
|
|
1,168 |
|
|
950 |
|
|
2,118 |
Long-term - FHLB advances |
|
|
612 |
|
|
389 |
|
|
1,001 |
|
|
|
848 |
|
|
785 |
|
|
1,633 |
Senior notes, net |
|
|
0 |
|
|
(1) |
|
|
(1) |
|
|
|
1 |
|
|
0 |
|
|
1 |
Subordinated debt, net |
|
|
(16) |
|
|
(10) |
|
|
(26) |
|
|
|
(99) |
|
|
(60) |
|
|
(159) |
Total borrowed funds |
|
|
972 |
|
|
1,024 |
|
|
1,996 |
|
|
|
1,918 |
|
|
1,675 |
|
|
3,593 |
Total Interest Expense |
|
|
1,072 |
|
|
4,893 |
|
|
5,965 |
|
|
|
2,033 |
|
|
7,849 |
|
|
9,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
1,106 |
|
$ |
(442) |
|
$ |
664 |
|
|
$ |
2,227 |
|
$ |
(1,147) |
|
$ |
1,080 |
| (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 lower levels of pre-tax income in 2023, the income tax provision for the second quarter 2023 of $1,419,000 was $199,000 lower than the provision for the second quarter 2022 and the provision for the six months ended June 30, 2023 of $2,828,000 was $273,000 lower than the amount for the first six months of 2022. The effective tax rate (tax provision as a percentage of pre-tax income) was 19.0% in the second quarter 2023 compared to 17.8% in the second quarter 2022 and 18.7% for the first six months of 2023 as compared to 17.7% for the first six 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, state income taxes and other permanent differences.
50
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at June 30, 2023 and December 31, 2022 represents the following temporary difference components:
|
|
June 30, |
|
December 31, |
||
(In Thousands) |
|
2023 |
|
2022 |
||
Deferred tax assets: |
|
|
|
|
|
|
Unrealized holding losses on securities |
|
$ |
12,901 |
|
$ |
13,391 |
Allowance for credit losses on loans |
|
|
4,184 |
|
|
3,648 |
Purchase accounting adjustments on loans |
|
|
538 |
|
|
938 |
Deferred compensation |
|
|
1,244 |
|
|
1,149 |
Operating leases liability |
|
|
845 |
|
|
907 |
Deferred loan origination fees |
|
|
746 |
|
|
779 |
Net operating loss carryforward |
|
|
600 |
|
|
659 |
Accrued incentive compensation |
|
|
253 |
|
|
354 |
Other deferred tax assets |
|
|
1,281 |
|
|
1,115 |
Total deferred tax assets |
|
|
22,592 |
|
|
22,940 |
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
Defined benefit plans - ASC 835 |
|
|
122 |
|
|
129 |
Bank premises and equipment |
|
|
290 |
|
|
298 |
Core deposit intangibles |
|
|
587 |
|
|
633 |
Right-of-use assets from operating leases |
|
|
845 |
|
|
907 |
Other deferred tax liabilities |
|
|
61 |
|
|
89 |
Total deferred tax liabilities |
|
|
1,905 |
|
|
2,056 |
Deferred tax asset, net |
|
$ |
20,687 |
|
$ |
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 June 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.
51
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
The composition of the available-for-sale debt securities portfolio at June 30, 2023, December 31, 2022 and December 31, 2021 is as follows:
(Dollars In Thousands) |
|
June 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 |
|
$ |
33,931 |
|
$ |
30,743 |
|
$ |
35,166 |
|
$ |
31,836 |
|
$ |
25,058 |
|
$ |
24,912 |
|
Obligations of U.S. Government agencies |
|
|
22,899 |
|
|
20,552 |
|
|
25,938 |
|
|
23,430 |
|
|
23,936 |
|
|
24,091 |
|
Bank holding company debt securities |
|
|
28,948 |
|
|
23,325 |
|
|
28,945 |
|
|
25,386 |
|
|
18,000 |
|
|
17,987 |
|
Obligations of states and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt |
|
|
125,247 |
|
|
113,170 |
|
|
146,149 |
|
|
132,623 |
|
|
143,427 |
|
|
148,028 |
|
Taxable |
|
|
65,715 |
|
|
55,702 |
|
|
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 |
|
|
105,027 |
|
|
92,795 |
|
|
112,782 |
|
|
99,941 |
|
|
98,048 |
|
|
98,181 |
|
Residential collateralized mortgage obligations |
|
|
40,444 |
|
|
35,897 |
|
|
44,868 |
|
|
40,296 |
|
|
44,015 |
|
|
44,247 |
|
Commercial mortgage-backed securities |
|
|
76,780 |
|
|
65,517 |
|
|
91,388 |
|
|
79,686 |
|
|
86,926 |
|
|
87,468 |
|
Private label commercial mortgage-backed securities |
|
|
8,141 |
|
|
7,994 |
|
|
8,070 |
|
|
8,023 |
|
|
0 |
|
|
0 |
|
Total Available-for-Sale Debt Securities |
|
$ |
507,132 |
|
$ |
445,695 |
|
$ |
561,794 |
|
$ |
498,033 |
|
$ |
511,592 |
|
$ |
517,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Unrealized (Loss) Gain |
|
|
|
|
$ |
(61,437) |
|
|
|
|
$ |
(63,761) |
|
|
|
|
$ |
6,087 |
|
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost |
|
|
|
|
|
(12.1) |
% |
|
|
|
|
(11.3) |
% |
|
|
|
|
1.2 |
% |
Market Yield on 5-Year U.S. Treasury Obligations (a) |
|
|
|
|
|
4.13 |
% |
|
|
|
|
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 $61,437,000, or 12.1% at June 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 in 2022, resulted from changes in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 0.14% higher at June 30, 2023 in comparison to December 31, 2022, and 2.87% 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 June 30, 2023 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of June 30, 2023 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at June 30, 2023, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:
| ● | Bank holding company debt securities – All of the Corporation’s holdings of bank holding company debt securities were investment grade and there have been no payment defaults. There were seven securities with face amounts ranging from $3 million to $5 million, including one senior security and six subordinated securities. All of the issuers have publicly traded common stock. At June 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 June 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 – 70%; A – 7%. |
52
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
| ● | 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 June 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 June 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 June 30, 2023 of $1,814,510,000 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 2018 and 2019. 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 June 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 six 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 $143,000 at June 30, 2023.
At June 30, 2023, gross loans outstanding increased $74,040,000 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 second half of 2023 will depend on the impact of 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 $39,366,000 at June 30, 2023, down from $44,723,000 at December 31, 2022.
At June 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 $95,644,000, or 5.3% of total gross loans receivable. Within this segment, at June 30, 2023, there was one loan with a recorded investment of $2,591,000 risk rated as Special Mention with no related ACL, and one loan with a recorded investment of $1,381,000 risk rated as Substandard and nonaccrual with an ACL of $38,000. The remainder of the non-owner occupied commercial real estate loans for the primary purpose of office space utilization totaling $91,672,000 were accruing interest and risk rated Pass at June 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.
53
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 June 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 June 30, 2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,363,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2022 was $1,515,000.
At June 30, 2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $318,267,000, including loans sold through the MPF Xtra program of $152,930,000 and loans sold through the Original program of $165,337,000. 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 June 30, 2023 and December 31, 2022.
54
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE VII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands) |
|
June 30, |
|
December 31, |
||||||||||||||
|
|
2023 |
|
2022 |
|
2021 |
|
2020 |
|
2019 |
|
2018 |
||||||
Commercial real estate - nonowner occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonowner occupied |
|
$ |
505,519 |
|
$ |
454,386 |
|
$ |
358,352 |
|
$ |
328,662 |
|
$ |
208,579 |
|
$ |
115,128 |
Multi-family (5 or more) residential |
|
|
61,004 |
|
|
55,406 |
|
|
49,054 |
|
|
54,893 |
|
|
30,474 |
|
|
7,104 |
1-4 Family - commercial purpose |
|
|
167,260 |
|
|
165,805 |
|
|
175,027 |
|
|
198,918 |
|
|
147,121 |
|
|
35,176 |
Total commercial real estate - nonowner occupied |
|
|
733,783 |
|
|
675,597 |
|
|
582,433 |
|
|
582,473 |
|
|
386,174 |
|
|
157,408 |
Commercial real estate - owner occupied |
|
|
227,801 |
|
|
205,910 |
|
|
196,083 |
|
|
191,075 |
|
|
78,729 |
|
|
38,478 |
All other commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
80,270 |
|
|
95,368 |
|
|
118,488 |
|
|
222,923 |
|
|
67,288 |
|
|
49,947 |
Commercial lines of credit |
|
|
122,607 |
|
|
141,444 |
|
|
106,338 |
|
|
105,802 |
|
|
92,509 |
|
|
65,492 |
Political subdivisions |
|
|
84,456 |
|
|
86,663 |
|
|
75,401 |
|
|
46,295 |
|
|
46,054 |
|
|
49,037 |
Commercial construction and land |
|
|
80,391 |
|
|
60,892 |
|
|
59,505 |
|
|
41,000 |
|
|
32,717 |
|
|
11,126 |
Other commercial loans |
|
|
24,960 |
|
|
25,710 |
|
|
26,498 |
|
|
29,310 |
|
|
28,735 |
|
|
23,130 |
Total all other commercial loans |
|
|
392,684 |
|
|
410,077 |
|
|
386,230 |
|
|
445,330 |
|
|
267,303 |
|
|
198,732 |
Residential mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family - residential |
|
|
378,698 |
|
|
363,005 |
|
|
327,593 |
|
|
356,532 |
|
|
388,415 |
|
|
360,195 |
1-4 Family residential construction |
|
|
25,535 |
|
|
30,577 |
|
|
23,151 |
|
|
18,736 |
|
|
14,640 |
|
|
24,698 |
Total residential mortgage |
|
|
404,233 |
|
|
393,582 |
|
|
350,744 |
|
|
375,268 |
|
|
403,055 |
|
|
384,893 |
Consumer loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer lines of credit (including HELOCs) |
|
|
36,608 |
|
|
36,650 |
|
|
33,522 |
|
|
34,566 |
|
|
30,810 |
|
|
31,955 |
All other consumer |
|
|
19,401 |
|
|
18,224 |
|
|
15,837 |
|
|
15,497 |
|
|
16,151 |
|
|
16,097 |
Total consumer |
|
|
56,009 |
|
|
54,874 |
|
|
49,359 |
|
|
50,063 |
|
|
46,961 |
|
|
48,052 |
Total |
|
|
1,814,510 |
|
|
1,740,040 |
|
|
1,564,849 |
|
|
1,644,209 |
|
|
1,182,222 |
|
|
827,563 |
Less: allowance for credit losses on loans |
|
|
(19,056) |
|
|
(16,615) |
|
|
(13,537) |
|
|
(11,385) |
|
|
(9,836) |
|
|
(9,309) |
Loans, net |
|
$ |
1,795,454 |
|
$ |
1,723,425 |
|
$ |
1,551,312 |
|
$ |
1,632,824 |
|
$ |
1,172,386 |
|
$ |
818,254 |
Additional details regarding the composition of the nonowner occupied commercial real estate loan portfolio at June 30, 2023 is as follows:
NONOWNER OCCUPIED COMMERCIAL REAL ESTATE
(In Thousands) |
|
June 30, |
|
% of Nonowner |
|
% of |
|||
|
|
2023 |
|
Occupied CRE |
|
Total Loans |
|||
Industrial |
|
$ |
104,067 |
|
20.6 |
% |
|
5.7 |
% |
Office |
|
|
95,644 |
|
18.9 |
% |
|
5.3 |
% |
Retail |
|
|
91,635 |
|
18.1 |
% |
|
5.1 |
% |
Hotels |
|
|
73,998 |
|
14.6 |
% |
|
4.1 |
% |
Mixed Use |
|
|
62,940 |
|
12.5 |
% |
|
3.5 |
% |
Other |
|
|
77,235 |
|
15.3 |
% |
|
4.3 |
% |
Total Nonowner Occupied CRE Loans |
|
$ |
505,519 |
|
|
|
|
|
|
Total Gross Loans |
|
$ |
1,814,510 |
|
|
|
|
|
|
55
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 provision for credit losses for the second and first quarters of 2023, and for the six-month period ended June 30, 2023, is as follows:
(In Thousands) |
|
3 Months |
|
3 Months |
|
6 Months |
|||
|
|
Ended |
|
Ended |
|
Ended |
|||
|
|
June 30, |
|
March 31, |
|
June 30, |
|||
|
|
2023 |
|
2023 |
|
2023 |
|||
Provision (credit) for credit losses: |
|
|
|
|
|
|
|
|
|
Loans receivable |
|
$ |
836 |
|
$ |
(312) |
|
$ |
524 |
Off-balance sheet exposures (1) |
|
|
(24) |
|
|
(40) |
|
|
(64) |
Total provision (credit) for credit losses |
|
$ |
812 |
|
$ |
(352) |
|
$ |
460 |
| (1) | The provision (credit) 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. |
The provision for credit losses for the second quarter and six-month periods ended June 30, 2023 was mainly attributable to loan growth, as the ACL as a percentage of gross loans receivable was 1.05% at June 30, 2023 and March 31, 2023 as compared to 1.08% at January 1, 2023 upon initial adoption of CECL. The net impact of changes in qualitative factors and the economic forecast used to calculate the ACL at June 30, 2023 was not significant in comparison to March 31, 2023. In comparison, the credit for credit losses in the first quarter 2023 resulted mainly from a reduction in the allowance related to the commercial segment of the portfolio resulting from a reduction in qualitative factors applied to commercial loan pools, mainly due to an improvement in data used to evaluate commercial real estate values in the Corporation’s relevant market areas, along with a reduction in the historical net charge-off percentage for non-owner occupied commercial real estate. In the first quarter 2023, these adjustments were partially offset by the impact of an increase in the allowance based on changes in the economic forecast. Within the net provision for credit losses on loans in the first six months of 2023, the net provision related to specific loans was $156,000, including net charge-offs of $187,000 and a net decrease in specific allowances on loans of $31,000. In comparison, the provision for the first six months of 2022 included a net credit of $124,000 related to specific loans (net charge-offs of $189,000 offset by a net decrease in specific allowances on loans of $313,000).
Table X shows that total nonperforming assets as a percentage of total assets was 0.58% at June 30, 2023, down from 1.04% at December 31, 2022 and lower than that at year-end 2018 through 2021. Total nonperforming assets were $14.5 million at June 30, 2023, down from $25.6 million at December 31, 2022. Similarly, total loans individually evaluated for credit loss decreased to $9.1 million at June 30, 2023 from $19.4 million at December 31, 2022. The net decrease in nonperforming assets at June 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 $2,221,000 in the first six 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 $433,000 at June 30, 2023. These reductions were partially offset by the addition to nonaccrual of a commercial loan relationship totaling $1,931,000 at June 30, 2023.
56
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Based on an updated appraisal, the allowance related to the loans to this borrower was reduced from $182,000 at March 31, 2023 to $38,000 at June 30, 2023.
In the first six months of 2023, net charge-offs were minimal by historical standards, totaling $187,000, 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 six 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 June 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) |
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
June 30, |
|
June 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 |
|
|
(201) |
|
|
(221) |
|
|
|
(4,245) |
|
|
(1,575) |
|
|
(2,465) |
|
|
(379) |
|
|
(497) |
|
Recoveries |
|
|
14 |
|
|
32 |
|
|
|
68 |
|
|
66 |
|
|
101 |
|
|
57 |
|
|
366 |
|
Net charge-offs |
|
|
(187) |
|
|
(189) |
|
|
|
(4,177) |
|
|
(1,509) |
|
|
(2,364) |
|
|
(322) |
|
|
(131) |
|
Provision for credit losses |
|
|
524 |
|
|
1,199 |
|
|
|
7,255 |
|
|
3,661 |
|
|
3,913 |
|
|
849 |
|
|
584 |
|
Balance, end of period |
|
$ |
19,056 |
|
$ |
14,547 |
|
|
$ |
16,615 |
|
$ |
13,537 |
|
$ |
11,385 |
|
$ |
9,836 |
|
$ |
9,309 |
|
Net charge-offs as a % of average loans |
|
|
0.01 |
% |
|
0.01 |
% |
|
|
0.26 |
% |
|
0.09 |
% |
|
0.16 |
% |
|
0.03 |
% |
|
0.02 |
% |
57
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES
UPON ADOPTION OF CECL
(In Thousands) |
June 30, |
|
January 1, |
||
|
2023 |
|
2023 |
||
Loans individually evaluated |
$ |
720 |
|
$ |
751 |
Loans collectively evaluated: |
|
|
|
|
|
Commercial real estate - nonowner occupied |
|
10,138 |
|
|
9,641 |
Commercial real estate - owner occupied |
|
1,869 |
|
|
1,765 |
All other commercial loans |
|
3,587 |
|
|
3,914 |
Residential mortgage |
|
2,464 |
|
|
2,407 |
Consumer |
|
278 |
|
|
241 |
Total Allowance |
$ |
19,056 |
|
$ |
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 |
TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS
(Dollars In Thousands) |
|
June 30, |
|
As of December 31, |
|
||||||||||||||
|
|
2023 |
|
2022 |
|
2021 |
|
2020 |
|
2019 |
|
2018 |
|
||||||
Loans individually evaluated with a valuation allowance |
|
$ |
5,785 |
|
$ |
3,460 |
|
$ |
6,540 |
|
$ |
8,082 |
|
$ |
3,375 |
|
$ |
4,851 |
|
Loans individually evaluated without a valuation allowance |
|
|
3,314 |
|
|
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 |
|
$ |
9,099 |
|
$ |
19,358 |
|
$ |
15,734 |
|
$ |
17,818 |
|
$ |
5,486 |
|
$ |
9,774 |
|
Total loans past due 30-89 days and still accruing |
|
$ |
4,709 |
|
$ |
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 |
|
|
12,827 |
|
|
22,058 |
|
|
12,441 |
|
|
14,575 |
|
|
8,777 |
|
|
13,113 |
|
Total nonaccrual loans |
|
|
12,827 |
|
|
23,085 |
|
|
18,999 |
|
|
21,416 |
|
|
9,218 |
|
|
13,113 |
|
Total loans past due 90 days or more and still accruing |
|
|
1,164 |
|
|
2,237 |
|
|
2,219 |
|
|
1,975 |
|
|
1,207 |
|
|
2,906 |
|
Total nonperforming loans |
|
|
13,991 |
|
|
25,322 |
|
|
21,218 |
|
|
23,391 |
|
|
10,425 |
|
|
16,019 |
|
Foreclosed assets held for sale (real estate) |
|
|
459 |
|
|
275 |
|
|
684 |
|
|
1,338 |
|
|
2,886 |
|
|
1,703 |
|
Total nonperforming assets |
|
$ |
14,450 |
|
$ |
25,597 |
|
$ |
21,902 |
|
$ |
24,729 |
|
$ |
13,311 |
|
$ |
17,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans as a % of loans |
|
|
0.77 |
% |
|
1.46 |
% |
|
1.36 |
% |
|
1.42 |
% |
|
0.88 |
% |
|
1.94 |
% |
Total nonperforming assets as a % of assets |
|
|
0.58 |
% |
|
1.04 |
% |
|
0.94 |
% |
|
1.10 |
% |
|
0.80 |
% |
|
1.37 |
% |
Allowance for credit losses as a % of total loans |
|
|
1.05 |
% |
|
0.95 |
% |
|
0.87 |
% |
|
0.69 |
% |
|
0.83 |
% |
|
1.12 |
% |
58
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 $22,814,000 at June 30, 2023.
The Corporation’s outstanding, available, and total credit facilities at June 30, 2023 and December 31, 2022 are as follows:
|
|
Outstanding |
|
Available |
|
Total Credit |
||||||||||||
(In Thousands) |
|
June 30, |
|
December 31, |
|
June 30, |
|
December 31, |
|
June 30, |
|
December 31, |
||||||
|
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
||||||
Federal Home Loan Bank of Pittsburgh |
|
$ |
157,428 |
|
$ |
150,099 |
|
$ |
725,417 |
|
$ |
689,279 |
|
$ |
882,845 |
|
$ |
839,378 |
Federal Reserve Bank Discount Window |
|
|
0 |
|
|
0 |
|
|
21,903 |
|
|
23,107 |
|
|
21,903 |
|
|
23,107 |
Other correspondent banks |
|
|
0 |
|
|
0 |
|
|
95,000 |
|
|
95,000 |
|
|
95,000 |
|
|
95,000 |
Total credit facilities |
|
$ |
157,428 |
|
$ |
150,099 |
|
$ |
842,320 |
|
$ |
807,386 |
|
$ |
999,748 |
|
$ |
957,485 |
At June 30, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term advances of $30,500,000, long-term borrowings of $115,220,000 and letters of credit totaling $11,708,000. 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 June 30, 2023 resulting from increases in interest rates in 2022, 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 June 30, 2023, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $257,537,000.
Deposits totaled $2,010,118,000 at June 30, 2023, up $12,525,000 (0.6%) from $1,997,593,000 at December 31, 2022. Excluding brokered deposits, adjusted total deposits at June 30, 2023 were lower by $37,145,000 (1.9%) as compared to December 31, 2022. Brokered deposits, consisting mainly of short-term certificates of deposits, totaled $70,653,000 at June 30, 2023, an increase of $49,670,000 from December 31, 2022. Average total deposits of $1,948,405,000 for the second quarter 2023 were up $17,279,000 from the first quarter 2023 and were down $14,586,000 (0.7%) as compared to the second quarter 2022. For the six months ended June 30, 2023, average total deposits of $1,939,813,000 were down $7,609,000 (0.4%) as compared to the first six months of 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 $83.6 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 seasonal reductions in municipal deposits. As shown in the table below, at June 30, 2023, estimated uninsured deposits totaled $605.8 million, or 29.9% 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 $173.0 million at June 30, 2023. As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.4% of total deposits, 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 June 30, 2023.
59
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Available funding from these sources totaled 181.6% of uninsured deposits and 254.1% of total uninsured and uncollateralized deposits at June 30, 2023.
Uninsured Deposits Information |
|
June 30, |
December 31, |
||||
|
|
2023 |
2022 |
||||
Total Deposits - C&N Bank |
|
$ |
2,025,471 |
|
$ |
2,016,666 |
|
|
|
|
|
|
|
|
|
Estimated Total Uninsured Deposits |
|
$ |
605,801 |
|
$ |
689,435 |
|
Portion of Uninsured Deposits that are |
|
|
|
|
|
|
|
Collateralized |
|
|
172,976 |
|
|
205,886 |
|
Uninsured and Uncollateralized Deposits |
|
$ |
432,825 |
|
$ |
483,549 |
|
|
|
|
|
|
|
|
|
Uninsured and Uncollateralized Deposits as |
|
|
|
|
|
|
|
a % of Total Deposits |
|
|
21.4 |
% |
|
24.0 |
% |
|
|
|
|
|
|
|
|
Available Funding from Credit Facilities |
|
$ |
842,320 |
|
$ |
807,386 |
|
Fair Value of Available-for-sale Debt |
|
|
|
|
|
|
|
Securities in Excess of Pledging Obligations |
|
|
257,537 |
|
|
272,475 |
|
Highly Liquid Available Funding |
|
$ |
1,099,857 |
|
$ |
1,079,861 |
|
|
|
|
|
|
|
|
|
Highly Liquid Available Funding as a % of |
|
|
|
|
|
|
|
Uninsured Deposits |
|
|
181.6 |
% |
|
156.6 |
% |
|
|
|
|
|
|
|
|
Highly Liquid Available Funding as a % of |
|
|
|
|
|
|
|
Uninsured and Uncollateralized Deposits |
|
|
254.1 |
% |
|
223.3 |
% |
Despite the reduction in deposits, excluding brokered deposits, in the first six 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 June 30, 2023; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
60
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Details concerning capital ratios at June 30, 2023 and December 31, 2022 are presented below. Management believes, as of June 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 June 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 |
|
||
June 30, 2023: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
285,832 |
|
15.86 |
% |
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
$ |
189,233 |
|
≥10.5 |
% |
C&N Bank |
|
|
271,580 |
|
15.10 |
% |
143,881 |
|
≥8 |
% |
188,844 |
|
≥10.5 |
% |
179,852 |
|
≥10 |
% |
|
188,844 |
|
≥10.5 |
% |
Tier 1 capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
240,961 |
|
13.37 |
% |
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
|
153,188 |
|
≥8.5 |
% |
C&N Bank |
|
|
251,370 |
|
13.98 |
% |
107,911 |
|
≥6 |
% |
152,874 |
|
≥8.5 |
% |
143,881 |
|
≥8 |
% |
|
152,874 |
|
≥8.5 |
% |
Common equity tier 1 capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
240,961 |
|
13.37 |
% |
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
|
126,155 |
|
≥7 |
% |
C&N Bank |
|
|
251,370 |
|
13.98 |
% |
80,933 |
|
≥4.5 |
% |
125,896 |
|
≥7.0 |
% |
116,904 |
|
≥6.5 |
% |
|
125,896 |
|
≥7 |
% |
Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
240,961 |
|
9.81 |
% |
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
|
196,436 |
|
≥8 |
% |
C&N Bank |
|
|
251,370 |
|
10.30 |
% |
97,581 |
|
≥4 |
% |
N/A |
|
N/A |
|
121,976 |
|
≥5 |
% |
|
195,162 |
|
≥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. In the second quarter 2023, 237,187 shares were repurchased for a total cost of $4,635,000, at an average price of $19.54 per share. For the six months ended June 30, 2023, 314,617 shares were repurchased for a total cost of $6,297,000, at an average price of $20.01 per share. At June 30, 2023, there were 10,683 shares available to be repurchased under the program, all of which were repurchased in July 2023. Cumulatively, the Corporation repurchased 1,000,000 shares for a total cost of $23,086,000, at an average price of $23.09 per share. The Board of Directors has not announced a new treasury stock repurchase program, though the Board may consider doing so in the future depending on market conditions.
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.
61
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At June 30, 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 June 30, 2023, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 7.37%.
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 $48,536,000 at June 30, 2023 and $50,370,000 at December 31, 2022. The increase in stockholders’ equity in the first six months of 2023 from the change in accumulated other comprehensive loss resulted from a decrease in interest rates. Changes in accumulated other comprehensive loss are excluded from earnings and directly increase or decrease stockholders’ equity. To the extent unrealized losses on available-for-sale debt securities result from credit losses, unrealized losses are recorded as a charge against earnings. The securities section of Management’s Discussion and Analysis and 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 June 30, 2023.
62
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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. As described in more detail below, the Corporation made changes in the estimated rate sensitivity of nonmaturity deposits in the June 30, 2023 analysis presented in Table XI.
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 June 30, 2023 and December 31, 2022. In the analysis based on June 30, 2023 data, the amounts of net interest income and economic value of equity decrease, as compared to the amounts based on current interest rates, in both the upward and downward rate scenarios. The results based on June 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 June 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 $101.9 million lower at June 30, 2023 as compared to December 31, 2022, while time deposits were higher by $114.4 million. Further, the reduction in net interest income in the downward rate scenarios reflects the 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.
63
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 $48.5 million at June 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
June 30, 2023 Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Period Ending June 30, 2024 |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis Point |
|
|
Interest |
|
|
Interest |
|
|
Net Interest |
|
NII |
|
|
NII |
|
Change in Rates |
|
|
Income |
|
|
Expense |
|
|
Income (NII) |
|
% Change |
|
|
Risk Limit |
|
+400 |
|
$ |
141,215 |
|
$ |
70,429 |
|
$ |
70,786 |
|
(17.9) |
% |
|
25.0 |
% |
+300 |
|
|
136,134 |
|
|
59,460 |
|
|
76,674 |
|
(11.1) |
% |
|
20.0 |
% |
+200 |
|
|
131,088 |
|
|
49,815 |
|
|
81,273 |
|
(5.7) |
% |
|
15.0 |
% |
+100 |
|
|
126,012 |
|
|
41,499 |
|
|
84,513 |
|
(2.0) |
% |
|
10.0 |
% |
0 |
|
|
120,714 |
|
|
34,515 |
|
|
86,199 |
|
0.0 |
% |
|
0.0 |
% |
-100 |
|
|
115,263 |
|
|
30,065 |
|
|
85,198 |
|
(1.2) |
% |
|
10.0 |
% |
-200 |
|
|
109,748 |
|
|
25,753 |
|
|
83,995 |
|
(2.6) |
% |
|
15.0 |
% |
-300 |
|
|
103,803 |
|
|
22,025 |
|
|
81,778 |
|
(5.1) |
% |
|
20.0 |
% |
-400 |
|
|
97,541 |
|
|
18,961 |
|
|
78,580 |
|
(8.8) |
% |
|
25.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Value of Equity at June 30, 2023 |
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present |
|
|
Present |
|
|
Present |
|
|
|
|
|
|
Basis Point |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
|
|
|
|
Change in Rates |
|
|
Equity |
|
|
% Change |
|
|
Risk Limit |
|
|
|
|
|
|
+400 |
|
$ |
353,626 |
|
|
(21.8) |
% |
|
50.0 |
% |
|
|
|
|
|
+300 |
|
|
385,684 |
|
|
(14.7) |
% |
|
45.0 |
% |
|
|
|
|
|
+200 |
|
|
414,143 |
|
|
(8.4) |
% |
|
35.0 |
% |
|
|
|
|
|
+100 |
|
|
436,604 |
|
|
(3.4) |
% |
|
25.0 |
% |
|
|
|
|
|
0 |
|
|
451,990 |
|
|
0.0 |
% |
|
0.0 |
% |
|
|
|
|
|
-100 |
|
|
444,617 |
|
|
(1.6) |
% |
|
25.0 |
% |
|
|
|
|
|
-200 |
|
|
442,340 |
|
|
(2.1) |
% |
|
35.0 |
% |
|
|
|
|
|
-300 |
|
|
424,290 |
|
|
(6.1) |
% |
|
45.0 |
% |
|
|
|
|
|
-400 |
|
|
408,420 |
|
|
(9.6) |
% |
|
50.0 |
% |
|
|
|
|
|
64
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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 |
|
7.1 |
% |
|
25.0 |
% |
+300 |
|
|
125,127 |
|
|
30,816 |
|
|
94,311 |
|
4.8 |
% |
|
20.0 |
% |
+200 |
|
|
119,561 |
|
|
26,864 |
|
|
92,697 |
|
3.0 |
% |
|
15.0 |
% |
+100 |
|
|
113,703 |
|
|
22,912 |
|
|
90,791 |
|
0.8 |
% |
|
10.0 |
% |
0 |
|
|
107,451 |
|
|
18,961 |
|
|
88,490 |
|
0.0 |
% |
|
0.0 |
% |
-100 |
|
|
101,048 |
|
|
15,516 |
|
|
85,532 |
|
(5.0) |
% |
|
10.0 |
% |
-200 |
|
|
94,854 |
|
|
13,240 |
|
|
81,614 |
|
(9.3) |
% |
|
15.0 |
% |
-300 |
|
|
89,405 |
|
|
11,325 |
|
|
78,080 |
|
(13.3) |
% |
|
20.0 |
% |
-400 |
|
|
85,076 |
|
|
9,439 |
|
|
75,637 |
|
(16.0) |
% |
|
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 |
|
|
14.1 |
% |
|
50.0 |
% |
|
|
|
|
|
+300 |
|
|
496,186 |
|
|
13.6 |
% |
|
45.0 |
% |
|
|
|
|
|
+200 |
|
|
501,422 |
|
|
14.8 |
% |
|
35.0 |
% |
|
|
|
|
|
+100 |
|
|
501,991 |
|
|
14.9 |
% |
|
25.0 |
% |
|
|
|
|
|
0 |
|
|
496,650 |
|
|
0.0 |
% |
|
0.0 |
% |
|
|
|
|
|
-100 |
|
|
485,332 |
|
|
11.1 |
% |
|
25.0 |
% |
|
|
|
|
|
-200 |
|
|
468,195 |
|
|
7.2 |
% |
|
35.0 |
% |
|
|
|
|
|
-300 |
|
|
445,129 |
|
|
1.9 |
% |
|
45.0 |
% |
|
|
|
|
|
-400 |
|
|
417,505 |
|
|
(4.4) |
% |
|
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.
65
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
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. As of June 30, 2023, 989,317 shares had been repurchased under the repurchase program. On July 11, 2023, the Corporation announced that it had completed the treasury stock repurchase program. The Board of Directors has not announced a new treasury stock repurchase program, though the Board may consider doing so in the future depending on market conditions.
The following table sets forth a summary of the purchases by the Corporation of its common stock during the second quarter 2023.
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Total Number of |
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Maximum |
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Shares |
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Number of |
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Purchased |
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Shares that May |
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as Part of |
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Yet |
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Publicly |
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be Purchased |
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Total Number |
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Average |
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Announced |
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Under |
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|
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of Shares |
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Price Paid |
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Plans |
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the Plans or |
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Period |
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Purchased |
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per Share |
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or Programs |
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Programs |
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April 1 - 30, 2023 |
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104,221 |
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$ |
20.21 |
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856,351 |
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143,649 |
May 1 - 31, 2023 |
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90,708 |
|
$ |
18.48 |
|
947,059 |
|
52,941 |
June 1 - 30, 2023 |
|
42,258 |
|
$ |
20.15 |
|
989,317 |
|
10,683 |
66
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
During the three months ended June 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.
67
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Item 6. Exhibits
3.1 |
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Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 10-Q filed May 6, 2022 |
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3.2 |
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Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 8-K filed February 18, 2022 |
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4. |
Instruments defining the rights of Security holders, including Indentures |
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4.1 |
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Incorporated by reference to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021 |
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4.2 |
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Incorporated by reference to Exhibit A-2 to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021 |
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4.3 |
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Incorporated by reference to Exhibit 4.3 of the Corporation’s Form 8-K filed May 19, 2021 |
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31. |
Rule 13a-14(a)/15d-14(a) certifications: |
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31.1 |
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Filed herewith |
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31.2 |
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Filed herewith |
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32. |
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Filed herewith |
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101.INS |
Inline XBRL Instance Document. |
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Filed herewith |
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101.SCH |
Inline XBRL Schema Document. |
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Filed herewith |
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||
101.CAL |
Inline XBRL Calculation Linkbase Document. |
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Filed herewith |
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101.DEF |
Inline XBRL Definition Linkbase Document. |
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Filed herewith |
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101.LAB |
Inline XBRL Label Linkbase Document. |
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Filed herewith |
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101.PRE |
Inline XBRL Presentation Linkbase Document. |
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Filed herewith |
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104 |
The cover page of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL (contained in Exhibit 101). |
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Filed herewith |
68
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.
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CITIZENS & NORTHERN CORPORATION |
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August 8, 2023 |
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By: /s/ J. Bradley Scovill |
Date |
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President and Chief Executive Officer |
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August 8, 2023 |
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By: /s/ Mark A. Hughes |
Date |
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Treasurer and Chief Financial Officer |
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69
Exhibit 31.1
CERTIFICATION
I, J. Bradley Scovill, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Citizens & Northern Corporation; |
2. |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
August 8, 2023 |
By: |
/s/ J. Bradley Scovill |
Date |
|
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Mark A. Hughes, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Citizens & Northern Corporation; |
2. |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
August 8, 2023 |
By: |
/s/ Mark A. Hughes |
Date |
|
Treasurer and Chief Financial Officer |
Exhibit 32
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of Citizens & Northern Corporation (the “Corporation”) on Form 10-Q for the quarterly period ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to each of the undersigned’s best knowledge and belief:
(a) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and
(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
August 8, 2023 |
By: |
/s/ J. Bradley Scovill |
Date |
|
President and Chief Executive Officer |
|
|
|
August 8, 2023 |
By: |
/s/ Mark A. Hughes |
Date |
|
Treasurer and Chief Financial Officer |
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|
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These certifications accompany this report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Corporation specifically incorporates them by reference.
A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request.