Table of Contents
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, 2024
or
◻ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________________.
Commission file number: 000-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA
23-2451943
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
90-92 MAIN STREET, WELLSBORO, PA 16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock Par Value $1.00
CZNC
NASDAQ Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ Accelerated filer ⌧ Non-accelerated filer ◻ Smaller reporting company ☐ Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ⌧
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock ($1.00 par value)
15,392,444 Shares Outstanding on July 31, 2024
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) – June 30, 2024 and December 31, 2023
Page 3
Consolidated Statements of Income (Unaudited) – Three-month and Six-month Periods Ended June 30, 2024 and 2023
Page 4
Consolidated Statements of Comprehensive Income (Unaudited) – Three-month and Six-month Periods Ended June 30, 2024 and 2023
Page 5
Consolidated Statements of Cash Flows (Unaudited) – Six-month Periods Ended June 30, 2024 and 2023
Page 6
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Six-month Periods Ended June 30, 2024 and 2023
Page 7
Notes to Unaudited Consolidated Financial Statements
Pages 8 –32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Pages 33 –55
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pages 56 – 58
Item 4. Controls and Procedures
Page 58
Part II. Other Information
Pages 58 – 60
Signatures
Page 61
2
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data) (Unaudited)
June 30,
December 31,
(In Thousands, Except Share and Per Share Data)
2024
2023
ASSETS
Cash and due from banks:
Noninterest-bearing
$
26,539
24,855
Interest-bearing
73,873
32,023
Total cash and due from banks
100,412
56,878
Available-for-sale debt securities, at fair value
401,145
415,755
Loans receivable
1,893,207
1,848,139
Allowance for credit losses
(20,382)
(19,208)
Loans, net
1,872,825
1,828,931
Bank-owned life insurance
50,301
63,674
Accrued interest receivable
9,165
9,140
Bank premises and equipment, net
21,966
21,632
Foreclosed assets held for sale
181
478
Deferred tax asset, net
18,375
17,441
Goodwill
52,505
Core deposit intangibles, net
2,274
2,469
Other assets
63,973
46,681
TOTAL ASSETS
2,593,122
2,515,584
LIABILITIES
Deposits:
501,774
490,554
1,557,535
1,524,252
Total deposits
2,059,309
2,014,806
Short-term borrowings
16,874
33,874
Long-term borrowings - FHLB advances
185,649
138,337
Senior notes, net
14,865
14,831
Subordinated debt, net
24,773
24,717
Accrued interest and other liabilities
28,431
26,638
TOTAL LIABILITIES
2,329,901
2,253,203
STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation
preference per share; no shares issued
0
Common stock, par value $1.00 per share; authorized 30,000,000 shares;
issued 16,030,172 and outstanding 15,375,982 at June 30, 2024;
issued 16,030,172 and outstanding 15,295,135 at December 31, 2023
16,030
Paid-in capital
143,352
144,388
Retained earnings
159,859
157,028
Treasury stock, at cost; 654,190 shares at June 30, 2024 and 735,037
shares at December 31, 2023
(14,659)
(16,628)
Accumulated other comprehensive loss
(41,361)
(38,437)
TOTAL STOCKHOLDERS' EQUITY
263,221
262,381
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Consolidated Statements of Income
(In Thousands Except Per Share Data) (Unaudited)
Three Months Ended
Six Months Ended
(In Thousands, Except Per Share Data)
INTEREST INCOME
Interest and fees on loans:
Taxable
27,490
24,362
54,193
46,793
Tax-exempt
594
564
1,139
1,135
Income from available-for-sale debt securities:
2,137
2,152
4,273
4,363
560
610
1,113
1,250
Other interest and dividend income
545
323
944
609
Total interest and dividend income
31,326
28,011
61,662
54,150
INTEREST EXPENSE
Interest on deposits
9,314
5,099
18,205
8,329
Interest on short-term borrowings
360
1,144
957
2,241
Interest on long-term borrowings - FHLB advances
1,855
1,056
3,311
1,737
Interest on senior notes, net
120
119
240
239
Interest on subordinated debt, net
232
231
463
461
Total interest expense
11,881
7,649
23,176
13,007
Net interest income
19,445
20,362
38,486
41,143
Provision for credit losses
565
812
1,519
460
Net interest income after provision for credit losses
18,880
19,550
36,967
40,683
NONINTEREST INCOME
Trust revenue
2,014
1,804
3,911
3,581
Brokerage and insurance revenue
527
365
1,066
795
Service charges on deposit accounts
1,472
1,388
2,790
2,678
Interchange revenue from debit card transactions
1,089
1,010
2,102
2,017
Net gains from sale of loans
235
139
426
213
Loan servicing fees, net
130
190
312
Increase in cash surrender value of life insurance
444
152
914
290
Other noninterest income
1,943
1,587
2,960
2,358
Realized (losses) gains on available-for-sale debt securities, net
(1)
6
Total noninterest income
7,854
6,634
14,529
12,250
NONINTEREST EXPENSE
Salaries and employee benefits
11,023
10,777
22,585
22,204
Net occupancy and equipment expense
1,333
1,323
2,783
2,725
Data processing and telecommunications expense
2,003
1,900
3,995
3,836
Automated teller machine and interchange expense
473
395
960
870
Pennsylvania shares tax
434
404
867
807
Professional fees
552
1,070
1,501
Other noninterest expense
3,437
3,359
5,299
5,866
Total noninterest expense
19,255
18,722
37,559
37,809
Income before income tax provision
7,479
7,462
13,937
15,124
Income tax provision
1,366
1,419
2,518
2,828
NET INCOME
6,113
6,043
11,419
12,296
EARNINGS PER COMMON SHARE - BASIC
0.40
0.39
0.74
0.80
EARNINGS PER COMMON SHARE - DILUTED
4
Consolidated Statements of Comprehensive Income
(In Thousands) (Unaudited)
(In Thousands)
Net income
Available-for-sale debt securities:
Unrealized holding (losses) gains on available-for-sale debt securities
(812)
(6,663)
(3,586)
2,330
Reclassification adjustment for losses (gains) realized in income
1
(6)
Other comprehensive (loss) income on available-for-sale debt securities
(6,662)
2,324
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses
394
(8)
Amortization of prior service cost and net actuarial loss and curtailment gain included in net periodic benefit cost
(20)
(14)
(510)
(28)
Other comprehensive loss on pension and postretirement obligations
(116)
(36)
Other comprehensive (loss) income before income tax
(832)
(6,676)
(3,702)
2,288
Income tax related to other comprehensive loss (income)
177
1,400
778
(483)
Net other comprehensive (loss) income
(655)
(5,276)
(2,924)
1,805
Comprehensive income
5,458
767
8,495
14,101
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Realized gains on available-for-sale debt securities, net
Net amortization of securities
862
1,038
(914)
(290)
Depreciation and amortization of bank premises and equipment
1,054
1,104
Net accretion of purchase accounting adjustments
(128)
(158)
Stock-based compensation
716
695
Deferred income taxes
(156)
153
Decrease in fair value of servicing rights
43
95
(426)
(213)
Origination of loans held for sale
(13,829)
(6,552)
Proceeds from sales of loans held for sale
13,033
6,768
Increase in accrued interest receivable and other assets
(300)
(351)
Increase in accrued interest payable and other liabilities
1,363
2,291
Other
106
13
Net Cash Provided by Operating Activities
14,362
17,343
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit
250
1,750
Proceeds from sales of available-for-sale debt securities
18,357
Proceeds from calls and maturities of available-for-sale debt securities
18,174
35,273
Purchase of available-for-sale debt securities
(8,012)
(2,000)
Redemption of Federal Home Loan Bank of Pittsburgh stock
5,241
12,975
Purchase of Federal Home Loan Bank of Pittsburgh stock
(6,491)
(13,577)
Purchase of Federal Reserve Bank stock
(24)
Net increase in loans
(45,120)
(73,725)
Purchase of premises and equipment
(1,404)
(551)
Proceeds from sale of foreclosed assets
293
28
109
Net Cash Used in Investing Activities
(37,065)
(21,389)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
44,507
12,545
Net decrease in short-term borrowings
(17,000)
(48,631)
Proceeds from long-term borrowings - FHLB advances
59,386
60,000
Repayments of long-term borrowings - FHLB advances
(12,055)
(7,052)
Purchases of treasury stock
(595)
(6,500)
Common dividends paid
(7,756)
(7,852)
Net Cash Provided by Financing Activities
66,487
2,510
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
43,784
(1,536)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
52,778
47,698
CASH AND CASH EQUIVALENTS, END OF PERIOD
96,562
46,162
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Decrease in accrued purchase of available-for-sale debt securities
Assets acquired through foreclosure of real estate loans
184
Increase in other assets from surrender of bank-owned life insurance
14,289
Leased assets obtained in exchange for new operating lease liabilities
187
Interest paid
22,399
12,379
Income taxes paid
2,716
2,807
Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands Except Share and Per Share Data) (Unaudited)
Accumulated
Common
Treasury
Paid-in
Retained
Comprehensive
Three Months Ended June 30, 2024
Shares
Stock
Capital
Earnings
Loss
Total
Balance, March 31, 2024
16,030,172
652,107
143,016
158,051
(40,706)
(14,735)
261,656
Other comprehensive loss, net
Cash dividends declared on common stock, $.28 per share
(4,305)
Shares issued for dividend reinvestment plan
(21,902)
(90)
495
405
Forfeiture of restricted stock
1,489
36
Stock-based compensation expense
390
Treasury stock purchases
22,496
(383)
Balance, June 30, 2024
654,190
Three Months Ended June 30, 2023
Balance, March 31, 2023
545,137
143,395
151,990
(42,797)
(13,050)
255,568
(4,308)
(22,992)
(117)
524
407
2,744
65
(65)
318
237,187
(4,635)
Balance, June 30, 2023
762,076
143,661
153,725
(48,073)
(17,226)
248,117
Six Months Ended June 30, 2024
Balance, December 31, 2023
735,037
Cash dividends declared on common stock, $.56 per share
(8,588)
(42,788)
968
Restricted stock granted
(72,860)
(1,646)
1,646
2,076
50
(50)
Purchase of restricted stock for tax withholding
10,229
(212)
Six Months Ended June 30, 2023
Balance, December 31, 2022
511,353
143,950
151,743
(49,878)
(12,520)
249,325
Adoption of ASU 2016-13 (CECL)
(1,652)
Other comprehensive income, net
(8,662)
(40,687)
(146)
956
810
(53,788)
(1,314)
1,314
476
(476)
8,615
(203)
314,617
(6,297)
7
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, 2023, 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.
Operating results reported for the six-month period ended June 30, 2024 might not be indicative of the results for the year ending December 31, 2024. 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 Standard Updates (ASUs) to communicate changes to the FASB Accounting Standard 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 financial statements issued in the foreseeable future.
CECL ADOPTION
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. The Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The following table illustrates the impact on the allowance for credit losses from the adoption of ASC 326:
As Reported
Under
Pre-ASC 326
Impact of
ASC 326
Adoption
January 1, 2023
December 31, 2022
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
21,323
20,884
439
150,091
Recent Issued but Not Yet Effective Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures which improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU No. 2023-09 is effective for public business entities
8
for annual periods beginning after December 15, 2024. The ASU may be adopted on a prospective or retrospective basis and early adoption is permitted. The Corporation is currently evaluating the impact the new guidance will have on disclosures related to income taxes.
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.
Basic
Less: Dividends and undistributed earnings allocated to participating securities
(47)
(86)
(99)
Net income attributable to common shares
6,066
5,996
11,333
12,197
Basic weighted-average common shares outstanding
15,264,533
15,231,505
15,247,557
15,320,101
Basic earnings per common share (a)
Diluted
Dilutive effect of potential common stock arising from stock options
265
Diluted weighted-average common shares outstanding
15,320,366
Diluted earnings per common share (a)
Weighted-average nonvested restricted shares outstanding
118,605
120,300
115,844
124,343
Anti-dilutive stock options are excluded from earnings per share calculations. There were no anti-dilutive instruments outstanding in the three-month and six-month periods ended June 30, 2024. 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.
9
3. COMPREHENSIVE INCOME
Comprehensive income 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:
Before-Tax
Income Tax
Net-of-Tax
Amount
Effect
Unrealized holding losses on available-for-sale debt securities
173
(639)
Reclassification adjustment for (gains) realized in income
Other comprehensive loss from available-for-sale debt securities
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost
(16)
Other comprehensive loss on unfunded retirement obligations
Total other comprehensive loss
1,397
(5,266)
Reclassification adjustment for losses realized in income
(5,265)
(11)
754
(2,832)
(83)
311
107
(403)
24
(92)
Unrealized holding gains on available-for-sale debt securities
(491)
1,839
(5)
Other comprehensive income from available-for-sale debt securities
(490)
1,834
(7)
(22)
Other comprehensive income on unfunded retirement obligations
(29)
Total other comprehensive income
10
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
Reclassification adjustment for (gains) losses realized in income (before-tax)
Amortization of prior service cost and net actuarial loss and curtailment gain included in net periodic benefit cost (before-tax)
Income tax effect
Changes in the components of accumulated other comprehensive (loss) income are as follows and are presented net of tax:
Unrealized
(Losses)
Unfunded
Gains
Retirement
on Securities
Obligations
(Loss) Income
Balance, beginning of period
(41,071)
Other comprehensive loss during three months ended June 30, 2024
Balance, end of period
(41,710)
349
(43,271)
474
Other comprehensive loss during three months ended June 30, 2023
(48,536)
(38,878)
441
Other comprehensive loss during six months ended June 30, 2024
(50,370)
492
Other comprehensive income during six months ended June 30, 2023
4. CASH AND DUE FROM BANKS
Cash and due from banks at June 30, 2024 and December 31, 2023 include the following:
Cash and cash equivalents
Certificates of deposit
3,850
4,100
11
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, 2024 and December 31, 2023 are summarized as follows:
June 30, 2024
Gross
Amortized
Holding
Fair
Cost
Losses
Value
Obligations of the U.S. Treasury
10,323
(1,066)
9,257
Obligations of U.S. Government agencies
10,582
(1,232)
9,350
Bank holding company debt securities
28,955
(5,298)
23,657
Obligations of states and political subdivisions:
113,659
247
(11,886)
102,020
56,294
(8,813)
47,481
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities
104,708
(10,834)
93,874
Residential collateralized mortgage obligations
46,623
(4,058)
42,565
Commercial mortgage-backed securities
74,510
(9,792)
64,718
Private label commercial mortgage-backed securities
8,290
(67)
8,223
Total available-for-sale debt securities
453,944
(53,046)
December 31, 2023
12,325
(1,035)
11,290
11,119
(1,173)
9,946
28,952
(5,452)
23,500
113,464
(9,576)
104,199
58,720
(8,609)
50,111
105,549
40
(10,184)
95,405
50,212
(3,750)
46,462
76,412
(9,730)
66,682
8,215
(55)
8,160
464,968
351
(49,564)
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, 2024 and December 31, 2023 for which an allowance for credit losses has not been recorded:
12
Less Than 12 Months
12 Months or More
1,921
(23)
95,837
(11,863)
97,758
13,586
(111)
80,288
(10,723)
12,945
(160)
29,620
(3,898)
28,452
(294)
368,431
(52,752)
396,883
1,595
(9)
8,351
(1,164)
3,257
96,758
(9,552)
100,015
49,961
3,334
(27)
84,297
(10,157)
87,631
3,588
(2)
32,808
(3,748)
36,396
2,327
64,355
(9,714)
22,261
(133)
371,320
(49,431)
393,581
Gross realized gains and losses from available-for-sale debt securities were as follows:
Gross realized gains from sales
89
Gross realized losses from sales
(10)
Net realized (losses) gains
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, 2024. 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.
Due in one year or less
10,983
10,847
Due from one year through five years
29,973
27,736
Due from five years through ten years
77,475
67,081
Due after ten years
101,382
86,101
Sub-total
219,813
191,765
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.
Investment securities carried at $178,513,000 at June 30, 2024 and $232,437,000 at December 31, 2023 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.
A summary of information management considered in evaluating debt and equity securities for credit losses at June 30, 2024 and December 31, 2023 is provided below.
Debt Securities
As reflected in the table above, gross unrealized holding losses on available-for-sale debt securities totaled $53,046,000 at June 30, 2024 and $49,564,000 at December 31, 2023. At June 30, 2024, 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 have occurred subsequent to the purchase of most of the securities.
At June 30, 2024 and December 31, 2023, 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, 2024 and December 31, 2023, 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 allowance for credit losses (“ACL”) required on available-for-sale debt securities in an unrealized loss position at June 30, 2024 and December 31, 2023.
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
14
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 $16,464,000 at June 30, 2024 and $15,214,000 at December 31, 2023. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at June 30, 2024 and December 31, 2023. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.
In July 2023, C&N Bank became a member of the Federal Reserve System. As a member, C&N Bank is required to purchase and maintain stock in the Federal Reserve Bank of Philadelphia. There is no active market for Federal Reserve Bank stock, and it must ordinarily be redeemed by the Federal Reserve Bank of Philadelphia in order to be liquidated. C&N Bank’s investment in Federal Reserve Bank stock, included in other assets in the consolidated balance sheets, was $6,276,000 at June 30, 2024 and $6,252,000 at December 31, 2023.
The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of $858,000 at June 30, 2024 and $871,000 December 31, 2023, consisting exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $142,000 at June 30, 2024 and $129,000 at December 31, 2023. 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 $9,000 in the second quarter 2024, a loss of $14,000 in the second quarter 2023, a loss of $13,000 in the six-month period ended June 30, 2024 and no net gain or loss in the six-month period ended June 30, 2023.
6. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable at June 30, 2024 and December 31, 2023 are summarized as follows:
Summary of Loans by Type
Commercial real estate - non-owner occupied
723,964
737,342
Commercial real estate - owner occupied
267,169
237,246
All other commercial loans
431,106
399,693
Residential mortgage loans
409,824
413,714
Consumer loans
61,144
60,144
Less: allowance for credit losses on loans
In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $4,475,000 at June 30, 2024 and $4,459,000 at December 31, 2023.
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.
15
The following tables presents an analysis of past due loans as of June 30, 2024 and December 31, 2023:
As of June 30, 2024
Past Due
30-89
90+
Nonaccrual
Current
Days
Loans
8,527
715,437
470
2,506
264,193
63
4,147
426,896
1,967
4,077
403,780
588
20
322
60,214
3,088
19,579
1,870,520
As of December 31, 2023
2,215
126
8,412
726,589
849
1,575
234,822
229
2,593
395,548
5,365
326
3,627
404,396
617
145
59,142
9,275
3,190
15,177
1,820,497
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. 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. 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. 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.
16
The following table presents the recorded investment in loans by credit quality indicators by year of origination as of June 30, 2024:
Term Loans by Year of Origination
2022
2021
2020
Prior
Revolving
Pass
22,989
97,139
158,754
85,497
54,040
266,691
685,110
Special Mention
18,656
2,388
5,719
26,763
Substandard
64
12,027
12,091
Doubtful
Total commercial real estate - non-owner occupied
177,474
87,885
284,437
Year-to-date gross charge-offs
117
19,381
34,188
53,368
50,680
12,129
85,680
255,426
165
5,216
738
2,467
3,157
11,578
Total commercial real estate - owner occupied
39,404
54,106
53,147
89,002
31,494
66,797
78,764
51,753
24,537
29,004
120,166
402,515
411
9,039
31
310
392
10,183
1,242
5,146
325
1,387
10,308
18,408
Total all other commercial loans
31,905
89,045
56,899
24,893
30,701
130,866
60
18,229
55,539
83,693
52,879
37,745
156,960
405,045
32
85
4,662
4,779
Total residential mortgage loans
83,725
37,830
161,622
2,758
4,606
3,639
1,417
966
817
46,435
60,638
56
443
506
Total consumer loans
1,424
873
46,878
67
115
49
17
The following table presents the recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023:
2019
96,615
167,484
89,582
55,390
80,020
207,017
696,108
20,072
2,446
116
6,188
28,822
18
566
11,828
12,412
187,556
92,028
55,408
80,702
225,033
33,761
37,429
52,090
12,858
17,505
71,775
225,418
104
746
166
1,016
5,200
2,567
3,045
10,812
39,065
38,175
54,657
74,986
58,393
90,560
51,813
27,718
16,421
24,326
107,234
376,465
2,690
5,043
794
301
8,836
1,267
453
679
1,085
9,658
14,392
94,517
58,106
28,179
17,100
26,205
117,193
57,300
87,519
56,183
39,411
32,401
135,546
408,360
285
369
4,700
5,354
39,696
32,770
140,246
33
6,020
4,664
1,944
1,205
175
913
44,312
59,233
58
836
911
1,949
1,216
176
971
45,148
149
138
The following tables are a summary of the Corporation’s nonaccrual loans by major categories for the periods indicated.
Nonaccrual Loans with
Nonaccrual Loans
Total Nonaccrual
No Allowance
with an Allowance
4,642
3,885
2,228
278
1,697
2,450
12,966
6,613
1,111
7,301
1,281
294
1,132
191
7,391
7,786
The Corporation recognized interest income on nonaccrual loans of $285,000 and $516,000 in the three and six months ended June 30, 2024 and $196,000 and $427,000 in the three and six months ended June 30, 2023.
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, 2024 and 2023:
June 30, 2023
19
26
118
169
34
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:
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:
Allowance
8,526
493
648
2,507
234
503
1,277
90
15,180
1,230
11,264
743
The following table summarizes the activity related to the allowance for credit losses for the three and six months ended June 30, 2024 and 2023.
Commercial
All
real estate -
other
Residential
nonowner
owner
commercial
mortgage
Consumer
occupied
loans
12,533
2,718
3,580
769
423
20,023
Charge-offs
(119)
(236)
Recoveries
29
Provision (credit) for credit losses on loans
(239)
183
83
343
196
12,177
2,901
3,678
1,112
514
20,382
12,010
2,116
2,918
1,764
400
19,208
(60)
(416)
35
284
785
327
1,526
9,654
1,942
2,864
306
18,346
(120)
(134)
949
(387)
10,603
2,025
3,686
2,464
19,056
Unallocated
6,305
4,142
2,751
475
1,000
3,763
(88)
(344)
(234)
(1,000)
(33)
(163)
(201)
535
76
(363)
88
188
Modifications Made to Borrowers Experiencing Financial Difficulty
The Corporation closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Because the effect of most modifications made to borrowers experiencing financial difficulty 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. During the three and six months ended June 30, 2024 and June 30, 2023, the Corporation had no modifications to borrowers experiencing financial difficulty.
The Corporation closely monitors the performance of the loans modified to borrowers experiencing financial difficultly to understand the effectiveness of its modification efforts. The following table depicts the performance of two loans which were in non-accrual status at June 30, 2024 that were modified in the past twelve months:
Payment Status (Amortized Costs Basis)
90+ Days Past Due
Commercial real estate - non-owner occupied:
Non-owner occupied
2,504
1,381
The loan that was past due more than 90 days in the table above was in default with its modified terms at June 30, 2024.
At June 30, 2024 and December 31, 2023, the Corporation had no commitments to lend any additional funds on modified loans. Except as described above, at June 30, 2024 and June 30, 2023, the Corporation had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.
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:
Foreclosed residential real estate
25
47
The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:
Residential real estate in process of foreclosure
690
1,227
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The contract amounts of these financial instruments at June 30, 2024 and December 31, 2023 are as follows:
21
Dec. 31,
Commitments to extend credit
387,563
395,997
Standby letters of credit
57,532
19,158
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 $683,000 at June 30, 2024 and $690,000 at December 31, 2023, 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, 2024 and 2023:
Three Months
Six Months
Ended
Beginning Balance
684
1,178
Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13
Credit for unfunded commitments
(64)
Ending Balance, June 30
683
1,154
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, 2024 and December 31, 2023, the net carrying value of goodwill was $52,505,000.
Information related to core deposit intangibles is as follows:
Gross amount
6,639
Accumulated amortization
(4,365)
(4,170)
Net
Amortization expense related to core deposit intangibles is included in other noninterest expense in the consolidated statements of income, as follows:
Amortization expense
98
102
195
204
22
8. BORROWED FUNDS
SHORT-TERM BORROWINGS
Short-term borrowings (initial maturity within one year) include the following:
FHLB-Pittsburgh borrowings
15,000
31,500
Customer repurchase agreements
1,874
2,374
Total short-term borrowings
The Corporation had available credit with other correspondent banks totaling $75,000,000 at June 30, 2024 and December 31, 2023. These lines of credit are primarily unsecured. No amounts were outstanding at June 30, 2024 or December 31, 2023.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At June 30, 2024, the Corporation had available credit in the amount of $18,884,000 on this line with no outstanding advances. At December 31, 2023, the Corporation had available credit in the amount of $19,982,000 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 $19,718,000 at June 30, 2024 and $20,829,000 at December 31, 2023.
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, 2024 and December 31, 2023. The carrying value of the underlying securities was $1,880,000 at June 30, 2024 and $2,400,000 at December 31, 2023.
The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $1,347,570,000 at June 30, 2024 and $1,323,008,000 at December 31, 2023. 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 $16,464,000 at June 30, 2024 and $15,214,000 at December 31, 2023. The Corporation’s total credit facility with FHLB-Pittsburgh was $943,575,000 at June 30, 2024, including an unused (available) amount of $719,722,000. At December 31, 2023, the Corporation’s total credit facility with FHLB-Pittsburgh was $926,845,000, including an unused (available) amount of $737,824,000.
At June 30, 2024, short-term borrowings included short-term advances maturing in the third and fourth quarters of 2024 totaling $15,000,000 with a weighted average interest rate of 5.32%. At December 31, 2023, short-term borrowings included an overnight borrowing from FHLB-Pittsburgh of $6,500,000 at an interest rate of 5.68% and short-term advances maturing in the first quarter 2024 totaling $25,000,000 with a weighted average interest rate of 5.60%.
23
LONG-TERM BORROWINGS – FHLB ADVANCES
Long-term borrowings from FHLB-Pittsburgh are as follows:
Loans maturing in 2024 with a weighted-average rate of 2.96%
20,142
32,161
Loans maturing in 2025 with a weighted-average rate of 4.30%
44,572
44,627
Loans maturing in 2026 with a weighted-average rate of 4.61%
48,018
35,518
Loans maturing in 2027 with a weighted-average rate of 4.24%
34,571
24,031
Loans maturing in 2028 with a weighted-average rate of 4.30%
26,027
2,000
Loans maturing in 2029 with a weighted-average rate of 4.42%
12,319
Total long-term FHLB-Pittsburgh borrowings
Note: Weighted-average rates are presented as of June 30, 2024.
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 2024 and $34,000 for the six-month ended June 30, 2024, and $17,000 in the second quarter 2023 and $33,000 for the six-month ended June 30, 2023, was included in interest expense in the unaudited consolidated statements of income.
At June 30, 2024 and December 31, 2023, outstanding Senior Notes are as follows:
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
Total carrying value
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.
The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation. The Subordinated Notes rank junior in right to payment to the Corporation's current and future senior indebtedness, including the Senior Notes (described above). The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.
The Subordinated Notes were recorded, net of debt issuance costs of $563,000, at an initial carrying amount of $24,437,000. Debt issuance costs are amortized through June 1, 2026 as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Subordinated Notes totaling $28,000 in the second quarter 2024 and $56,000 for the six-month period ended June 30, 2024, and $27,000 in the second quarter 2023 and $54,000 for the six-month period ended June 30, 2023, was included in interest expense in the unaudited consolidated statements of income.
At June 30, 2024 and December 31, 2023, the carrying amounts of subordinated debt agreements are as follows:
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
9. STOCK-BASED COMPENSATION PLANS
The Corporation has a stock incentive plan for selected officers and the independent directors. The first quarter 2024 awards to employees vest ratably over three years, and the 2024 restricted stock awards for the independent directors vest over one year. There were no restricted stock awards granted in the three-month period ended June 30, 2024. Following is a summary of restricted stock awards granted in the six-month period ended June 30, 2024:
(Dollars in Thousands)
Aggregate
Grant
Date
Number of
Six Months Ended June 30, 2024 awards:
Time-based awards to independent directors
10,000
214
Time-based awards to employees
43,514
931
Performance-based awards to employees
19,346
371
72,860
1,516
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, 2024 is estimated to total $1,433,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $390,000 in the second quarter 2024 and $318,000 in the second quarter 2023. Total stock-based compensation expense attributable to restricted stock awards amounted to $716,000 in the six-month period ended June 30, 2024 and $695,000 in the six-month period ended June 30, 2023.
10. CONTINGENCIES
Class Action Litigation
On March 27, 2024, a putative class action lawsuit was filed in the US District Court for the Western District of Texas by investors in a purported Ponzi scheme operated by two individuals, one of whom maintained accounts at C&N Bank. The plaintiffs have sued C&N Bank, along with another bank, and additional law firm and accounting firm defendants. The case is styled Goldovsky, et al. v. Rausch, et al. Plaintiffs have asserted claims against C&N Bank and the other bank for aiding and abetting alleged violations of the Texas Securities Act, and additional claims against the legal and accounting professionals for statutory fraud, common law fraud, negligent misrepresentation, and knowing participation in breach of fiduciary duty. C&N Bank has filed motions to dismiss the case for wont of personal jurisdiction and failure to state a claim. The Plaintiffs have responded to those motions. The motions are pending. C&N Bank believes that it has substantial defenses, and it intends to defend itself against the plaintiffs’ allegations. Based on the information available to the Corporation, the Corporation does not believe at this time that a loss is probable in this matter, nor can a range of possible losses be determined. Accordingly, no accrual or range of loss has been included in the accompanying financial statements. The Corporation’s estimate may change from time to time, and actual losses could vary.
Other Matters
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 $147,650,000 at June 30, 2024 and $150,028,000 at December 31, 2023. There were no interest rate swaps originated in the six-month periods ended June 30, 2024, and 2023. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at June 30, 2024. The net impact on the consolidated statements of income from interest rate swaps was an increase in interest income on loans of $493,000 in the second quarter 2024 and $991,000 in the six-month period ended June 30, 2024 as compared to $439,000 in the second quarter 2023 and $784,000 in the six-months ended June 30, 2023.
The Corporation has entered into an RPA with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA In.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation purchased an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA Out.” The net impact on the consolidated statements of income from RPAs was an increase in other noninterest income of $1,000 in the second quarter 2024 and $2,000 in the six-month period ended June 30, 2024 as compared to $2,000 in the second quarter 2023 and $18,000 in the six months ended June 30, 2023.
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, 2024 and December 31, 2023:
At June 30, 2024
At December 31, 2023
Asset Derivatives
Liability Derivatives
Notional
Value (1)
Value (2)
Interest rate swap agreements
73,825
3,202
75,014
RPA Out
7,020
7,082
RPA In
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. There was interest-bearing cash pledged as collateral against the Corporation’s liability related to the interest rate swaps of $1,140,000 at June 30, 2024 and $1,360,000 at December 31, 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.
27
At June 30, 2024 and December 31, 2023, assets and liabilities measured at fair value and the valuation methods used are as follows:
Quoted Prices
Other Observable
Unobservable
in Active Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Fair Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
391,888
Marketable equity security
858
Servicing rights
2,720
Interest rate swap agreements, assets
Total recurring fair value measurements, assets
10,115
395,094
407,929
Recurring fair value measurements, liabilities:
Interest rate swap agreements, liabilities
Total recurring fair value measurements, liabilities
3,206
Nonrecurring fair value measurements, assets:
Loans individually evaluated for credit loss, net
5,383
Total nonrecurring fair value measurements, assets
5,564
404,465
871
2,659
12,161
407,259
422,079
Recurring fair value measurements, liabilities,
2,796
Impaired loans, net
7,043
7,521
Level 2 valuation techniques used to measure fair value for the financial instruments in the preceding tables are as follows:
Available-for-sale debt securities - Level 2 debt securities are valued by a third-party pricing service. The pricing service uses pricing models that vary based on asset class and incorporate available market information, including quoted prices of investment securities with similar characteristics. Because many fixed income securities do not trade on a daily basis, pricing models use available information, as applicable, through processes such as benchmark yield curves, benchmarking of like securities, sector groupings and matrix pricing.
Derivative instruments - Interest rate SWAP agreements, RPA Out and RPA In- The fair value of derivatives are based on valuation models using observable market data as of the measurement date, valued by a third-party pricing service using quantitative models that utilize multiple market inputs. The inputs include prices and indices to generate continuous yield or pricing curves, estimates of current and potential future credit exposure and calculated discounted cash flow factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
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.
At June 30, 2024 and December 31, 2023, 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
6/30/2024
Valuation
Method or Value As of
Asset
Technique
Input(s)
Discounted cash flow
Discount rate
13.00
%
Rate used through modeling period
Loan prepayment speeds
112.00
Weighted-average PSA
12/31/2023
131.00
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:
Servicing rights balance, beginning of period
2,731
2,585
2,653
Originations of servicing rights
57
Unrealized loss included in earnings
(68)
(12)
(43)
(95)
Servicing rights balance, end of period
2,607
Loans are individually evaluated for credit loss when they do not share similar risk characteristics as similar loans within its loan pool. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For individually evaluated 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.
30
At June 30, 2024 and December 31, 2023, 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)
Range (Weighted
Average)
Balance at
Allowance at
Discount at
Loans individually evaluated for credit loss:
Commercial real estate - nonowner occupied
3,392
Sales comparison
Discount to appraised value
25%-30% (27)
44
Sales comparison & SBA guaranty
99% (99)
1,947
0%- 85% (16)
Total loans individually evaluated for credit loss
Foreclosed assets held for sale - real estate:
Residential (1-4 family)
62% (62)
Commercial real estate
156
18%-77% (34)
Total foreclosed assets held for sale
6,653
22%-30% (25)
289
93% (93)
101
Liquidation & SBA guaranty
0%-76% (17)
20%-62% (50)
431
18%-50% (45)
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.
The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:
Hierarchy
Carrying
Level
Financial assets:
Level 1
Level 2
3,676
3,859
Restricted equity securities (included in other assets)
22,990
N/A
21,716
Level 3
1,784,727
1,750,336
Financial liabilities:
Deposits with no stated maturity
1,587,482
1,590,357
Time deposits
471,827
470,630
424,449
423,643
Long-term borrowings
184,756
137,775
Senior debt
13,163
12,706
Subordinated debt
22,499
22,750
Accrued interest payable
2,235
1,525
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:
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 2024 as Compared to Second Quarter 2023
Second quarter 2024 net income was $6,113,000, or $0.40 per diluted share, as compared to $6,043,000, or $0.39 per diluted share, in the second quarter 2023. Significant variances were as follows:
Six Months Ended June 30, 2024 as Compared to Six Months Ended June 30, 2023
Net income for the six-month period ended June 30, 2024 was $11,419,000, or $0.74 per diluted share, as compared to $12,296,000, or $0.80 per diluted share, for the first six months of 2023. Significant variances were as follows:
TABLE I – QUARTERLY FINANCIAL DATA
(Dollars In Thousands,
For the Three Months Ended :
Except Per Share Data)
March 31,
September 30,
(Unaudited)
Interest income
30,336
30,236
29,118
Interest expense
11,295
10,642
9,455
19,041
19,594
19,663
Provision (credit) for credit losses
954
951
(1,225)
Net interest income after provision (credit) for credit losses
18,087
18,643
20,888
Noninterest income
6,675
5,678
6,489
6,633
Noninterest expense
18,304
18,399
17,940
6,458
5,922
9,437
7,461
1,152
1,661
1,846
5,306
4,261
7,591
6,042
5,267
4,231
7,534
Basic earnings per common share
0.35
0.28
0.50
Diluted earnings per common share
TABLE II – COMPARISON OF NONINTEREST INCOME
Change
210
11.6
162
44.4
84
6.1
79
7.8
Net gains from sales of loans
96
69.1
(31.6)
292
192.1
356
22.4
Realized losses on available-for-sale debt securities, net
(100.0)
1,220
18.4
330
9.2
271
34.1
112
4.2
100.0
48
15.4
624
215.2
602
25.5
2,279
18.6
TABLE III - COMPARISON OF NONINTEREST EXPENSE
246
2.3
0.8
103
5.4
78
19.7
7.4
(2.1)
533
2.8
381
1.7
2.1
159
4.1
10.3
(431)
(28.7)
(567)
(9.7)
(250)
(0.7)
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
37
forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly.
Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables IV, V and VI include information regarding the Corporation’s net interest income for the three-month and six-month periods ended June 30, 2024 and 2023. 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. Management believes presentation of net interest income on a fully taxable-equivalent basis, which is a non-GAAP financial measure, 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 amount of net interest income on a fully taxable-equivalent basis reflected in these tables exceed the net interest income 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, 2024 and 2023
For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $19,647,000 in 2024 was $954,000 (4.6%) lower than in 2023. The decrease in net interest income reflected an increase in interest expense of $4,232,000 and an increase in interest income of $3,278,000. 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 2024 as compared to second quarter 2023 by $374,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $1,328,000. As presented in Table V, the Net Interest Margin was 3.31% in the second quarter 2024 as compared to 3.53% in the second quarter 2023, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 2.61% in 2024 from 2.98% in 2023. The average yield on earning assets of 5.32% was 0.48% higher in 2024 as compared to 2023, and the average rate on interest-bearing liabilities of 2.71% in 2024 was 0.85% higher.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $31,528,000 in 2024, an increase of $3,278,000, or 11.6% from 2023.
Interest and fees from loans receivable increased $3,158,000 in 2024 as compared to 2023. The fully taxable equivalent yield on loans in 2024 increased to 6.03% from 5.62% in 2023, reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased $95,535,000 (5.3%) to $1,883,386,000 in 2024 from $1,787,851,000 in 2023. The increase in average loans receivable includes the impact of growth in commercial real estate and other commercial loans.
Income from interest-bearing due from banks totaled $516,000 in 2024, an increase of $207,000 from the total for 2023. The average balance of interest-bearing due from banks was $43,139,000 in 2024, up from $29,861,000 in 2023. Within this category, the largest asset balance in 2024 and 2023 has been interest-bearing deposits held with the Federal Reserve. The average yield on interest-bearing due from banks was 4.81% in 2024, up from 4.15% in 2023.
Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, totaled $2,763,000 in 2024, down $102,000 from 2023, as the average balance (at amortized cost) of available-for-sale debt securities decreased $65,672,000 as indicated in Table V. The average yield on available-for-sale debt securities was 2.43% in 2024, up from 2.20% in 2023.
38
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $4,232,000 to $11,881,000 in 2024 from $7,649,000 in 2023.
Interest expense on deposits increased $4,215,000, as the average rate on interest-bearing deposits increased to 2.46% in 2024 from 1.45% in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,016,520,000 for the second quarter 2024, up $68,115,000 (3.5%) from the second quarter 2023. Within average total deposits, average brokered deposits (primarily time and money market) were $68,311,000 with an average interest rate of 5.20% in the second quarter 2024, up from $45,230,000 with an average interest rate of 4.52% in the second quarter 2023. The deposit mix has changed as businesses and consumers have become more interest-rate sensitive in light of higher market rates. In comparing the second quarter 2024 to the second quarter 2023, average time deposits increased $82,328,000 and average interest checking deposits increased $53,845,000, while average savings deposits decreased $39,904,000 and average noninterest-bearing demand deposits decreased $39,611,000.
Interest expense on short-term borrowings decreased $784,000 to $360,000 in 2024 from $1,144,000 in 2023. The average balance of short-term borrowings decreased to $27,732,000 in 2024 from $87,479,000 in 2023. The average rate on short-term borrowings was 5.22% in 2024 compared to 5.25% in 2023.
Interest expense on long-term borrowings (FHLB advances) increased $799,000 to $1,855,000 in 2024 from $1,056,000 in 2023. The average balance of long-term borrowings was $175,373,000 in 2024, up from an average balance of $110,982,000 in 2023. Over the last several months of 2023 and the first six months of 2024, the Corporation entered into FHLB advances maturing mainly in 2025 to 2029, effectively using the proceeds to reduce higher rate short-term borrowings. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 4.25% in 2024 compared to 3.82% in 2023.
Six-Month Periods Ended June 30, 2024 and 2023
For the six-month periods, fully taxable equivalent net interest income was $38,883,000 in 2024, which was $2,768,000 (6.6%) lower than in 2023. The decrease in net interest income reflected an increase in interest expense of $10,169,000 and an increase in interest income of $7,401,000. 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, 2024 over the six months ended June 30, 2023 by $1,236,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $4,004,000. As presented in Table V, the Net Interest Margin was 3.30% in the first six months of 2024 as compared to 3.62% in the first six months of 2023, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 2.62% in 2024 from 3.14% in 2023. The average yield on earning assets of 5.27% was 0.52% higher in 2024 as compared to 2023, while the average rate on interest-bearing liabilities of 2.65% in 2024 was 1.04% higher.
Interest income totaled $62,059,000 in 2024, an increase of $7,401,000 from 2023.
Interest and fees from loans receivable increased $7,387,000 in 2024 as compared to 2023. In the six-month period ended June 30, 2024, the fully taxable equivalent yield on loans was 5.97%, up from 5.53% in the first half of 2023, reflecting the effects of rising interest rates on new loan originations and floating-rate loans. Average outstanding loans receivable increased $114,288,000 (6.5%) to $1,871,316,000 in 2024 from $1,757,028,000 in 2023. As noted above, the Corporation has experienced growth in commercial real estate and other commercial loans in 2023 and in the first six months of 2024.
Income from interest-bearing due from banks totaled $899,000 in 2024, an increase of $312,000 from 2023. The average balance of interest-bearing due from banks was $37,932,000 in 2024, up from $30,744,000 in 2023. Within this category, the largest asset balance in 2024 and 2023 has been interest-bearing deposits held with the Federal Reserve. The average yield on interest-bearing due from banks was 4.77% in 2024, up from 3.85% in 2023.
39
Interest income from available-for-sale debt securities decreased $321,000 in 2024 from 2023. The average balance of available-for-sale debt securities (at amortized cost) decreased to $459,070,000 in 2024 from $531,981,000 in 2023, as proceeds from maturities and sales have been used to help fund loan growth. The average yield on available-for-sale debt securities was 2.42% for 2024 as compared to 2.21% in 2023.
For the six-month periods, interest expense increased $10,169,000 to $23,176,000 in 2024 from $13,007,000 in 2023.
Interest expense on deposits increased $9,876,000, as the average rate on interest-bearing deposits increased to 2.41% in 2024 from 1.20% in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,008,899,000 for the first six months of 2024, up $69,086,000 (3.6%) from the first six months of 2023. Within average total deposits, average brokered deposits (primarily time and money market) were $76,315,000 with an average interest rate of 5.21% in 2024, up from $30,785,000 with an average interest rate of 4.13% in 2023. Average time deposits increased $99,284,000 and average interest checking deposits increased $55,720,000, while average noninterest-bearing demand deposits decreased $49,045,000 and the average balance of savings accounts decreased $41,810,000.
Interest expense on borrowed funds increased $293,000 in 2024 as compared to 2023. Interest expense on short-term borrowings of $957,000 in 2024 was down from $2,241,000 in 2023 as the average balance of short-term borrowings decreased to $36,187,000 in 2024 from $89,611,000 in 2023. The average rate on short-term borrowings was 5.32% in 2024 compared to 5.04% in 2023. Interest expense on long-term borrowings (FHLB advances) increased $1,574,000 to $3,311,000 in 2024 from $1,737,000 in 2023. The average balance of long-term borrowings was $159,063,000 in 2024, up from an average balance of $95,899,000 in 2023. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 4.19% in 2024 compared to 3.65% in 2023.
More information regarding borrowed funds is provided in Note 8 to the unaudited consolidated financial statements.
TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE
Increase/
.
(Decrease)
Interest-bearing due from banks
516
309
207
899
587
(15)
626
713
(87)
1,249
1,480
(231)
2,763
2,865
(102)
5,522
5,843
(321)
Loans receivable:
3,128
7,400
730
700
1,413
(13)
Total loans receivable
28,220
25,062
3,158
55,593
48,206
7,387
Other earning assets
45
Total Interest Income
31,528
28,250
3,278
62,059
54,658
7,401
Interest-bearing deposits:
Interest checking
2,836
1,512
1,324
5,642
2,499
3,143
Money market
1,917
805
4,097
1,985
2,112
Savings
52
(19)
4,509
2,412
2,097
8,359
3,719
4,640
Total interest-bearing deposits
4,215
9,876
Borrowed funds:
Short-term
(784)
(1,284)
Long-term - FHLB advances
799
1,574
Total borrowed funds
2,550
4,971
4,678
Total Interest Expense
4,232
10,169
Net Interest Income
19,647
20,601
(954)
38,883
41,651
(2,768)
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.
Net Interest Income Under U.S. GAAP
(917)
(2,657)
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities
136
230
(94)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans
135
261
(17)
Net Interest Income as adjusted to a fully taxable-equivalent basis
41
TABLE V - Analysis of Average Daily Balances and Rates
Rate of
Return/
6/30/2023
Average
Cost of
Balance
Funds %
EARNING ASSETS
43,139
4.81
29,861
4.15
37,932
4.77
30,744
3.85
Available-for-sale debt securities, at amortized cost:
343,971
2.50
395,725
2.18
345,928
2.48
402,878
112,921
2.23
126,839
2.25
113,142
2.22
129,103
2.31
456,892
2.43
522,564
2.20
459,070
2.42
531,981
2.21
1,792,556
6.17
1,697,740
5.76
1,783,310
6.11
1,666,052
5.66
90,830
3.23
90,111
3.12
88,006
3.20
90,976
3.13
1,883,386
6.03
1,787,851
5.62
1,871,316
5.97
1,757,028
5.53
2,176
5.36
1,325
4.24
1,780
5.08
1,263
3.51
Total Earning Assets
2,385,593
5.32
2,341,601
4.84
2,370,098
5.27
2,321,016
4.75
Cash
22,396
23,084
21,422
22,682
Unrealized loss on securities
(56,765)
(56,564)
(53,807)
(58,300)
(20,290)
(18,795)
(19,887)
(17,929)
50,018
31,410
52,242
31,339
Bank premises and equipment
21,994
21,140
21,891
21,328
Intangible assets
54,827
55,228
54,876
55,279
89,859
69,213
86,369
68,278
Total Assets
2,547,632
2,466,317
2,533,204
2,443,693
INTEREST-BEARING LIABILITIES
517,145
463,300
1.31
516,025
460,305
1.09
340,038
2.27
328,581
1.36
351,451
2.34
346,514
1.16
207,530
0.10
247,434
210,404
252,214
457,885
3.96
375,557
2.58
443,485
3.79
344,201
1,522,598
2.46
1,414,872
1.45
1,521,365
2.41
1,403,234
1.20
27,732
5.22
87,479
5.25
36,187
89,611
5.04
175,373
4.25
110,982
3.82
159,063
4.19
95,899
3.65
14,856
3.25
14,789
14,848
14,781
3.26
24,759
3.77
24,648
3.76
24,745
24,634
242,720
237,898
4.30
234,843
4.26
224,925
Total Interest-bearing Liabilities
1,765,318
2.71
1,652,770
1.86
1,756,208
2.65
1,628,159
1.61
Demand deposits
493,922
533,533
487,534
536,579
Other liabilities
29,972
28,217
29,679
26,740
Total Liabilities
2,289,212
2,214,520
2,273,421
2,191,478
Stockholders' equity, excluding accumulated other comprehensive loss
302,758
296,015
301,895
297,797
(44,338)
(44,218)
(42,112)
(45,582)
Total Stockholders' Equity
258,420
251,797
259,783
252,215
Total Liabilities and Stockholders' Equity
Interest Rate Spread
2.61
2.98
2.62
3.14
Net Interest Income/Earning Assets
3.31
3.53
3.30
3.62
Total Deposits (Interest-bearing and Demand)
2,016,520
1,948,405
2,008,899
1,939,813
42
TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES
Three Months Ended 6/30/2024 vs. 6/30/2023
Six Months Ended 6/30/2024 vs. 6/30/2023
Change in
Volume
Rate
62
155
157
(303)
288
(78)
(175)
(56)
(381)
279
(830)
509
1,370
1,758
3,486
3,914
(44)
1,373
1,785
3,442
3,945
1,147
2,131
2,778
4,623
197
1,127
337
2,806
773
2,084
(18)
669
1,428
1,302
3,338
888
3,327
1,649
8,227
(789)
(1,401)
672
127
1,289
(115)
132
(107)
3,459
1,542
8,627
374
(1,328)
1,236
(4,004)
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. The income tax provision for the second quarter 2024 of $1,366,000 was $53,000 lower than the provision for the second quarter 2023 and the provision for the six months ended June 30, 2024 of $2,518,000 was $310,000 lower than the amount for the first six months of 2023 due to a lower amount of pre-tax income in 2024. The effective tax rate (tax provision as a percentage of pre-tax income) was 18.3% in the second quarter 2024 compared to 19.0% in the second quarter 2023 and 18.1% for the first six months of 2024 as compared to 18.7% for the first six months of 2023. The Corporation’s effective tax rates differ from the statutory rate of 21% principally because of the effects of tax-exempt interest income, nondeductible interest expense, state income taxes and other permanent differences.
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, 2024 and December 31, 2023 represents the following temporary difference components:
Deferred tax assets:
Unrealized holding losses on securities
11,089
10,335
4,475
4,230
Purchase accounting adjustments on loans
402
Deferred compensation
1,435
1,352
Operating leases liability
758
787
Deferred loan origination fees
753
731
Net operating loss carryforward
482
541
Accrued incentive compensation
319
Other deferred tax assets
1,312
1,316
Total deferred tax assets
21,025
20,225
Deferred tax liabilities:
BOLI surrender
950
Defined benefit plans - ASC 835
280
291
Core deposit intangibles
499
544
Right-of-use assets from operating leases
Other deferred tax liabilities
68
93
Total deferred tax liabilities
2,650
2,784
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, 2024 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.
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.
The composition of the available-for-sale debt securities portfolio at June 30, 2024 and December 31, 2023, 2022 and 2021 is as follows:
December 31, 2021
35,166
31,836
25,058
24,912
25,938
23,430
23,936
24,091
28,945
25,386
18,000
17,987
146,149
132,623
143,427
148,028
68,488
56,812
72,182
72,765
112,782
99,941
98,048
98,181
44,868
40,296
44,015
44,247
91,388
79,686
86,926
87,468
8,070
8,023
Total Available-for-Sale Debt Securities
561,794
498,033
511,592
517,679
Aggregate Unrealized (Loss) Gain
(52,799)
(49,213)
(63,761)
6,087
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost
(11.6)
(10.6)
(11.3)
1.2
Market Yield on 5-Year U.S. Treasury Obligations (a)
4.33
3.84
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 $52,799,000, or 11.6%, at June 30, 2024, $49,213,000, or 10.6%, at December 31, 2023 and $63,761,000, or 11.3%, at December 31, 2022 while the aggregate unrealized gain position was $6,087,000, or 1.2% at December 31, 2021. The volatility in the fair value of the portfolio, including the reduction in fair value, resulted from changes in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 0.49% higher at June 30, 2024 in comparison to December 31, 2023, 0.34% higher than at December 31, 2022 and 3.07% higher than at December 31, 2021. The table also shows that the amortized cost basis of the portfolio has been reduced to $453,944,000 at June 30, 2024 from $561,794,000 at December 31, 2022 as proceeds from maturities and sales have been used to help fund loan growth.
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, 2024 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of June 30, 2024 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at June 30, 2024, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:
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, 2024.
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 effect on the Corporation’s financial condition in 2024.
Table VII shows the composition of the loan portfolio at June 30, 2024 and at year-end from 2019 through 2023. The significant loan growth in 2020 reflects the impact of an acquisition of a bank located in Southeastern Pennsylvania. Primarily as a result of the expansion into Southeastern Pennsylvania, as well as expansion by opening two offices in Southcentral Pennsylvania, the mix of the loan portfolio has become predominantly commercial in nature. At June 30, 2024, commercial loans represented 75% of the portfolio while residential loans totaled 22% of the portfolio.
Also included in Table VII is additional detail regarding the composition of the non-owner occupied commercial real estate loan portfolio at June 30, 2024. The data in Table VII shows the recorded investment in non-owner occupied commercial real estate loans for which the primary purpose is utilization of office space by third parties was $96,642,000, or 5.1% of gross loans receivable. At June 30, 2024, within this segment there were two loans with a total recorded investment of $3,885,000 in nonaccrual status with specific allowances totaling $493,000. The remainder of the non-owner occupied commercial real estate loans with a primary purpose of office space utilization were in accrual status with no specific allowance at June 30, 2024. The Provision and Allowance for Credit Losses section of Management’s Discussion and Analysis provides additional related discussion.
While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. 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 $36,383,000 at June 30, 2024 down from $38,652,000 at December 31, 2023.
The Corporation is a party to financial instruments with off-balance risk, including commitments to extend credit and standby letters of credit. At June 30, 2024, the total contract amount of commitments to extend credit was $387,563,000 as compared to $395,997,000 at December 31, 2023, and the contract amount of standby letters of credit increased to $57,532,000 at June 30, 2024 from $19,158,000 at December 31, 2023. The increase in standby letters of credit at June 30, 2024 included a $40,000,000 letter of credit with a one-year term, subject to annual review for possible renewal, that was issued to guarantee performance on behalf of a municipal customer. This letter of credit is collateralized by the municipal customer’s investments in certificates of deposit and marketable securities.
46
The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh.
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, 2024, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,428,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2023 was $1,457,000.
At June 30, 2024, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $321,136,000, including loans sold through the MPF Xtra program of $149,523,000 and loans sold through the Original program of $171,613,000. At December 31, 2023, outstanding balances of loans sold and serviced through the two programs totaled $323,298,000, including loans sold through the MPF Xtra program of $150,015,000 and loans sold through the Original Program of $173,283,000. 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, 2024 and December 31, 2023.
TABLE VII - SUMMARY OF LOANS BY TYPE
489,514
499,104
454,386
358,352
328,662
208,579
Multi-family (5 or more) residential
67,154
64,076
55,406
49,054
54,893
30,474
1-4 Family - commercial purpose
167,296
174,162
165,805
175,027
198,918
147,121
675,597
582,433
582,473
386,174
205,910
196,083
191,075
78,729
All other commercial loans:
Commercial and industrial
77,339
78,832
95,368
118,488
222,923
67,288
Commercial lines of credit
130,924
117,236
141,444
106,338
105,802
92,509
Political subdivisions
89,460
79,031
86,663
75,401
46,295
46,054
Commercial construction and land
114,162
104,123
60,892
59,505
41,000
32,717
Other commercial loans
19,221
20,471
25,710
26,498
29,310
28,735
410,077
386,230
445,330
267,303
Residential mortgage loans:
1-4 Family - residential
383,494
389,262
363,005
327,593
356,532
388,415
1-4 Family residential construction
26,330
24,452
30,577
23,151
18,736
14,640
Total residential mortgage
393,582
350,744
375,268
403,055
Consumer loans:
Consumer lines of credit (including HELOCs)
42,325
41,503
36,650
33,522
34,566
30,810
All other consumer
18,819
18,641
18,224
15,837
15,497
16,151
Total consumer
54,874
49,359
50,063
46,961
1,564,849
1,644,209
1,182,222
(16,615)
(13,537)
(11,385)
(9,836)
1,723,425
1,551,312
1,632,824
1,172,386
Additional details regarding the composition of the non-owner occupied commercial real estate loan portfolio, excluding multi-family (5 or more) residential and 1-4 Family-commercial purpose loans, at June 30, 2024 is as follows:
NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
% of Non-owner
% of
Occupied CRE
Total Loans
Industrial
98,840
20.2
5.2
Office
96,642
5.1
Retail
93,552
19.1
4.9
Hotels
72,915
14.9
3.9
Mixed Use
58,891
12.0
3.1
68,674
14.0
3.6
Total Non-owner Occupied CRE Loans
Total Gross Loans
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
A summary of the provision (credit) for credit losses for the three-month and six-month periods ended June 30, 2024 and 2023 is as follows:
3 Months
6 Months
Provision (credit) for credit losses:
Off-balance sheet exposures
Total provision for credit losses
For the quarter ended June 30, 2024, there was a provision for credit losses of $565,000, a decrease of $247,000 compared to $812,000 in the second quarter 2023. For the six months ended June 30, 2024, there was a provision for credit losses of $1,519,000, an increase of $1,059,000 compared to $460,000 in 2023. The ACL as a percentage of gross loans receivable increased to 1.08% at June 30, 2024 from 1.04% at December 31, 2023; in comparison, the ACL dropped to 1.05% of gross loans receivable at June 30, 2023 from 1.08% upon adoption of CECL on January 1, 2023.
As shown in Table IX, the ACL on loans individually evaluated increased to $1,230,000 at June 30, 2024 from $743,000 at December 31, 2023. The increase in individual ACLs is primarily related to two borrowers: (1) at June 30, 2024, an ACL of $447,000 was recorded on loans totaling $2,330,000 for land related to a planned commercial construction project, and (2) consistent with an updated collateral valuation assessment, the ACL increased $229,000 to $234,000 at June 30, 2024 on commercial loans to one borrower totaling $278,000 at June 30, 2024. A partial offset to the net increase in individual ACLs resulted from a net charge-off of $117,000 in the second quarter 2024 on a non-owner occupied commercial loan for which there was an ACL of $124,000 at December 31, 2023. At June 30, 2024, there was no ACL on the loan and the carrying value of the loan, net of the partial charge-off, was $3,276,000. At June 30, 2024, there were six commercial relationships with loans receivable totaling $6,613,000 for which individual ACLs were recorded, including two non-owner occupied office loans with total outstanding balances of $3,885,000 and individual ACLs totaling $493,000.
Table IX also shows that, at June 30, 2024 as compared to December 31, 2023, the ACL related to collectively evaluated commercial loans increased by a total of $1,225,000 and the ACL on collectively evaluated consumer loans increased $114,000, while the ACL on collectively evaluated residential mortgage loans decreased $652,000. The increase for commercial loans includes the impact of an increase in outstanding loans and a net increase in qualitative factors used in the ACL evaluation, partially offset by a reduction from the impact of an economic forecast and the impact to the ACL valuation of lower estimated net charge-offs based on recent experience. The decrease for residential mortgage loans includes a reduction from the impact of an economic forecast, a net decrease in qualitative factors and lower net charge-offs based on recent experience.
Table X shows that total nonperforming assets as a percentage of total assets was 0.76% at June 30, 2024, up from 0.75% at December 31, 2023 but lower than at year-end 2019 through 2022. Total nonperforming assets were $19.8 million at June 30, 2024, up from $18.8 million at December 31, 2023 but lower than the totals at year-end 2020 through 2022. Nonperforming loans included increases in nonaccrual loans of $4.4 million from December 31, 2023, while loans past due 90 days or more still accruing decreased $3.2 million from December 31, 2023. In the first six months of 2024, the increase in nonaccrual loans included the commercial construction and land loans to one borrower totaling $2,330,000 noted above.
In the first six months of 2024, net charge-offs were low by historical standards, totaling $352,000, or 0.02% 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 0.01% in 2023.
Over the period 2019-2023 and the first six months of 2024, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of
allowance required on individual loans and may significantly impact the provision for credit losses and the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of loans requiring individual evaluation for credit loss, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of June 30, 2024. Management continues to closely monitor its commercial loan relationships for credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.
Tables VIII through X present historical data related to loans and the allowance for credit losses.
TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS
Years Ended December 31,
Balance, beginning of year
13,537
11,385
9,836
9,309
(356)
(4,245)
(1,575)
(2,465)
(379)
92
66
Net charge-offs
(352)
(187)
(264)
(4,177)
(1,509)
(2,364)
(322)
Provision for credit losses on loans
7,255
3,661
3,913
Balance, end of year
Net charge-offs as a % of average loans
0.02
0.01
0.26
0.09
0.16
0.03
TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS
January 1,
Loans individually evaluated
751
Loans collectively evaluated:
11,684
10,379
9,641
2,667
2,111
1,765
3,175
3,811
Residential mortgage
2,407
241
Total Allowance
PRIOR TO CECL ADOPTION
As of December 31,
ASC 310 - Impaired loans - individually evaluated
740
925
1,051
ASC 450 - Collectively evaluated:
10,845
7,553
5,545
4,073
4,338
4,091
4,006
244
281
671
585
TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS
Loans individually evaluated with a valuation allowance
3,460
6,540
8,082
3,375
Loans individually evaluated without a valuation allowance
8,567
3,478
14,871
2,636
2,895
1,670
Purchased credit impaired loans
1,027
6,558
6,841
Total individually evaluated loans
19,358
15,734
17,818
5,486
Total loans past due 30-89 days and still accruing
7,079
5,106
5,918
8,889
Nonperforming assets:
Other nonaccrual loans
22,058
12,441
14,575
8,777
Total nonaccrual loans
23,085
18,999
21,416
9,218
Total loans past due 90 days or more and still accruing
2,237
2,219
1,975
1,207
Total nonperforming loans
19,599
18,367
25,322
21,218
23,391
10,425
Foreclosed assets held for sale (real estate)
275
1,338
2,886
Total nonperforming assets
19,780
18,845
25,597
21,902
24,729
13,311
Total nonperforming loans as a % of loans
1.04
0.99
1.46
1.42
0.88
Total nonperforming assets as a % of assets
0.76
0.75
0.94
1.10
Allowance for credit losses as a % of total loans
1.08
0.95
0.87
0.69
0.83
51
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 $19,718,000 at June 30, 2024.
The Corporation’s outstanding, available, and total credit facilities at June 30, 2024 and December 31, 2023 are as follows:
Outstanding
Available
Total Credit
Federal Home Loan Bank of Pittsburgh
223,853
189,021
719,722
737,824
943,575
926,845
Federal Reserve Bank Discount Window
18,884
19,982
Other correspondent banks
75,000
Total credit facilities
813,606
832,806
1,037,459
1,021,827
At June 30, 2024, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term advances of $15,000,000, long-term borrowings of $185,645,000 and letters of credit totaling $23,208,000. At December 31, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term borrowings of $31,500,000, long-term borrowings of $138,313,000 and letters of credit totaling $19,208,000. 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. At June 30, 2024, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $238,375,000.
Deposits totaled $2,059,309,000 at June 30, 2024, up $44,503,000 (2.2%) from $2,014,806,000 at December 31, 2023. Excluding brokered deposits, adjusted total deposits at June 30, 2024 were higher by $49,371,000 (2.5%) as compared to December 31, 2023. Brokered deposits totaled $59,501,000 at June 30, 2024, a decrease of $4,868,000 from December 31, 2023. The increase in total deposits, excluding brokered deposits, included an increase in total deposits from municipal relationships of $16,587,000 to $294,299,000 at June 30, 2024 from $277,712,000 at December 31, 2023, consistent with historic seasonal trends for the Corporation’s Pennsylvania-based municipal depositors.
As shown in the table below, at June 30, 2024, estimated uninsured deposits totaled $605.8 million, or 29.2% of total deposits, as compared to $592.2 million or 29.2% of total deposits at December 31, 2023. Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling $158.3 million at June 30, 2024. As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.6% of total deposits at June 30, 2024, as compared to 21.7% at December 31, 2023.
As summarized in the table that immediately follows, the Corporation’s highly liquid sources of available funds described above, including unused borrowing capacity with the Federal Home Loan Bank of Pittsburgh, unused availability on the Federal Reserve Bank of Philadelphia’s discount window, available federal funds lines with other banks and unencumbered available-for-sale debt securities totaled $1.1 billion at June 30, 2024. Available funding from these sources totaled 173.7% of uninsured deposits and 235.1% of total uninsured and uncollateralized deposits at June 30, 2024.
Uninsured Deposits Information
Total Deposits - C&N Bank
2,074,806
2,030,909
Estimated Total Uninsured Deposits
605,765
592,206
Portion of Uninsured Deposits that are
Collateralized
158,268
151,031
Uninsured and Uncollateralized Deposits
447,497
441,175
Uninsured and Uncollateralized Deposits as
a % of Total Deposits
21.6
21.7
Available Funding from Credit Facilities
Fair Value of Available-for-sale Debt
Securities in Excess of Pledging Obligations
238,375
256,058
Highly Liquid Available Funding
1,051,981
1,088,864
Highly Liquid Available Funding as a % of
Uninsured Deposits
173.7
183.9
235.1
246.8
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, 2024; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
53
Details concerning capital ratios at June 30, 2024 and December 31, 2023 are presented below. Management believes, as of June 30, 2024, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at June 30, 2024 and December 31, 2023 exceed the Corporation’s Board policy threshold levels.
Minimum To Be
Minimum To Maintain
Well
Minimum
Capital Conservation
Capitalized Under
Minimum To Meet
Buffer at Reporting
Prompt Corrective
the Corporation's
Actual
Requirement
Action Provisions
Policy Thresholds
Ratio
June 30, 2024:
Total capital to risk-weighted assets:
Consolidated
295,624
15.50
209,805
≥11
C&N Bank
280,826
14.75
152,290
≥8
199,881
≥10.5
190,363
≥10
209,399
Tier 1 capital to risk-weighted assets:
249,787
13.10
171,659
≥9
259,762
13.65
114,218
≥6
161,808
≥8.5
171,326
Common equity tier 1 capital to risk-weighted assets:
143,049
≥7.5
85,663
≥4.5
133,254
≥7.0
123,736
≥6.5
142,772
Tier 1 capital to average assets:
9.85
202,969
10.30
100,919
≥4
126,149
≥5
201,838
December 31, 2023:
290,425
15.67
203,809
275,307
14.89
147,925
194,151
184,906
203,396
245,810
13.27
166,753
255,409
13.81
110,943
157,170
166,415
138,961
83,208
129,434
120,189
138,679
9.87
199,151
10.32
99,010
123,762
198,020
On September 25, 2023, the Corporation announced a new treasury stock repurchase program. Under the program, the Corporation is authorized to repurchase up to 750,000 shares of the Corporation’s common stock, or slightly less than 5% of the Corporation’s issued and outstanding shares at August 4, 2023. The new program was effective when publicly announced and will continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion. All shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plans and its equity compensation program. For the three and six months ended June 30, 2024, 22,496 shares were repurchased for a total cost of $383,000, at an average price of $17.01 per share. At June 30, 2024, there were 727,504 shares available to be repurchased under the program.
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.
54
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, 2024, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
Minimum common equity tier 1 capital ratio
4.5
Minimum common equity tier 1 capital ratio plus capital conservation buffer
7.0
Minimum tier 1 capital ratio
6.0
Minimum tier 1 capital ratio plus capital conservation buffer
8.5
Minimum total capital ratio
8.0
Minimum total capital ratio plus capital conservation buffer
10.5
A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer
Maximum Payout
(as a % of risk-weighted assets)
(as a % of eligible retained income)
Greater than 2.5%
No payout limitation applies
≤2.5% and >1.875%
≤1.875% and >1.25%
≤1.25% and >0.625%
≤0.625%
At June 30, 2024, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 6.75%.
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 $41,710,000 at June 30, 2024 and $38,878,000 at December 31, 2023. The decrease in stockholders’ equity in the first six months of 2024 from the change in accumulated other comprehensive loss resulted from an increase in interest rates. Changes in accumulated other comprehensive loss are excluded from earnings and directly increase or decrease stockholders’ equity. To the extent unrealized losses on available-for-sale debt securities result from credit losses, unrealized losses are recorded as a charge against earnings. The securities section of Management’s Discussion and Analysis and Note 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, 2024.
55
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices of the Corporation’s financial instruments. In addition to the effects of interest rates, the market prices of the Corporation’s available-for-sale debt securities are affected by fluctuations in the risk premiums (amounts of spread over risk-free rates) demanded by investors. Management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).
The Corporation’s major category of market risk, interest rate risk, is discussed in the following section.
INTEREST RATE RISK
The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the economic value of equity. For purposes of these calculations, the economic value of equity includes the discounted present values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects the amount of potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.
The projected results based on the model includes the impact of estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Further, the projected results are impacted by assumptions regarding the run-off and the extent of sensitivity to interest rate changes of deposits with no stated maturity (checking, savings and money market accounts). Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and economic value of equity. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.
The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in the economic value of equity from the baseline values based on current rates.
Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of June 30, 2024 and December 31, 2023. In the analysis based on June 30, 2024 and December 31, 2023 data, the amounts of net interest income decrease, as compared to the amounts based on current interest rates, in both the upward and downward rate scenarios. Further, at June 30, 2024 and December 31, 2023, the economic value of equity is modeled to decrease in all of the rising and falling rate scenarios. The modeling results reflect the impact of management’s assumptions that, in light of the significant increases in short-term interest rates that have occurred since early 2022, the Corporation’s deposit rates would rise in the increasing rate scenarios to a greater extent than they would fall in the decreasing rate scenarios. Further, results in the downward rate scenarios reflect limitations on the benefit of falling rates on some deposit types due to a 0% assumed floor. The Table also shows that as of the respective dates, the changes in net interest income and changes in economic value were within the policy limits in all scenarios.
In Table XI, the modeled economic value of equity is higher in all rate scenarios at June 30, 2024 as compared to December 31, 2023. The increase was mainly caused by an overall increase in the assumed lives of nonmaturity deposits used in the June 30, 2024 analysis based on an updated study completed in the second quarter 2024.
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 related to securities of $41.7 million at June 30, 2024. In contrast, most of the Corporation’s other financial instruments, including loans receivable (held for investment), deposits and borrowed funds are carried on the balance sheet at historical cost without adjustment for the impact of changes in interest rates.
TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
June 30, 2024 Data
Period Ending June 30, 2025
Basis Point
Interest
Net Interest
NII
Change in Rates
Income
Expense
Income (NII)
% Change
Risk Limit
+400
156,322
86,001
70,321
(15.7)
25.0
+300
150,593
75,112
75,481
(9.5)
20.0
+200
144,833
65,441
79,392
(4.8)
15.0
+100
139,020
56,989
82,031
(1.6)
10.0
133,160
49,756
83,404
0.0
-100
127,792
45,283
82,509
(1.1)
-200
121,714
40,862
80,852
(3.1)
-300
114,820
36,441
78,379
(6.0)
-400
107,255
32,020
75,235
(9.8)
Economic Value of Equity at June 30, 2024
Present
Equity
463,654
(13.1)
50.0
491,821
(7.8)
45.0
514,589
(3.5)
35.0
529,225
(0.8)
533,373
520,793
(2.4)
501,246
467,175
(12.4)
417,753
(21.7)
December 31, 2023 Data
Period Ending December 31, 2024
148,407
81,707
66,700
(21.5)
143,333
70,165
73,168
(13.9)
138,291
59,859
78,432
(7.7)
133,224
50,797
82,427
(3.0)
127,920
42,979
84,941
122,446
37,701
84,745
(0.2)
116,922
32,462
84,460
(0.6)
110,919
27,710
83,209
(2.0)
104,495
23,067
81,428
(4.1)
Economic Value of Equity at December 31, 2023
330,130
(21.2)
359,302
(14.3)
385,045
(8.1)
405,178
(3.3)
419,199
406,957
(2.9)
406,145
385,859
(8.0)
363,763
(13.2)
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.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The information provided in Note 10 of the Consolidated Unaudited Financial Statements is hereby incorporated into this Part II, Item 1 by reference.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Annual Report on Form 10-K filed March 11, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On September 25, 2023, the Corporation announced a new treasury stock repurchase program. Under the newly approved program, the Corporation is authorized to repurchase up to 750,000 shares of the Corporation’s common stock, or slightly less than 5% of the Corporation’s issued and outstanding shares at August 4, 2023. The new program was effective when publicly announced and will continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion. All shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plans and its equity compensation program. As of June 30, 2024, 22,496 shares had been repurchased under the repurchase program
The following table sets forth a summary of the purchases by the Corporation of its common stock during the second quarter 2024:
Total Number of
Maximum
Purchased
Shares that May
as Part of
Yet
Publicly
be Purchased
Total Number
Announced
of Shares
Price Paid
Plans
the Plans or
Period
per Share
or Programs
Programs
April 1 - 30, 2024
17.01
749,300
May 1 - 31, 2024
600
17.06
748,700
June 1 - 30, 2024
21,196
727,504
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
The table below details the directors or executive officers for whom a written plan for the purchase of the Corporation’s common stock that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) became effective in the second quarter 2024.
Name
Title
Effective date
Expiration date
Katherine W. Shattuck
Director
May 1, 2024
April 30, 2025
Frank G. Pellegrino
Robert G. Loughery
59
The written plan provides for the directors to receive designated fees for their service as directors in the form of the Corporation’s common stock to be purchased in the open market by the Corporation’s transfer agent. Each of the directors identified above asserted they were not aware of material nonpublic information about the Corporation or its common stock at the time they adopted the written plan.
Except as noted above, during the three months ended June 30, 2024, 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.
Item 6. Exhibits
Articles of Incorporation
Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 10-Q filed May 6, 2022
3.2
By-laws
Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 8-K filed February 18, 2022
31.
Rule 13a-14(a)/15d-14(a) certifications:
31.1
Certification of Chief Executive Officer
Filed herewith
31.2
Certification of Chief Financial Officer
32.
Section 1350 certifications
101.INS
Inline XBRL Instance Document.
101.SCH
Inline XBRL Schema Document.
101.CAL
Inline XBRL Calculation Linkbase Document.
101.DEF
Inline XBRL Definition Linkbase Document.
101.LAB
Inline XBRL Label Linkbase Document.
101.PRE
Inline XBRL Presentation Linkbase Document.
The cover page of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline XBRL (contained in Exhibit 101).
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.
August 7, 2024
By: /s/ J. Bradley Scovill
President and Chief Executive Officer
By: /s/ Mark A. Hughes
Treasurer and Chief Financial Officer
61