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 September 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)
15,414,132 Shares Outstanding on October 31, 2024
CITIZENS & NORTHERN CORPORATION – FORM 10-Q
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) – September 30, 2024 and December 31, 2023
Page 3
Consolidated Statements of Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2024 and 2023
Page 4
Consolidated Statements of Comprehensive Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2024 and 2023
Page 5
Consolidated Statements of Cash Flows (Unaudited) – Nine-month Periods Ended September 30, 2024 and 2023
Page 6
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Nine-month Periods Ended September 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)
September 30,
December 31,
(In Thousands, Except Share and Per Share Data)
2024
2023
ASSETS
Cash and due from banks:
Noninterest-bearing
$
25,707
24,855
Interest-bearing
158,506
32,023
Total cash and due from banks
184,213
56,878
Available-for-sale debt securities, at fair value
408,422
415,755
Loans receivable
1,892,764
1,848,139
Allowance for credit losses
(20,442)
(19,208)
Loans, net
1,872,322
1,828,931
Bank-owned life insurance
50,757
63,674
Accrued interest receivable
9,419
9,140
Bank premises and equipment, net
21,537
21,632
Foreclosed assets held for sale
181
478
Deferred tax asset, net
17,047
17,441
Goodwill
52,505
Core deposit intangibles, net
2,177
2,469
Other assets
52,242
46,681
TOTAL ASSETS
2,670,822
2,515,584
LIABILITIES
Deposits:
513,067
490,554
1,622,812
1,524,252
Total deposits
2,135,879
2,014,806
Short-term borrowings
11,426
33,874
Long-term borrowings - FHLB advances
174,617
138,337
Senior notes, net
14,882
14,831
Subordinated debt, net
24,802
24,717
Accrued interest and other liabilities
31,911
26,638
TOTAL LIABILITIES
2,393,517
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 15,414,132 at September 30, 2024;
issued 16,030,172 and outstanding 15,295,135 at December 31, 2023
16,030
Paid-in capital
143,206
144,388
Retained earnings
161,920
157,028
Treasury stock, at cost; 616,040 shares at September 30, 2024 and 735,037
shares at December 31, 2023
(13,787)
(16,628)
Accumulated other comprehensive loss
(30,064)
(38,437)
TOTAL STOCKHOLDERS' EQUITY
277,305
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
Nine Months Ended
(In Thousands, Except Per Share Data)
INTEREST INCOME
Interest and fees on loans:
Taxable
28,099
25,529
82,292
72,322
Tax-exempt
610
552
1,749
1,687
Income from available-for-sale debt securities:
2,136
2,077
6,409
6,440
572
597
1,685
1,847
Other interest and dividend income
1,670
363
2,614
972
Total interest and dividend income
33,087
29,118
94,749
83,268
INTEREST EXPENSE
Interest on deposits
10,412
7,264
28,617
15,593
Interest on short-term borrowings
184
677
1,141
2,918
Interest on long-term borrowings - FHLB advances
1,983
1,164
5,294
2,901
Interest on senior notes, net
120
360
359
Interest on subordinated debt, net
232
230
695
691
Total interest expense
12,931
9,455
36,107
22,462
Net interest income
20,156
19,663
58,642
60,806
Provision (credit) for credit losses
1,207
(1,225)
2,726
(765)
Net interest income after provision (credit) for credit losses
18,949
20,888
55,916
61,571
NONINTEREST INCOME
Trust revenue
1,946
1,919
5,857
5,500
Brokerage and insurance revenue
523
394
1,589
1,189
Service charges on deposit accounts
1,546
1,443
4,336
4,121
Interchange revenue from debit card transactions
1,103
1,098
3,205
3,115
Net gains from sale of loans
237
786
450
Loan servicing fees, net
74
154
434
466
Increase in cash surrender value of life insurance
458
160
1,372
Other noninterest income
1,123
1,084
4,083
3,442
Realized gains on available-for-sale debt securities, net
6
Total noninterest income
7,133
6,489
21,662
18,739
NONINTEREST EXPENSE
Salaries and employee benefits
10,875
10,878
33,460
33,082
Net occupancy and equipment expense
1,377
1,268
4,160
3,993
Data processing and telecommunications expense
1,882
1,823
5,877
5,659
Automated teller machine and interchange expense
510
504
1,470
1,374
Pennsylvania shares tax
433
403
1,300
1,210
Professional fees
555
487
1,625
1,988
Other noninterest expense
2,637
2,577
7,936
8,443
Total noninterest expense
18,269
17,940
55,828
55,749
Income before income tax provision
7,813
9,437
21,750
24,561
Income tax provision
1,448
1,846
3,966
4,674
NET INCOME
6,365
7,591
17,784
19,887
EARNINGS PER COMMON SHARE - BASIC
0.41
0.50
1.16
1.29
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 gains (losses) on available-for-sale debt securities
13,829
(14,865)
10,243
(12,535)
Reclassification adjustment for gains realized in income
(6)
Other comprehensive income (loss) on available-for-sale debt securities
(12,541)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses
(8)
Amortization of prior service cost and net actuarial loss and curtailment gain included in net periodic benefit cost
(22)
(14)
(532)
(42)
Other comprehensive loss on pension and postretirement obligations
(138)
(50)
Other comprehensive income (loss) before income tax
13,807
(14,879)
10,105
(12,591)
Income tax related to other comprehensive (income) loss
(2,510)
3,126
(1,732)
2,643
Net other comprehensive income (loss)
11,297
(11,753)
8,373
(9,948)
Comprehensive income (loss)
17,662
(4,162)
26,157
9,939
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities
1,269
1,556
(1,372)
(450)
Depreciation and amortization of bank premises and equipment
1,632
1,633
Net accretion of purchase accounting adjustments
(197)
(198)
Stock-based compensation
1,099
1,015
Deferred income taxes
(1,338)
235
Decrease in fair value of servicing rights
172
136
(786)
Origination of loans held for sale
(27,070)
(14,568)
Proceeds from sales of loans held for sale
24,773
14,341
Increase in accrued interest receivable and other assets
(3,196)
(1,175)
Increase in accrued interest payable and other liabilities
5,340
4,588
Other
124
22
Net Cash Provided by Operating Activities
20,960
25,801
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit
1,250
3,000
Proceeds from sales of available-for-sale debt securities
18,357
Proceeds from calls and maturities of available-for-sale debt securities
28,734
44,208
Purchase of available-for-sale debt securities
(11,516)
(8,215)
Redemption of Federal Home Loan Bank of Pittsburgh stock
5,991
19,503
Purchase of Federal Home Loan Bank of Pittsburgh stock
(6,748)
(19,905)
Purchase of Federal Reserve Bank stock
(36)
(6,243)
Net increase in loans
(45,752)
(89,998)
Proceeds from bank-owned life insurance
14,289
147
Purchase of premises and equipment
(1,554)
(1,381)
Proceeds from sale of foreclosed assets
293
62
33
109
Net Cash Used in Investing Activities
(15,016)
(40,356)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
121,077
27,425
Net decrease in short-term borrowings
(22,448)
(56,809)
Proceeds from long-term borrowings - FHLB advances
59,386
70,049
Repayments of long-term borrowings - FHLB advances
(23,083)
(7,078)
Purchases of treasury stock
(655)
(6,719)
Common dividends paid
(11,636)
(11,703)
Net Cash Provided by Financing Activities
122,641
15,165
INCREASE IN CASH AND CASH EQUIVALENTS
128,585
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
52,778
47,698
CASH AND CASH EQUIVALENTS, END OF PERIOD
181,363
48,308
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Increase (decrease) in accrued purchase of available-for-sale debt securities
911
(454)
Assets acquired through foreclosure of real estate loans
390
Leased assets obtained in exchange for new operating lease liabilities
187
Interest paid
35,134
21,392
Income taxes paid
4,839
4,667
Consolidated Statements of Changes in Stockholders’ Equity
Accumulated
Common
Treasury
Paid-in
Retained
Comprehensive
Three Months Ended September 30, 2024
Shares
Stock
Capital
Earnings
Loss
Total
Balance, June 30, 2024
16,030,172
654,190
143,352
159,859
(41,361)
(14,659)
263,221
Other comprehensive income, net
Cash dividends declared on common stock, $.28 per share
(4,304)
Shares issued for dividend reinvestment plan
(21,688)
(81)
484
Restricted stock granted
(20,000)
(448)
448
Stock-based compensation expense
383
Treasury stock purchases
3,538
(60)
Balance, September 30, 2024
616,040
Three Months Ended September 30, 2023
Balance, June 30, 2023
762,076
143,661
153,725
(48,073)
(17,226)
248,117
Other comprehensive loss, net
(4,272)
(20,184)
457
421
Forfeiture of restricted stock
1,073
27
(27)
320
Purchase of restricted stock for tax withholding
838
(16)
10,683
(203)
Balance, September 30, 2023
754,486
143,972
157,044
(59,826)
(17,015)
240,205
Nine Months Ended September 30, 2024
Balance, December 31, 2023
735,037
Cash dividends declared on common stock, $.84 per share
(12,892)
(64,476)
(237)
1,452
1,215
(92,860)
(2,094)
2,094
2,076
50
10,229
(212)
26,034
(443)
Nine Months Ended September 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)
(12,934)
(60,871)
(182)
1,413
1,231
(53,788)
(1,314)
1,314
23,039
503
(503)
9,453
(219)
325,300
(6,500)
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 nine-month period ended September 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 consolidated 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
Recently 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
(54)
(57)
(140)
(156)
Net income attributable to common shares
6,311
7,534
17,644
19,731
Basic weighted-average common shares outstanding
15,267,120
15,154,797
15,254,124
15,264,391
Basic earnings per common share (a)
Diluted
Dilutive effect of potential common stock arising from stock options
Diluted weighted-average common shares outstanding
15,264,395
Diluted earnings per common share (a)
Weighted-average nonvested restricted shares outstanding
131,302
113,328
121,035
120,632
Anti-dilutive stock options are excluded from earnings per share calculations. There were no anti-dilutive instruments outstanding in the three-month and nine-month periods ended September 30, 2024. The weighted-average number of anti-dilutive instruments outstanding was 8,934 in the three-month period ended September 30, 2023 and 0 in the nine-month period ended September 30, 2023.
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 gains on available-for-sale debt securities
(2,515)
11,314
Reclassification adjustment for (gains) realized in income
Other comprehensive income from available-for-sale debt securities
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost
(17)
Other comprehensive loss on unfunded retirement obligations
Total other comprehensive income
Unrealized holding losses on available-for-sale debt securities
3,123
(11,742)
Other comprehensive loss from available-for-sale debt securities
(11)
Total other comprehensive loss
(1,761)
8,482
(83)
311
112
(420)
29
(109)
2,632
(9,903)
1
(5)
2,633
(9,908)
(7)
(33)
10
(40)
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) 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
(41,710)
349
Other comprehensive income (loss) during three months ended September 30, 2024
Balance, end of period
(30,396)
332
(48,536)
463
Other comprehensive loss during three months ended September 30, 2023
(60,278)
452
(38,878)
441
Other comprehensive income (loss) during nine months ended September 30, 2024
(50,370)
492
Other comprehensive loss during nine months ended September 30, 2023
4. CASH AND DUE FROM BANKS
Cash and due from banks at September 30, 2024 and December 31, 2023 include the following:
Cash and cash equivalents
Certificates of deposit
2,850
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 September 30, 2024 and December 31, 2023 are summarized as follows:
September 30, 2024
Gross
Amortized
Holding
Fair
Cost
Losses
Value
Obligations of the U.S. Treasury
8,072
(751)
7,321
Obligations of U.S. Government agencies
10,271
(895)
9,376
Bank holding company debt securities
28,956
(5,007)
23,949
Obligations of states and political subdivisions:
113,093
342
(8,499)
104,936
55,182
48,434
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities
101,545
248
(7,740)
94,053
Residential collateralized mortgage obligations
48,251
233
(2,883)
45,601
Commercial mortgage-backed securities
73,695
(7,327)
66,390
Private label commercial mortgage-backed securities
8,327
35
8,362
Total available-for-sale debt securities
447,392
880
(39,850)
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 September 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
499
(1)
96,678
(8,498)
97,177
45,475
74,328
29,050
64,018
350,195
(39,849)
350,694
1,595
(9)
8,351
(1,164)
3,257
(24)
96,758
(9,552)
100,015
49,961
3,334
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
Net realized (losses) gains
13
The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of September 30, 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
9,459
9,408
Due from one year through five years
30,098
28,615
Due from five years through ten years
78,690
70,407
Due after ten years
97,327
85,586
Sub-total
215,574
194,016
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 $220,482,000 at September 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 September 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 $39,850,000 at September 30, 2024 and $49,564,000 at December 31, 2023. At September 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 increases in market interest rates that have occurred subsequent to the purchase of most of the securities.
At September 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 September 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 September 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 $15,971,000 at September 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 September 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 $6,288,000 at September 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 $889,000 at September 30, 2024 and $871,000 December 31, 2023, consisting exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $111,000 at September 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 gain of $31,000 in the third quarter 2024, a loss of $27,000 in the third quarter 2023, a gain of $18,000 in the nine-month period ended September 30, 2024 and a loss of $27,000 in the nine-month period ended September 30, 2023.
6. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable at September 30, 2024 and December 31, 2023 are summarized as follows:
Summary of Loans by Type
Commercial real estate - non-owner occupied
721,103
737,342
Commercial real estate - owner occupied
266,477
237,246
All other commercial loans
431,985
399,693
Residential mortgage loans
407,429
413,714
Consumer loans
65,770
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 $4,309,000 at September 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 September 30, 2024 and December 31, 2023:
As of September 30, 2024
Past Due
30-89
90+
Nonaccrual
Current
Days
Loans
7,867
7,799
705,437
467
1,741
264,269
4,999
10,151
416,835
2,284
4,325
400,820
289
56
385
65,040
15,906
24,401
1,852,401
As of December 31, 2023
2,215
126
8,412
726,589
849
1,575
234,822
229
2,593
1,323
395,548
5,365
326
3,627
404,396
617
145
240
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 September 30, 2024:
Term Loans by Year of Origination
2022
2021
2020
Prior
Revolving
Pass
29,241
98,545
158,232
78,742
53,094
256,743
674,597
Special Mention
26,222
2,359
6,468
35,049
Substandard
119
63
11,275
11,457
Doubtful
Total commercial real estate - non-owner occupied
29,360
184,517
81,101
274,486
Year-to-date gross charge-offs
757
23,389
33,835
52,785
50,098
11,856
82,977
254,940
5,172
733
2,417
3,215
11,537
Total commercial real estate - owner occupied
39,007
53,518
52,515
86,192
56,294
71,062
61,114
46,638
23,682
27,489
118,178
404,457
6,348
23
962
7,896
44
3,546
5,229
302
1,240
9,271
19,632
Total all other commercial loans
56,893
71,008
51,867
24,007
28,737
128,411
427
60
21
122
630
28,053
52,234
81,960
51,686
36,947
151,334
402,214
31
245
4,904
5,215
Total residential mortgage loans
52,269
81,991
37,192
156,238
7,897
3,941
3,267
1,184
674
752
47,547
65,262
55
451
508
Total consumer loans
3,943
807
47,998
67
130
84
297
Total Loans
144,874
259,617
357,358
228,348
126,253
519,295
165,725
1,801,470
32,570
6,476
42,945
163
5,209
4,373
7,646
547
20,689
9,722
48,349
145,592
264,826
394,301
238,353
126,823
546,460
176,409
557
1,684
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
6,020
4,664
1,944
1,205
175
913
44,312
59,233
58
836
1,949
1,216
176
971
45,148
149
138
252,089
387,656
251,612
136,582
146,522
439,577
151,546
1,765,584
23,508
7,489
7,148
38,674
3,822
767
1,615
20,716
10,494
43,881
257,393
412,431
262,923
137,357
148,253
467,441
162,341
36
150
356
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
6,442
1,357
1,476
265
22,779
1,622
1,111
7,301
1,281
294
1,132
191
7,391
7,786
The Corporation recognized interest income on nonaccrual loans of $234,000 and $750,000 in the three and nine months ended September 30, 2024 and $317,000 and $744,000 in the three and nine months ended September 30, 2023.
The following table represents the accrued interest receivable written off by reversing interest income during the three-month and nine-month periods ended September 30, 2024 and 2023:
September 30, 2023
19
48
79
197
24
258
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
648
159
1,277
90
19,691
173
11,264
743
Allowance for Credit Losses
The allowance for credit losses (“ACL”) on loans represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The ACL on loans includes two primary components: (i) an allowance established on loans which share similar risk characteristics which are collectively evaluated for credit losses, 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.
Management determines the ACL on loans that are collectively evaluated by considering the following: (a) the weighted-average remaining maturity (WARM) method is used to estimate credit losses, based on the Corporation’s historical loss experience, for pools of loans with similar risk and cash flow characteristics; (b) subjective adjustments are made, generally increasing the ACL, for qualitative risk factors that are deemed likely to cause estimated credit losses to differ from historical experience; and (c) an additional adjustment to expected credit losses is made, based on an economic forecast, and applied for the first 2 years of the weighted-average remaining life of the portfolio.
The following table summarizes the activity related to the allowance for credit losses for the three and nine months ended September 30, 2024 and 2023.
Commercial
All
real estate -
other
Residential
nonowner
owner
commercial
mortgage
Consumer
occupied
loans
12,177
3,678
1,112
514
20,382
Charge-offs
(640)
(570)
(58)
(1,268)
Recoveries
25
Provision (credit) for credit losses on loans
381
(28)
647
1,297
11,918
2,873
3,424
1,760
20,442
12,010
2,116
1,764
400
19,208
(757)
(630)
(297)
(1,684)
51
95
665
1,096
313
2,823
20
10,603
2,025
3,686
2,464
278
19,056
(91)
(98)
34
(268)
(161)
(479)
(933)
10,335
1,864
3,552
1,993
341
18,085
Unallocated
6,305
1,942
4,142
2,751
475
1,000
3,763
(88)
(344)
(234)
(1,000)
(12)
(254)
(299)
30
267
(85)
(524)
(391)
324
(409)
The ACL on loans individually evaluated decreased to $173,000 at September 30, 2024 from $1,230,000 at June 30, 2024 and $743,000 at December 31, 2023, primarily from partial charge-offs on three loans with individual ACLs at June 30, 2024, including two loans with individual ACLs at December 31, 2023.
The ACL on loans collectively evaluated was $20,269,000 at September 30, 2024, $19,152,000 at June 30, 2024 and $18,465,000 at December 31, 2023. The increase in the ACL at September 30, 2024 as compared to June 30, 2024 included an increase related to the economic forecast, an increase in the WARM method estimate based on the Corporation’s net charge-off experience and a net increase related to changes in qualitative adjustments. The increase in the ACL at September 30, 2024 as compared to December 31, 2023 included a net increase related to changes in qualitative adjustments and the net impact of an increase in loans receivable, partially offset by a decrease in the WARM method estimate.
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 nine months ended September 30, 2024 and September 30, 2023, the Corporation made no modifications to borrowers experiencing financial difficulty.
The following table depicts the performance of two loans which were in nonaccrual status at September 30, 2024 that were modified in the fourth quarter 2023:
Payment Status (Amortized Cost Basis)
90+ Days Past Due
Commercial real estate - non-owner occupied:
Non-owner occupied
3,203
The loan that was current at September 30, 2024 matured October 5, 2024, and the Corporation and borrower are engaged in negotiations regarding an extension of the loan term. The Corporation received principal payments totaling $40,000 during the nine months ended September 30, 2024 and recorded a partial charge-off of $640,000 on this loan in the third quarter 2024. There was no specific allowance
on this loan at September 30, 2024, while the specific allowance on the loan was $455,000 at June 30, 2024 and $486,000 at December 30, 2023.
The loan that was past due more than 90 days in the table above was in default with its modified terms at September 30, 2024. The Corporation received payments totaling $24,000 during the nine months September 30, 2024, all of which were applied to principal. There was a specific allowance on this loan of $14,000 at September 30, 2024 and $38,000 at June 30, 2024 and December 31, 2023.
Except as described above, at September 30, 2024 and December 31, 2023, the Corporation had no commitments to lend any additional funds on modified loans and during the three month and nine month periods ended September 30, 2024 and September 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
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
616
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 September 30, 2024 and December 31, 2023 are as follows:
Commitments to extend credit
378,535
395,997
Standby letters of credit
64,938
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 $593,000 at September 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 nine months ended September 30, 2024 and 2023:
Beginning Balance
683
1,154
690
Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13
38
Credit for unfunded commitments
(90)
(292)
(97)
(356)
Ending Balance, September 30
593
900
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At September 30, 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
(4,462)
(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
97
102
292
306
8. BORROWED FUNDS
SHORT-TERM BORROWINGS
Short-term borrowings (initial maturity within one year) include the following:
FHLB-Pittsburgh borrowings
10,000
31,500
Customer repurchase agreements
1,426
2,374
Total short-term borrowings
At September 30, 2024, short-term borrowings included short-term advances maturing in the third and fourth quarters of 2024 totaling $10,000,000 with a weighted average interest rate of 5.29%. 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%.
The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10% at September 30, 2024 and December 31, 2023. The carrying value of the underlying securities was $1,440,000 at September 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 $1,337,673,000 at September 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 $15,971,000 at September 30, 2024 and $15,214,000 at December 31, 2023. The Corporation’s total credit facility with FHLB-Pittsburgh was $945,142,000 at September 30, 2024, including an unused (available) amount of $737,284,000. 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.
The Corporation had available credit with other correspondent banks totaling $75,000,000 at September 30, 2024 and December 31, 2023. These lines of credit are primarily unsecured. No amounts were outstanding at September 30, 2024 or December 31, 2023.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At September 30, 2024, the Corporation had available credit in the amount of $18,602,000 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 $19,387,000 at September 30, 2024 and $20,829,000 at December 31, 2023.
LONG-TERM BORROWINGS – FHLB ADVANCES
Long-term borrowings from FHLB-Pittsburgh are as follows:
Loans maturing in 2024 with a weighted-average rate of 3.90%
9,138
32,161
Loans maturing in 2025 with a weighted-average rate of 4.30%
44,544
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 September 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 third quarter 2024 and $51,000 for the nine-month period ended September 30, 2024, and $16,000 in the third quarter 2023 and $49,000 for the nine-month period ended September 30, 2023, was included in interest expense in the unaudited consolidated statements of income.
At September 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 $29,000 in the third quarter 2024 and $85,000 for the nine-month period ended September 30, 2024, and $27,000 in the third quarter 2023 and $79,000 for the nine-month period ended September 30, 2023, was included in interest expense in the unaudited consolidated statements of income.
At September 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 restricted stock awards to employees vest ratably over three years, and the 2024 restricted stock awards for the independent directors vest over one year. During the three-month period ended September 30, 2024, there was a time-based award of 20,000 shares of restricted stock to the President and Chief Executive Officer pursuant to an amended and restated Employment Agreement with a vesting date of April 30, 2027. Following is a summary of restricted stock awards granted in the nine-month period ended September 30, 2024:
(Dollars in Thousands)
Aggregate
Grant
Date
Number of
Nine Months Ended September 30, 2024 awards:
Time-based awards to independent directors
214
Time-based awards to employees
63,514
1,336
Performance-based awards to employees
19,346
371
92,860
1,921
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 stock-based compensation expense attributable to restricted stock awards amounted to $383,000 in the third quarter 2024 and $320,000 in the third quarter 2023. Total stock-based compensation expense attributable to restricted stock awards amounted to $1,099,000 in the nine-month period ended September 30, 2024 and $1,015,000 in the nine-month period ended September 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. Plaintiffs have filed an application for certification of the suit as a class action. The court has stayed the motions to dismiss pending consideration of the class action certification application. Discovery as to the class action qualification is underway, with depositions of the named plaintiffs scheduled. C&N Bank believes that it has substantial defenses against the action, 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 liability has been recorded for this litigation matter in the accompanying consolidated 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 $143,070,000 at September 30, 2024 and $150,028,000 at December 31, 2023. There were no interest rate swaps originated in the nine-month periods ended September 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 September 30, 2024.
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 a decrease in other noninterest income of $1,000 in the third quarter 2024 and an increase of $1,000 in the nine-month period ended September 30, 2024 as compared to an increase of $1,000 in the third quarter 2023 and $19,000 in the nine months ended September 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 September 30, 2024 and December 31, 2023:
26
At September 30, 2024
At December 31, 2023
Asset Derivatives
Liability Derivatives
Notional
Value (1)
Value (2)
Interest rate swap agreements
71,535
1,991
75,014
2,783
RPA Out
6,988
7,082
RPA In
9,958
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 $1,350,000 at September 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.
At September 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:
401,101
Marketable equity security
889
Servicing rights
2,682
Interest rate swap agreements, assets
Total recurring fair value measurements, assets
8,210
403,100
413,992
Recurring fair value measurements, liabilities:
Interest rate swap agreements, liabilities
Total recurring fair value measurements, liabilities
Nonrecurring fair value measurements, assets:
Loans individually evaluated for credit loss, net
1,449
Total nonrecurring fair value measurements, assets
1,630
28
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 September 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
9/30/2024
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
122.00
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
2,720
2,607
2,653
Originations of servicing rights
91
64
195
113
Unrealized loss included in earnings
(129)
(41)
(172)
(136)
Servicing rights balance, end of period
2,630
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.
At September 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:
1,343
Sales comparison
Discount to appraised value
30% (30)
106
Sales comparison & SBA guaranty
97% (97)
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)
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
2,750
2,746
3,859
Restricted equity securities (included in other assets)
22,509
N/A
21,716
Level 3
1,794,754
1,750,336
Financial liabilities:
Deposits with no stated maturity
1,643,861
1,590,357
Time deposits
492,018
493,398
424,449
423,643
Long-term borrowings
177,338
137,775
Senior debt
13,581
12,706
Subordinated debt
19,602
22,750
Accrued interest payable
2,390
1,525
32
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
Third Quarter 2024 as Compared to Third Quarter 2023
Third quarter 2024 net income was $6,365,000, or $0.41 per diluted share, as compared to $7,591,000, or $0.50 per diluted share, in the third quarter 2023. Significant variances were as follows:
Nine Months Ended September 30, 2024 as Compared to Nine Months Ended September 30, 2023
Net income for the nine-month period ended September 30, 2024 was $17,784,000, or $1.16 per diluted share, as compared to $19,887,000, or $1.29 per diluted share, for the first nine 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)
June 30,
March 31,
(Unaudited)
Interest income
31,326
30,336
30,236
Interest expense
11,881
11,295
10,642
19,445
19,041
19,594
565
954
951
18,880
18,087
18,643
Noninterest income
7,854
6,675
5,678
Noninterest expense
19,255
18,304
18,399
7,479
6,458
5,922
1,366
1,152
1,661
6,113
5,306
4,261
6,066
5,267
4,231
Basic earnings per common share
0.40
0.35
0.28
Diluted earnings per common share
TABLE II – COMPARISON OF NONINTEREST INCOME
Change
1.4
129
32.7
103
7.1
0.5
Net gains from sales of loans
123
51.9
(80)
(51.9)
298
186.3
39
3.6
644
9.9
357
6.5
33.6
215
5.2
2.9
336
74.7
(32)
(6.9)
922
204.9
641
18.6
(100.0)
2,923
15.6
TABLE III - COMPARISON OF NONINTEREST EXPENSE
(3)
0.0
8.6
59
3.2
1.2
7.4
68
14.0
2.3
329
1.8
378
1.1
167
4.2
218
3.9
96
7.0
(363)
(18.3)
(507)
(6.0)
0.1
Additional detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
The presentation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
Allowance for Credit Losses on Loans – A material estimate that is particularly susceptible to significant change is the determination of the allowance for credit losses (ACL) on loans. The Corporation maintains an ACL on loans which represents management’s estimate of expected net charge-offs over the life of the loans. The ACL includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis). Management considers the determination of the ACL on loans to be critical because it requires significant judgment regarding estimates of expected credit losses based on the Corporation’s historical loss experience, current conditions and economic forecasts. Management’s evaluation is based upon a continuous review of the Corporation’s loans, with consideration given to evaluations resulting from examinations performed by regulatory authorities. 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
37
collateral, unforeseen events such as natural disasters and pandemics, and other factors. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly.
Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
NET INTEREST INCOME
The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables IV, V and VI include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 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 September 30, 2024 and 2023
For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $20,361,000 in 2024 was $486,000 (2.4%) higher than in 2023 as average earning assets were $106,852,000 higher in the third quarter 2024 as compared to the third quarter 2023. Average total deposits increased $94,562,000 in the third quarter 2024 over the third quarter 2023. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income in the third quarter 2024 as compared to third quarter 2023 by $613,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $127,000. As presented in Table V, the Net Interest Margin was 3.29% in the third quarter 2024 as compared to 3.35% in the third 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 2.55% in 2024 from 2.73% in 2023. The average yield on earning assets of 5.38% was 0.44% higher in 2024 as compared to 2023, and the average rate on interest-bearing liabilities of 2.83% in 2024 was 0.62% higher.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $33,292,000 in 2024, an increase of $3,962,000, or 13.5% from 2023.
Interest and fees from loans receivable increased $2,639,000 in 2024 as compared to 2023. The fully taxable equivalent yield on loans in 2024 increased to 6.08% from 5.72% in 2023, reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased $71,472,000 (3.9%) to $1,888,470,000 in 2024 from $1,816,998,000 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 $1,622,000 in 2024, an increase of $1,277,000 from the total for 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 5.38% in 2024, up from 4.31% in 2023. The average balance of interest-bearing due from banks was $119,885,000 in 2024, up $88,156,000 from $31,729,000 in 2023. The increase in interest-bearing due from banks included the net impact of the increase in average total deposits of $94,562,000, a reduction in average available-for-sale debt securities (amortized cost) of $54,384,000 and an increase in average borrowed funds of $27,739,000, partially offset by the increase in the average loans receivable of $71,472,000 and the net use of cash that contributed to an increase in average Bank-Owned Life Insurance of $18,911,000.
Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, totaled $2,774,000 in 2024, up $16,000 from 2023, as the average yield on available-for-sale debt securities was 2.45% in 2024, up from 2.17% in 2023. The average balance (at amortized cost) of available-for-sale debt securities decreased $54,384,000.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $3,476,000 to $12,931,000 in 2024 from $9,455,000 in 2023.
Interest expense on deposits increased $3,148,000, as the average rate on interest-bearing deposits increased to 2.62% in 2024 from 1.93% in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,084,654,000 for the third quarter 2024, up $94,562,000 (4.8%) from the third quarter 2023. Within average total deposits, average brokered deposits (primarily time and money market) were $58,782,000 with an average interest rate of 5.28% in the third quarter 2024, as compared to $60,829,000 with an average interest rate of 4.98% in the third quarter 2023. At September 30, 2024, total brokered deposits were $45,051,000. The deposit mix has changed as businesses and consumers have become more interest-rate sensitive in light of higher market rates. In comparing the third quarter 2024 to the third quarter 2023, average time deposits increased $79,272,000, average interest checking deposits increased $31,214,000 and average total money market accounts increased $15,689,000 while average savings deposits decreased $33,928,000.
Interest expense on short-term borrowings decreased $493,000 to $184,000 in 2024 from $677,000 in 2023. The average balance of short-term borrowings decreased to $15,038,000 in 2024 from $49,157,000 in 2023. The average rate on short-term borrowings was 4.87% in 2024 compared to 5.46% in 2023.
Interest expense on long-term borrowings (FHLB advances) increased $819,000 to $1,983,000 in 2024 from $1,164,000 in 2023. The average balance of long-term borrowings was $181,075,000 in 2024, up from an average balance of $119,395,000 in 2023. Over the last several months of 2023 and the first nine 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 and increase cash held with the Federal Reserve. 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 4.36% in 2024 compared to 3.87% in 2023.
Nine-Month Periods Ended September 30, 2024 and 2023
For the nine-month periods, fully taxable equivalent net interest income (a non-GAAP measure) was $59,244,000 in 2024, which was $2,282,000 (3.7%) lower than in 2023. The decrease in net interest income reflected an increase in interest expense of $13,645,000 and an increase in interest income of $11,363,000. 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 nine months ended September 30, 2024 over the nine months ended September 30, 2023 by $1,849,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $4,131,000. As presented in Table V, the Net Interest Margin was 3.30% in the first nine months of 2024 as compared to 3.53% in the first nine 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 2.60% in 2024 from 2.99% in 2023. The average yield on earning assets of 5.31% was 0.50% higher in 2024 as compared to 2023, while the average rate on interest-bearing liabilities of 2.71% in 2024 was 0.89% higher.
Interest income totaled $95,351,000 in 2024, an increase of $11,363,000 from 2023.
Interest and fees from loans receivable increased $10,026,000 in 2024 as compared to 2023. In the nine-month period ended September 30, 2024, the fully taxable equivalent yield on loans was 6.01%, up from 5.60% in the first nine months of 2023, reflecting the effects of primarily rising interest rates on new loan originations and floating-rate loans. Average outstanding loans receivable increased $99,838,000 (5.6%) to $1,877,076,000 in 2024 from $1,777,238,000 in 2023. As noted above, the Corporation has experienced growth in commercial real estate and other commercial loans in 2023 and in the first nine months of 2024.
Income from interest-bearing due from banks totaled $2,521,000 in 2024, an increase of $1,589,000 from 2023. Within this category, the largest asset balance in 2024 and 2023 has been interest-bearing deposits held with the Federal Reserve. The average yield on
interest-bearing due from banks was 5.15% in 2024, up from 4.01% in 2023. The average balance of interest-bearing due from banks was $65,449,000 in 2024, up from $31,076,000 in 2023. Similar to the third quarter 2024 to third quarter 2023 comparison, the net increase in average interest-bearing due from banks for the first nine months of 2024 as compared to 2023 reflected net sources of cash from deposit growth, a reduction in average available-for-sale debt securities and an increase in borrowed funds, partially offset by net uses of cash for loan growth and an increase in Bank-Owned Life Insurance.
Interest income from available-for-sale debt securities decreased $305,000 in 2024 from 2023. The average balance of available-for-sale debt securities (at amortized cost) decreased to $455,944,000 in 2024 from $522,600,000 in 2023. The average yield on available-for-sale debt securities increased to 2.43% for 2024 from 2.20% in 2023.
For the nine-month periods, interest expense increased $13,645,000 to $36,107,000 in 2024 from $22,462,000 in 2023.
Interest expense on deposits increased $13,024,000, as the average rate on interest-bearing deposits increased to 2.48% in 2024 from 1.45% in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $2,034,335,000 for the first nine months of 2024, up $77,578,000 (4.0%) from the first nine months of 2023. Within average total deposits, average brokered deposits (primarily time and money market) were $70,428,000 with an average interest rate of 5.24% in 2024, up from $40,910,000 with an average interest rate of 4.56% in 2023. Average time deposits increased $92,488,000 and average interest checking deposits increased $47,428,000, while the average balance of savings accounts decreased $39,139,000 and average noninterest-bearing demand deposits decreased $31,814,000.
Interest expense on borrowed funds increased $621,000 in 2024 as compared to 2023. Interest expense on short-term borrowings of $1,141,000 in 2024 was down from $2,918,000 in 2023 as the average balance of short-term borrowings decreased to $29,086,000 in 2024 from $75,978,000 in 2023. The average rate on short-term borrowings was 5.24% in 2024 compared to 5.13% in 2023. Interest expense on long-term borrowings (FHLB advances) increased $2,393,000 to $5,294,000 in 2024 from $2,901,000 in 2023. The average balance of long-term borrowings was $166,454,000 in 2024, up from an average balance of $103,817,000 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 4.25% in 2024 compared to 3.74% 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
345
2,521
932
(31)
638
681
(43)
1,887
2,161
(274)
2,774
2,758
8,296
8,601
(305)
Loans receivable:
2,570
9,970
749
680
69
2,149
2,093
Total loans receivable
28,848
26,209
2,639
84,441
74,415
10,026
Other earning assets
93
53
Total Interest Income
33,292
29,330
3,962
95,351
83,988
11,363
Interest-bearing deposits:
Interest checking
3,240
2,360
8,882
4,859
4,023
Money market
2,159
1,669
490
6,256
3,654
2,602
Savings
(10)
157
186
(29)
4,963
3,175
1,788
13,322
6,894
6,428
Total interest-bearing deposits
3,148
13,024
Borrowed funds:
Short-term
(493)
(1,777)
Long-term - FHLB advances
819
2,393
Total borrowed funds
2,519
2,191
328
7,490
6,869
621
Total Interest Expense
3,476
13,645
Net Interest Income
20,361
19,875
486
59,244
61,526
(2,282)
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
493
(2,164)
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities
66
(18)
202
314
(112)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans
139
128
406
Net Interest Income as adjusted to a fully taxable-equivalent basis
41
TABLE V - Analysis of Average Daily Balances and Rates
Three Months
Nine Months
Ended
Rate of
Return/
9/30/2023
Average
Cost of
Balance
Funds %
EARNING ASSETS
119,885
5.38
31,729
4.31
65,449
5.15
31,076
4.01
Available-for-sale debt securities, at amortized cost:
336,246
2.53
379,709
2.17
342,677
2.50
395,070
2.18
113,514
2.24
124,435
113,267
2.23
127,530
2.27
449,760
2.45
504,144
455,944
2.43
522,600
2.20
1,797,224
6.22
1,729,972
5.85
1,787,982
6.15
1,687,593
5.73
91,246
3.27
87,026
3.10
89,094
3.22
89,645
3.12
1,888,470
6.08
1,816,998
5.72
1,877,076
6.01
1,777,238
5.60
3,076
6.21
1,468
4.86
5.61
1,332
4.02
Total Earning Assets
2,461,191
2,354,339
4.94
2,400,684
5.31
2,332,246
4.81
Cash
24,987
22,068
22,619
22,475
Unrealized loss on securities
(47,806)
(63,110)
(51,792)
(59,921)
(20,643)
(19,540)
(20,141)
(18,472)
50,470
31,559
51,647
31,413
Bank premises and equipment
21,793
21,132
21,858
21,262
Intangible assets
54,730
55,125
54,827
55,227
73,320
74,483
81,988
70,369
Total Assets
2,618,042
2,476,056
2,561,690
2,454,599
INTEREST-BEARING LIABILITIES
543,288
2.37
512,074
1.83
525,179
2.26
477,751
1.36
356,487
2.41
340,618
1.94
353,142
344,527
1.42
198,312
0.10
232,240
206,344
245,483
485,708
4.07
406,436
457,662
3.89
365,174
2.52
1,583,795
2.62
1,491,368
1.93
1,542,327
2.48
1,432,935
1.45
15,038
4.87
49,157
5.46
29,086
5.24
75,978
5.13
181,075
4.36
119,395
3.87
166,454
4.25
103,817
3.74
14,875
3.21
14,808
14,857
3.24
14,790
3.25
24,787
3.72
24,676
3.70
24,759
3.75
24,648
235,775
208,036
4.18
235,156
219,233
4.19
Total Interest-bearing Liabilities
1,819,570
2.83
1,699,404
2.21
1,777,483
2.71
1,652,168
1.82
Demand deposits
500,859
498,724
492,008
523,822
Other liabilities
29,226
30,749
29,527
28,091
Total Liabilities
2,349,655
2,228,877
2,299,018
2,204,081
Stockholders' equity, excluding accumulated other comprehensive loss
305,808
296,577
303,209
297,386
(37,421)
(49,398)
(40,537)
(46,868)
Total Stockholders' Equity
268,387
247,179
262,672
250,518
Total Liabilities and Stockholders' Equity
Interest Rate Spread
2.55
2.73
2.60
2.99
Net Interest Income/Earning Assets
3.29
3.35
3.30
3.53
Total Deposits (Interest-bearing and Demand)
2,084,654
1,990,092
2,034,335
1,956,757
42
TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES
Three Months Ended 9/30/2024 vs. 9/30/2023
Nine Months Ended 9/30/2024 vs. 9/30/2023
Change in
Volume
Rate
1,110
1,265
(257)
316
(912)
881
(62)
(37)
(319)
335
(1,149)
844
990
1,580
4,476
5,494
(13)
1,021
1,618
4,463
5,563
1,834
2,128
4,612
6,751
188
692
525
3,498
65
2,509
750
1,038
2,052
4,376
994
2,154
10,381
(435)
(1,836)
661
158
1,950
443
227
501
1,221
2,255
2,763
10,882
613
(127)
1,849
(4,131)
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 third quarter 2024 of $1,448,000 was $398,000 lower than the provision for the third quarter 2023 and the provision for the nine months ended September 30, 2024 of $3,966,000 was $708,000 lower than the amount for the first nine months of 2023 due to lower pre-tax income in 2024. The effective tax rate (tax provision as a percentage of pre-tax income) was 18.5% in the third quarter 2024 compared to 19.6% in the third quarter 2023 and 18.2% for the first nine months of 2024 as compared to 19.0% for the first nine months of 2023. The Corporation’s effective tax rates differ from the statutory federal rate of 21% principally because of the effects of tax-exempt interest income, nondeductible interest expense, state income taxes and other permanent differences.
43
The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at September 30, 2024 and December 31, 2023 represents the following temporary difference components:
Deferred tax assets:
Unrealized holding losses on securities
8,574
4,490
4,230
Purchase accounting adjustments on loans
367
470
Deferred compensation
1,352
Operating leases liability
725
787
Deferred loan origination fees
716
731
Net operating loss carryforward
541
Accrued incentive compensation
494
Other deferred tax assets
1,442
1,316
Total deferred tax assets
18,687
20,225
Deferred tax liabilities:
BOLI surrender
950
Defined benefit plans - ASC 835
270
291
Core deposit intangibles
544
Right-of-use assets from operating leases
Other deferred tax liabilities
77
Total deferred tax liabilities
1,640
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 September 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 September 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
(38,970)
(49,213)
(63,761)
6,087
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost
(8.7)
(10.6)
(11.3)
Market Yield on 5-Year U.S. Treasury Obligations (a)
3.58
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 $38,970,000, or 8.7%, at September 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 0.26% lower at September 30, 2024 in comparison to December 31, 2023, 0.41% lower than at December 31, 2022 and 2.32% higher than at December 31, 2021. The table also shows that the amortized cost basis of the portfolio has been reduced to $447,392,000 at September 30, 2024 from $561,794,000 at December 31, 2022 as proceeds from maturities and sales have been used to help fund loan growth and for other purposes.
Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 3, Quantitative and Qualitative Disclosures about Market Risk.
As described in Note 5 to the unaudited consolidated financial statements, management determined the Corporation does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at September 30, 2024 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of September 30, 2024 and concluded there were no credit-related declines in fair value. Additional information related to the types
45
of securities held at September 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 September 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 September 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 September 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 September 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 $96,241,000, or 5.1% of gross loans receivable. At September 30, 2024, within this segment there were two loans with a total recorded investment of $3,204,000 in nonaccrual status with a specific allowance of $14,000 on one loan. During the third quarter 2024, there was a partial charge-off of $640,000 on the other office loan in nonaccrual status which had a specific allowance of $455,000 at June 30, 2024. The charge-off resulted from a decrease in the appraised value of property which is the primary source of collateral. At September 30, 2024, the carrying value of this loan was $1,846,000. At September 30, 2024, there was no specific allowance on this loan though it remained in nonaccrual status. 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 September 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 $35,652,000 at September 30, 2024 down from $38,652,000 at December 31, 2023.
46
The Corporation is a party to financial instruments with off-balance risk, including commitments to extend credit and standby letters of credit. At September 30, 2024, the total contract amount of commitments to extend credit was $378,535,000 as compared to $395,997,000 at December 31, 2023, and the contract amount of standby letters of credit increased to $64,938,000 at September 30, 2024 from $19,158,000 at December 31, 2023. The increase in standby letters of credit at September 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.
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 September 30, 2024, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $2,698,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2023 was $2,839,000.
At September 30, 2024, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $325,004,000, including loans sold through the MPF Xtra program of $152,880,000 and loans sold through the Original program of $172,124,000. 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 September 30, 2024 and December 31, 2023.
TABLE VII - SUMMARY OF LOANS BY TYPE
470,383
499,104
454,386
358,352
328,662
208,579
Multi-family (5 or more) residential
87,487
64,076
55,406
49,054
54,893
30,474
1-4 Family - commercial purpose
163,233
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
93,205
78,832
95,368
118,488
222,923
67,288
Commercial lines of credit
128,461
117,236
141,444
106,338
105,802
92,509
Political subdivisions
85,479
79,031
86,663
75,401
46,295
46,054
Commercial construction and land
105,255
104,123
60,892
59,505
41,000
32,717
Other commercial loans
19,585
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
383,482
389,262
363,005
327,593
356,532
388,415
1-4 Family residential construction
23,947
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)
43,624
41,503
36,650
33,522
34,566
30,810
All other consumer
22,146
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 September 30, 2024 is as follows:
NON-OWNER OCCUPIED COMMERCIAL REAL ESTATE
% of Non-owner
% of
Occupied CRE
Office
96,241
20.5
5.1
Retail
94,773
20.1
5.0
Industrial
82,946
17.6
4.4
Hotels
72,491
15.4
3.8
Mixed Use
60,800
12.9
63,132
13.4
3.3
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 nine-month periods ended September 30, 2024 and 2023 is as follows:
3 Months
9 Months
Provision (credit) for credit losses:
Off-balance sheet exposures
Total provision (credit) for credit losses
For the quarter ended September 30, 2024, there was a provision for credit losses of $1,207,000, an increase of $2,432,000 compared to a credit for credit losses (reduction in expense) of $1,225,000 in third quarter 2023. For the nine months ended September 30, 2024, there was a provision for credit losses of $2,726,000, an increase of $3,491,000 compared to a credit for credit losses of $765,000 in 2023. For the nine months ended September 30, 2024, the provision related to loans receivable included the impact of increases in the ACL from an increase in qualitative adjustments resulting mainly from changes in external indexes and an increase in past due and nonaccrual loans as well as net charge-offs in excess of specific allowances. The ACL as a percentage of gross loans receivable increased to 1.08% at September 30, 2024 from 1.04% at December 31, 2023; in comparison, the ACL dropped to 0.99% of gross loans receivable at September 30, 2023 from 1.08% upon adoption of CECL on January 1, 2023.
As shown in Table IX, the ACL on loans individually evaluated decreased to $173,000 at September 30, 2024 from $743,000 at December 31, 2023, primarily from partial charge-offs on two loans with individual ACLs at December 31, 2023. In the third quarter 2024, there was a partial charge-off of $640,000 on a non-owner occupied commercial real estate office loan with a specific allowance of $455,000 at June 30, 2024 and $486,000 at December 31, 2023. At September 30, 2024, the carrying value of this loan was $1,846,000 with no specific allowance on the loan. In the second quarter 2024, there was a partial charge-off of $117,000 on a non-owner occupied commercial real estate loan for which there was an ACL of $124,000 at December 31, 2023. At September 30, 2024, there was no ACL on the loan and the carrying value of the loan was $3,276,000. At September 30, 2024, there were two commercial relationships with loans receivable totaling $1,622,000 for which individual ACLs were recorded, including one non-owner occupied office loan with an outstanding balance of $1,357,000 and an individual ACL of $14,000.
Table IX also shows that, at September 30, 2024 as compared to December 31, 2023, the ACL related to collectively evaluated commercial loans increased by a total of $1,741,000 and the ACL on collectively evaluated consumer loans increased $67,000, while the ACL on collectively evaluated residential mortgage loans decreased $4,000. The increase for commercial loans includes the impact of an increase in qualitative adjustments resulting mainly from changes in external indexes and an increase in past due and nonaccrual loans.
In the first nine months of 2024, net charge-offs totaled $1,589,000, or 0.08% (0.11% annualized) of average outstanding loans. In addition to the two charge-offs described above, in the third quarter 2024 there was a partial charge-off of $427,000 on two commercial construction and land loans to one borrower with a specific ACL of $447,000 at June 30, 2024 and no specific ACL at December 31, 2023. At September 30, 2024, the carrying value of these loans totaled $1,883,000 with no specific allowance on the 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.
Table X shows that total nonperforming assets as a percentage of total assets was 0.92% at September 30, 2024, up from 0.75% at December 31, 2023 but lower than at year-end 2020 through 2022. Total nonperforming assets were $24,638,000 at September 30, 2024, up from $18,845,000 at December 31, 2023. Nonperforming loans included an increase in nonaccrual loans of $9,244,000 from December 31, 2023, while loans past due 90 days or more still accruing decreased $3,134,000 from December 31, 2023. In the first nine
49
months of 2024, the net increase in nonaccrual loans included an increase in nonaccrual commercial construction and land loans, primarily to three borrowers.
Table X also shows that loans past due 30-89 days totaled $15,906,000 at September 30, 2024, up from $9,275,000 at December 31, 2023. The net increase includes a multi-family residential loan with a carrying value of $7,650,000 that was 60 days past due at September 30, 2024. The property that collateralizes this loan is a newly-built apartment complex for which construction was completed to the point of allowing tenants to begin occupying the units in the summer of 2024. Based on management’s assessment of appraisal and market information, and support provided by a guarantor, there was no individual ACL on this loan at September 30, 2024.
Over the period 2019-2023 and the first nine 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 September 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
(4,245)
(1,575)
(2,465)
(379)
92
57
Net charge-offs
(1,589)
(225)
(264)
(4,177)
(1,509)
(2,364)
(322)
753
7,255
3,661
3,913
Balance, end of year
Net charge-offs (annualized) as a % of average loans
0.11
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:
Commercial real estate - nonowner occupied
11,904
10,379
9,641
2,714
2,111
1,765
3,811
3,914
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
239
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
18,069
3,478
14,871
2,636
2,895
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
Total nonperforming loans
24,457
18,367
25,322
21,218
23,391
10,425
Foreclosed assets held for sale (real estate)
275
684
1,338
2,886
Total nonperforming assets
24,638
18,845
25,597
21,902
24,729
13,311
Total nonperforming loans as a % of loans
0.99
1.46
0.88
Total nonperforming assets as a % of assets
0.92
0.75
1.04
0.94
1.10
0.80
Allowance for credit losses as a % of total loans
1.08
0.95
0.87
0.69
0.83
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 $19,387,000 at September 30, 2024.
The Corporation’s outstanding, available, and total credit facilities at September 30, 2024 and December 31, 2023 are as follows:
Outstanding
Available
Total Credit
Federal Home Loan Bank of Pittsburgh
207,858
189,021
737,284
737,824
945,142
926,845
Federal Reserve Bank Discount Window
18,602
19,982
Other correspondent banks
75,000
Total credit facilities
830,886
832,806
1,038,744
1,021,827
At September 30, 2024, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term advances of $10,000,000, long-term borrowings of $174,617,000 and letters of credit totaling $23,241,000. At December 31, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term borrowings of $31,500,000, long-term borrowings 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 September 30, 2024, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $223,060,000.
Deposits totaled $2,135,879,000 at September 30, 2024, up $121,073,000 (6.0%) from $2,014,806,000 at December 31, 2023. Excluding brokered deposits, adjusted total deposits at September 30, 2024 were higher by $140,391,000 (7.2%) as compared to December 31, 2023. Brokered deposits totaled $45,051,000 at September 30, 2024, a decrease of $19,318,000 from December 31, 2023. The increase in total deposits, excluding brokered deposits, included an increase in total deposits from municipal relationships of $64,829,000 to $342,541,000 at September 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 September 30, 2024, estimated uninsured deposits totaled $655.6 million, or 30.5% 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 $183.3 million at September 30, 2024. As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.9% of total deposits at September 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 September 30, 2024. Available funding from these sources totaled 160.8% of uninsured deposits and 223.2% of total uninsured and uncollateralized deposits at September 30, 2024.
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Uninsured Deposits Information
Total Deposits - C&N Bank
2,152,136
2,030,909
Estimated Total Uninsured Deposits
655,569
592,206
Portion of Uninsured Deposits that are
Collateralized
183,274
151,031
Uninsured and Uncollateralized Deposits
472,295
441,175
Uninsured and Uncollateralized Deposits as
a % of Total Deposits
21.9
21.7
Available Funding from Credit Facilities
Fair Value of Available-for-sale Debt
Securities in Excess of Pledging Obligations
223,060
256,058
Highly Liquid Available Funding
1,053,946
1,088,864
Highly Liquid Available Funding as a % of
Uninsured Deposits
160.8
183.9
223.2
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 September 30, 2024; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
Details concerning capital ratios at September 30, 2024 and December 31, 2023 are presented below. Management believes, as of September 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 C&N Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. For comparison purposes, the Corporation’s capital ratios are presented along with those of C&N Bank in the table below. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at September 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
September 30, 2024:
Total capital to risk-weighted assets:
Consolidated
298,517
15.72
208,892
≥11
C&N Bank
283,604
14.96
151,630
≥8
199,015
≥10.5
189,538
≥10
208,491
Tier 1 capital to risk-weighted assets:
252,679
13.31
170,912
≥9
262,568
13.85
113,723
≥6
161,107
≥8.5
170,584
Common equity tier 1 capital to risk-weighted assets:
142,427
≥7.5
85,292
≥4.5
132,676
≥7.0
123,200
≥6.5
142,153
Tier 1 capital to average assets:
9.71
208,240
10.15
103,524
≥4
129,405
≥5
207,049
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
To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At September 30, 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
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
54
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 September 30, 2024, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 6.96%.
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 nine months ended September 30, 2024, 26,034 shares were repurchased for a total cost of $443,000, at an average price of $17.02 per share. At September 30, 2024, there were 723,966 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.
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 $30,396,000 at September 30, 2024 and $38,878,000 at December 31, 2023. The increase in stockholders’ equity in the first nine months of 2024 from the change in accumulated other comprehensive loss resulted from a decrease in interest rates. Changes in accumulated other comprehensive loss are excluded from earnings and directly increase or decrease stockholders’ equity. To the extent unrealized losses on available-for-sale debt securities result from credit losses, unrealized losses are recorded as a charge against earnings. The securities section of Management’s Discussion and Analysis and 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 September 30, 2024.
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 (“EVE”). For purposes of these calculations, EVE includes the discounted present values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects the amount of potential changes in net interest income and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.
The projected results based on the model includes the impact of estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Further, the projected results are impacted by assumptions regarding the run-off and the extent of sensitivity to interest rate changes of deposits with no stated maturity (checking, savings and money market accounts). Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and EVE. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.
The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in EVE from the baseline values based on current rates.
Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of September 30, 2024 and December 31, 2023. The Table shows that as of the respective dates, the changes in net interest income and changes in economic value of equity were within the policy limits in all scenarios.
Based on September 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. The modeling results reflect the impact of management’s assumptions that the Corporation’s deposit rates would rise in the increasing rate scenarios to a greater extent than they would fall in the decreasing rate scenarios. Further, results in the downward rate scenarios reflect limitations on the benefit of falling rates on some deposit types due to a 0% assumed floor.
At September 30, 2024 and December 31, 2023, EVE is modeled to decrease compared to the 0 basis point scenario in all of the rising and falling rate scenarios except for a slight (0.6%) increase at September 30, 2024 in the up 100 basis points scenario. In Table XI, EVE is higher at September 30, 2024 as compared to December 31, 2023 in the 0 basis point, down 100 and 200 basis points and all of the rising rate scenarios, but lower in the down 300 and 400 basis point scenarios. The volatility in comparative amounts of EVE reflects the impact of an overall increase in the assumed lives of nonmaturity deposits used in the September 30, 2024 analysis based on an updated study completed in the second quarter 2024. Volatility in EVE values also reflect lower discount rates used in the model at September 30, 2024 than at December 31, 2023, consistent with lower market rates.
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 $30.4 million at September 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
September 30, 2024 Data
Period Ending September 30, 2025
Basis Point
Interest
Net Interest
NII
Change in Rates
Income
Expense
Income (NII)
% Change
Risk Limit
+400
163,203
90,878
72,325
(15.2)
25.0
+300
156,644
79,147
77,497
(9.1)
20.0
+200
150,034
68,641
81,393
(4.5)
15.0
+100
143,342
59,358
83,984
(1.5)
10.0
136,567
51,304
85,263
-100
130,038
46,177
83,861
(1.6)
-200
122,694
41,100
81,594
(4.3)
-300
114,449
36,024
78,425
(8.0)
-400
105,759
31,044
74,715
(12.4)
Economic Value of Equity at September 30, 2024
Present
Equity
459,311
(9.4)
50.0
483,347
(4.7)
45.0
501,999
(1.0)
35.0
510,297
0.6
507,073
478,156
(5.7)
437,986
(13.6)
376,826
(25.7)
298,376
(41.2)
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
(3.1)
385,859
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 September 30, 2024, 26,034 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 third 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
July 1 - 31, 2024
17.06
723,966
August 1 - 31, 2024
September 1 - 30, 2024
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
During the three months ended September 30, 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
3.1
Articles of Incorporation
Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 10-Q filed May 6, 2022
By-laws
Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed February 18, 2022
10.1
Restricted Stock Agreement, dated July 30, 2024, between Citizens & Northern Corporation and J. Bradley Scovill
Incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed July 31, 2024
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 September 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.
November 6, 2024
By: /s/ J. Bradley Scovill
President and Chief Executive Officer
By: /s/ Mark A. Hughes
Treasurer and Chief Financial Officer
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