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目錄

Graphic

美國

證券交易委員會

華盛頓特區20549

表格 10-Q

(標記一個)

根據1934年證券交易所法案第13或15(d)條的季報告

截至2024年6月30日季度結束 September 30, 2024

為過渡期從_______________至_________________________。

委員會文件號碼: 000-16084

CITIZENS & NORTHERN CORPORATION

(依照公司章程規定指定的登記證券名稱)

賓夕法尼亞

    

23-2451943

(依據所在地或其他管轄區)

(國稅局雇主識別號碼)

的註冊地或組織地點)

識別號碼)

90-92號主街, 威爾斯堡, 賓夕法尼亞州 16901

(主要行政辦公室地址)(郵政編碼)

570-724-3411

(註冊人的電話號碼,包括區號)

根據法案第12(b)條註冊的證券:

每個班級的標題

    

交易符號

    

註冊的每個交易所的名稱

普通股票面值為1.00美元

CZNC

納斯達克 資本市場

請檢查標記,確認註冊商是否(1)在過去的12個月內(或更短的期限,註冊商在該期限內需要提交此類報告)提交了證券交易法1934年第13條或15(d)條要求提交的所有報告;並且(2)過去90天一直受到此類報告的要求。 沒有

請以勾選標記表示該登記者是否在過去12個月內(或登記者被要求遞交此類文件的更短期間內)根據Regulation S-t第405條的規定,電子遞交了應遞交的每個互動數據文件。

請以勾選標記表示登記者是否為大型加速遞交人,加速遞交人,非加速遞交人,較小的報告公司或新興增長公司。 請參見《交易法》第120億2條中對“大型加速遞交人”,“加速遞交人”,“較小的報告公司”和“新興增長公司”定義的規定。

大型快速進入文件 加速歸檔人 非加速檔案 較小報告公司 新興成長公司

如果一家新興成長型企業,請勾選“是”表示註冊人選擇不使用根據證券交易所法第13(a)條所提供的任何新的或修改後的財務會計準則的延長過渡期來遵守。

在Check Mark中指示註冊公司是否為空殼公司(根據交易所法規第120億2條的定義)。

是的

請指示在最近切實可行的日期,申報人各類普通股的股份總數。

普通股票(面值1.00美元)

15,414,132 截至2024年10月31日的流通股數

目錄

CITIZENS & NORTHERN CORPORATION – 報表10-Q

CITIZENS & NORTHERN CORPORATION

指數

第一部分。基本財務資訊

 

 

 

項目1.基本報表

 

 

合併資產負債表(未經審核)- 2024年9月30日和2023年12月31日

第3頁

 

 

合併損益表(未經審核)- 截至2024年9月30日和2023年的三個月和九個月期間

第4頁

合併綜合損益表(未經審核)- 截至2024年9月30日和2023年的三個月和九個月期間

第5頁

 

 

合併現金流量表(未經審核)- Nine截至2024年和2023年9月30日的-個月期間

第6頁

 

 

股東權益變動綜合報表(未經審核)-截至2024年和2023年9月30日的三個月和九個月期間

第7頁

 

 

附註未經審核的合併基本報表

第8至32頁

 

 

項目 2. 管理層對財務狀況和業績的討論與分析

頁碼 33 - 55

 

 

項目3.有關市場風險的定量和質量披露

頁碼 56 - 58

第四項。控制與程序。

頁碼 58

 

 

第二部分。其他資訊

第58至60頁

 

 

簽名

第61頁

2

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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

    

September 30, 

    

December 31, 

(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

 

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:

 

 

Noninterest-bearing

$

513,067

$

490,554

Interest-bearing

 

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

 

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

 

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

$

2,670,822

$

2,515,584

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

3

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

(In Thousands, Except Per Share Data)

2024

2023

2024

2023

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:

 

 

 

 

Taxable

 

2,136

 

2,077

 

6,409

 

6,440

Tax-exempt

 

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

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

 

360

 

237

 

786

 

450

Loan servicing fees, net

 

74

 

154

 

434

 

466

Increase in cash surrender value of life insurance

 

458

 

160

 

1,372

 

450

Other noninterest income

 

1,123

 

1,084

 

4,083

 

3,442

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

0

0

0

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

$

0.41

$

0.50

$

1.16

$

1.29

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income

(In Thousands) (Unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

(In Thousands)

2024

    

2023

2024

    

2023

Net income

$

6,365

$

7,591

$

17,784

$

19,887

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

0

0

0

(6)

Other comprehensive income (loss) on available-for-sale debt securities

13,829

(14,865)

10,243

(12,541)

Unfunded pension and postretirement obligations:

 

 

 

 

Changes from plan amendments and actuarial gains and losses

 

0

 

0

 

394

 

(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

 

(22)

 

(14)

 

(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

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

    

Nine Months Ended

 

September 30, 

September 30, 

 

(In Thousands)

2024

    

2023

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

17,784

$

19,887

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

 

 

Provision (credit) for credit losses

 

2,726

 

(765)

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

 

0

 

(6)

Net amortization of securities

1,269

1,556

Increase in cash surrender value of life insurance

 

(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

Net gains from sale of loans

 

(786)

 

(450)

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

 

0

 

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

Other

 

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

 

610

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

$

0

$

390

Leased assets obtained in exchange for new operating lease liabilities

$

187

0

Interest paid

$

35,134

$

21,392

Income taxes paid

$

4,839

$

4,667

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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

 

Accumulated

 

Other

 

Common

 

Treasury

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

Three Months Ended September 30, 2024

 

Shares

 

Shares

 

Stock

 

Capital

 

Earnings

 

Loss

 

Stock

 

Total

Balance, June 30, 2024

 

16,030,172

 

654,190

$

16,030

$

143,352

$

159,859

$

(41,361)

$

(14,659)

$

263,221

Net income

 

 

6,365

 

6,365

Other comprehensive income, net

 

 

11,297

 

11,297

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

 

 

(4,304)

 

(4,304)

Shares issued for dividend reinvestment plan

 

 

(21,688)

(81)

484

 

403

Restricted stock granted

 

 

(20,000)

(448)

448

 

0

Stock-based compensation expense

 

 

383

 

383

Treasury stock purchases

3,538

(60)

(60)

Balance, September 30, 2024

 

16,030,172

 

616,040

$

16,030

$

143,206

$

161,920

$

(30,064)

$

(13,787)

$

277,305

Three Months Ended September 30, 2023

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, June 30, 2023

 

16,030,172

 

762,076

$

16,030

$

143,661

$

153,725

$

(48,073)

$

(17,226)

$

248,117

Net income

 

 

 

 

 

7,591

 

 

 

7,591

Other comprehensive loss, net

 

 

 

 

 

 

(11,753)

 

 

(11,753)

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

 

 

 

 

 

(4,272)

 

 

 

(4,272)

Shares issued for dividend reinvestment plan

 

 

(20,184)

 

 

(36)

 

 

 

457

 

421

Forfeiture of restricted stock

 

 

1,073

 

 

27

 

 

 

(27)

 

0

Stock-based compensation expense

 

 

 

 

320

 

 

 

 

320

Purchase of restricted stock for tax withholding

838

(16)

(16)

Treasury stock purchases

10,683

(203)

(203)

Balance, September 30, 2023

 

16,030,172

 

754,486

$

16,030

$

143,972

$

157,044

$

(59,826)

$

(17,015)

$

240,205

    

    

    

    

    

    

Accumulated

    

    

Other

Common

Treasury

Common

Paid-in

Retained

Comprehensive

Treasury

Nine Months Ended September 30, 2024

Shares

Shares

Stock

Capital

Earnings

Loss

Stock

Total

Balance, December 31, 2023

 

16,030,172

 

735,037

$

16,030

$

144,388

$

157,028

$

(38,437)

$

(16,628)

$

262,381

Net income

 

 

17,784

17,784

Other comprehensive income, net

 

 

8,373

8,373

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

 

 

(12,892)

(12,892)

Shares issued for dividend reinvestment plan

 

 

(64,476)

(237)

1,452

1,215

Restricted stock granted

 

 

(92,860)

(2,094)

2,094

0

Forfeiture of restricted stock

 

 

2,076

50

(50)

0

Stock-based compensation expense

 

 

1,099

1,099

Purchase of restricted stock for tax withholding

 

 

10,229

(212)

(212)

Treasury stock purchases

26,034

(443)

(443)

Balance, September 30, 2024

 

16,030,172

 

616,040

$

16,030

$

143,206

$

161,920

$

(30,064)

$

(13,787)

$

277,305

Nine Months Ended September 30, 2023

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2022

 

16,030,172

 

511,353

$

16,030

$

143,950

$

151,743

$

(49,878)

$

(12,520)

$

249,325

Adoption of ASU 2016-13 (CECL)

(1,652)

(1,652)

Net income

 

 

 

  

 

  

 

19,887

 

  

 

  

 

19,887

Other comprehensive loss, net

 

 

 

  

 

  

 

 

(9,948)

 

  

 

(9,948)

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

 

 

 

  

 

  

 

(12,934)

 

  

 

  

 

(12,934)

Shares issued for dividend reinvestment plan

 

 

(60,871)

 

 

(182)

 

  

 

  

 

1,413

 

1,231

Restricted stock granted

 

 

(53,788)

 

 

(1,314)

 

  

 

  

 

1,314

 

0

Forfeiture of restricted stock

 

 

23,039

 

 

503

 

  

 

  

 

(503)

 

0

Stock-based compensation expense

 

 

 

  

 

1,015

 

  

 

  

 

  

 

1,015

Purchase of restricted stock for tax withholding

 

 

9,453

 

 

  

 

  

 

  

 

(219)

 

(219)

Treasury stock purchases

 

325,300

(6,500)

 

(6,500)

Balance, September 30, 2023

 

16,030,172

 

754,486

$

16,030

$

143,972

$

157,044

$

(59,826)

$

(17,015)

$

240,205

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Unaudited Consolidated Financial Statements

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

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

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 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

ASC 326

(In Thousands)

January 1, 2023

December 31, 2022

Adoption

Loans receivable

$

1,740,846

$

1,740,040

$

806

Allowance for credit losses on loans

18,719

16,615

2,104

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

 

1,218

 

425

 

793

Deferred tax asset, net

 

21,323

 

20,884

 

439

Retained earnings

 

150,091

 

151,743

 

(1,652)

Recently Issued but Not Yet Effective Accounting Pronouncements

In December 2023the 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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.

(In Thousands, Except Share and Per Share Data)

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2024

    

2023

    

2024

    

2023

Basic

  

 

  

 

  

 

  

Net income

$

6,365

$

7,591

$

17,784

$

19,887

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)

$

0.41

$

0.50

$

1.16

$

1.29

Diluted

 

  

 

  

 

  

 

  

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

Dilutive effect of potential common stock arising from stock options

 

0

 

0

 

0

 

4

Diluted weighted-average common shares outstanding

 

15,267,120

 

15,154,797

 

15,254,124

 

15,264,395

Diluted earnings per common share (a)

$

0.41

$

0.50

$

1.16

$

1.29

Weighted-average nonvested restricted shares outstanding

 

131,302

 

113,328

 

121,035

 

120,632

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

Anti-dilutive stock options are excluded from earnings per share calculations. 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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:

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended September 30, 2024

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

$

13,829

$

(2,515)

$

11,314

Reclassification adjustment for (gains) realized in income

0

0

0

Other comprehensive income from available-for-sale debt securities

13,829

(2,515)

11,314

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

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

 

(22)

 

5

 

(17)

Other comprehensive loss on unfunded retirement obligations

(22)

5

(17)

Total other comprehensive income

$

13,807

$

(2,510)

$

11,297

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended September 30, 2023

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(14,865)

$

3,123

$

(11,742)

Reclassification adjustment for (gains) realized in income

0

0

0

Other comprehensive loss from available-for-sale debt securities

(14,865)

3,123

(11,742)

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

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

 

(14)

 

3

 

(11)

Other comprehensive loss on unfunded retirement obligations

(14)

3

(11)

Total other comprehensive loss

$

(14,879)

$

3,126

$

(11,753)

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Nine Months Ended September 30, 2024

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

$

10,243

(1,761)

$

8,482

Reclassification adjustment for (gains) realized in income

0

0

0

Other comprehensive income from available-for-sale debt securities

10,243

(1,761)

8,482

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses

394

(83)

311

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

 

(532)

112

 

(420)

Other comprehensive loss on unfunded retirement obligations

(138)

29

(109)

Total other comprehensive income

$

10,105

$

(1,732)

$

8,373

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Nine Months Ended September 30, 2023

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(12,535)

$

2,632

$

(9,903)

Reclassification adjustment for (gains) realized in income

(6)

1

(5)

Other comprehensive loss from available-for-sale debt securities

(12,541)

2,633

(9,908)

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses

(8)

1

(7)

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

 

(42)

 

9

 

(33)

Other comprehensive loss on unfunded retirement obligations

(50)

10

(40)

Total other comprehensive loss

$

(12,591)

$

2,643

$

(9,948)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Affected Line Item in the

Description

 

Consolidated Statements of Income

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

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

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

 

Other noninterest expense

Income tax effect

Income tax provision

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

(In Thousands)

    

Unrealized

    

    

Accumulated

(Losses)

Unfunded

Other

 

Gains

 

Retirement

 

Comprehensive

 

on Securities

 

Obligations

 

(Loss) Income

Three Months Ended September 30, 2024

 

  

 

  

 

  

Balance, beginning of period

$

(41,710)

$

349

$

(41,361)

Other comprehensive income (loss) during three months ended September 30, 2024

 

11,314

(17)

 

11,297

Balance, end of period

$

(30,396)

$

332

$

(30,064)

Three Months Ended September 30, 2023

 

  

 

  

 

  

Balance, beginning of period

$

(48,536)

$

463

$

(48,073)

Other comprehensive loss during three months ended September 30, 2023

 

(11,742)

 

(11)

 

(11,753)

Balance, end of period

$

(60,278)

$

452

$

(59,826)

(In Thousands)

    

Unrealized

    

    

Accumulated

(Losses)

Unfunded

Other

 

Gains

 

Retirement

 

Comprehensive

 

on Securities

 

Obligations

 

(Loss) Income

Nine Months Ended September 30, 2024

 

  

 

  

 

  

Balance, beginning of period

$

(38,878)

$

441

$

(38,437)

Other comprehensive income (loss) during nine months ended September 30, 2024

 

8,482

(109)

 

8,373

Balance, end of period

$

(30,396)

$

332

$

(30,064)

Nine Months Ended September 30, 2023

 

  

 

  

 

  

Balance, beginning of period

$

(50,370)

$

492

$

(49,878)

Other comprehensive loss during nine months ended September 30, 2023

 

(9,908)

 

(40)

 

(9,948)

Balance, end of period

$

(60,278)

$

452

$

(59,826)

4. CASH AND DUE FROM BANKS

Cash and due from banks at September 30, 2024 and December 31, 2023 include the following:

(In Thousands)

    

September 30, 

    

December 31, 

2024

2023

Cash and cash equivalents

$

181,363

$

52,778

Certificates of deposit

 

2,850

 

4,100

Total cash and due from banks

$

184,213

$

56,878

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

5. SECURITIES

Amortized cost and fair value of available-for-sale debt securities at September 30, 2024 and December 31, 2023 are summarized as follows:

(In Thousands)

    

September 30, 2024

Gross

Gross

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

8,072

$

0

$

(751)

$

7,321

Obligations of U.S. Government agencies

10,271

0

(895)

9,376

Bank holding company debt securities

28,956

0

(5,007)

23,949

Obligations of states and political subdivisions:

 

 

 

 

  

Tax-exempt

 

113,093

342

 

(8,499)

 

104,936

Taxable

 

55,182

 

0

 

(6,748)

 

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

 

22

 

(7,327)

 

66,390

Private label commercial mortgage-backed securities

8,327

 

35

 

0

 

8,362

Total available-for-sale debt securities

$

447,392

$

880

$

(39,850)

$

408,422

(In Thousands)

    

December 31, 2023

Gross

Gross

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

12,325

$

0

$

(1,035)

$

11,290

Obligations of U.S. Government agencies

11,119

0

(1,173)

9,946

Bank holding company debt securities

28,952

0

(5,452)

23,500

Obligations of states and political subdivisions:

 

 

 

 

  

Tax-exempt

 

113,464

311

 

(9,576)

 

104,199

Taxable

 

58,720

 

0

 

(8,609)

 

50,111

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

 

 

  

 

 

  

Residential pass-through securities

 

105,549

 

40

 

(10,184)

 

95,405

Residential collateralized mortgage obligations

 

50,212

 

0

 

(3,750)

 

46,462

Commercial mortgage-backed securities

 

76,412

 

0

 

(9,730)

 

66,682

Private label commercial mortgage-backed securities

8,215

 

0

 

(55)

 

8,160

Total available-for-sale debt securities

$

464,968

$

351

$

(49,564)

$

415,755

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:

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

September 30, 2024

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of the U.S. Treasury

$

0

$

0

$

7,321

(751)

$

7,321

$

(751)

Obligations of U.S. Government agencies

0

0

9,376

(895)

9,376

(895)

Bank holding company debt securities

0

0

23,949

(5,007)

23,949

(5,007)

Obligations of states and political subdivisions:

Tax-exempt

499

(1)

96,678

(8,498)

97,177

(8,499)

Taxable

 

0

0

45,475

(6,748)

45,475

(6,748)

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

 

Residential pass-through securities

0

0

74,328

(7,740)

74,328

(7,740)

Residential collateralized mortgage obligations

 

0

0

29,050

(2,883)

29,050

(2,883)

Commercial mortgage-backed securities

 

0

0

64,018

(7,327)

64,018

(7,327)

Total

$

499

$

(1)

$

350,195

$

(39,849)

$

350,694

$

(39,850)

December 31, 2023

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of the U.S. Treasury

$

0

$

0

$

11,290

$

(1,035)

$

11,290

$

(1,035)

Obligations of U.S. Government agencies

1,595

(9)

8,351

(1,164)

9,946

(1,173)

Bank holding company debt securities

0

0

23,500

(5,452)

23,500

(5,452)

Obligations of states and political subdivisions:

Tax-exempt

3,257

(24)

96,758

(9,552)

100,015

(9,576)

Taxable

 

0

0

 

49,961

(8,609)

 

49,961

 

(8,609)

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

 

 

 

  

 

  

Residential pass-through securities

3,334

(27)

84,297

(10,157)

87,631

(10,184)

Residential collateralized mortgage obligations

 

3,588

(2)

 

32,808

(3,748)

 

36,396

 

(3,750)

Commercial mortgage-backed securities

 

2,327

(16)

 

64,355

(9,714)

 

66,682

 

(9,730)

Private label commercial mortgage-backed securities

8,160

(55)

0

0

8,160

(55)

Total

$

22,261

$

(133)

$

371,320

$

(49,431)

$

393,581

$

(49,564)

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

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2024

    

2023

    

2024

    

2023

    

Gross realized gains from sales

$

0

$

0

$

0

$

89

Gross realized losses from sales

 

0

 

0

 

0

 

(83)

Net realized (losses) gains

$

0

$

0

$

0

$

6

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.

(In Thousands)

September 30, 2024

Amortized

Fair

    

Cost

    

Value

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

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

 

  

 

Residential pass-through securities

 

101,545

 

94,053

Residential collateralized mortgage obligations

 

48,251

 

45,601

Commercial mortgage-backed securities

 

73,695

 

66,390

Private label commercial mortgage-backed securities

8,327

8,362

Total

$

447,392

$

408,422

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)

 

September 30, 

    

December 31, 

 

2024

2023

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

Total

1,892,764

1,848,139

Less: allowance for credit losses on loans

(20,442)

(19,208)

Loans, net

$

1,872,322

$

1,828,931

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following tables presents an analysis of past due loans as of September 30, 2024 and December 31, 2023:

(In Thousands)

As of September 30, 2024

Past Due

Past Due

30-89

90+

Nonaccrual

Current

Total

Days

Days

Loans

Loans

Loans

Commercial real estate - non-owner occupied

$

7,867

$

0

$

7,799

$

705,437

$

721,103

Commercial real estate - owner occupied

 

467

 

0

 

1,741

 

264,269

 

266,477

All other commercial loans

4,999

0

10,151

416,835

431,985

Residential mortgage loans

2,284

0

4,325

400,820

407,429

Consumer loans

 

289

 

56

 

385

 

65,040

 

65,770

Total

$

15,906

$

56

$

24,401

$

1,852,401

$

1,892,764

(In Thousands)

As of December 31, 2023

Past Due

Past Due

30-89

90+

Nonaccrual

Current

Total

Days

Days

Loans

Loans

Loans

Commercial real estate - non-owner occupied

$

2,215

$

126

$

8,412

$

726,589

$

737,342

Commercial real estate - owner occupied

 

849

 

0

 

1,575

 

234,822

 

237,246

All other commercial loans

229

2,593

1,323

395,548

399,693

Residential mortgage loans

5,365

326

3,627

404,396

413,714

Consumer loans

617

 

145

 

240

 

59,142

 

60,144

Total

$

9,275

$

3,190

$

15,177

$

1,820,497

$

1,848,139

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents the recorded investment in loans by credit quality indicators by year of origination as of September 30, 2024:

(In Thousands)

Term Loans by Year of Origination

2024

2023

2022

2021

2020

Prior

Revolving

Total

Commercial real estate - non-owner occupied

 

 

 

 

 

  

 

  

 

  

 

  

Pass

$

29,241

$

98,545

$

158,232

$

78,742

$

53,094

$

256,743

$

0

$

674,597

Special Mention

 

0

 

0

 

26,222

 

2,359

 

0

 

6,468

 

0

 

35,049

Substandard

119

0

63

0

0

11,275

0

11,457

Doubtful

0

0

0

0

0

0

0

0

Total commercial real estate - non-owner occupied

$

29,360

$

98,545

$

184,517

$

81,101

$

53,094

$

274,486

$

0

$

721,103

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

757

$

0

$

757

Commercial real estate - owner occupied

 

 

 

 

 

 

 

 

Pass

$

23,389

$

33,835

$

52,785

$

50,098

$

11,856

$

82,977

$

0

$

254,940

Special Mention

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Substandard

0

5,172

733

2,417

0

3,215

0

11,537

Doubtful

0

0

0

0

0

0

0

0

Total commercial real estate - owner occupied

$

23,389

$

39,007

$

53,518

$

52,515

$

11,856

$

86,192

$

0

$

266,477

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

0

All other commercial loans

 

 

 

 

 

 

 

 

Pass

$

56,294

$

71,062

$

61,114

$

46,638

$

23,682

$

27,489

$

118,178

$

404,457

Special Mention

 

555

 

0

 

6,348

 

0

 

23

 

8

 

962

 

7,896

Substandard

44

0

3,546

5,229

302

1,240

9,271

19,632

Doubtful

0

0

0

0

0

0

0

0

Total all other commercial loans

$

56,893

$

71,062

$

71,008

$

51,867

$

24,007

$

28,737

$

128,411

$

431,985

Year-to-date gross charge-offs

$

0

$

0

$

427

$

60

$

21

$

122

$

0

$

630

Residential mortgage loans

Pass

$

28,053

$

52,234

$

81,960

$

51,686

$

36,947

$

151,334

$

0

$

402,214

Special Mention

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Substandard

0

35

31

0

245

4,904

0

5,215

Doubtful

0

0

0

0

0

0

0

0

Total residential mortgage loans

$

28,053

$

52,269

$

81,991

$

51,686

$

37,192

$

156,238

$

0

$

407,429

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

0

Consumer loans

Pass

$

7,897

$

3,941

$

3,267

$

1,184

$

674

$

752

$

47,547

$

65,262

Special Mention

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Substandard

0

2

0

0

0

55

451

508

Doubtful

0

0

0

0

0

0

0

0

Total consumer loans

$

7,897

$

3,943

$

3,267

$

1,184

$

674

$

807

$

47,998

$

65,770

Year-to-date gross charge-offs

$

0

$

67

$

130

$

7

$

8

$

1

$

84

$

297

Total Loans

Pass

$

144,874

$

259,617

$

357,358

$

228,348

$

126,253

$

519,295

$

165,725

$

1,801,470

Special Mention

 

555

 

0

 

32,570

 

2,359

 

23

 

6,476

 

962

 

42,945

Substandard

163

5,209

4,373

7,646

547

20,689

9,722

48,349

Doubtful

0

0

0

0

0

0

0

0

Total

$

145,592

$

264,826

$

394,301

$

238,353

$

126,823

$

546,460

$

176,409

$

1,892,764

Year-to-date gross charge-offs

$

0

$

67

$

557

$

67

$

29

$

880

84

$

1,684

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents the recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023:

Term Loans by Year of Origination

(In Thousands)

2023

2022

2021

2020

2019

Prior

Revolving

Total

Commercial real estate - non-owner occupied

Pass

$

96,615

$

167,484

$

89,582

$

55,390

$

80,020

$

207,017

 

0

 

696,108

Special Mention

0

20,072

2,446

0

116

6,188

0

28,822

Substandard

0

0

0

18

566

11,828

0

12,412

Doubtful

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Total commercial real estate - non-owner occupied

$

96,615

$

187,556

$

92,028

$

55,408

$

80,702

$

225,033

$

0

$

737,342

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

0

Commercial real estate - owner occupied

Pass

$

33,761

$

37,429

$

52,090

$

12,858

$

17,505

$

71,775

$

0

$

225,418

Special Mention

104

746

0

0

0

166

0

1,016

Substandard

 

5,200

 

0

 

2,567

 

0

 

0

 

3,045

 

0

 

10,812

Doubtful

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Total commercial real estate - owner occupied

$

39,065

$

38,175

$

54,657

$

12,858

$

17,505

$

74,986

$

0

$

237,246

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

0

All other commercial loans

Pass

$

58,393

$

90,560

$

51,813

$

27,718

$

16,421

$

24,326

$

107,234

$

376,465

Special Mention

0

2,690

5,043

8

0

794

301

8,836

Substandard

0

 

1,267

 

1,250

 

453

 

679

 

1,085

 

9,658

 

14,392

Doubtful

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Total all other commercial loans

$

58,393

$

94,517

$

58,106

$

28,179

$

17,100

$

26,205

$

117,193

$

399,693

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

0

$

12

$

12

Residential mortgage loans

Pass

$

57,300

$

87,519

$

56,183

$

39,411

$

32,401

$

135,546

$

0

$

408,360

Special Mention

0

0

0

0

0

0

0

0

Substandard

0

 

0

 

0

 

285

 

369

 

4,700

 

0

 

5,354

Doubtful

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Total residential mortgage loans

$

57,300

$

87,519

$

56,183

$

39,696

$

32,770

$

140,246

$

0

$

413,714

Year-to-date gross charge-offs

$

0

$

0

$

0

$

0

$

0

$

33

$

0

$

33

Consumer loans

Pass

$

6,020

$

4,664

$

1,944

$

1,205

$

175

$

913

$

44,312

$

59,233

Special Mention

0

0

0

0

0

0

0

0

Substandard

0

 

0

 

5

 

11

 

1

 

58

 

836

 

911

Doubtful

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

Total consumer loans

$

6,020

$

4,664

$

1,949

$

1,216

$

176

$

971

$

45,148

$

60,144

Year-to-date gross charge-offs

$

0

$

149

$

0

$

18

$

3

$

3

$

138

$

311

Total Loans

Pass

$

252,089

$

387,656

$

251,612

$

136,582

$

146,522

$

439,577

$

151,546

$

1,765,584

Special Mention

 

104

 

23,508

 

7,489

 

8

 

116

 

7,148

 

301

 

38,674

Substandard

5,200

1,267

3,822

767

1,615

20,716

10,494

43,881

Doubtful

0

0

0

0

0

0

0

0

Total

$

257,393

$

412,431

$

262,923

$

137,357

$

148,253

$

467,441

$

162,341

$

1,848,139

Year-to-date gross charge-offs

$

0

$

149

$

0

$

18

$

3

$

36

150

$

356

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

September 30, 2024

Nonaccrual Loans with

Nonaccrual Loans

Total Nonaccrual

(In Thousands)

No Allowance

with an Allowance

Loans

Commercial real estate - non-owner occupied

$

6,442

$

1,357

$

7,799

Commercial real estate - owner occupied

 

1,476

 

265

 

1,741

All other commercial loans

10,151

0

10,151

Residential mortgage loans

4,325

0

4,325

Consumer loans

 

385

 

0

 

385

Total

$

22,779

$

1,622

$

24,401

December 31, 2023

    

    

Nonaccrual Loans with

Nonaccrual Loans

Total Nonaccrual

    

(In Thousands)

 

No Allowance

with an Allowance

Loans

Commercial real estate - non-owner occupied

$

1,111

$

7,301

$

8,412

Commercial real estate - owner occupied

 

1,281

 

294

 

1,575

All other commercial loans

1,132

191

1,323

Residential mortgage loans

3,627

0

3,627

Consumer loans

 

240

 

0

 

240

Total

$

7,391

$

7,786

$

15,177

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:

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

(In Thousands)

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Commercial real estate - non-owner occupied

$

0

$

22

$

19

$

48

Commercial real estate - owner occupied

 

0

 

0

 

10

 

0

All other commercial loans

79

0

197

0

Residential mortgage loans

6

11

24

17

Consumer loans

 

4

 

0

 

8

 

2

Total

$

89

$

33

$

258

$

67

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

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.
All other commercial loans include loans typically secured by business assets including inventory, equipment and receivables. Also within this category, commercial construction and land loans and some commercial lines of credit are secured by real estate.
Residential mortgage loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.

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Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

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

September 30, 2024

December 31, 2023

Amortized

Amortized

(In Thousands)

Cost

Allowance

Cost

Allowance

Commercial real estate - non-owner occupied

$

7,799

$

14

$

8,412

$

648

Commercial real estate - owner occupied

 

1,741

 

159

 

1,575

 

5

All other commercial loans

10,151

0

1,277

90

Total

$

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

Commercial

All

real estate -

real estate -

other

Residential

nonowner

owner

commercial

mortgage

Consumer

(In Thousands)

occupied

occupied

loans

loans

loans

Total

Balance, June 30, 2024

$

12,177

$

2,901

$

3,678

$

1,112

$

514

$

20,382

Charge-offs

(640)

0

(570)

0

(58)

(1,268)

Recoveries

0

0

5

1

25

31

Provision (credit) for credit losses on loans

 

381

 

(28)

 

311

 

647

 

(14)

 

1,297

Balance, September 30, 2024

$

11,918

$

2,873

$

3,424

$

1,760

$

467

$

20,442

Commercial

Commercial

All

real estate -

real estate -

other

Residential

nonowner

owner

commercial

mortgage

Consumer

(In Thousands)

occupied

occupied

loans

loans

loans

Total

Balance, December 31, 2023

$

12,010

$

2,116

$

2,918

$

1,764

$

400

$

19,208

Charge-offs

(757)

0

(630)

0

(297)

(1,684)

Recoveries

0

0

40

4

51

95

Provision (credit) for credit losses on loans

 

665

757

1,096

(8)

313

 

2,823

Balance, September 30, 2024

$

11,918

$

2,873

$

3,424

$

1,760

$

467

$

20,442

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Commercial

Commercial

All

real estate -

real estate -

other

Residential

nonowner

owner

commercial

mortgage

Consumer

(In Thousands)

occupied

occupied

loans

loans

loans

Total

Balance, June 30, 2023

$

10,603

$

2,025

$

3,686

$

2,464

$

278

$

19,056

Charge-offs

0

0

(7)

0

(91)

(98)

Recoveries

0

0

34

8

18

60

Provision (credit) for credit losses on loans

 

(268)

 

(161)

 

(161)

 

(479)

 

136

 

(933)

Balance, September 30, 2023

$

10,335

$

1,864

$

3,552

$

1,993

$

341

$

18,085

Commercial

Commercial

All

real estate -

real estate -

other

Residential

nonowner

owner

commercial

mortgage

Consumer

(In Thousands)

occupied

occupied

loans

loans

loans

Unallocated

Total

Balance, December 31, 2022

$

6,305

$

1,942

$

4,142

$

2,751

$

475

$

1,000

$

16,615

Adoption of ASU 2016-13 (CECL)

3,763

7

(88)

(344)

(234)

(1,000)

2,104

Charge-offs

0

0

(12)

(33)

(254)

0

(299)

Recoveries

0

0

34

10

30

0

74

Provision (credit) for credit losses on loans

 

267

(85)

(524)

(391)

324

0

 

(409)

Balance, September 30, 2023

$

10,335

$

1,864

$

3,552

$

1,993

$

341

$

0

$

18,085

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:

(In Thousands)

Payment Status (Amortized Cost Basis)

September 30, 2024

    

Current

    

90+ Days Past Due

    

Total

Commercial real estate - non-owner occupied:

 

  

 

  

 

  

Non-owner occupied

$

1,846

$

1,357

$

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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:

(In Thousands)

September 30, 

    

December 31,

2024

2023

Foreclosed residential real estate

$

25

$

47

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

(In Thousands)

September 30, 

    

December 31,

2024

2023

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:

September 30,

December 31,

(In Thousands)

    

2024

    

2023

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:

Three Months Ended

Nine Months Ended

(In Thousands)

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Beginning Balance

$

683

$

1,154

$

690

$

425

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

0

0

0

793

Recoveries

0

38

0

38

Credit for unfunded commitments

(90)

(292)

(97)

(356)

Ending Balance, September 30

$

593

$

900

$

593

$

900

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At September 30, 2024 and December 31, 2023, the net carrying value of goodwill was $52,505,000.

Information related to core deposit intangibles is as follows:

(In Thousands)

    

September 30, 

    

December 31, 

 

2024

2023

 

Gross amount

$

6,639

$

6,639

Accumulated amortization

 

(4,462)

 

(4,170)

Net

$

2,177

$

2,469

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

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2024

    

2023

    

2024

    

2023

Amortization expense

$

97

    

$

102

    

$

292

    

$

306

8. BORROWED FUNDS

SHORT-TERM BORROWINGS

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

(In Thousands)

September 30, 

    

December 31,

2024

2023

FHLB-Pittsburgh borrowings

$

10,000

$

31,500

Customer repurchase agreements

 

1,426

 

2,374

Total short-term borrowings

$

11,426

$

33,874

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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:

(In Thousands)

September 30, 

    

December 31, 

2024

2023

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

0

Total long-term FHLB-Pittsburgh borrowings

$

174,617

$

138,337

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:

(In Thousands)

    

September 30, 

    

December 31, 

2024

2023

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

$

14,882

$

14,831

Total carrying value

$

14,882

$

14,831

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

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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:

(In Thousands)

    

September 30, 

    

December 31, 

2024

2023

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

$

24,802

$

24,717

Total carrying value

$

24,802

$

24,717

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

Fair

Shares

Value

Nine Months Ended September 30, 2024 awards:

Time-based awards to independent directors

10,000

$

214

Time-based awards to employees

63,514

1,336

Performance-based awards to employees

19,346

371

Total

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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:

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(In Thousands)

At September 30, 2024

At December 31, 2023

Asset Derivatives

Liability Derivatives

Asset Derivatives

Liability Derivatives

Notional

Fair

Notional

Fair

Notional

Fair

Notional

Fair

Amount

Value (1)

Amount

Value (2)

Amount

Value (1)

Amount

Value (2)

Interest rate swap agreements

$

71,535

$

1,991

$

71,535

$

1,991

$

75,014

$

2,783

$

75,014

$

2,783

RPA Out

6,988

8

0

0

7,082

11

0

0

RPA In

0

0

9,958

9

0

0

10,000

13

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

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.

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At September 30, 2024 and December 31, 2023, assets and liabilities measured at fair value and the valuation methods used are as follows:

September 30, 2024

Quoted Prices

Other Observable

Unobservable

in Active Markets

Inputs

Inputs

Total

(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Fair Value

Recurring fair value measurements, assets:

 

  

 

  

 

  

 

  

AVAILABLE-FOR-SALE DEBT SECURITIES:

 

  

 

  

 

  

 

  

Obligations of the U.S. Treasury

$

7,321

$

0

$

0

$

7,321

Obligations of U.S. Government agencies

0

9,376

0

9,376

Bank holding company debt securities

0

23,949

0

23,949

Obligations of states and political subdivisions:

 

  

 

 

  

 

Tax-exempt

 

0

 

104,936

 

0

 

104,936

Taxable

 

0

 

48,434

 

0

 

48,434

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

 

  

 

 

  

 

  

Residential pass-through securities

 

0

 

94,053

 

0

 

94,053

Residential collateralized mortgage obligations

 

0

 

45,601

 

0

 

45,601

Commercial mortgage-backed securities

 

0

 

66,390

 

0

 

66,390

Private label commercial mortgage-backed securities

 

0

 

8,362

 

0

 

8,362

Total available-for-sale debt securities

 

7,321

 

401,101

 

0

 

408,422

Marketable equity security

 

889

 

0

 

0

 

889

Servicing rights

 

0

 

0

 

2,682

 

2,682

RPA Out

0

8

0

8

Interest rate swap agreements, assets

0

1,991

0

1,991

Total recurring fair value measurements, assets

$

8,210

$

403,100

$

2,682

$

413,992

Recurring fair value measurements, liabilities:

RPA In

$

0

$

9

$

0

$

9

Interest rate swap agreements, liabilities

0

1,991

0

1,991

Total recurring fair value measurements, liabilities

$

0

$

2,000

$

0

$

2,000

Nonrecurring fair value measurements, assets:

 

  

 

  

 

  

 

  

Loans individually evaluated for credit loss, net

$

0

$

0

$

1,449

$

1,449

Foreclosed assets held for sale

 

0

 

0

 

181

 

181

Total nonrecurring fair value measurements, assets

$

0

$

0

$

1,630

$

1,630

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December 31, 2023

Quoted Prices

Other Observable

Unobservable

in Active Markets

Inputs

Inputs

Total

(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Fair Value

Recurring fair value measurements, assets:

 

  

 

  

 

  

 

  

AVAILABLE-FOR-SALE DEBT SECURITIES:

 

  

 

  

 

  

 

  

Obligations of the U.S. Treasury

$

11,290

$

0

$

0

$

11,290

Obligations of U.S. Government agencies

0

9,946

0

9,946

Bank holding company debt securities

0

23,500

0

23,500

Obligations of states and political subdivisions:

 

  

 

 

  

 

Tax-exempt

 

0

 

104,199

 

0

 

104,199

Taxable

 

0

 

50,111

 

0

 

50,111

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

 

  

 

  

 

  

 

  

Residential pass-through securities

 

0

 

95,405

 

0

 

95,405

Residential collateralized mortgage obligations

 

0

 

46,462

 

0

 

46,462

Commercial mortgage-backed securities

 

0

 

66,682

 

0

 

66,682

Private label commercial mortgage-backed securities

 

0

 

8,160

 

0

 

8,160

Total available-for-sale debt securities

 

11,290

 

404,465

 

0

 

415,755

Marketable equity security

 

871

 

0

 

0

 

871

Servicing rights

 

0

 

0

 

2,659

 

2,659

RPA Out

0

11

0

11

Interest rate swap agreements, assets

0

2,783

0

2,783

Total recurring fair value measurements, assets

$

12,161

$

407,259

$

2,659

$

422,079

Recurring fair value measurements, liabilities,

RPA In

$

0

$

13

$

0

$

13

Interest rate swap agreements, liabilities

0

2,783

0

2,783

Total recurring fair value measurements, liabilities

$

0

$

2,796

$

0

$

2,796

Nonrecurring fair value measurements, assets:

 

  

 

  

 

  

 

  

Impaired loans, net

$

0

$

0

$

7,043

$

7,043

Foreclosed assets held for sale

 

0

 

0

 

478

 

478

Total nonrecurring fair value measurements, assets

$

0

$

0

$

7,521

$

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.

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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

Unobservable

Method or Value As of

Asset

(In Thousands)

Technique

Input(s)

9/30/2024

Servicing rights

$

2,682

 

Discounted cash flow

 

Discount rate

 

13.00

%  

Rate used through modeling period

 

 

Loan prepayment speeds

122.00

%  

Weighted-average PSA

    

Fair Value at

    

  

    

  

    

  

    

  

12/31/2023

Valuation

Unobservable

Method or Value As of

Asset

(In Thousands)

Technique

Input(s)

12/31/2023

Servicing rights

$

2,659

 

Discounted cash flow

 

Discount rate

 

13.00

%  

Rate used through modeling period

 

 

Loan prepayment speeds

131.00

%  

Weighted-average PSA

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

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

(In Thousands)

Three Months Ended

Nine Months Ended

    

September 30, 2024

    

September 30, 2023

    

September 30, 2024

    

September 30, 2023

    

Servicing rights balance, beginning of period

$

2,720

$

2,607

$

2,659

$

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

$

2,682

$

2,630

$

2,682

$

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.

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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

 

Valuation

  

  

  

Average)

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

9/30/2024

9/30/2024

9/30/2024

Technique

Inputs

9/30/2024

Loans individually evaluated for credit loss:

 

  

 

  

 

  

 

  

 

  

  

Commercial real estate - non-owner occupied

$

1,357

$

14

$

1,343

 

Sales comparison

 

Discount to appraised value

30% (30)

% 

Commercial real estate - owner occupied

265

159

106

Sales comparison & SBA guaranty

Discount to appraised value

97% (97)

%

Total loans individually evaluated for credit loss

$

1,622

$

173

$

1,449

 

  

 

  

Foreclosed assets held for sale - real estate:

 

 

  

 

  

 

  

 

  

Residential (1-4 family)

$

25

$

0

$

25

 

Sales comparison

 

Discount to appraised value

62% (62)

%

Commercial real estate

156

0

156

Sales comparison

Discount to appraised value

18%-77% (34)

%

Total foreclosed assets held for sale

$

181

$

0

$

181

 

  

 

  

(Dollars In Thousands)

    

    

  

    

  

    

  

    

  

    

Range (Weighted

 

Valuation

  

  

  

Average)

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

12/31/2023

12/31/2023

12/31/2023

Technique

Inputs

12/31/2023

Loans individually evaluated for credit loss:

 

  

 

  

 

  

 

  

 

  

  

Commercial real estate - non-owner occupied

$

7,301

$

648

$

6,653

 

Sales comparison

 

Discount to appraised value

22%-30% (25)

% 

Commercial real estate - owner occupied

294

5

289

Sales comparison & SBA guaranty

Discount to appraised value

93% (93)

%

All other commercial loans

191

90

101

Liquidation & SBA guaranty

Discount to appraised value

0%-76% (17)

%

Total loans individually evaluated for credit loss

$

7,786

$

743

$

7,043

 

  

 

  

  

Foreclosed assets held for sale - real estate:

 

 

  

 

  

 

  

 

  

  

Residential (1-4 family)

$

47

$

0

$

47

 

Sales comparison

 

Discount to appraised value

20%-62% (50)

%

Commercial real estate

431

0

431

Sales comparison

Discount to appraised value

18%-50% (45)

%

Total foreclosed assets held for sale

$

478

$

0

$

478

 

  

 

  

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

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

(In Thousands)

Fair Value

September 30, 2024

December 31, 2023

Hierarchy

Carrying

Fair

Carrying

Fair

    

Level

    

Amount

    

Value

    

Amount

    

Value

Financial assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

Level 1

$

181,363

$

181,363

$

52,778

$

52,778

Certificates of deposit

 

Level 2

 

2,750

 

2,746

 

4,100

 

3,859

Restricted equity securities (included in other assets)

 

Level 2

 

22,509

 

N/A

 

21,716

 

N/A

Loans, net

 

Level 3

 

1,872,322

 

1,794,754

 

1,828,931

 

1,750,336

Accrued interest receivable

 

Level 2

 

9,419

 

9,419

 

9,140

 

9,140

Financial liabilities:

 

  

 

 

 

  

 

  

Deposits with no stated maturity

 

Level 2

 

1,643,861

 

1,643,861

 

1,590,357

 

1,590,357

Time deposits

 

Level 2

 

492,018

493,398

 

424,449

 

423,643

Short-term borrowings

 

Level 2

 

11,426

11,426

 

33,874

 

33,874

Long-term borrowings

 

Level 2

 

174,617

177,338

 

138,337

 

137,775

Senior debt

Level 2

14,882

13,581

14,831

12,706

Subordinated debt

Level 2

24,802

19,602

24,717

22,750

Accrued interest payable

 

Level 2

 

2,390

 

2,390

 

1,525

 

1,525

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

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

changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
changes in general economic conditions
adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, sources of liquidity and capital funding, and regulatory responses to these developments
the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses
current, pending or future legislation or regulation that could have a negative effect on the Corporation’s revenue and businesses, including rules and regulations relating to capital and liquidity requirements, bank products and financial services, and the Corporation’s ability to address, and the expense related to complying, with those requirements
downturn in demand for loan, deposit and other financial services in the Corporation’s market area
increased competition from other banks and non-bank providers of financial services
technological changes and increased technology-related costs
information security breach or other technology difficulties or failures
changes in accounting principles, or the application of generally accepted accounting principles
failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions
fraud and cyber malfunction risks as usage of artificial intelligence continues to expand

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

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:

Net interest income of $20,156,000 in the third quarter 2024 was $493,000 higher than in the third quarter 2023. 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. The net interest margin was 3.29% in the third quarter 2024, down from 3.35% in the third quarter 2023. The interest rate spread decreased 0.18%, as the average rate on interest-bearing liabilities increased 0.62%, while the average yield on earning assets increased 0.44%.  

For the quarter ended September 30, 2024, there was a provision for credit losses of $1,207,000, an increase of $2,432,000 in expense compared to a credit for credit losses (reduction in expense) of $1,225,000 in the third quarter 2023. The allowance for credit losses (“ACL”) as a percentage of gross loans receivable was 1.08% at September 30, 2024 as compared to 0.99% at September 30, 2023.

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Noninterest income of $7,133,000 in the third quarter 2024 increased $644,000 from the third quarter 2023 amount. Significant variances included the following:

ØEarnings from the increase in cash surrender value of life insurance of $458,000 increased $298,000 from the third quarter 2023 as the average balance of Bank-Owned Life Insurance increased to $50,470,000 in the third quarter 2024 from $31,559,000 in the third quarter 2023.

ØBrokerage and insurance revenue of $523,000 increased $129,000 due to an increase in sales volume.

ØNet gains from sale of loans of $360,000 increased $123,000 from the third quarter 2023, reflecting an increase in volume of residential mortgage loans sold.

ØService charges on deposit accounts increased $103,000 from the third quarter 2024 reflecting an increase in volume of fees.

Noninterest expense of $18,269,000 in the third quarter 2024 increased $329,000 (1.8%) from the third quarter 2023 including increases of $109,000 in net occupancy and equipment expense, $68,000 in professional fees, $60,000 in other expenses and $59,000 in data processing and telecommunications expenses.

The income tax provision of $1,448,000, or 18.5% of pre-tax income, for the third quarter 2024 decreased $398,000 from $1,846,000 or 19.6% of pre-tax income, for the third quarter 2023 consistent with the decrease in pre-tax income.

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:

Net interest income totaled $58,642,000 in the nine months ended September 30, 2024, a decrease of $2,164,000 from the total for the first nine months of 2023. The net interest margin was 3.30% for the first nine months of 2024, down from 3.53% in the corresponding period of 2023. The interest rate spread decreased 0.39%, as the average rate on interest-bearing liabilities was higher by 0.89% while the average yield on earning assets increased 0.50%. Average total earning assets increased $68,438,000. Average total loans increased $99,838,000 (5.6%) and average total deposits increased $77,578,000 (4.0%).

For the nine months ended September 30, 2024, the provision for credit losses was $2,726,000, compared to a credit for credit losses (reduction in expense) of $765,000 in the first nine months of 2023 resulting in an increase of $3,491,000. 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 related to changes in external indexes and an increase in past due and nonaccrual loans as well as net charge-offs in excess of specific allowances at December 31, 2023. The credit related to loans receivable for the nine months ended September 30, 2023 was mainly attributable to qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, as well as a reduction in the Corporation’s average net charge-off experience, used in the calculation of the ACL. In the first nine months of 2024, the ACL increased $1,234,000 to 1.08% of loans receivable at September 30, 2024 as compared to 1.04% at December 31, 2023. For the nine months ended September 30, 2024, net charge-offs totaled $1,589,000, or 0.08% of average loans receivable as compared to $225,000 or 0.02% annualized for the first nine months of 2023.

Noninterest income totaled $21,662,000 in the first nine months of 2024, up $2,923,000 from the total for the first nine months of 2023. Significant variances included the following:

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ØEarnings from the increase in cash surrender value of life insurance of $1,372,000 increased $922,000 as the average balance of Bank-Owned Life Insurance increased to $51,647,000 in the nine months ended September 30, 2024 from $31,413,000 in the first nine months of 2023.

ØOther noninterest income of $4,083,000 increased $641,000 as dividends on FHLB-Pittsburgh and Federal Reserve stock totaled $1,292,000, an increase of $400,000, and income from tax credits related to donations increased $120,000.

ØBrokerage and insurance revenue of $1,589,000 increased $400,000 due to an increase in sales volume.

ØTrust revenue of $5,857,000 increased $357,000, consistent with appreciation in the trading prices of many U.S. equity securities and includes revenue from new business.

ØNet gains from sale of loans of $786,000 increased $336,000, reflecting an increase in volume of residential mortgage loans sold.

ØService charges on deposit accounts of $4,336,000 increased $215,000 reflecting an increase in volume of fees.

Noninterest expense totaled $55,828,000 for the first nine months of 2024, a decrease of $79,000 from the total for the first nine months of 2023. Significant variances included the following:  

ØOther noninterest expense of $7,936,000 decreased $507,000. Within this category, significant variances included the following:
For the first nine months of 2024, there was a reduction in expense of $513,000 related to the defined benefit postretirement medical benefit plan, including a curtailment of $469,000 related to plan adjustments in the first quarter 2024. In comparison, in the first nine months of 2023, there was a reduction in expense associated with the postretirement plan of $15,000.
Legal fees totaled $491,000 in the first nine months of 2024, a decrease of $209,000, mainly due to lower fees incurred related to non-litigation-related corporate matters.
ØProfessional fees of $1,625,000 decreased $363,000 as 2023 included $389,000 of conversion costs related to a change in Wealth Management platform for providing brokerage and investment advisory services.

ØSalaries and employee benefits expense of $33,460,000 increased $378,000, including an increase in base salaries expense of $690,000, or 3.1% and an increase of $451,000 in cash and stock-based incentive compensation, while estimated contributions to the Employee Stock Ownership Plan and Supplemental Executive Retirement Plan decreased $638,000 and health insurance expense decreased $344,000.

The income tax provision of $3,966,000, or 18.2% of pre-tax income, for the nine months ended September 30, 2024 decreased $708,000 from $4,674,000, or 19.0% of pre-tax income, for nine months ended September 30, 2023. The decrease in income tax provision in 2024 reflected the decrease in pre-tax income of $2,811,000.

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TABLE I – QUARTERLY FINANCIAL DATA

(Dollars In Thousands,

For the Three Months Ended :

Except Per Share Data)

September 30, 

June 30, 

March 31, 

December 31, 

September 30, 

(Unaudited)

    

2024

2024

2024

    

2023

2023

Interest income

$

33,087

$

31,326

$

30,336

$

30,236

$

29,118

Interest expense

 

12,931

 

11,881

 

11,295

 

10,642

 

9,455

Net interest income

 

20,156

 

19,445

 

19,041

 

19,594

 

19,663

Provision (credit) for credit losses

 

1,207

 

565

 

954

 

951

 

(1,225)

Net interest income after provision (credit) for credit losses

 

18,949

 

18,880

 

18,087

 

18,643

 

20,888

Noninterest income

 

7,133

 

7,854

 

6,675

 

5,678

 

6,489

Noninterest expense

 

18,269

 

19,255

 

18,304

 

18,399

 

17,940

Income before income tax provision

 

7,813

 

7,479

 

6,458

 

5,922

 

9,437

Income tax provision

 

1,448

 

1,366

 

1,152

 

1,661

 

1,846

Net income

$

6,365

$

6,113

$

5,306

$

4,261

$

7,591

Net income attributable to common shares

$

6,311

$

6,066

$

5,267

$

4,231

$

7,534

Basic earnings per common share

$

0.41

$

0.40

$

0.35

$

0.28

$

0.50

Diluted earnings per common share

$

0.41

$

0.40

$

0.35

$

0.28

$

0.50

NONINTEREST INCOME

TABLE II – COMPARISON OF NONINTEREST INCOME

(Dollars in Thousands)

Three Months Ended

 

September 30, 

$

%

 

    

2024

2023

    

Change

Change

 

    

Trust revenue

$

1,946

$

1,919

$

27

1.4

%

Brokerage and insurance revenue

 

523

394

129

32.7

%

Service charges on deposit accounts

 

1,546

1,443

103

7.1

%

Interchange revenue from debit card transactions

 

1,103

1,098

5

0.5

%

Net gains from sales of loans

 

360

237

123

51.9

%

Loan servicing fees, net

 

74

154

(80)

(51.9)

%

Increase in cash surrender value of life insurance

 

458

160

298

186.3

%

Other noninterest income

 

1,123

1,084

39

3.6

%

Total noninterest income

$

7,133

$

6,489

$

644

9.9

%

(Dollars in Thousands)

Nine Months Ended

 

September 30, 

$

%

 

    

2024

2023

    

Change

Change

 

    

Trust revenue

$

5,857

$

5,500

$

357

6.5

%

Brokerage and insurance revenue

 

1,589

1,189

400

33.6

%

Service charges on deposit accounts

 

4,336

4,121

215

5.2

%

Interchange revenue from debit card transactions

 

3,205

3,115

90

2.9

%

Net gains from sales of loans

 

786

450

336

74.7

%

Loan servicing fees, net

 

434

466

(32)

(6.9)

%

Increase in cash surrender value of life insurance

 

1,372

450

922

204.9

%

Other noninterest income

 

4,083

3,442

641

18.6

%

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

0

6

(6)

(100.0)

%

Total noninterest income

$

21,662

$

18,739

$

2,923

15.6

%

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NONINTEREST EXPENSE

TABLE III - COMPARISON OF NONINTEREST EXPENSE

(Dollars in Thousands)

 Three Months Ended 

 

September 30, 

 $ 

 % 

 

 

2024

 

2023

 

 Change 

 

 Change 

Salaries and employee benefits

    

$

10,875

    

$

10,878

    

$

(3)

    

0.0

%

Net occupancy and equipment expense

 

1,377

 

1,268

 

109

 

8.6

%

Data processing and telecommunications expense

 

1,882

 

1,823

 

59

 

3.2

%

Automated teller machine and interchange expense

 

510

 

504

 

6

 

1.2

%

Pennsylvania shares tax

 

433

 

403

 

30

 

7.4

%

Professional fees

 

555

 

487

 

68

 

14.0

%

Other noninterest expense

2,637

2,577

60

2.3

%

Total noninterest expense

$

18,269

$

17,940

$

329

 

1.8

%

(Dollars in Thousands)

Nine Months Ended

 

September 30, 

 $ 

 % 

 

 

2024

 

2023

 

 Change 

 

 Change 

Salaries and employee benefits

    

$

33,460

    

$

33,082

    

$

378

    

1.1

%

Net occupancy and equipment expense

 

4,160

 

3,993

 

167

 

4.2

%

Data processing and telecommunications expense

 

5,877

 

5,659

 

218

 

3.9

%

Automated teller machine and interchange expense

 

1,470

 

1,374

 

96

 

7.0

%

Pennsylvania shares tax

 

1,300

 

1,210

 

90

 

7.4

%

Professional fees

 

1,625

 

1,988

 

(363)

 

(18.3)

%

Other noninterest expense

7,936

8,443

(507)

(6.0)

%

Total noninterest expense

$

55,828

$

55,749

$

79

 

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

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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.  

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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 AND EARNING ASSETS

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

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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.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE

Three Months Ended

Nine Months Ended

September 30, 

Increase/

.

September 30, 

Increase/

(In Thousands)

    

2024

    

2023

    

(Decrease)

    

2024

    

2023

    

(Decrease)

    

INTEREST INCOME

Interest-bearing due from banks

$

1,622

$

345

$

1,277

$

2,521

$

932

$

1,589

Available-for-sale debt securities:

 

 

 

 

 

 

Taxable

 

2,136

 

2,077

 

59

 

6,409

 

6,440

 

(31)

Tax-exempt

 

638

 

681

 

(43)

 

1,887

 

2,161

 

(274)

Total available-for-sale debt securities

 

2,774

 

2,758

 

16

 

8,296

 

8,601

 

(305)

Loans receivable:

 

 

 

 

 

 

Taxable

 

28,099

 

25,529

 

2,570

 

82,292

 

72,322

 

9,970

Tax-exempt

 

749

 

680

 

69

 

2,149

 

2,093

 

56

Total loans receivable

 

28,848

 

26,209

 

2,639

 

84,441

 

74,415

 

10,026

Other earning assets

 

48

 

18

 

30

 

93

 

40

 

53

Total Interest Income

 

33,292

 

29,330

 

3,962

 

95,351

 

83,988

 

11,363

INTEREST EXPENSE

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

Interest checking

 

3,240

 

2,360

 

880

 

8,882

 

4,859

 

4,023

Money market

 

2,159

 

1,669

 

490

 

6,256

 

3,654

 

2,602

Savings

 

50

 

60

 

(10)

 

157

 

186

 

(29)

Time deposits

 

4,963

 

3,175

 

1,788

 

13,322

 

6,894

 

6,428

Total interest-bearing deposits

 

10,412

 

7,264

 

3,148

 

28,617

 

15,593

 

13,024

Borrowed funds:

 

 

 

 

 

 

Short-term

 

184

 

677

 

(493)

 

1,141

 

2,918

 

(1,777)

Long-term - FHLB advances

 

1,983

 

1,164

 

819

 

5,294

 

2,901

 

2,393

Senior notes, net

120

120

0

360

359

1

Subordinated debt, net

 

232

 

230

 

2

 

695

 

691

 

4

Total borrowed funds

 

2,519

 

2,191

 

328

 

7,490

 

6,869

 

621

Total Interest Expense

 

12,931

 

9,455

 

3,476

 

36,107

 

22,462

 

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.

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

Increase/

September 30, 

Increase/

2024

    

2023

    

(Decrease)

2024

    

2023

(Decrease)

Net Interest Income Under U.S. GAAP

$

20,156

$

19,663

$

493

$

58,642

$

60,806

$

(2,164)

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

66

84

(18)

202

314

(112)

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

139

128

11

400

406

(6)

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

$

20,361

$

19,875

$

486

$

59,244

$

61,526

$

(2,282)

41

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE V - Analysis of Average Daily Balances and Rates

(Dollars in Thousands)

Three Months

Three Months

 

Nine Months

Nine Months

 

Ended

Rate of

Ended

Rate of

 

Ended

Rate of

Ended

Rate of

 

9/30/2024

Return/

9/30/2023

Return/

 

9/30/2024

Return/

9/30/2023

Return/

 

Average

Cost of

Average

Cost of

 

Average

Cost of

Average

Cost of

 

    

Balance

    

Funds %

    

Balance

    

Funds %

 

Balance

    

Funds %

    

Balance

    

Funds %

 

EARNING ASSETS

 

  

 

  

 

  

 

  

  

 

  

 

  

 

  

Interest-bearing due from banks

$

119,885

 

5.38

%

$

31,729

 

4.31

%

$

65,449

5.15

%  

$

31,076

 

4.01

%

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

 

 

 

 

  

 

  

Taxable

336,246

 

2.53

%

379,709

 

2.17

%

342,677

2.50

%  

395,070

 

2.18

%

Tax-exempt

 

113,514

 

2.24

%

 

124,435

 

2.17

%

 

113,267

2.23

%  

 

127,530

 

2.27

%

Total available-for-sale debt securities

 

449,760

 

2.45

%

 

504,144

 

2.17

%

 

455,944

 

2.43

%  

 

522,600

 

2.20

%

Loans receivable:

 

  

 

 

  

 

  

 

  

 

 

  

 

  

Taxable

 

1,797,224

 

6.22

%

 

1,729,972

 

5.85

%

 

1,787,982

6.15

%  

 

1,687,593

 

5.73

%

Tax-exempt

 

91,246

 

3.27

%

 

87,026

 

3.10

%

 

89,094

3.22

%  

 

89,645

 

3.12

%

Total loans receivable

 

1,888,470

 

6.08

%

 

1,816,998

 

5.72

%

 

1,877,076

 

6.01

%  

 

1,777,238

 

5.60

%

Other earning assets

 

3,076

 

6.21

%

 

1,468

 

4.86

%

 

2,215

 

5.61

%  

 

1,332

 

4.02

%

Total Earning Assets

 

2,461,191

 

5.38

%

 

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)

 

  

Allowance for credit losses

 

(20,643)

 

  

 

(19,540)

 

  

 

(20,141)

 

 

(18,472)

 

  

Bank-owned life insurance

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

 

  

Other assets

 

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

 

  

 

  

 

  

 

  

 

  

 

 

  

 

  

Interest-bearing deposits:

 

  

 

 

  

 

  

 

 

 

  

 

  

Interest checking

$

543,288

 

2.37

%

$

512,074

 

1.83

%

$

525,179

2.26

%  

$

477,751

 

1.36

%

Money market

 

356,487

 

2.41

%

 

340,618

 

1.94

%

 

353,142

2.37

%  

 

344,527

 

1.42

%

Savings

 

198,312

 

0.10

%

 

232,240

 

0.10

%

 

206,344

0.10

%  

 

245,483

 

0.10

%

Time deposits

 

485,708

 

4.07

%

 

406,436

 

3.10

%

 

457,662

3.89

%  

 

365,174

 

2.52

%

Total interest-bearing deposits

 

1,583,795

 

2.62

%

 

1,491,368

 

1.93

%

 

1,542,327

 

2.48

%  

 

1,432,935

 

1.45

%

Borrowed funds:

 

  

 

 

  

 

 

  

 

 

  

 

  

Short-term

 

15,038

 

4.87

%

 

49,157

 

5.46

%

 

29,086

5.24

%  

 

75,978

 

5.13

%

Long-term - FHLB advances

 

181,075

 

4.36

%

 

119,395

 

3.87

%

 

166,454

4.25

%  

 

103,817

 

3.74

%

Senior notes, net

14,875

3.21

%

14,808

3.22

%

14,857

3.24

%

14,790

3.25

%

Subordinated debt, net

 

24,787

 

3.72

%

 

24,676

 

3.70

%

 

24,759

3.75

%  

 

24,648

 

3.75

%

Total borrowed funds

 

235,775

 

4.25

%

 

208,036

 

4.18

%

 

235,156

 

4.25

%  

 

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

 

  

Accumulated other comprehensive loss

 

(37,421)

 

  

 

(49,398)

 

  

 

(40,537)

 

 

(46,868)

 

  

Total Stockholders' Equity

 

268,387

 

  

 

247,179

 

  

 

262,672

 

 

250,518

 

  

Total Liabilities and Stockholders' Equity

$

2,618,042

 

$

2,476,056

 

  

$

2,561,690

 

$

2,454,599

 

  

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

 

  

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

42

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands)

Three Months Ended 9/30/2024 vs. 9/30/2023

.

Nine Months Ended 9/30/2024 vs. 9/30/2023

Change in

Change in

Total

 

Change in

Change in

Total

    

Volume

    

Rate

    

Change

 

Volume

    

Rate

    

Change

EARNING ASSETS

 

  

 

  

 

  

  

 

  

 

  

Interest-bearing due from banks

$

1,110

$

167

$

1,277

$

1,265

$

324

$

1,589

Available-for-sale debt securities:

 

 

 

 

 

 

Taxable

 

(257)

 

316

 

59

 

(912)

 

881

 

(31)

Tax-exempt

 

(62)

 

19

 

(43)

 

(237)

 

(37)

 

(274)

Total available-for-sale debt securities

 

(319)

 

335

 

16

 

(1,149)

 

844

 

(305)

Loans receivable:

 

  

 

  

 

 

  

 

  

 

Taxable

 

990

1,580

 

2,570

 

4,476

5,494

 

9,970

Tax-exempt

 

31

38

 

69

 

(13)

69

 

56

Total loans receivable

 

1,021

 

1,618

 

2,639

 

4,463

 

5,563

 

10,026

Other earning assets

 

22

 

8

 

30

 

33

 

20

 

53

Total Interest Income

 

1,834

 

2,128

 

3,962

 

4,612

 

6,751

 

11,363

 

  

 

  

 

  

 

  

 

  

 

  

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

 

188

692

880

 

525

3,498

4,023

Money market

 

65

425

490

 

93

2,509

2,602

Savings

 

(9)

(1)

(10)

 

(27)

(2)

(29)

Time deposits

 

750

1,038

1,788

 

2,052

4,376

6,428

Total interest-bearing deposits

 

994

 

2,154

 

3,148

 

2,643

 

10,381

 

13,024

Borrowed funds:

 

 

 

 

 

 

Short-term

 

(435)

(58)

(493)

 

(1,836)

59

(1,777)

Long-term - FHLB advances

 

661

158

819

 

1,950

443

2,393

Senior notes, net

0

0

0

2

(1)

1

Subordinated debt, net

 

1

1

2

 

4

0

4

Total borrowed funds

 

227

 

101

 

328

 

120

 

501

 

621

Total Interest Expense

 

1,221

 

2,255

 

3,476

 

2,763

 

10,882

 

13,645

 

 

 

 

 

 

Net Interest Income

$

613

$

(127)

$

486

$

1,849

$

(4,131)

$

(2,282)

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

INCOME TAXES

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. 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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at September 30, 2024 and December 31, 2023 represents the following temporary difference components:

    

September 30, 

    

December 31, 

(In Thousands)

2024

2023

Deferred tax assets:

 

  

 

  

Unrealized holding losses on securities

$

8,574

$

10,335

Allowance for credit losses on loans

4,490

4,230

Purchase accounting adjustments on loans

 

367

 

470

Deferred compensation

1,426

1,352

Operating leases liability

 

725

 

787

Deferred loan origination fees

 

716

 

731

Net operating loss carryforward

453

541

Accrued incentive compensation

494

463

Other deferred tax assets

 

1,442

 

1,316

Total deferred tax assets

 

18,687

 

20,225

 

  

 

  

Deferred tax liabilities:

 

  

 

  

BOLI surrender

 

0

 

950

Defined benefit plans - ASC 835

 

90

 

119

Bank premises and equipment

 

270

 

291

Core deposit intangibles

 

478

 

544

Right-of-use assets from operating leases

 

725

 

787

Other deferred tax liabilities

 

77

 

93

Total deferred tax liabilities

 

1,640

 

2,784

Deferred tax asset, net

$

17,047

$

17,441

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.

44

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The composition of the available-for-sale debt securities portfolio at September 30, 2024 and December 31, 2023, 2022 and 2021 is as follows:

(Dollars In Thousands)

September 30, 2024

December 31, 2023

 

December 31, 2022

December 31, 2021

Amortized

Fair

Amortized

Fair

 

Amortized

Fair

Amortized

Fair

 

Cost

 

Value

 

Cost

 

Value

Cost

 

Value

Cost

 

Value

Obligations of the U.S. Treasury

$

8,072

7,321

$

12,325

11,290

$

35,166

$

31,836

$

25,058

$

24,912

Obligations of U.S. Government agencies

10,271

9,376

11,119

9,946

25,938

23,430

23,936

24,091

Bank holding company debt securities

28,956

23,949

28,952

23,500

28,945

25,386

18,000

17,987

Obligations of states and political subdivisions:

 

 

 

 

 

 

Tax-exempt

 

113,093

104,936

 

113,464

104,199

 

146,149

 

132,623

 

143,427

 

148,028

Taxable

 

55,182

48,434

 

58,720

50,111

 

68,488

 

56,812

 

72,182

 

72,765

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

 

 

 

  

 

  

 

  

 

  

Residential pass-through securities

 

101,545

94,053

 

105,549

95,405

 

112,782

 

99,941

 

98,048

 

98,181

Residential collateralized mortgage obligations

 

48,251

45,601

 

50,212

46,462

 

44,868

 

40,296

 

44,015

 

44,247

Commercial mortgage-backed securities

 

73,695

66,390

 

76,412

66,682

 

91,388

 

79,686

 

86,926

 

87,468

Private label commercial mortgage-backed securities

8,327

8,362

8,215

8,160

8,070

8,023

0

0

Total Available-for-Sale Debt Securities

$

447,392

$

408,422

$

464,968

$

415,755

$

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)

%

1.2

%

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

of securities held at September 30, 2024, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:

Bank holding company debt securities – All of the Corporation’s holdings of bank holding company debt securities were investment grade and there have been no payment defaults. There were seven securities with face amounts ranging from $3 million to $5 million, including one senior security and six subordinated securities. All of the issuers have publicly traded common stock. At September 30, 2024, the securities have external ratings ranging from BBB-/Baa3 to A-.
Obligations of states and political subdivisions (municipal bonds) – All of the Corporation’s holdings of municipal bonds were investment grade and there have been no payment defaults. Summary ratings information at September 30, 2024, based on the amortized cost basis and reflecting the lowest enhanced or underlying rating by Moody’s, Standard & Poors or Fitch, is as follows: AAA or pre-refunded – 22% of the portfolio; AA – 71%; A – 7%.
Private label commercial mortgage-backed securities (PLCMBS) – There were two PLCMBS securities, both of which were from the most senior payment (subordination) classes of their respective issuances. These securities were investment grade (rated Aaa), and there have been no payment defaults on these securities.

Based on the results of management’s assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at September 30, 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 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 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)

September 30, 

December 31, 

    

2024

    

2023

    

2022

    

2021

    

2020

    

2019

Commercial real estate - non-owner occupied:

 

 

  

 

  

 

  

 

  

 

  

Non-owner occupied

$

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

Total commercial real estate - non-owner occupied

721,103

737,342

675,597

582,433

582,473

386,174

Commercial real estate - owner occupied

266,477

237,246

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

Total all other commercial loans

431,985

399,693

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

407,429

413,714

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

65,770

60,144

54,874

49,359

50,063

46,961

Total

1,892,764

1,848,139

1,740,040

1,564,849

1,644,209

1,182,222

Less: allowance for credit losses on loans

(20,442)

(19,208)

(16,615)

(13,537)

 

(11,385)

 

(9,836)

Loans, net

$

1,872,322

$

1,828,931

$

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

(In Thousands)

September 30, 

% of Non-owner

% of

2024

Occupied CRE

Total Loans

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

%

3.2

%

Other

63,132

13.4

%

3.3

%

Total Non-owner Occupied CRE Loans

$

470,383

Total Gross Loans

$

1,892,764

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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:

(In Thousands)

3 Months

3 Months

9 Months

9 Months

Ended

Ended

Ended

Ended

September 30, 

September 30, 

September 30, 

September 30, 

2024

2023

2024

2023

Provision (credit) for credit losses:

Loans receivable

$

1,297

$

(933)

$

2,823

$

(409)

Off-balance sheet exposures

 

(90)

 

(292)

 

(97)

 

(356)

Total provision (credit) for credit losses

$

1,207

$

(1,225)

$

2,726

$

(765)

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(Dollars In Thousands)

Nine Months Ended

September 30, 

September 30, 

Years Ended December 31, 

    

2024

    

2023

  

  

2023

  

2022

    

2021

    

2020

    

2019

    

Balance, beginning of year

$

19,208

$

16,615

$

16,615

$

13,537

$

11,385

$

9,836

$

9,309

Adoption of ASU 2016-13 (CECL)

 

0

 

2,104

 

2,104

 

0

 

0

 

0

 

0

Charge-offs

 

(1,684)

 

(299)

 

(356)

 

(4,245)

 

(1,575)

 

(2,465)

 

(379)

Recoveries

 

95

 

74

 

92

 

68

 

66

 

101

 

57

Net charge-offs

 

(1,589)

 

(225)

 

(264)

 

(4,177)

 

(1,509)

 

(2,364)

 

(322)

Provision (credit) for credit losses on loans

 

2,823

 

(409)

 

753

 

7,255

 

3,661

 

3,913

 

849

Balance, end of year

$

20,442

$

18,085

$

19,208

$

16,615

$

13,537

$

11,385

$

9,836

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

(In Thousands)

September 30, 

December 31,

January 1,

2024

2023

2023

Loans individually evaluated

$

173

$

743

$

751

Loans collectively evaluated:

Commercial real estate - nonowner occupied

11,904

10,379

9,641

Commercial real estate - owner occupied

2,714

2,111

1,765

All other commercial loans

3,424

3,811

3,914

Residential mortgage

1,760

1,764

2,407

Consumer

467

400

241

Total Allowance

$

20,442

$

19,208

$

18,719

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PRIOR TO CECL ADOPTION

(In Thousands)

As of December 31, 

    

2022

    

2021

    

2020

    

2019

ASC 310 - Impaired loans - individually evaluated

$

453

$

740

$

925

$

1,051

ASC 450 - Collectively evaluated:

 

  

 

  

 

  

 

  

Commercial

 

10,845

 

7,553

 

5,545

 

3,913

Residential mortgage

 

4,073

 

4,338

 

4,091

 

4,006

Consumer

 

244

 

235

 

239

 

281

Unallocated

 

1,000

 

671

 

585

 

585

Total Allowance

$

16,615

$

13,537

$

11,385

$

9,836

TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS

(Dollars In Thousands)

September 30, 

As of December 31, 

    

2024

    

2023

    

2022

    

2021

    

2020

    

2019

    

Loans individually evaluated with a valuation allowance

$

1,622

$

7,786

$

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

 

1,670

Purchased credit impaired loans

0

0

1,027

6,558

6,841

441

Total individually evaluated loans

$

19,691

$

11,264

$

19,358

$

15,734

$

17,818

$

5,486

Total loans past due 30-89 days and still accruing

$

15,906

$

9,275

$

7,079

$

5,106

$

5,918

$

8,889

Nonperforming assets:

 

 

  

 

  

 

  

 

  

 

  

Purchased credit impaired loans

$

0

$

0

$

1,027

$

6,558

$

6,841

$

441

Other nonaccrual loans

24,401

15,177

22,058

12,441

14,575

8,777

Total nonaccrual loans

24,401

15,177

23,085

18,999

21,416

9,218

Total loans past due 90 days or more and still accruing

 

56

 

3,190

 

2,237

 

2,219

 

1,975

 

1,207

Total nonperforming loans

 

24,457

 

18,367

 

25,322

 

21,218

 

23,391

 

10,425

Foreclosed assets held for sale (real estate)

 

181

 

478

 

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

 

1.29

%  

 

0.99

%  

 

1.46

%  

 

1.36

%  

 

1.42

%  

 

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

%  

 

1.04

%  

 

0.95

%  

 

0.87

%  

 

0.69

%  

 

0.83

%  

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

LIQUIDITY

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

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

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

(In Thousands)

    

September 30, 

    

December 31, 

    

September 30, 

    

December 31, 

    

September 30, 

    

December 31, 

2024

2023

2024

2023

2024

2023

Federal Home Loan Bank of Pittsburgh

$

207,858

$

189,021

$

737,284

$

737,824

$

945,142

$

926,845

Federal Reserve Bank Discount Window

 

0

 

0

 

18,602

 

19,982

 

18,602

 

19,982

Other correspondent banks

 

0

 

0

 

75,000

 

75,000

 

75,000

 

75,000

Total credit facilities

$

207,858

$

189,021

$

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Uninsured Deposits Information

September 30, 

December 31, 

2024

2023

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

$

830,886

$

832,806

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

%  

Highly Liquid Available Funding as a % of

Uninsured and Uncollateralized Deposits

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.

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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.

(Dollars in Thousands)

Minimum To Be

 

Minimum To Maintain

Well

 

Minimum

Capital Conservation

Capitalized Under

Minimum To Meet

 

Capital

Buffer at Reporting

Prompt Corrective

the Corporation's

 

Actual

Requirement

Date

Action Provisions

Policy Thresholds

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

September 30, 2024:

  

  

  

  

  

  

  

  

  

  

 

Total capital to risk-weighted assets:

  

  

  

  

  

  

  

  

  

  

 

Consolidated

$

298,517

 

15.72

%  

N/A

N/A

N/A

N/A

N/A

N/A

$

208,892

≥11

%

C&N Bank

 

283,604

 

14.96

%  

151,630

 

≥8

%

199,015

 

≥10.5

%

189,538

 

≥10

%

208,491

 

≥11

%

Tier 1 capital to risk-weighted assets:

 

 

 

 

  

 

 

  

 

 

  

 

 

  

Consolidated

 

252,679

 

13.31

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

170,912

 

≥9

%

C&N Bank

 

262,568

 

13.85

%  

113,723

 

≥6

%

161,107

 

≥8.5

%

151,630

 

≥8

%

170,584

 

≥9

%

Common equity tier 1 capital to risk-weighted assets:

 

 

 

 

  

 

 

  

 

 

  

 

  

Consolidated

 

252,679

 

13.31

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

142,427

 

≥7.5

%

C&N Bank

 

262,568

 

13.85

%  

85,292

 

≥4.5

%

132,676

 

≥7.0

%

123,200

 

≥6.5

%

142,153

 

≥7.5

%

Tier 1 capital to average assets:

 

 

 

 

  

 

 

  

 

 

  

 

 

  

Consolidated

 

252,679

 

9.71

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

208,240

 

≥8

%

C&N Bank

 

262,568

 

10.15

%  

103,524

 

≥4

%

N/A

 

N/A

 

129,405

 

≥5

%

207,049

 

≥8

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

December 31, 2023:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

$

290,425

 

15.67

%  

N/A

N/A

N/A

N/A

N/A

N/A

$

203,809

≥11

%

C&N Bank

 

275,307

 

14.89

%  

147,925

 

≥8

%

194,151

 

≥10.5

%

184,906

 

≥10

%

203,396

 

≥11

%

Tier 1 capital to risk-weighted assets:

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Consolidated

 

245,810

 

13.27

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

166,753

 

≥9

%

C&N Bank

 

255,409

 

13.81

%  

110,943

 

≥6

%

157,170

 

≥8.5

%

147,925

 

≥8

%

166,415

 

≥9

%

Common equity tier 1 capital to risk-weighted assets:

 

 

 

 

  

 

 

  

 

 

  

 

  

Consolidated

 

245,810

 

13.27

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

138,961

 

≥7.5

%

C&N Bank

 

255,409

 

13.81

%  

83,208

 

≥4.5

%

129,434

 

≥7.0

%

120,189

 

≥6.5

%

138,679

 

≥7.5

%

Tier 1 capital to average assets:

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Consolidated

 

245,810

 

9.87

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

199,151

 

≥8

%

C&N Bank

 

255,409

 

10.32

%  

99,010

 

≥4

%

N/A

 

N/A

 

123,762

 

≥5

%

198,020

 

≥8

%

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

 

7.0

%

Minimum tier 1 capital ratio

 

6.0

%

Minimum tier 1 capital ratio plus capital conservation buffer

 

8.5

%

Minimum total capital ratio

 

8.0

%

Minimum total capital ratio plus capital conservation buffer

 

10.5

%

A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:

Capital Conservation Buffer

    

Maximum Payout

 

(as a % of risk-weighted assets)

(as a % of eligible retained income)

 

Greater than 2.5%

No payout limitation applies

≤2.5% and >1.875%

60

%

≤1.875% and >1.25%

40

%

≤1.25% and >0.625%

20

%

≤0.625%

0

%

At September 30, 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices of the Corporation’s financial instruments. In addition to the effects of interest rates, the market prices of the Corporation’s available-for-sale debt securities are affected by fluctuations in the risk premiums (amounts of spread over risk-free rates) demanded by investors. Management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).

The Corporation’s major category of market risk, interest rate risk, is discussed in the following section.

INTEREST RATE RISK

The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the economic value of equity (“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.

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Under U.S. generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive income (loss) within stockholders’ equity. Increases in interest rates have caused the fair value of the Corporation’s available-for-sale debt securities to decrease, resulting in an accumulated other comprehensive loss 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

(In Thousands)

Period Ending September 30, 2025

Basis Point

Interest

Interest

Net Interest

NII

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

%

0

136,567

51,304

85,263

0.0

%

0.0

%

-100

130,038

46,177

83,861

(1.6)

%

10.0

%

-200

122,694

41,100

81,594

(4.3)

%

15.0

%

-300

114,449

36,024

78,425

(8.0)

%

20.0

%

-400

105,759

31,044

74,715

(12.4)

%

25.0

%

Economic Value of Equity at September 30, 2024

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$

459,311

(9.4)

%

50.0

%

+300

483,347

(4.7)

%

45.0

%

+200

501,999

(1.0)

%

35.0

%

+100

510,297

0.6

%

25.0

%

0

507,073

0.0

%

0.0

%

-100

478,156

(5.7)

%

25.0

%

-200

437,986

(13.6)

%

35.0

%

-300

376,826

(25.7)

%

45.0

%

-400

298,376

(41.2)

%

50.0

%

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December 31, 2023 Data

(In Thousands)

Period Ending December 31, 2024

Basis Point

Interest

Interest

Net Interest

NII

NII

Change in Rates

Income

Expense

Income (NII)

% Change

Risk Limit

+400

$

148,407

$

81,707

$

66,700

(21.5)

%

25.0

%

+300

143,333

70,165

73,168

(13.9)

%

20.0

%

+200

138,291

59,859

78,432

(7.7)

%

15.0

%

+100

133,224

50,797

82,427

(3.0)

%

10.0

%

0

127,920

42,979

84,941

0.0

%

0.0

%

-100

122,446

37,701

84,745

(0.2)

%

10.0

%

-200

116,922

32,462

84,460

(0.6)

%

15.0

%

-300

110,919

27,710

83,209

(2.0)

%

20.0

%

-400

104,495

23,067

81,428

(4.1)

%

25.0

%

Economic Value of Equity at December 31, 2023

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$

330,130

(21.2)

%

50.0

%

+300

359,302

(14.3)

%

45.0

%

+200

385,045

(8.1)

%

35.0

%

+100

405,178

(3.3)

%

25.0

%

0

419,199

0.0

%

0.0

%

-100

406,957

(2.9)

%

25.0

%

-200

406,145

(3.1)

%

35.0

%

-300

385,859

(8.0)

%

45.0

%

-400

363,763

(13.2)

%

50.0

%

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.

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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

Shares

Number of

Purchased

Shares that May

as Part of

Yet

Publicly

be Purchased

Total Number

Average

Announced

Under

of Shares

Price Paid

Plans

the Plans or

Period

Purchased

per Share

or Programs

Programs

July 1 - 31, 2024

 

3,538

$

17.06

 

3,538

 

723,966

August 1 - 31, 2024

 

0

$

0

 

0

 

723,966

September 1 - 30, 2024

 

0

$

0

 

0

 

723,966

Total

3,538

$

17.06

3,538

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 6.       Exhibits

3.1

Articles of Incorporation

    

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

 

 

3.2

By-laws

 

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

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

 

Filed herewith

 

 

 

32.

Section 1350 certifications

 

Filed herewith

 

 

 

101.INS

Inline XBRL Instance Document.

 

Filed herewith

 

 

 

101.SCH

Inline XBRL Schema Document.

Filed herewith

 

101.CAL

Inline XBRL Calculation Linkbase Document.

Filed herewith

101.DEF

Inline XBRL Definition Linkbase Document.

Filed herewith

101.LAB

Inline XBRL Label Linkbase Document.

Filed herewith

101.PRE

Inline XBRL Presentation Linkbase Document.

Filed herewith

104

The cover page of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline XBRL (contained in Exhibit 101).

Filed herewith

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SIGNATURES

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

 

 

CITIZENS & NORTHERN CORPORATION

 

 

 

 

 

November 6, 2024

 

By: /s/ J. Bradley Scovill

Date

 

President and Chief Executive Officer

 

 

 

 

 

 

 

November 6, 2024

 

By: /s/ Mark A. Hughes

Date

 

Treasurer and Chief Financial Officer

 

 

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