10-K
CITIZENS & NORTHERN CORP (CZNC)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________________.
Commission file number: 0-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
| PENNSYLVANIA | 23-2451943 |
|---|---|
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
90-92 MAIN STREET, WELLSBORO, PA 16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
|---|---|---|
| Common Stock Par Value $1.00 | CZNC | NASDAQ Capital Market |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻ No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻ No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,“ “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ Accelerated filer ⌧ Non-accelerated filer ◻ Smaller reporting company ◻ Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2023, the registrant’s most recently completed second fiscal quarter, was $285,962,462.
The number of shares of common stock outstanding at February 29, 2024 was 15,378,065.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 25, 2024 are incorporated by reference into Parts III and IV of this report.
Table of Contents TABLE OF CONTENTS
| Page(s) | |
|---|---|
| Part I: | |
| Item 1. Business | 3-5 |
| Item 1A. Risk Factors | 5-9 |
| Item 1B. Unresolved Staff Comments | 9 |
| Item 1C. Cybersecurity | 9-10 |
| Item 2. Properties | 10 |
| Item 3. Legal Proceedings | 11 |
| Item 4. Mine Safety Disclosure | 11 |
| Part II. | |
| Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 11-13 |
| Item 6. Reserved | 13 |
| Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations | 13-38 |
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 38-41 |
| Item 8. Financial Statements and Supplementary Data | 42-93 |
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 94 |
| Item 9A. Controls and Procedures | 94 |
| Item 9B. Other Information | 95 |
| Part III: | |
| Item 10. Directors, Executive Officers and Corporate Governance | 95 |
| Item 11. Executive Compensation | 95 |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 95 |
| Item 13. Certain Relationships and Related Transactions, and Director Independence | 95 |
| Item 14. Principal Accountant Fees and Services | 95 |
| Part IV: | |
| Item 15. Exhibits and Financial Statement Schedules | 96-100 |
| Signatures | 101 |
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Table of Contents PART I
ITEM 1. BUSINESS
Citizens & Northern Corporation (“Corporation”) is a holding company whose principal activity is community banking. The Corporation’s principal office is located in Wellsboro, Pennsylvania. The largest subsidiary is Citizens & Northern Bank (“C&N Bank” or the “Bank”). The Corporation’s other wholly-owned subsidiaries are Citizens & Northern Investment Corporation and Bucktail Life Insurance Company (“Bucktail”). Citizens & Northern Investment Corporation was formed in 1999 to engage in investment activities. Bucktail reinsures credit and mortgage life and accident and health insurance on behalf of C&N Bank.
Over the past few years, the Corporation has been employing a growth strategy. In 2019 and 2020, the Corporation has expanded into Southeastern Pennsylvania by acquisitions and Southcentral Pennsylvania by opening new branches. The Corporation acquired Covenant Financial, Inc. (“Covenant”), effective July 1, 2020. Covenant was the parent company of Covenant Bank, a commercial bank which operated a community bank office in Bucks County, Pennsylvania and another in Chester County, Pennsylvania. The Covenant acquisition followed the 2019 acquisition of Monument Bancorp, Inc. (“Monument”), a commercial bank with offices in Bucks County. In Southcentral Pennsylvania, in 2021, the Corporation converted the lending office in York, Pennsylvania to a full-service branch and established a new branch in Lancaster, Pennsylvania. Mainly as a result of the acquisitions and subsequent growth in the newer markets, the Corporation’s consolidated total assets at December 31, 2023 of $2.5 billion were up 52% from the corresponding total at December 31, 2019. Similarly, gross loans of $1.8 billion at December 31, 2023 were up 56% from December 31, 2019 and total deposits of $2.0 billion were up 61% from December 31, 2019.
C&N Bank is a Pennsylvania banking institution that was formed by the consolidation of Northern National Bank of Wellsboro and Citizens National Bank of Towanda in 1971. C&N Bank has held its current name since May 6, 1975, at which time C&N Bank changed its charter from a national bank to a Pennsylvania bank. The Bank has expanded its presence over the past several decades through a series of mergers as well as by opening new branch and lending offices and providing access to banking services via the internet and through ATMs. At December 31, 2023, the Bank had 29 branch offices, including 22 in the Northern tier/Northcentral region of Pennsylvania, 1 in the Southern tier of New York State, 4 in Southeastern Pennsylvania (3 in Bucks County and 1 in Chester County) and 2 in Southcentral Pennsylvania (York and Lancaster). In addition to its branch locations, the Bank has a lending office in Elmira, New York.
C&N Bank provides an extensive range of banking services, including deposit and loan products for personal and commercial customers. The Bank also provides wealth management services through its trust department and C&N Financial Services, LLC (“CNFS”). The trust department offers a wide range of financial services, such as 401(k) plans, retirement planning, estate planning, estate settlements and asset management. CNFS, a wholly-owned subsidiary of the Bank, is a licensed insurance agency that provides insurance products to individuals and businesses and through a broker-dealer arrangement, offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. CNFS’s operations are not significant in relation to the total operations of the Corporation.
Northern Tier Holding LLC, acquires, holds and disposes of real property acquired by the Bank through foreclosure procedures. C&N Bank is the sole member of Northern Tier Holding LLC.
All phases of the Bank’s business are competitive. The Bank competes with online financial institutions, local commercial banks headquartered in our market areas and other commercial banks with branches in our market area. Many of the online financial institutions and some of the banks that have branches in our market areas are larger in overall size. With respect to lending activities and attracting deposits, the Bank also competes with savings banks, savings and loan associations, insurance companies, regulated small loan companies and credit unions. Also, the Bank competes with mutual funds, exchange-traded funds and other investment vehicles for deposits. C&N Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management, brokerage and insurance services. The Bank is generally competitive with all financial institutions in our service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The Bank serves a diverse customer base and is not economically dependent on any small group of customers or on any individual industry.
At December 31, 2023, C&N Bank had total assets of $2,501,822,000, total deposits of $2,030,909,000 and net loans outstanding of $1,828,931,000. 3
Table of Contents Most activities of the Corporation and its subsidiaries are regulated by federal or state agencies. The primary regulatory relationships are described as follows:
| ● | The Corporation is a bank holding company formed under the provisions of Section 3 of the Federal Reserve Act. The Corporation is under the direct supervision of the Federal Reserve and must comply with the reporting requirements of the Federal Bank Holding Company Act. |
|---|---|
| ● | C&N Bank is a state-chartered, Federal Reserve member bank, supervised by the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking and Securities. |
| --- | --- |
| ● | The Pennsylvania Department of Insurance regulates CNFS’s insurance activities. Brokerage products are offered through third party networking agreements. |
| --- | --- |
| ● | Bucktail is incorporated in the state of Arizona and supervised by the Arizona Department of Insurance. |
| --- | --- |
A copy of the Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current events reports on Form 8-K, and amendments to these reports, will be furnished without charge upon written request to the Corporation’s Treasurer at P.O. Box 58, Wellsboro, PA 16901. Copies of these reports will be furnished as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission. The information is also available through the Corporation’s web site at www.cnbankpa.com.
Human Capital
The Corporation’s Board of Directors and executive leadership team have established the following mission, vision and values:
Mission: Creating value through lifelong relationships with our customers, teammates, shareholders and communities.
Vision: Every customer says “C&N is the ONLY bank I need.”
Values: Teamwork, Respect, Responsibility and Accountability, Excellence, Integrity, Client Focus, Have Fun.
We recognize that our ability to create value on a consistent basis is highly dependent upon the effectiveness of our team.
The Corporation’s key human capital management objectives are to attract and retain diverse raw and seasoned talent that fits our values and culture. Our talent strategy focuses on acquiring new employees through branding and outreach programs, developing employees though a robust onboarding program, ongoing training, and performance management, and retaining employees through recognition, engagement, and an attractive total rewards package. At December 31, 2023, the Corporation had 404 full-time equivalent employees.
Diversity and Inclusion
At C&N Bank, we are committed to creating value through relationships. At the heart of this mission is a promise of excellence in service to all people, as demonstrated by our commitment to equity of opportunity, inclusion and our fostering of a spirit of belonging. We live our values of respect, integrity and excellence by creating access and providing support to help our diverse constituents of customers, teammates, shareholders and communities in achieving their financial goals. We embrace inclusion of all of our stakeholders as an important component of our vision to be the ONLY bank our customers need.
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Table of Contents
Compensation and Benefits
The Corporation offers competitive compensation to attract and retain talent. Our generous total rewards package includes market-competitive salary, bonuses or sales commissions, short-term and long-term equity incentives, healthcare and retirement benefits, and paid time off. Employees have regular performance reviews and salary raises commensurate with performance. Employees have access to a holistic suite of items within our employee assistance program that caters to physical, emotional, and mental wellbeing for the employee and their family.
Training and Development
The Corporation provides a robust training and development program that supports our culture, prepares employees for their immediate role, develops them for long term success at the Bank and supports personal enrichment. We offer functional training, culture building exercises, personal development, C&N Bank history, C&N Bank integration and ongoing technical training throughout each year. Employees also have access to additional educational and development opportunities including tuition reimbursement and certification programs.
Communication and Engagement
At C&N, we believe in the importance of employee communication and engagement. We utilize several methods to foster engagement, including activities such as Employee Recognition programs, Service Anniversary Awards, Bank wide monthly calls, semi-annual Bank wide events, annual employee surveys, focus groups, daily huddles, and the Giving Back, Giving Together community service program. We believe keeping our team well informed, connected, and appreciated adds to the success of our organization.
ITEM 1A. RISK FACTORS
The Corporation is subject to the many risks and uncertainties applicable to all banking companies, as well as risks specific to the Corporation’s geographic locations. Although the Corporation seeks to effectively manage risks, and maintains a level of equity that exceeds the banking regulatory agencies’ thresholds for being considered “well capitalized” (see Note 17 to the consolidated financial statements), management cannot predict the future and cannot eliminate the possibility of credit, operational or other losses. Accordingly, actual results may differ materially from management’s expectations. Some of the Corporation’s significant risks and uncertainties are discussed below.
Risk Related to Acquisition Activity – As described in Item 1, the Corporation has completed acquisitions of banking companies in 2020 and 2019 (Covenant and Monument) and expanded its geographic footprint to Southeastern and Southcentral Pennsylvania. Further, management intends to continue to pursue additional acquisition opportunities. Potential acquisitions may disrupt the Corporation’s business and dilute shareholder value. We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial service companies. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including: potential exposure to unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, difficulty and expense of integrating the operations and personnel of the target company, potential disruption to the Corporation’s business, potential diversion of management’s time and attention, the possible loss of key employees and customers of the target company, difficulty in estimating the value of the target company and potential changes in banking or tax laws or regulations that may affect the target company. Acquisitions may involve the payment of a premium over book and market values, and, therefore, some dilution of the Corporation’s tangible book value and net income per share of common stock may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue projections, cost savings, increases in geographic or product presence, and/or other projected benefits from recent or future acquisitions could have a material adverse effect on the Corporation’s financial condition or results of operations.
Risks Related to Banking Industry Turmoil – The Corporation is exposed to the risk that when a bank or other financial institution experiences financial difficulties, there could be an adverse “contagion” impact on other banking institutions. The failures of Silicon Valley Bank in California, Signature Bank in New York and First Republic Bank in California during the first and second quarters of 2023 caused an element of panic and uncertainty in the investor community and among bank customers generally, including, specifically, deposit customers. While the Corporation does not believe that the circumstances of these three failures are necessarily indicators of broader issues for concern with all other banks or with the banking system itself, the failures have reduced customer confidence and are 5
Table of Contents likely to affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have negative reputational ramifications for institutions in the banking industry, including, possibly, the Corporation. The Corporation will continue to closely monitor the ongoing events and volatility in the financial services industry, together with any responsive measures taken by the banking regulators to mitigate or manage the turmoil.
Credit Risk from Lending Activities - A significant source of risk is the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most of the Corporation’s loans are secured, but some loans are unsecured. With respect to secured loans, the collateral securing the repayment of these loans may be insufficient to cover the obligations owed under such loans. A significant portion of such collateral is real estate located in the Corporation's core banking markets. Collateral values may be adversely affected by changes in economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events. A decline in local economic conditions may have a greater effect on the Corporation’s earnings and capital than on the earnings and capital of other financial institutions whose real estate loan portfolios are more geographically diverse. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when it is not. The Corporation has adopted underwriting and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss. Also, as discussed further in the “Provision and Allowance for Credit Losses” section of Management’s Discussion and Analysis, the Corporation uses an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Such risk management and accounting policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
A significant portion of the Corporation's loan portfolio consists of commercial real estate loans, including owner occupied properties, non-owner-occupied properties, and other commercial properties. These types of loans are generally viewed as having more risk of default than residential real estate loans and depend on cash flows from the owner’s business or the property’s tenants to service the debt. The borrower’s cash flows may be affected significantly by general economic conditions, a downturn in the local economy or in occupancy rates in the market where the property is located, any of which could increase the likelihood of default. Commercial real estate loans also typically have larger loan balances, and, therefore, the deterioration of one or a few of these loans could cause a significant increase in the percentage of the Corporation's non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for credit losses for loans, and an increase in charge-offs, all of which could have a material adverse effect on the Corporation's business, financial condition, and results of operations.
The banking regulatory agencies have recently expressed concerns about weaknesses in the current commercial real estate market. Banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement enhanced risk management practices, including stricter underwriting, internal controls, risk management policies, more granular reporting, and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures. If the Corporation's banking regulators determine that our commercial real estate lending activities are particularly risky and are subject to such heightened scrutiny, the Corporation may incur significant additional costs or be required to restrict certain of our commercial real estate lending activities. Furthermore, failures in the Corporation's risk management policies, procedures and controls could adversely affect our ability to manage this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which could have a material adverse effect on the Corporation's business, financial condition, and results of operations.
Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from deposits with no stated maturities, term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change.
Moreover, the Federal Reserve lowered the Federal Funds rate in 2020 and maintained a rate of 0% to 0.25% throughout 2021 while injecting massive amounts of liquidity into the nation’s monetary system. In 2022, the Federal Reserve changed course, raising the Federal Funds rate several times to a range of 4.25% to 4.50% at December 31, 2022. Furthermore, in 2023, the Federal Reserve raised 6
Table of Contents the rate several times to a range of 5.25% to 5.50% at December 31, 2023. The Federal Reserve’s rate increases, along with an accompanying tightening of the money supply, have been conducted in an effort to contain inflation.
Significant fluctuations in interest rates, including fluctuations in interest rates triggered by the Federal Reserve’s actions, could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Limited Geographic Diversification - The Corporation grants commercial, residential and personal loans to customers primarily in the Corporation’s legacy markets of the Northern tier/Northcentral regions of Pennsylvania and Southern tier of New York and in Southeastern 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 these regions. Deterioration in economic conditions could adversely affect the quality of the Corporation’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Competition - All phases of the Corporation’s business are competitive. Some competitors are much larger in total assets and capitalization than the Corporation, have greater access to capital markets and can offer a broader array of financial services. There can be no assurance that the Corporation will be able to compete effectively in its markets. Additionally, the financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products and services, including those related to artificial intelligence, to technologies that automate functions previously performed manually, facilitate the ability of customers to engage in financial transactions and otherwise enhance the customer experience. Many of these initiatives take a significant amount of time to develop and implement, are tied to critical systems, and require substantial financial, human, and other resources. The investments by larger competitors in these initiatives may be more substantial than those of the Corporation, which may cause the Corporation to lose market share. Although the Corporation, in making such investments, takes steps to mitigate the risks and uncertainties associated with these initiatives, they are not always implemented on time, within budget, or without negative financial, operational, or customer impact and do not always perform as the Corporation or its customers expect. Moreover, costs associated with implementing technology-driven products or other services, or technology-related or other developments increasing the nature or level of competition, could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Inability to Attract and Develop Qualified Personnel – The future success of the Corporation will depend in large part on our ability to attract, develop and retain highly qualified management, lending, financial, technological, marketing, sales, and support personnel. Competition for qualified personnel is intense and we cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time. Our ability to retain key officers and employees may be further impacted by legislation and regulation affecting the financial services industry. For example, legislation and bank regulatory action that places restrictions on executive compensation at, and the pay practices of, financial institutions may further impact our ability to compete for talent with other industries that are not subject to the same limitations as financial institutions. Any inability to attract, develop and retain significant numbers of qualified management and other personnel would have a material adverse effect on our business, results of operations and financial condition.
Cyber Security Risks and Technology Dependence – In the ordinary course of business, the Corporation collects and stores sensitive data, including proprietary business information and personally identifiable information of our customers and employees in systems and on networks. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf. The secure processing, maintenance and use of this information is critical to operations and our business strategy.
The Corporation has invested in accepted technologies, and continually reviews processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access, and maintains an information security risk insurance policy. On an on-going basis the Corporation assesses its cyber security procedures and controls and performs network penetration tests on at least an annual basis. All employees receive monthly information security awareness training.
Despite these security measures, the Corporation’s computer systems and infrastructure or those of third parties used by us to compile, process or store such information may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to sensitive information, destroy data, steal financial assets, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions. The Corporation may be subject to similar attacks in the future. Hacking and identity theft risks could 7
Table of Contents cause serious reputational harm and financial loss to the Corporation. Cyber threats are rapidly evolving and the Corporation may not be able to anticipate or prevent all such attacks. Advancements in the use of artificial intelligence could lead to attacks by exploiting vulnerabilities to manipulate model outputs or bypass security controls. A breach of any kind could compromise systems and the information stored there could be accessed, damaged, locked up, or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Corporation’s reputation, which could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Government Regulation and Monetary Policy - The Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the way the Corporation conducts its business, undertakes new investments and activities, and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit the Corporation’s shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. For example, the regulatory authorities may take actions that could result in decreases in service charge revenue from deposit accounts, including overdraft privilege and other fees. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects short-term interest rates and credit conditions, and any unfavorable change in these conditions could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
Bank Secrecy Act and Related Laws and Regulations - These laws and regulations have significant implications for all financial institutions. In recent years, they have increased due diligence requirements and reporting obligations for financial institutions, created new crimes and penalties, and required the federal banking agencies, in reviewing merger and other acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering activities. Even innocent noncompliance and inconsequential failure to follow the regulations could result in significant fines or other penalties, which could have a material adverse impact on the Corporation’s financial condition, results of operations or liquidity.
The Federal Home Loan Bank of Pittsburgh - Through its subsidiary (C&N Bank), the Corporation is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. The Corporation has a line of credit with the FHLB-Pittsburgh that is secured by a blanket lien on its loan portfolio. Access to this line of credit is critical if a funding need arises. However, there can be no assurance that the FHLB-Pittsburgh will be able to provide funding when needed, nor can there be assurance that the FHLB-Pittsburgh will provide funds specifically to the Corporation should its financial condition deteriorate and/or regulators prevent that access. The inability to access this source of funds could have a materially adverse effect on the Corporation’s financial flexibility if alternate financing is not available at acceptable interest rates. The failure of the FHLB-Pittsburgh or the FHLB system in general, may materially impair the Corporation’s ability to meet short- and long-term liquidity needs or to meet growth plans.
The Corporation owns common stock of the FHLB-Pittsburgh to qualify for membership in the FHLB system and access services from the FHLB-Pittsburgh. The FHLB-Pittsburgh faces a variety of risks in its operations including interest rate risk, counterparty credit risk, and adverse changes in its regulatory framework. In addition, the 11 Federal Home Loan Banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB cannot meet its obligations, other FHLBs can be called upon to make required payments. Such risks affecting the FHLB-Pittsburgh could adversely impact the value of the Corporation’s investment in the common stock of the FHLB-Pittsburgh and/or affect its access to credit.
Soundness of Other Financial Institutions - In addition to the FHLB-Pittsburgh, the Corporation maintains other credit facilities that provide it with additional liquidity. These facilities include secured and unsecured borrowings from the Federal Reserve Bank and third-party commercial banks. The Corporation believes that it maintains a strong liquidity position and that it is well positioned to withstand foreseeable market conditions. However, legal agreements with counterparties typically include provisions allowing them to restrict or terminate the Corporation’s access to these credit facilities with or without advance notice and at their sole discretion.
Financial institutions are interconnected because of trading, clearing, counterparty, and other relationships. Financial market conditions have been negatively impacted in the past and such disruptions or adverse changes in the Corporation’s results of operations or financial condition could, in the future, have a negative impact on available sources of liquidity. Such a situation may arise due to circumstances that are outside the Corporation’s control, such as general market disruptions or operational problems affecting the Corporation or third parties. The Corporation’s efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in available liquidity. In such events, the Corporation’s cost of funds may increase, thereby reducing net interest 8
Table of Contents income, or the Corporation may need to sell a portion of its securities and/or loan portfolio, which, depending upon market conditions, could necessitate realizing a loss.
Securities Markets – The fair value of the Corporation’s available-for-sale debt securities, as well as the revenues the Corporation earns from its wealth management services, are sensitive to price fluctuations and market events.
Declines in the values of the Corporation’s securities holdings, combined with adverse changes in the expected cash flows from these investments, would negatively impact their value for liquidity management purposes and could result in the recording of an allowance for credit losses. At December 31, 2023, the fair value of the Corporation’s available-for-sale debt securities portfolio was $415.8 million, or 10.6% less than the amortized cost basis. The unrealized decrease in fair value was consistent with the increases in market interest rates that occurred subsequent to the purchases of the securities, and no allowance for credit losses was required on available-for-sale debt securities in an unrealized loss position at December 31, 2023. Further increases in interest rates would cause the fair value of the available-for-sale debt securities portfolio to decrease further. For additional information regarding debt securities, see the “Securities” section of Management’s Discussion and Analysis and Note 6 to the consolidated financial statements.
The Corporation’s trust revenue is determined, in part, from the value of the underlying investment portfolios. Accordingly, if the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in securities markets.
Mortgage Banking – Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program. Since 2014, the Corporation has also originated and sold residential mortgage loans to the secondary market through the MPF Original program. Both of these programs are administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, 2023, the total outstanding balance of residential mortgages sold and serviced through the two programs amounted to $323,298,000. The Corporation must strictly adhere to the MPF Xtra and MPF Original program guidelines for origination, underwriting and servicing loans, and failure to do so may result in the Corporation being forced to repurchase loans or being dropped from the program. As of December 31, 2023, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,335,000. If the volume of such forced repurchases of loans were to increase significantly, or if the Corporation were to be dropped from the programs, it could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.
ITEM 1B . UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 1C. CYBE RSECURITY
Risk Management and Strategy- **** The Corporation’s cybersecurity risk management program is designed to assess, identify, and manage material risks from cybersecurity threats and is an integral part of the overall risk management program. Cybersecurity risk includes exposure to failures or interruptions of service or security breaches resulting from malicious technological attacks that impact the confidentiality, integrity, or availability of our or third parties’ operations, systems, or data. The Corporation assesses its cyber security procedures and controls on an on-going basis as safeguarding its systems and data is critical to its operations and business strategy.
The Corporation uses third-party vendors, including a managed security service provider, to assist in monitoring, detecting, and managing cyber threats. The Board of Directors has established risk management guidelines for third-party vendors. Further, the Corporation conducts due diligence reviews of third-party vendors before contracts or agreements for provision of services are signed and conducts ongoing due diligence and oversight procedures with the frequency of the procedures determined based on a risk assessment of the services provided. The Corporation generally has agreements in place with its service providers that include requirements related to cybersecurity and data privacy. Due diligence and oversight procedures may include, but are not limited to, reviews of financial information, internal control reports, business continuity and disaster recovery plans, and information security and cyber security policies and associated tests of effectiveness. The Corporation cannot guarantee, however, that such agreements, due diligence, and oversight procedures will prevent a cyber incident from impacting our systems or information. Additionally, the 9
Table of Contents Corporation may not be able to obtain adequate or any reimbursement from its insurance coverage or from its service providers in the event it should suffer any such incidents. Due to applicable laws and regulations or contractual obligations, the Corporation may be held responsible for cyber incidents attributed to its service providers in relation to any data that the Corporation shares with them.
During 2023, the Corporation has not experienced a cybersecurity threat or incident that has materially affected or is reasonably likely to materially affect the Corporation, including its business strategy, results of consolidated operations or financial condition. Refer to the risk factor captioned “Cyber Security Risks and Technology Dependence” in Part I, Item 1A. “Risk Factors” for additional information.
Governance- The Board of Directors provides oversight of the risk management program and setting the Corporation’s cyber risk profile, which includes risks from cybersecurity threats, enterprise cyber strategy, and key cyber initiatives. The Board has appointed a Risk Management Committee currently made up of five members of the Board with governance and oversight of the Corporation’s enterprise-wide risk management program. The members of the Risk Management Committee collectively have years of business management and professional experience in the banking industry and other industries including exposure to cyber risk management considerations. The Board also meets with our internal and external auditors, and federal and state regulators to review and discuss reports on risk, examination, and regulatory compliance matters. In fulfilling its role, the Risk Management Committee is actively engaged with management regarding cyber security procedures and controls to manage and mitigate cybersecurity-related risks. Management provides at least quarterly information security reports to the Risk Management Committee who provides a report to the Board of its discussions and decisions. These reports to the Risk Management Committee address management’s efforts to monitor, detect and prevent cyber threats. In addition, the Board of Directors is engaged, as needed, in accordance with the Incident Response Plan.
The Corporation has an information security program that is primarily managed by the Information Security Department, which is led by the Chief Risk Management Officer and the Director of Information Security and supported by the Information Technology Operations Department, which is led by the Chief Information Officer. The Information Security Department is led by the Director of Information Security, and is responsible for day-to-day management of the information security program including system monitoring, vulnerability scans, employee security training including phishing exercises, security controls, and building strong relationships with security vendors. The Chief Risk Management Officer, the Chief Information Officer, the Director of Information Security and the other members of the Information Security Department are qualified by years of experience, post-secondary education, industry certifications and regular continuing education. A network penetration test and vulnerability assessment are performed at a minimum annually by a third-party vendor. The Information Security Committee is the management committee responsible for the oversight of the Information Security Program and is also responsible for policy development and information security risk assessment. This committee meets at least quarterly to discuss and review the information security program. The Information Security Program is updated at least annually and the Board of Directors, with input from the Risk Management Committee, approves all material changes.
The Corporation has an Incident Response Plan that provides a documented guideline for handling potential threats and taking appropriate measures including timely notification and escalation to executive leadership and the Board of Directors. The Incident Response Plan is managed by the Incident Response Team which includes the Director of Information Security, Chief Risk Management Officer, Chief Information Officer, and other essential members of management. The Incident Response Plan is reviewed and tested at least annually.
ITEM 2. PROPERTIES
A summary of the Corporation’s operating properties is as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Number | | Number of | | Number of |
| | | of | | Owned | | Leased |
| | | Locations | | Properties | | Properties |
| Branches | | 29 | | 23 | | 6 |
| Limited Purpose Office-Lending | | 1 | | 1 | | 0 |
| Administrative/Multi-purpose | | 2 | | 1 | | 1 |
| Ancillary Facilities | | 2 | | 1 | | 1 |
| Total | | 34 | | 26 | | 8 |
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Table of Contents
ITEM 3. LEGAL PROCEEDINGS
The Corporation and the Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material adverse effect on the Corporation’s financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
QUARTERLY SHARE DATA
Trades of the Corporation’s stock are executed through various brokers who maintain a market in the Corporation’s stock. The Corporation’s stock is listed on the NASDAQ Capital Market with the trading symbol CZNC. As of December 31, 2023, there were 2,036 shareholders of record of the Corporation’s common stock.
While the Corporation has a history of paying cash dividends, future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, 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. These restrictions are described in Note 17 to the consolidated financial statements.
On September 25, 2023, the Corporation announced a new treasury stock repurchase program. Under the newly approved program, the Corporation is authorized to repurchase up to 750,000 shares of the Corporation’s common stock, or slightly less than 5% of the Corporation’s issued and outstanding shares at August 4, 2023. The new program was effective when publicly announced and will continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion. All shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plans and its equity compensation program. Through December 31, 2023, no shares were repurchased under the new program. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.
The following table sets forth a summary of purchases by the Corporation, in the open market, of its equity securities during the fourth quarter 2023:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | **** | | **** | | | **** | Total Number of | **** | Maximum |
| | | | | | | | Shares | | Number of |
| | | | | | | | Purchased | | Shares that May |
| | | | | | | | as Part of | | Yet |
| | | | | | | | Publicly | | be Purchased |
| | | Total Number | | Average | | Announced | | Under | |
| | | of Shares | | Price Paid | | Plans | | the Plans or | |
| Period | | Purchased | | per Share | | or Programs | | Programs | |
| October 1 - 31, 2023 | 0 | | $ | N/A | 0 | 750,000 | |||
| November 1 - 30, 2023 | 0 | | $ | N/A | 0 | 750,000 | |||
| December 1 - 31, 2023 | 0 | | $ | N/A | 0 | 750,000 |
11
Table of Contents PERFORMANCE GRAPH
Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the Russell 2000 Index and the Corporation’s peer group index (the NASDAQ Bank Index) for the five-year period commencing December 31, 2018 and ended December 31, 2023.
The index values are market-weighted dividend-reinvestment numbers, which measure the total return for investing $100.00 five years ago. This meets Securities & Exchange Commission requirements for showing dividend reinvestment share performance over a five-year period and measures the return to an investor for placing $100.00 into a group of bank stocks and reinvesting any and all dividends into the purchase of more of the same stock for which dividends were paid.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Period Ending | ||||||||||
| Index | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 | ||||||
| Citizens & Northern Corporation | 100.00 | 111.83 | 83.01 | 114.60 | 105.03 | 108.92 | ||||||
| Russell 2000 Index | 100.00 | 125.49 | 150.50 | 172.75 | 137.40 | 160.60 | ||||||
| Peer Group (NASDAQ Bank Index) | 100.00 | 124.38 | 115.04 | 164.41 | 137.65 | 132.92 |
12
Table of Contents EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information concerning the Citizens & Northern 2023 Equity Stock Incentive Plan which was approved by the Corporation’s shareholders in April 2023. The 646 shares issuable pursuant to stock options at December 31, 2023 were issued under a previous plan and expired in January 2024. The figures shown in the table below are as of December 31, 2023.
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | | **** | | | Number of | |
| | | Number of | | Weighted- | | Securities | |
| | | Securities to be | | average | | Remaining | |
| | | Issued Upon | | Exercise | | for Future | |
| | | Exercise of | | Price of | | Issuance Under | |
| | | Outstanding | | Outstanding | | Equity Compen- | |
| | Options | Options | sation Plans | ||||
| Equity compensation plans approved by shareholders | 646 | | $ | 20.45 | 500,000 | ||
| | | | | | | | |
| Equity compensation plans not approved by shareholders | 0 | | N/A | 0 |
More details related to the Corporation’s equity compensation plans are provided in Notes 1 and 12 to the consolidated financial statements.
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this section and elsewhere in this Annual Report on Form 10-K are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
| ● | changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates |
|---|
●changes in general economic conditions
| ● | recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, sources of liquidity and capital funding, and regulatory responses to these developments |
|---|
●the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses
●legislative or regulatory changes
●downturn in demand for loan, deposit and other financial services in the Corporation’s market area
●increased competition from other banks and non-bank providers of financial services
| ● | technological changes and increased technology-related costs |
|---|---|
| ● | information security breach or other technology difficulties or failures |
| --- | --- |
●changes in accounting principles, or the application of generally accepted accounting principles
| ● | failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions |
|---|---|
| ● | 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.
13
Table of Contents EARNINGS OVERVIEW
2023 vs. 2022
Net income for the year ended December 31, 2023 was $24,148,000, or $1.57 per diluted share, as compared to $26,618,000, or $1.71 per diluted share, for the year ended December 31, 2022. As described in more detail below, the results for 2023 included the impact of a $1.3 million charge, or $0.08 per diluted share, related to the repositioning of available-for-sale securities and BOLI investments. Significant variances were as follows:
| ● | In December 2023**,** the Corporation repositioned its available-for-sale securities portfolio and its investments in bank-owned life insurance (“BOLI”). As a result of the repositioning, the Corporation recognized a net charge to earnings of approximately $1.3 million, or $0.08 per diluted share in the fourth quarter 2023 reflecting the net impact of: (1) a $3.0 million pre-tax loss and after-tax loss of $2.4 million from the sale of available-for-sale debt securities with an amortized cost basis of $45.5 million, (2) a tax charge of $950,000 from initiating the surrender of BOLI with a book value of $14.3 million, and (3) noninterest income of $2.1 million from a one-time enhancement on a $30 million purchase of new BOLI. Proceeds from the sale of securities were used in the $30 million purchase of BOLI as noted and in purchases totaling $13.7 million of debt securities in December 2023. Management expects to recover the fourth quarter 2023 loss in less than one year from reinvestment in assets with higher yields as compared to the yields on the assets sold or surrendered. |
|---|---|
| ● | For the year ended December 31, 2023, net interest income totaled $80,400,000, $2,728,000 lower than in 2022. The interest rate spread decreased 0.66%, as the average rate on interest-bearing liabilities was higher by 1.36% while the average yield on earning assets increased 0.70%. The net interest margin was 3.47% in 2023, down from 3.77% in 2022. Average total earning assets increased $101,418,000 in 2023 over 2022, including an increase in average loans receivable of $164,055,000, or 10.1%. Average interest-bearing deposits increased $27,528,000 while average total deposits decreased $8,486,000, or 0.4%, in 2023 as compared to 2022. |
| --- | --- |
| ● | For the year ended December 31, 2023, there was a provision for credit losses of $186,000, a decrease of $7,069,000 in expense compared to $7,255,000 in 2022. The provision for 2023 included expense related to loans receivable of $753,000 and a credit related to off-balance sheet exposures of $567,000. The expense related to loans receivable was mainly attributable to qualitative adjustments of the Corporation’s historical loss experience in estimating the allowance for credit losses (“ACL”) and the impact of an economic forecast, as well as a reduction in the Corporation’s average net charge-off experience used in the calculation of the ACL. The ACL as a percentage of gross loans receivable was 1.04% at December 31, 2023 as compared to 1.08% at January 1, 2023 upon the initial adoption of CECL. For the year ended December 31, 2023, net charge-offs totaled $264,000 or 0.01% of gross loans receivable as compared to $4,177,000 or 0.26% of gross loans receivable in 2022. |
| --- | --- |
| ● | Noninterest income, excluding realized (losses) gains on available-for-sale debt securities, totaled $27,453,000 for the year ended December 31, 2023, up $3,041,000 from the comparable category for the year ended December 31, 2022. Significant variances included the following: |
| --- | --- |
| Ø | Increase in cash surrender value of life insurance of $2,703,000 increased $2,158,000 in 2023 from 2022 including $2,100,000 in income from a one-time enhancement on a $30 million purchase of new BOLI as previously discussed. |
| --- | --- |
| Ø | Other noninterest income of $4,610,000 increased $912,000 as dividends on FHLB-Pittsburgh stock totaled $1,138,000, an increase of $541,000. Additionally, in 2023, the Corporation recognized income of $156,000 from dividends on Federal Reserve Bank stock with no comparable amount in 2022 and income of $234,000, with no comparable amount in 2022, from a conversion assistance payment received related to a change in wealth management platform for providing brokerage and investment advisory services. |
|---|
| Ø | Service charges on deposit accounts of $5,567,000 increased $548,000 as the volume of consumer and business overdraft activity increased and included in 2022 was a reduction in income of $290,000 related to refunds of consumer overdraft fees as the result of updated regulatory guidance on certain overdraft fees. |
|---|
| Ø | Trust revenue of $7,413,000 increased $419,000 reflecting revenue from new business. |
|---|
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| Ø | Brokerage and insurance revenue of $1,675,000 decreased $616,000 due to a reduction in sales volume. |
|---|
| Ø | Loan servicing fees, net, of $602,000 decreased $358,000, as the fair value of servicing rights decreased $200,000 in 2023 as compared to an increase of $126,000 in 2022. |
|---|
| ● | Net losses on available-for-sale debt securities were $3,036,000 for the year ended December 31, 2023, compared to net gains on available-for-sale debt securities of $20,000 for the year ended December 31, 2022. The net losses on available-for-sale debt securities of $3,036,000 for the year ended December 31, 2023, were primarily from the sales in the fourth quarter related to the previously described repositioning of the portfolio. |
|---|---|
| ● | Noninterest expense totaled $74,148,000 for the year ended December 31, 2023, an increase of $6,193,000 from the total for the year ended December 31, 2022. Significant variances included the following: |
| --- | --- |
| Ø | Other noninterest expense of $11,233,000 increased $3,012,000. Within this category, significant variances included the following: |
| --- | --- |
| ◾ | Other operational losses included net increase in expense of $854,000 to $505,000 in other losses in 2023 from a net reduction in expense of $349,000 in 2022. Included in 2023 is $427,000 related to a trust department tax compliance matter while most of the reduction in other losses in 2022 was from recoveries or reversals of previously recorded charges related to trust department tax compliance matters. Also included in other operational losses was $232,000 of expenses related to check fraud in 2023 with no comparable amount in 2022. |
| --- | --- |
| ◾ | FDIC insurance expense increased $481,000, reflecting the impact of an increase in base deposit insurance assessment rate applicable to all banks. |
| --- | --- |
| ◾ | Legal fees totaled $759,000 in 2023, an increase of $261,000, mainly due to fees incurred related to non-litigation-related corporate matters. |
| --- | --- |
| ◾ | In 2023, the allowance for disallowed SBA claims decreased $90,000, resulting in a reduction in expense of the same amount, reflecting better than previously estimated claims experience. The comparable amount in 2022 was a reduction in expense of $367,000. At December 31, 2023, there was no remaining allowance for disallowed SBA claims. |
| --- | --- |
| ◾ | Included in 2022 was a reduction of $172,000 in expense related to credit losses on off balance sheet exposures. In 2023, the net credit for credit losses related to off-balance sheet exposures of $211,000 is included in the provision for credit losses in the consolidated statements of income. |
| --- | --- |
| Ø | Salaries and employee benefits expense of $44,195,000 increased $2,362,000, including increases in base salaries expense of $1,713,000, or 6.0% and in estimated cash and stock-based incentive compensation expense of $670,000 consistent with comparisons in both years of the Corporation’s earnings performance to that of defined peer groups. |
| --- | --- |
| Ø | Data processing and telecommunications expense of $7,582,000 increased $776,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities. |
| --- | --- |
| Ø | Professional fees of $2,497,000 increased $492,000, including $389,000 of conversion costs related to a change in wealth management platform for providing brokerage and investment advisory services. |
|---|
| Ø | Pennsylvania shares tax expense of $1,602,000 in 2023 is lower by $354,000, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax. |
|---|
| ● | The income tax provision of $6,335,000, or 20.8% of pre-tax income for the year ended December 31, 2023 increased $603,000 from $5,732,000, or 17.7% of pre-tax income for the year ended December 31, 2022. The higher effective rate in 2023 includes: (1) the tax charge of $950,000 for the initiated surrender of BOLI; (2) an increase in nondeductible interest expense; (3) the impact of the increase in trust department tax compliance-related penalties; and (4) the impact of the permanent difference related to stock-based compensation resulting in an increase in taxable income in 2023 as compared to a deduction in 2022 due to the reduction in CZNC stock price. Partially offsetting the higher effective rate in 2023 was the non-taxable income of $2,100,000 from a one-time enhancement on $30 million purchase of new BOLI. |
|---|
15
Table of Contents 2022 vs. 2021
Net income for the year ended December 31, 2022 was $26,618,000, or $1.71 per diluted share as compared to 2021 net income of $30,554,000 or $1.92 per share. Significant variances were as follows:
| ● | Net interest income of $83,128,000 in 2022 was up $5,189,000 over the 2021 total. The net interest margin increased to 3.77% in 2022 from 3.69% in 2021. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $3,610,000 in 2022 as compared to 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $168.2 million. Total interest and fees on loans increased $4,289,000 in 2022 as compared to 2021. Interest and fees on loans included $1,852,000 in 2022 and $231,000 in 2021 from repayments received on purchased credit impaired loans in excess of previous carrying amounts. Total interest and fees from the Small Business Administration’s Paycheck Protection Program (“PPP”) loans were $958,000 in 2022, a decrease of $5,572,000 from the 2021 total of $6,530,000. Average outstanding loans increased $31.3 million, despite a reduction in average PPP loans of $89.2 million. Average loans, excluding PPP loans, were up $120.6 million (8.0%) in 2022 as compared to 2021. Average total deposits increased $75.0 million (3.9%) in 2022 as compared to 2021. |
|---|---|
| ● | The provision for loan losses of $7,255,000 for 2022 was higher than the 2021 provision by $3,594,000. In 2022, the provision includes the impact of partial charge-offs totaling $3,942,000 on a commercial real estate secured participation loan to a borrower in the health care industry. In total, the provision for 2022 includes $3,890,000 related to specific loans (net charge-offs of $4,177,000 and net decrease in specific allowances on loans of $287,000), an increase of $3,036,000 in the collectively determined portion of the allowance and a $329,000 increase in the unallocated portion. In comparison, the provision for loan losses in 2021 includes $1,324,000 related to specific loans (net charge-offs of $1,509,000 and a decrease in specific allowances on loans of $185,000), an increase of $2,251,000 in the collectively determined portion of the allowance and an $86,000 increase in the unallocated portion. |
| --- | --- |
| ● | Noninterest income decreased $1,449,000, or 5.6% in 2022 from 2021. Significant variances include the following: |
| --- | --- |
| Ø | Net gains from sales of loans of $757,000 decreased $2,671,000 reflecting a reduction in volume of residential mortgage loans sold. |
| --- | --- |
| Ø | Trust revenue of $6,994,000 decreased $240,000 reflecting the impact of market value depreciation of assets under management. |
|---|
| Ø | Brokerage and insurance revenue of $2,291,000 increased $431,000 due to commissions on higher transaction volumes for the year. |
|---|
| Ø | Service charges on deposit accounts of $5,019,000 increased $386,000 as the volume of consumer and business overdraft and other activity increased partially offset by the impact of refunds resulting from updated regulatory guidance on certain consumer overdraft fees. |
|---|
| Ø | Interchange revenue from debit card transactions of $4,148,000 increased $293,000, reflecting an increase in transaction volumes. |
|---|
| Ø | Loan servicing fees, net of $960,000 increased $266,000, reflecting growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights increased $126,000 in 2022 as compared to a decrease of $68,000 in 2021 mainly due to changes in assumptions related to prepayments of mortgage loans. |
|---|
| Ø | Other noninterest income of $3,699,000 increased $119,000, including increases in income from interest rate swap fees on commercial loans of $268,000, credit card interchange income of $107,000 and dividend income from Federal Home Loan Bank stock of $83,000. Offsetting decreases include a $147,000 reduction in income from title agencies and an increase in unrealized fair value depreciation on a marketable equity security of $83,000. |
|---|
| ● | Noninterest expense increased $5,483,000, or 8.8% in 2022 over 2021. Significant variances included the following: |
|---|
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Table of Contents
| Ø | Salaries and employee benefits of $41,833,000 increased $4,230,000, including an increase in base salaries expense of $3.8 million reflecting merit-based salary increases and an increase in number of personnel related to expansion of the Southcentral PA market with the opening of an office in Lancaster. Additional increases include an increase in health care expense of $658,000 due to higher claims on the Corporation’s partially self-insured plan, $327,000 related to savings, retirement and pension plan contribution expenses, $249,000 related to payroll taxes and $131,000 due to a lower portion of payroll costs capitalized (added to the carrying value of loans) due to the higher volume of PPP loans originated in 2021. Decreases include a reduction in estimated cash and stock-based incentive compensation expense of $822,000 consistent with a comparison of the Corporation’s earnings performance to that of defined peer groups and a reduction in severance expense of $232,000. |
|---|---|
| Ø | Data processing and telecommunications of $6,806,000 increased $903,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities. |
| --- | --- |
| Ø | Net occupancy and equipment expense of $5,533,000 increased $549,000, including accelerated depreciation expense of $329,000 related to the closure of two branches in November 2022. |
| --- | --- |
| Ø | Automated teller machine and interchange expense increased $168,000 reflecting increased volume of activity. |
| --- | --- |
| Ø | Professional fees of $1,601,000 decreased $238,000, mainly due to decreases in recruiting services and PPP loan processing-related professional fees. |
| --- | --- |
| Ø | Other noninterest expense totaled $8,221,000, a decrease of $134,000 from 2021. Within this category, significant variances included the following: |
| --- | --- |
| ● | There was a net reduction in other operational losses of $348,000 in 2022 as compared to expense of $199,000 in 2021. In 2022, there was a reduction in expense resulting from abatement of Trust Department tax compliance penalties for which expense was recorded in 2020 and a favorable outcome on appeal of a Trust Department state tax reporting matter for which expense was also recorded in 2020. |
| --- | --- |
| ● | There was a reduction in expense related to credit losses on off balance sheet exposures related to residential mortgage loans sold of $172,000 in 2022 as compared to a provision for credit losses of $135,000 in 2021. |
| --- | --- |
| ● | The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $367,000 in 2022 as compared to a reduction in expense of $236,000 in 2021. |
| --- | --- |
| ● | Travel and entertainment expenses totaled $457,000 in 2022, an increase of $236,000 over 2021, as the volume of travel and related costs for meetings with customers and internal meetings increased. |
| --- | --- |
| ● | The income tax provision of $5,732,000, or 17.7% of pre-tax income for the year ended December 31, 2022, decreased $1,401,000 from $7,133,000, or 18.9% of pre-tax income for the year ended December 31, 2021. The lower provision in 2022 includes the impact of a reduction in pre-tax income. The lower effective tax rate in 2022 includes the impact of higher tax-exempt interest as a percentage of pre-tax income, a larger permanent difference (deduction) related to restricted stock compensation and the benefit of a $340,000 reduction in expense from the reversal of tax penalties being non-deductible. |
|---|
More detailed information concerning the Corporation’s earnings results 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 17
Table of Contents (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. Notes 1 and 7 to the consolidated financial statements provide an overview of the process management uses for determining the ACL, and additional discussion of the ACL is provided in a separate section of Management’s Discussion and Analysis.
The ACL may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables, including new information regarding existing problem loans, identification of additional problem loans, changes in the fair value of underlying collateral, unforeseen events such as natural disasters and pandemics, and other factors. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly.
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 I, II and III include information regarding the Corporation’s net interest income in 2023, 2022 and 2021. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.
2023 vs. 2022
Fully taxable equivalent net interest income was $81,319,000 in 2023, $3,035,000 (3.6%) lower than in 2022. The decrease in net interest income reflected an increase in interest expense of $23,585,000 (includes $17,595,000 interest on deposits and $5,990,000 in interest on borrowings) and an increase of $20,550,000 in total interest income as compared to 2022. As presented in Table II, the Net Interest Margin was 3.47% in 2023, as compared to 3.77% in 2022, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 2.91% in 2023 from 3.57% in 2022. The average yield on earning assets of 4.89% was 0.70% higher in 2023 as compared to 2022, while the average rate on interest bearing liabilities of 1.98% was 1.36% higher in 2023 as compared to 2022. Table III shows the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for 2023 over 2022 by $2,679,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $5,714,000.
Income from purchase accounting-related adjustments in 2023 had a positive effect on net interest income of $697,000, including an increase in income on loans of $623,000 and a net reduction in interest expense on time deposits and borrowed funds totaling $74,000. The positive impact of purchase accounting-related adjustments to the net interest margin was 0.03% in 2023. In comparison, the net positive impact of purchase accounting-related adjustments was $1,621,000, with a positive impact on the net interest margin of 0.07% in 2022.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $114,423,000 in 2023, an increase of $20,550,000, or 21.9%, from 2022.
Interest and fees from loans receivable increased $20,540,000 in 2023 as compared to 2022. In 2023, the fully taxable equivalent yield on loans was 5.67%, up from 4.98% in 2022, reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased $164,055,000 (10.1%) to $1,792,149,000 in 2023 from $1,628,094,000 in 2022. The Corporation has 18
Table of Contents experienced growth in outstanding commercial real estate and residential mortgage loans over the last three quarters of 2022 and in 2023.
Income from interest-bearing due from banks totaled $1,379,000 in 2023, an increase of $734,000 from the total for 2022. The average yield on interest-bearing due from banks was 4.22% in 2023 and 1.25% in 2022. The average balance of interest-bearing due from banks was $32,709,000 in 2023 as compared to $51,407,000 in 2022. The average balance of interest-bearing due from banks fell to 1.4% of average earning assets in 2023 from 2.3% in 2022 as excess funds were invested primarily in loans. Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with the Federal Reserve.
Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, decreased $711,000 in 2023 as compared to 2022, as the average balance (at amortized cost) of available-for-sale debt securities decreased $43.0 million as indicated in Table II. The average yield on available-for-sale debt securities was 2.21% for 2023, up from 2.16% in 2022.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $23,585,000 to $33,104,000 in 2023 from $9,519,000 in 2022.
Interest expense on deposits increased $17,595,000, as the average rate on interest-bearing deposits increased to 1.66% in 2023 from 0.46% in 2022 reflecting the impact of increases in market rates in 2023. Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,971,926,000 for 2023, down $8,486,000 (0.4%) from $1,980,412,000 in 2022. Within average deposits, average brokered deposits were $47,424,000 at an average rate of 4.78% for 2023 as compared to $33,458,000 at an average rate of 1.71% in 2022. The deposit mix changed significantly in 2023. Average time deposits increased $96,224,000 and average interest checking deposits increased $45,654,000, while the average total balance of money market accounts decreased $95,954,000, the average balance of noninterest bearing demand deposits decreased $36,014,000 and average savings deposits decreased $18,396,000.
Interest expense on short-term borrowings in 2023 was $2,811,000 as compared to $429,000 in 2022 as the average balance of short-term borrowings increased to $62,926,000 in 2023 from $21,766,000 in 2022. The average rate on short-term borrowings was 5.15% in 2023 compared to 1.97% in 2022.
Interest expense on long-term borrowings (FHLB advances) increased $3,334,000 to $4,230,000 in 2023 from $896,000 in 2022. The average balance of long-term borrowings was $110,943,000 in 2023, up from an average balance of $40,194,000 in 2022. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 3.81% in 2023 compared to 2.23% in 2022.
Interest expense on senior notes issued in May 2021 totaled $479,000 in 2023 as compared to $477,000 in 2022. The average rate on senior notes was 3.24% in 2023 and in 2022.
Interest expense on subordinated debt decreased $157,000 to $922,000 in 2023 from $1,079,000 in 2022. The average balance of subordinated debt decreased to $24,662,000 in 2023 from $27,116,000 in 2022 and the average rate on subordinated debt decreased to 3.74% in 2023 from 3.98% in 2022 reflecting the repayment of subordinated debt assumed in an acquisition of $8,500,000 in the second quarter 2022.
2022 vs. 2021
Fully taxable equivalent net interest income was $84,354,000 in 2022, $5,280,000 (6.7%) higher than in 2021. Interest income was $8,237,000 higher in 2022 as compared to 2021; interest expense was higher by $2,957,000 in comparing the same periods. As presented in Table II, the Net Interest Margin was 3.77% in 2022, as compared to 3.69% in 2021, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased slightly to 3.57% in 2022 from 3.55% in 2021. The average yield on earning assets of 4.19% was 0.20% higher in 2022 as compared to 2021, and the average rate on interest bearing liabilities of 0.62% was 0.18% higher in 2022 as compared to 2021. Table III shows that, in the aggregate, rising interest rates in 2022 had a positive impact on net interest income as the portion of the increase attributable to changes in rate was $4,976,000.
Income from purchase accounting-related adjustments in 2022 had a positive effect on net interest income of $1,621,000, including an increase in income on loans of $1,216,000 and a net reduction in interest expense on time deposits and borrowed funds totaling $405,000. 19
Table of Contents The positive impact of purchase accounting-related adjustments to the net interest margin was 0.07% in 2022. In comparison, the net positive impact of purchase accounting-related adjustments was $2,659,000, with a positive impact on the net interest margin of 0.13% in 2021.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled $93,873,000 in 2022, an increase of $8,237,000, or 9.6% from 2021.
Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $3,610,000 in 2022 as compared to 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $168.2 million as indicated in Table II. The average yield on available-for-sale debt securities was 2.16% for 2022, down slightly from 2.17% in 2021.
Interest and fees from loans receivable increased $4,289,000 in 2022 as compared to 2021. Total interest and fees from loans excluding PPP loans increased $9,861,000 in 2022 as compared to 2021. Interest and fees on PPP loans totaled $958,000 in 2022, a decrease of $5,572,000 from 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers. In 2022, total interest and fees on loans included $1,852,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts as compared to income from similar repayments of $231,000 in 2021.
Average outstanding loans receivable increased $31,338,000 (2.0%) to $1,628,094,000 in 2022 from $1,596,756,000 in 2021, despite a reduction in average PPP loans of $89,246,000. Average total loans outstanding, excluding PPP loans, increased $120,584,000 (8.0%).
The fully taxable equivalent yield on loans in 2022 was 4.98% compared to 4.81% in 2021. The average yield on loans included the positive impact of the income on PCI loans in 2022. The comparatively high yield on PPP loans provided a benefit to the margin in both periods though the higher volume resulted in a larger benefit in 2021. Excluding PPP loans and income from excess repayments on purchased credit impaired loans, the adjusted yield on loans was 4.83% in 2022, up from the similarly adjusted yield of 4.67% in 2021.
Income from interest-bearing due from banks totaled $645,000 in 2022, an increase of $327,000 from the total for 2021. The average yield on interest-bearing due from banks was 1.25% in 2022 and 0.20% in 2021. The average balance of interest-bearing due from banks was $51,407,000 in 2022 as compared to $156,152,000 in 2021. The average balance of interest-bearing due from banks fell to 2.3% of average earning assets in 2022 from 7.3% in 2021 as excess funds were invested in securities and loans.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased $2,957,000, or 45.1%, to $9,519,000 in 2022 from $6,562,000 in 2021. Interest expense on deposits increased $2,100,000. Table II shows the average rate on interest-bearing deposits increased to 0.46% in 2022 from 0.33% in 2021 reflecting the impact of increases in market rates in 2022.
Average total deposits (interest-bearing and noninterest-bearing) increased $75,012,000 (3.9%) to $1,980,412,000 in 2022 from $1,905,400 in 2021. Average time deposits decreased $42,552,000, while the average total balance of other categories increased $117,564,000, or 7.5%. The increase in average deposits included the impact of growth in commercial deposits, reflecting higher average balances maintained and new business.
Interest expense on short-term borrowings in 2022 was $429,000 as compared to $23,000 in 2021. The average balance of short-term borrowings increased to $21,766,000 in 2022 from $6,269,000 in 2021. The average rate on short-term borrowings was 1.97% in 2022 compared to 0.37% in 2021.
Interest expense on long-term borrowings (FHLB advances) increased $497,000 to $896,000 in 2022 from $399,000 in 2021. The average balance of long-term borrowings was $40,194,000 in 2022, down from an average balance of $44,026,000 in 2021. The average rate on long-term borrowings was 2.23% in 2022 compared to 0.91% in 2021.
Interest expense on senior notes issued in May 2021 totaled $477,000 in 2022 as compared to $293,000 in 2021. The average balance of the senior notes increased to $14,733,000 in 2022 from $9,129,000 in 2021. The average rate on senior notes was 3.24% in 2022 and 3.21% in 2021. 20
Table of Contents Interest expense on subordinated debt decreased $230,000 to $1,079,000 in 2022 from $1,309,000 in 2021. The average balance of subordinated debt decreased slightly to $27,116,000 in 2022 from $27,399,000 in 2021. The average rate on subordinated debt decreased to 3.98% in 2022 from 4.78% in 2021 including the net impact of a new issue of subordinated debt of $24,437,000, net, at an effective rate of 3.74% in May 2021 and the redemption of subordinated notes totaling $8,000,000 in the second quarter 2021 and $8,500,000 in the second quarter 2002.
21
Table of Contents TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year Ended | | | | | | | |||||||
| | | December 31, | | Increase/(Decrease) | |||||||||||
| (In Thousands) | 2023 | 2022 | | 2021 | | 2023/2022 | 2022/2021 | ||||||||
| INTEREST INCOME | | | | | | | | | | | | | | | |
| Interest-bearing due from banks | | $ | 1,379 | | $ | 645 | | $ | 318 | | $ | 734 | | $ | 327 |
| Available-for-sale debt securities: | | | | | | | | | | | |||||
| Taxable | | 8,555 | | 8,360 | | 5,114 | | 195 | | 3,246 | |||||
| Tax-exempt | | 2,815 | | 3,721 | | 3,357 | | (906) | | 364 | |||||
| Total available-for-sale debt securities | | 11,370 | | 12,081 | | 8,471 | | (711) | | 3,610 | |||||
| Loans receivable: | | | | | | | | | | | |||||
| Taxable | | 98,843 | | 77,641 | | 68,019 | | 21,202 | | 9,622 | |||||
| Paycheck Protection Program | | | 11 | | | 54 | | | 3,476 | | | (43) | | | (3,422) |
| Tax-exempt | | 2,756 | | 2,471 | | 2,232 | | 285 | | 239 | |||||
| Total loans receivable | | 101,610 | | 81,070 | | 76,781 | | 20,540 | | 4,289 | |||||
| Other earning assets | | 64 | | 77 | | 66 | | (13) | | 11 | |||||
| Total Interest Income | | 114,423 | | 93,873 | | 85,636 | | 20,550 | | 8,237 | |||||
| | | | | | | | | | | | | | | | |
| INTEREST EXPENSE | | | | | | | | | | | |||||
| Interest-bearing deposits: | | | | | | | | | | | |||||
| Interest checking | | 7,668 | | 1,833 | | 897 | | 5,835 | | 936 | |||||
| Money market | | 5,686 | | 2,088 | | 1,156 | | 3,598 | | 932 | |||||
| Savings | | 243 | | 257 | | 231 | | (14) | | 26 | |||||
| Time deposits | | 10,636 | | 2,460 | | 2,254 | | 8,176 | | 206 | |||||
| Total interest-bearing deposits | | 24,233 | | 6,638 | | 4,538 | | 17,595 | | 2,100 | |||||
| Borrowed funds: | | | | | | | | | | | |||||
| Short-term | | 3,240 | | 429 | | 23 | | 2,811 | | 406 | |||||
| Long-term - FHLB advances | | 4,230 | | 896 | | 399 | | 3,334 | | 497 | |||||
| Senior notes, net | | | 479 | | | 477 | | | 293 | | | 2 | | | 184 |
| Subordinated debt, net | | 922 | | 1,079 | | 1,309 | | (157) | | (230) | |||||
| Total borrowed funds | | 8,871 | | 2,881 | | 2,024 | | 5,990 | | 857 | |||||
| Total Interest Expense | | 33,104 | | 9,519 | | 6,562 | | 23,585 | | 2,957 | |||||
| | | | | | | | | | | | | | | | |
| Net Interest Income | | $ | 81,319 | | $ | 84,354 | | $ | 79,074 | | $ | (3,035) | | $ | 5,280 |
| (1) | 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%. |
|---|---|
| (2) | Fees on loans are included with interest on loans and amounted to $1,856,000 in 2023, $2,958,000 in 2022 and $7,958,000 in 2021. |
| --- | --- |
| (3) | The table that follows 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) | | Year Ended | | | | | | | |||||||
| | | December 31, | | Increase/(Decrease) | |||||||||||
| | | 2023 | 2022 | | 2021 | | 2023/2022 | 2022/2021 | |||||||
| Net Interest Income Under U.S. GAAP | | $ | 80,400 | | $ | 83,128 | | $ | 77,939 | | $ | (2,728) | | $ | 5,189 |
| Add: fully taxable-equivalent interest income adjustment from tax-exempt securities | | | 388 | | | 720 | | | 673 | | | (332) | | | 47 |
| Add: fully taxable-equivalent interest income adjustment from tax-exempt loans | | | 531 | | | 506 | | | 462 | | | 25 | | | 44 |
| Net Interest Income as adjusted to a fully taxable-equivalent basis | | $ | 81,319 | | $ | 84,354 | | $ | 79,074 | | $ | (3,035) | | $ | 5,280 |
22
Table of Contents TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
| | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars In Thousands) | Year | | | | | Year | | | | | Year | | | | | |||||
| | Ended | | Rate of | | | Ended | | Rate of | | | Ended | | Rate of | | ||||||
| | 12/31/2023 | | Return/ | | | 12/31/2022 | | Return/ | | | 12/31/2021 | | Return/ | | ||||||
| | Average | | Cost of | | Average | | Cost of | | Average | | Cost of | | ||||||||
| | Balance | Funds% | | Balance | Funds% | | Balance | Funds% | | |||||||||||
| EARNING ASSETS | | | | | | | | | | | | |||||||||
| Interest-bearing due from banks | $ | 32,709 | | | 4.22 | % | | $ | 51,407 | | | 1.25 | % | | $ | 156,152 | | | 0.20 | % |
| Available-for-sale debt securities, at amortized cost: | | | | | | | | | | | | | | | ||||||
| Taxable | 389,456 | | 2.20 | % | | 410,033 | | 2.04 | % | | 262,880 | | 1.95 | % | ||||||
| Tax-exempt | 125,920 | | 2.24 | % | | 148,344 | | 2.51 | % | | 127,283 | | 2.64 | % | ||||||
| Total available-for-sale debt securities | 515,376 | | 2.21 | % | | 558,377 | | 2.16 | % | | 390,163 | | 2.17 | % | ||||||
| Loans receivable: | | | | | | | | | | | | | | | ||||||
| Taxable | 1,703,697 | | 5.80 | % | | 1,533,417 | | 5.06 | % | | 1,426,150 | | 4.77 | % | ||||||
| Paycheck Protection Program | | 142 | | | 7.75 | % | | | 8,406 | | | 11.40 | % | | | 97,652 | | | 6.69 | % |
| Tax-exempt | 88,310 | | 3.12 | % | | 86,271 | | 2.86 | % | | 72,954 | | 3.06 | % | ||||||
| Total loans receivable | 1,792,149 | | 5.67 | % | | 1,628,094 | | 4.98 | % | | 1,596,756 | | 4.81 | % | ||||||
| Other earning assets | 1,383 | | 4.63 | % | | 2,321 | | 3.32 | % | | 2,404 | | 2.75 | % | ||||||
| Total Earning Assets | 2,341,617 | | 4.89 | % | | 2,240,199 | | 4.19 | % | | 2,145,475 | | 3.99 | % | ||||||
| Cash | 22,108 | | | | 22,685 | | | | 24,132 | | | |||||||||
| Unrealized (loss) gain on securities | (63,118) | | | | (38,784) | | | | 10,676 | | | |||||||||
| Allowance for credit losses | (18,498) | | | | (14,962) | | | | (12,354) | | | |||||||||
| Bank-owned life insurance | | 31,808 | | | | | | | 30,925 | | | | | | | 30,373 | | | | |
| Bank premises and equipment | 21,330 | | | | | 21,559 | | | | | 20,814 | | | | ||||||
| Intangible assets | 55,176 | | | | | 55,599 | | | | | 56,086 | | | | ||||||
| Other assets | 72,433 | | | | | 55,567 | | | | | 44,032 | | | | ||||||
| Total Assets | $ | 2,462,856 | | | | | | $ | 2,372,788 | | | | | | $ | 2,319,234 | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| INTEREST-BEARING LIABILITIES | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | |
| Interest checking | $ | 488,761 | | | 1.57 | % | | $ | 443,107 | | | 0.41 | % | | $ | 399,130 | | | 0.22 | % |
| Money market | | 347,130 | | | 1.64 | % | | | 443,084 | | | 0.47 | % | | | 433,508 | | | 0.27 | % |
| Savings | | 238,760 | | | 0.10 | % | | | 257,156 | | | 0.10 | % | | | 228,411 | | | 0.10 | % |
| Time deposits | | 381,488 | | | 2.79 | % | | | 285,264 | | | 0.86 | % | | | 327,816 | | | 0.69 | % |
| Total interest-bearing deposits | 1,456,139 | | 1.66 | % | | 1,428,611 | | 0.46 | % | | 1,388,865 | | 0.33 | % | ||||||
| Borrowed funds: | | | | | | | | | | | | | | | ||||||
| Short-term | 62,926 | | 5.15 | % | | 21,766 | | 1.97 | % | | 6,269 | | 0.37 | % | ||||||
| Long-term - FHLB advances | 110,943 | | 3.81 | % | | 40,194 | | 2.23 | % | | 44,026 | | 0.91 | % | ||||||
| Senior notes, net | | 14,798 | | 3.24 | % | | | 14,733 | | 3.24 | % | | | 9,129 | | 3.21 | % | |||
| Subordinated debt, net | 24,662 | | 3.74 | % | | 27,116 | | 3.98 | % | | 27,399 | | 4.78 | % | ||||||
| Total borrowed funds | 213,329 | | 4.16 | % | | 103,809 | | 2.78 | % | | 86,823 | | 2.33 | % | ||||||
| Total Interest-bearing Liabilities. | 1,669,468 | | 1.98 | % | | 1,532,420 | | 0.62 | % | | 1,475,688 | | 0.44 | % | ||||||
| Demand deposits | | 515,787 | | | | | | | 551,801 | | | | | | | 516,535 | | | | |
| Other liabilities | | 29,107 | | | | | | | 23,474 | | | | | | | 25,785 | | | | |
| Total Liabilities | | 2,214,362 | | | | | | | 2,107,695 | | | | | | | 2,018,008 | | | | |
| Stockholders' equity, excluding accumulated other comprehensive (loss) income | | 297,894 | | | | | | | 295,447 | | | | | | | 292,683 | | | | |
| Accumulated other comprehensive (loss) income | | (49,400) | | | | | | | (30,354) | | | | | | | 8,543 | | | | |
| Total Stockholders' Equity | | 248,494 | | | | | | | 265,093 | | | | | | | 301,226 | | | | |
| Total Liabilities and Stockholders' Equity | $ | 2,462,856 | | | | | | $ | 2,372,788 | | | | | | $ | 2,319,234 | | | | |
| Interest Rate Spread | | | | | 2.91 | % | | | | | | 3.57 | % | | | | | | 3.55 | % |
| Net Interest Income/Earning Assets | | | | | 3.47 | % | | | | | | 3.77 | % | | | | | | 3.69 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Total Deposits (Interest-bearing and Demand) | $ | 1,971,926 | | | | | | $ | 1,980,412 | | | | | | $ | 1,905,400 | | | | |
| (1) | 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. | |||||||||||||||||||
| --- | --- |
23
Table of Contents TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES
| | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | Year Ended 12/31/2023 vs. 12/31/2022 | . | | Year Ended 12/31/2022 vs. 12/31/2021 | |||||||||||||||
| | Change in | | Change in | | Total | | Change in | | Change in | | Total | ||||||||
| | Volume | Rate | Change | | Volume | Rate | Change | ||||||||||||
| EARNING ASSETS | | | | | | | | | | ||||||||||
| Interest-bearing due from banks | | $ | (309) | | $ | 1,043 | | $ | 734 | | | $ | (339) | | $ | 666 | | $ | 327 |
| Available-for-sale debt securities: | | | | | | | | | | | | | | ||||||
| Taxable | | (433) | | 628 | | 195 | | | 2,989 | | 257 | | 3,246 | ||||||
| Tax-exempt | | (527) | | (379) | | (906) | | | 534 | | (170) | | 364 | ||||||
| Total available-for-sale debt securities | | (960) | | 249 | | (711) | | | 3,523 | | 87 | | 3,610 | ||||||
| Loans receivable: | | | | | | | | | | | | | | ||||||
| Taxable | | 9,165 | | | 12,037 | | 21,202 | | | 5,289 | | 4,333 | | 9,622 | |||||
| Paycheck Protection Program | | | (714) | | | (233) | | | (947) | | | | (4,664) | | | 1,242 | | | (3,422) |
| Tax-exempt | | 59 | | 226 | | 285 | | | 388 | | (149) | | 239 | ||||||
| Total loans receivable | | 8,510 | | 12,030 | | 20,540 | | | (2,756) | | 7,045 | | 4,289 | ||||||
| Other earning assets | | (37) | | | 24 | | (13) | | | (2) | | 13 | | 11 | |||||
| Total Interest Income | | 7,204 | | 13,346 | | 20,550 | | | 426 | | 7,811 | | 8,237 | ||||||
| | | | | | | | | ||||||||||||
| INTEREST-BEARING LIABILITIES | | | | | | | | ||||||||||||
| Interest-bearing deposits: | | | | | | | | ||||||||||||
| Interest checking | | 208 | | 5,627 | | 5,835 | | | 109 | | 827 | | 936 | ||||||
| Money market | | (542) | | 4,140 | | 3,598 | | | 27 | | 905 | | 932 | ||||||
| Savings | | (14) | | 0 | | (14) | | | 29 | | (3) | | 26 | ||||||
| Time deposits | | 1,073 | | 7,103 | | 8,176 | | | (318) | | 524 | | 206 | ||||||
| Total interest-bearing deposits | | 725 | | 16,870 | | 17,595 | | | (153) | | 2,253 | | 2,100 | ||||||
| Borrowed funds: | | | | | | | | | | | | | | ||||||
| Short-term | | 1,517 | | 1,294 | | 2,811 | | | 146 | | 260 | | 406 | ||||||
| Long-term - FHLB advances | | 2,375 | | 959 | | 3,334 | | | (38) | | 535 | | 497 | ||||||
| Senior notes, net | | | 2 | | | 0 | | | 2 | | | | 181 | | | 3 | | | 184 |
| Subordinated debt, net | | (94) | | (63) | | (157) | | | (14) | | (216) | | (230) | ||||||
| Total borrowed funds | | 3,800 | | 2,190 | | 5,990 | | | 275 | | 582 | | 857 | ||||||
| Total Interest Expense | | 4,525 | | 19,060 | | 23,585 | | | 122 | | 2,835 | | 2,957 | ||||||
| | | | | | | | | | | | | | | ||||||
| Net Interest Income | | $ | 2,679 | | $ | (5,714) | | $ | (3,035) | | | $ | 304 | | $ | 4,976 | | $ | 5,280 |
| (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 amounts of the change in each. | ||||||||||||||||||
| --- | --- |
24
Table of Contents NONINTEREST INCOME
TABLE IV - COMPARISON OF NONINTEREST INCOME
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in Thousands) | | Year Ended | | | | | | |||||
| | | December 31, | | | $ | | % | |||||
| | 2023 | | 2022 | | Change | | Change | |||||
| Trust revenue | | $ | 7,413 | | $ | 6,994 | | $ | 419 | | 6.0 | % |
| Brokerage and insurance revenue | | 1,675 | | | 2,291 | | | (616) | | (26.9) | % | |
| Service charges on deposit accounts | | 5,567 | | | 5,019 | | | 548 | | 10.9 | % | |
| Interchange revenue from debit card transactions | | 4,160 | | | 4,148 | | | 12 | | 0.3 | % | |
| Net gains from sales of loans | | 723 | | | 757 | | | (34) | | (4.5) | % | |
| Loan servicing fees, net | | 602 | | | 960 | | | (358) | | (37.3) | % | |
| Increase in cash surrender value of life insurance | | 2,703 | | | 545 | | | 2,158 | | 396.0 | % | |
| Other noninterest income | | 4,610 | | | 3,698 | | | 912 | | 24.7 | % | |
| Realized (losses) gains on available-for-sale debt securities, net | | | (3,036) | | | 20 | | | (3,056) | | N/M | % |
| Total noninterest income | | $ | 24,417 | | $ | 24,432 | | $ | (15) | | (0.1) | % |
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in Thousands) | | Year Ended | | | | | | |||||
| | | December 31, | | | $ | | % | |||||
| | 2022 | | 2021 | | Change | | Change | |||||
| Trust revenue | | $ | 6,994 | | $ | 7,234 | | $ | (240) | | (3.3) | % |
| Brokerage and insurance revenue | | 2,291 | | | 1,860 | | | 431 | | 23.2 | % | |
| Service charges on deposit accounts | | 5,019 | | | 4,633 | | | 386 | | 8.3 | % | |
| Interchange revenue from debit card transactions | | 4,148 | | | 3,855 | | | 293 | | 7.6 | % | |
| Net gains from sales of loans | | 757 | | | 3,428 | | | (2,671) | | (77.9) | % | |
| Loan servicing fees, net | | 960 | | | 694 | | | 266 | | 38.3 | | |
| Increase in cash surrender value of life insurance | | 545 | | | 573 | | | (28) | | (4.9) | % | |
| Other noninterest income | | 3,698 | | | 3,580 | | | 118 | | 3.3 | % | |
| Realized gains on available-for-sale debt securities, net | | | 20 | | | 24 | | | (4) | | (16.7) | % |
| Total noninterest income | | $ | 24,432 | | $ | 25,881 | | $ | (1,449) | | (5.6) | % |
NONINTEREST EXPENSE
TABLE V - COMPARISON OF NONINTEREST EXPENSE
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in Thousands) | | Year Ended | | | | | |||||
| | | December 31, | | | % | ||||||
| | | 2023 | | 2022 | | Change | | Change | |||
| Salaries and employee benefits | $ | 44,195 | $ | 41,833 | 5.6 | % | |||||
| Net occupancy and equipment expense | | 5,357 | | 5,533 | | (3.2) | % | ||||
| Data processing and telecommunications expense | | 7,582 | | 6,806 | | 11.4 | % | ||||
| Automated teller machine and interchange expense | | 1,682 | | 1,601 | | 5.1 | % | ||||
| Pennsylvania shares tax | | 1,602 | | 1,956 | | (18.1) | % | ||||
| Professional fees | | 2,497 | | 2,005 | | 24.5 | % | ||||
| Other noninterest expense | | 11,233 | | 8,221 | | 36.6 | % | ||||
| Total noninterest expense | | $ | 74,148 | | $ | 67,955 | | 9.1 | % |
All values are in US Dollars.
25
Table of Contents
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in Thousands) | | Year Ended | | | | | |||||
| | | December 31, | | | % | ||||||
| | | 2022 | | 2021 | | Change | | Change | |||
| Salaries and employee benefits | $ | 41,833 | $ | 37,603 | 11.2 | % | |||||
| Net occupancy and equipment expense | | 5,533 | | 4,984 | | 11.0 | % | ||||
| Data processing and telecommunications expense | | 6,806 | | 5,903 | | 15.3 | % | ||||
| Automated teller machine and interchange expense | | 1,601 | | 1,433 | | 11.7 | % | ||||
| Pennsylvania shares tax | | 1,956 | | 1,951 | | 0.3 | % | ||||
| Professional fees | | 2,005 | | 2,243 | | (10.6) | % | ||||
| Other noninterest expense | | 8,221 | | 8,355 | | (1.6) | % | ||||
| Total noninterest expense | | $ | 67,955 | | $ | 62,472 | | 8.8 | % |
All values are in US Dollars.
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.
INCOME TAXES
The effective income tax rate was 20.8% of pre-tax income in 2023, up from 17.7% in 2022 and 18.9% in 2021. The higher effective income tax rate in 2023 as compared to 2022 includes: (1) a tax charge of $950,000 for the initiated surrender of BOLI; (2) an increase in nondeductible interest expense; (3) an increase in non-deductible trust department tax compliance-related penalties; and (4) a permanent difference related to stock-based compensation resulting in an increase in taxable income in 2023 as compared to a deduction in 2022 due to the reduction in CZNC stock price. Partially offsetting the higher effective rate in 2023 was the non-taxable income of $2,100,000 from a one-time enhancement on $30 million purchase of new BOLI. The Corporation’s effective tax rates differed from the federal statutory rate of 21% mainly because of the effects of tax-exempt interest income for 2022 and 2021. The lower effective income tax rate in 2022 as compared to 2021 resulted mainly from an increase in the proportion of tax-exempt interest income to total pre-tax income.
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. At December 31, 2023, the net deferred tax asset was $17,441,000, down from the balance at December 31, 2022 of $20,884,000. The most significant change in temporary difference components was a decrease of $3,056,000 in the net deferred tax asset related to the unrealized loss on available-for-sale debt securities, consistent with a decrease in interest rates.
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, including taxable income in prior carryback years, as well as future taxable income. Further, the value of the benefit from realization of deferred tax assets would be impacted if income tax rates were changed from currently enacted levels.
Management believes the recorded net deferred tax asset at December 31, 2023 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.
Additional information related to income taxes is presented in Note 13 to the consolidated financial statements.
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, maximizing return on earning assets within reasonable risk parameters and providing a means to hedge the Corporation’s overall asset-sensitive interest rate risk exposure, while maintaining high credit quality.
Table VI shows the composition of the available-for-sale debt securities portfolio at December 31, 2023, 2022 and 2021. The total amortized cost of available-for-sale debt securities decreased $96,826,000 to $464,968,000 at December 31, 2023 from $561,794,000 at December 31, 2022. The decrease in 2023 followed an increase of $50,202,000 at December 31, 2022 as compared to December 31, 2021. The decrease in the amortized cost basis of the securities portfolio at December 31, 2023 resulted from maturities and proceeds 26
Table of Contents from sales which included the sale of available-for-sale debt securities with an amortized cost basis of $45.5 million as part of the repositioning of its available-for-sale securities portfolio in December 2023. In 2022, the increase in the amortized cost basis of the securities portfolio resulted from management’s decision to invest excess funds available mainly due to growth in deposits.
At December 31, 2023, the largest categories of securities held as a percentage of total amortized cost, were as follows: (1) tax-exempt and taxable municipal bonds, 37.0%; (2) residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies, including pass-through securities and collateralized mortgage obligations, 33.5%; and (3) commercial mortgage-backed securities issued or guaranteed by U.S. Government sponsored agencies, 16.4%.
The composition of the available-for-sale debt securities portfolio at December 31, 2023, December 31, 2022 and December 31, 2021 is as follows:
TABLE VI - INVESTMENT SECURITIES
| | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2023 | | 2022 | | 2021 | |||||||||||||
| | | Amortized | | Fair | | Amortized | | Fair | | Amortized | | Fair | **** | ||||||
| (In Thousands) | **** | Cost | **** | Value | | Cost | **** | Value | **** | Cost | **** | Value | | ||||||
| AVAILABLE-FOR-SALE DEBT SECURITIES: | | | | | | | | | |||||||||||
| Obligations of the U.S. Treasury | | $ | 12,325 | | $ | 11,290 | | $ | 35,166 | | $ | 31,836 | | $ | 25,058 | | $ | 24,912 | |
| Obligations of U.S. Government agencies | | | 11,119 | | | 9,946 | | | 25,938 | | | 23,430 | | | 23,936 | | | 24,091 | |
| Bank holding company debt securities | | | 28,952 | | | 23,500 | | | 28,945 | | | 25,386 | | | 18,000 | | | 17,987 | |
| Obligations of states and political subdivisions: | | | | | | | | | | | | | | ||||||
| Tax-exempt | | 113,464 | | 104,199 | | 146,149 | | 132,623 | | 143,427 | | 148,028 | | ||||||
| Taxable | | 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 | | 105,549 | | 95,405 | | 112,782 | | 99,941 | | 98,048 | | 98,181 | | ||||||
| Residential collateralized mortgage obligations | | 50,212 | | 46,462 | | 44,868 | | 40,296 | | 44,015 | | 44,247 | | ||||||
| Commercial mortgage-backed securities | | 76,412 | | 66,682 | | 91,388 | | 79,686 | | 86,926 | | 87,468 | | ||||||
| Private label commercial mortgage-backed securities | | 8,215 | | 8,160 | | 8,070 | | 8,023 | | 0 | | 0 | | ||||||
| Total Available-for-Sale Debt Securities | | $ | 464,968 | | $ | 415,755 | | $ | 561,794 | | $ | 498,033 | | $ | 511,592 | | $ | 517,679 | |
| | | | | | | | | | | | | | | | | | | | |
| Aggregate Unrealized (Loss) Gain | | | | | $ | (49,213) | | | | | $ | (63,761) | | | | | $ | 6,087 | |
| Aggregate Unrealized (Loss) Gain as a % of Amortized Cost | | | | | | (10.6) | % | | | | | (11.3) | % | | | | | 1.2 | % |
| Market Yield on 5-Year U.S. Treasury Obligations (a) | | | | | | 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 $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 (1.2%) at December 31, 2021. The volatility in the fair value of the portfolio, including the significant reduction in fair value, resulted from changes in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 0.15% lower at December 31, 2023 in comparison to December 31, 2022, and 2.58% higher than at December 31, 2021.
Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
As described in Note 6 to the 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 December 31, 2023 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of December 31, 2023 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at December 31, 2023, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows: 27
Table of Contents
| ● | 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 December 31, 2023, the securities have external ratings ranging from BBB-/Baa3 to A-. |
|---|---|
| ● | Obligations of states and political subdivisions (municipal bonds) – All of the Corporation’s holdings of municipal bonds were investment grade and there have been no payment defaults. Summary ratings information at December 31, 2023, based on the amortized cost basis and reflecting the lowest enhanced or underlying rating by Moody’s, Standard & Poors or Fitch, is as follows: AAA or pre-refunded – 21% of the portfolio; AA – 72%; 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 December 31, 2023.
The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2023. Yields on tax-exempt securities are presented on a fully taxable-equivalent basis. For callable securities, yields on securities purchased at a discount are based on yield-to-maturity, while yields on securities purchased at a premium are based on yield to the first call date. Yields on mortgage-backed securities are estimated and include the effects of prepayment assumptions. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | Within | **** | | **** | One- | **** | | **** | Five- | **** | | **** | After | **** | | **** | | | **** | | **** | ||||
| | | One | | | | Five | | | | Ten | | | | Ten | | | | | | | | **** | ||||
| (Dollars In Thousands) | | Year | | Yield | | Years | | Yield | | Years | | Yield | | Years | | Yield | | Total | | Yield | **** | |||||
| AVAILABLE-FOR-SALE DEBT SECURITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of the U.S. Treasury | | $ | 4,238 | | 1.13 | % | $ | 3,075 | | 1.20 | % | $ | 5,012 | | 1.51 | % | $ | 0 | | 0.00 | % | $ | 12,325 | | 1.30 | % |
| Obligations of U.S. Government agencies | | | 0 | 0.00 | % | | 0 | 0.00 | % | | 7,412 | 2.54 | % | | 3,707 | 3.45 | % | | 11,119 | 2.84 | % | |||||
| Bank holding company debt securities | | | 0 | 0.00 | % | | 0 | 0.00 | % | | 28,952 | 3.47 | % | | 0 | 0.00 | % | | 28,952 | 3.47 | % | |||||
| Obligations of states and political subdivisions: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax-exempt | | 1,684 | 2.07 | % | 14,899 | 2.40 | % | 23,065 | 2.73 | % | 73,816 | 2.29 | % | 113,464 | 2.39 | % | ||||||||||
| Taxable | | 7,278 | 1.42 | % | 9,977 | 2.13 | % | 12,805 | 2.25 | % | 28,660 | 2.43 | % | 58,720 | 2.21 | % | ||||||||||
| Sub-total | | $ | 13,200 | 1.41 | % | $ | 27,951 | 2.17 | % | $ | 77,246 | 2.83 | % | $ | 106,183 | 2.37 | % | $ | 224,580 | 2.45 | % | |||||
| Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | | | | | | | | |||||||||||||||||||
| Residential pass-through securities | | | | | | | | | 105,549 | 2.18 | % | |||||||||||||||
| Residential collateralized mortgage obligations | | | | | | | | | 50,212 | 2.91 | % | |||||||||||||||
| Commercial mortgage-backed securities | | | | | | | | | 76,412 | 2.03 | % | |||||||||||||||
| Private label commercial mortgage-backed securities | | | | | | | | | 8,215 | 5.49 | % | |||||||||||||||
| Total | | | | | | | | | $ | 464,968 | 2.42 | % |
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. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period.
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 28
Table of Contents 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 for loans and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at December 31, 2023, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2024.
Table VII shows the composition of the loan portfolio at year-end from 2019 through 2023. The significant loan growth in 2019 and 2020 reflects the impact of acquisitions located in Southeastern Pennsylvania. Primarily as a result of the acquisitions, as well as expansion by opening two offices in Southcentral Pennsylvania, the mix of the loan portfolio has changed to become predominantly commercial in nature. At December 31, 2023, commercial loans represented 75% of the portfolio while residential loans totaled 22% of the portfolio.
The segments presented in Table VII have been revised from those used in prior year disclosures to be consistent with the pools used in determining the collectively evaluated portion of the allowance for credit losses based on the CECL methodology in 2023.
As presented in Table VII, total loans outstanding at December 31, 2023 were $1,848,139,000 which is an increase of $108,099,000 (6.2%) from total loans at December 31, 2022. In comparing outstanding balances at December 31, 2023 and 2022, total commercial loans were up $82,697,000 (6.4%), reflecting growth in non-owner occupied commercial real estate loans of $61,745,000 and owner occupied commercial real estate loans of $31,336,000 and a net decrease of $10,384,000 in other commercial loans. Within other commercial loans, the outstanding balance of commercial construction and land loans increased $43,231,000, offset by decreases in the outstanding balances of commercial and industrial, commercial lines of credit, loans to political subdivisions and other commercial loans. Total residential mortgage loans were up $20,132,000 (5.1%) and total consumer loans increased $5,270,000 (9.6%).
Also included in Table VII is additional detail regarding the composition of the non-owner occupied commercial real estate loan portfolio at December 31, 2023. 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 $94,341,000, or 5.1% of gross loans receivable. At December 31, 2023, within this segment there were two loans with a total recorded investment of $3,908,000 in nonaccrual status with specific allowances totaling $524,000. The remainder of the non-owner occupied commercial real estate loans with a primary purpose of office space utilization were in accrual status with no specific allowance at December 31, 2023. 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. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to $38,652,000 at December 31, 2023, down from $44,723,000 at December 31, 2022.
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. The Corporation also may originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through December 31, 2023, the Corporation’s activity under the MPF Direct Program has been minimal.
For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At December 31, 2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,335,000 compared to $1,515,000 at December 31, 2022. 29
Table of Contents At December 31, 2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original 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. At December 31, 2022, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $325,677,000, including loans sold through the MPF Xtra program of $155,506,000 and loans sold through the Original program of $170,171,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 2023 and December 31, 2022.
TABLE VII – Five-year Summary of Loans by Type
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars In Thousands) | **** | 2023 | **** | % | | 2022 | **** | % | | 2021 | **** | % | | 2020 | **** | % | | 2019 | **** | % | |||||
| Commercial real estate - non-owner occupied: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-owner occupied | | $ | 499,104 | | 27.0 | | $ | 454,386 | | 26.1 | | $ | 358,352 | | 22.9 | | $ | 328,662 | | 20.0 | | $ | 208,579 | | 17.6 |
| Multi-family (5 or more) residential | | | 64,076 | | 3.5 | | | 55,406 | | 3.2 | | | 49,054 | | 3.1 | | | 54,893 | | 3.3 | | | 30,474 | | 2.6 |
| 1-4 Family - commercial purpose | | 174,162 | 9.4 | | | 165,805 | 9.5 | | | 175,027 | 11.2 | | | 198,918 | 12.1 | | | 147,121 | 12.4 | ||||||
| Total commercial real estate - non-owner occupied | | 737,342 | 39.9 | | 675,597 | 38.8 | | 582,433 | 37.2 | | 582,473 | 35.4 | | 386,174 | 32.6 | ||||||||||
| Commercial real estate - owner occupied | | | 237,246 | | 12.8 | | | 205,910 | | 11.8 | | | 196,083 | | 12.5 | | | 191,075 | | 11.6 | | | 78,729 | | 6.7 |
| All other commercial loans: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | 78,832 | 4.3 | | 95,368 | 5.5 | | 118,488 | 7.6 | | 222,923 | 13.6 | | 67,288 | 5.7 | ||||||||||
| Commercial lines of credit | | 117,236 | 6.3 | | 141,444 | 8.1 | | 106,338 | 6.8 | | 105,802 | 6.4 | | 92,509 | 7.8 | ||||||||||
| Political subdivisions | | 79,031 | 4.3 | | 86,663 | 5.0 | | 75,401 | 4.8 | | 46,295 | 2.8 | | 46,054 | 3.9 | ||||||||||
| Commercial construction and land | | 104,123 | 5.6 | | 60,892 | 3.5 | | 59,505 | 3.8 | | 41,000 | 2.5 | | 32,717 | 2.8 | ||||||||||
| Other commercial loans | | 20,471 | 1.2 | | 25,710 | 1.5 | | 26,498 | 1.8 | | 29,310 | 1.9 | | 28,735 | 2.4 | ||||||||||
| Total all other commercial loans | | 399,693 | 21.7 | | 410,077 | 23.6 | | 386,230 | 24.8 | | 445,330 | 27.2 | | 267,303 | 22.6 | ||||||||||
| Residential mortgage loans: | | | | | | | | | | | | | | | | | | ||||||||
| 1-4 Family - residential | | | 389,262 | 21.1 | | | 363,005 | | 20.9 | | | 327,593 | | 20.9 | | | 356,532 | | 21.7 | | | 388,415 | | 32.9 | |
| 1-4 Family residential construction | | | 24,452 | 1.3 | | | 30,577 | 1.8 | | | 23,151 | 1.5 | | | 18,736 | 1.1 | | | 14,640 | 1.2 | |||||
| Total residential mortgage | | 413,714 | 22.4 | | 393,582 | 22.7 | | 350,744 | 22.4 | | 375,268 | 22.8 | | 403,055 | 34.1 | ||||||||||
| Consumer loans: | | | | | | | | | | | | | | | | ||||||||||
| Consumer lines of credit (including HELOCs) | | 41,503 | 2.2 | | 36,650 | 2.1 | | 33,522 | 2.1 | | 34,566 | 2.1 | | 30,810 | 2.6 | ||||||||||
| All other consumer | | | 18,641 | 1.0 | | 18,224 | 1.0 | | 15,837 | 1.0 | | 15,497 | 0.9 | | 16,151 | 1.4 | |||||||||
| Total consumer | | 60,144 | 3.2 | | 54,874 | 3.1 | | 49,359 | 3.1 | | 50,063 | 3.0 | | 46,961 | 4.0 | ||||||||||
| Total | | 1,848,139 | 100.0 | | 1,740,040 | 100.0 | | 1,564,849 | 100.0 | | 1,644,209 | 100.0 | | 1,182,222 | 100.0 | ||||||||||
| Less: allowance for credit losses on loans | | (19,208) | | | (16,615) | | | (13,537) | | | (11,385) | | | (9,836) | | ||||||||||
| Loans, net | | $ | 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 at December 31, 2023 is as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | December 31, | | % of Non-owner | | % of | |||
| | | 2023 | | Occupied CRE | | Total Loans | |||
| Industrial | | $ | 109,160 | | 21.9 | % | | 5.9 | % |
| Retail | | | 94,824 | | 19.0 | % | | 5.1 | % |
| Office | | | 94,341 | | 18.9 | % | | 5.1 | % |
| Hotels | | | 73,094 | | 14.6 | % | | 4.0 | % |
| Mixed Use | | | 59,687 | | 12.0 | % | | 3.2 | % |
| Other | | | 67,998 | | 13.6 | % | | 3.7 | % |
| Total Non-owner Occupied CRE Loans | | $ | 499,104 | | | | | | |
| Total Gross Loans | | $ | 1,848,139 | | | | | | |
30
Table of Contents TABLE VIII – LOAN MATURITY DISTRIBUTION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | As of December 31, 2023 | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fixed-Rate Loans | | | Variable- or Adjustable-Rate Loans | | All Loans | ||||||||||||||||||||||
| | | 1 Year | | 1-5 | | >5 | | | | | | 1 Year | | 1-5 | | >5 | | | | | | | |||||||
| (In Thousands) | **** | or Less | **** | Years | **** | Years | **** | Total | **** | **** | or Less | **** | Years | **** | Years | **** | Total | | | Total | |||||||||
| Commercial Real Estate- Nonowner Occupied: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-owner occupied | | $ | 30,180 | | $ | 181,360 | | $ | 27,690 | | $ | 239,230 | | | $ | 70,947 | | $ | 183,009 | | $ | 5,918 | | $ | 259,874 | | | $ | 499,104 |
| Multi-family (5 or more) residential | | 5,775 | | 20,151 | | 2,157 | | 28,083 | | | 7,166 | | 28,526 | | 301 | | 35,993 | | | | 64,076 | ||||||||
| 1-4 Family - commercial purpose | | | 14,537 | | | 51,672 | | | 10,784 | | | 76,993 | | | 14,906 | | 81,862 | | 401 | | 97,169 | | | | 174,162 | ||||
| Total commercial real estate - non-owner occupied | | | 50,492 | | | 253,183 | | | 40,631 | | | 344,306 | | | | 93,019 | | | 293,397 | | | 6,620 | | | 393,036 | | | | 737,342 |
| Commercial real estate - owner occupied | | | 11,425 | | | 76,136 | | | 25,997 | | | 113,559 | | | | 22,281 | | | 100,449 | | | 957 | | | 123,687 | | | | 237,246 |
| All other commercial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and industrial | | | 1,453 | | | 44,794 | | | 7,719 | | | 53,966 | | | | 10,552 | | | 13,686 | | | 628 | | | 24,866 | | | | 78,832 |
| Commercial lines of credit | | | 6,122 | | | 0 | | | 0 | | | 6,122 | | | | 106,505 | | | 1,003 | | | 3,606 | | | 111,114 | | | | 117,236 |
| Political subdivisions | | | 919 | | | 19,150 | | | 56,213 | | | 76,282 | | | | 15 | | | 2,639 | | | 95 | | | 2,749 | | | | 79,031 |
| Commercial construction and land | | | 7,112 | | | 21,889 | | | 746 | | | 29,747 | | | | 57,370 | | | 17,006 | | | 0 | | | 74,376 | | | | 104,123 |
| Other commercial loans | | | 981 | | | 3,725 | | | 2,404 | | | 7,110 | | | | 6,320 | | | 7,041 | | | 0 | | | 13,361 | | | | 20,471 |
| Total all other commercial loans | | | 16,587 | | | 89,558 | | | 67,082 | | | 173,227 | | | | 180,762 | | | 41,375 | | | 4,329 | | | 226,466 | | | | 399,693 |
| Residential mortgage loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 Family - residential | | | 402 | | | 7,566 | | | 149,915 | | | 157,883 | | | | 17,120 | | | 62,189 | | | 152,070 | | | 231,379 | | | | 389,262 |
| 1-4 Family residential construction | | | 138 | | | 918 | | | 9,490 | | | 10,546 | | | | 0 | | | 0 | | | 13,906 | | | 13,906 | | | | 24,452 |
| Total residential mortgage | | | 540 | | | 8,484 | | | 159,405 | | | 168,429 | | | | 17,120 | | | 62,189 | | | 165,976 | | | 245,285 | | | | 413,714 |
| Consumer loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 0 |
| Consumer lines of credit (including HELOCs) | | | 334 | | | 0 | | | 2 | | | 336 | | | | 41,167 | | | 0 | | | 0 | | | 41,167 | | | | 41,503 |
| All other consumer | | | 751 | | | 12,014 | | | 2,360 | | | 15,125 | | | | 3,516 | | | 0 | | | 0 | | | 3,516 | | | | 18,641 |
| Total consumer | | | 1,085 | | | 12,014 | | | 2,362 | | | 15,461 | | | | 44,683 | | | 0 | | | 0 | | | 44,683 | | | | 60,144 |
| Total | | $ | 80,129 | | $ | 439,375 | | $ | 295,477 | | $ | 814,982 | | | $ | 357,865 | | $ | 497,410 | | $ | 177,882 | | $ | 1,033,157 | | | $ | 1,848,139 |
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
On January 1, 2023, the Corporation adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Note 1 to the consolidated financial statements provides a detailed explanation of the Corporation’s adopted accounting policies related to the application of CECL.
Effective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). At January 1, 2023, the impact of adopting CECL included an increase in gross loans receivable of $806,000 as compared to December 31, 2022 and an increase in the 31
Table of Contents allowance for credit losses of $2,104,000 as compared to the allowance for loan losses determined under the Incurred Loss method at December 31, 2022.
A summary of the provision for credit losses for the year ended December 31, 2023, is as follows:
| | | | | |
|---|---|---|---|---|
| (In Thousands) | | Year | | |
| | | Ended | | |
| | | December 31, | | |
| | | 2023 | | |
| Provision for credit losses: | | | | |
| Loans receivable | | $ | 753 | |
| Off-balance sheet exposures (1) | | (567) | | |
| Tota provision for credit losses | | $ | 186 | |
| (1) | The (credit) provision for credit losses on off-balance sheet exposures prior to January 1, 2023 was included in other noninterest expense in the consolidated statements of income. |
|---|
For the year ended December 31, 2023, there was a provision for credit losses of $186,000, a decrease of $7,069,000 in expense compared to a provision for loan losses of $7,255,000 in 2022. The provision for 2023 included expense related to loans receivable of $753,000 and a credit related to off-balance sheet exposures of $567,000. The expense related to loans receivable was mainly attributable to qualitative adjustments of the Corporation’s historical loss experience in estimating the ACL and the impact of an economic forecast, as well as a reduction in the Corporation’s average net charge-off experience, used in the calculation of the ACL. The ACL as a percentage of gross loans receivable was 1.04% at December 31, 2023 as compared to 1.08% at January 1, 2023 upon the initial adoption of CECL.
Table XI shows that total nonperforming assets as a percentage of total assets was 0.75% at December 31, 2023, down from 1.04% at December 31, 2022 and lower than that at year-end 2019 through 2021. Total nonperforming assets were $18.8 million at December 31, 2023, down from $25.6 million at December 31, 2022. Similarly, total loans individually evaluated for credit loss decreased to $11.3 million at December 31, 2023 from $19.4 million at December 31, 2022. The net decrease in nonperforming assets at December 31, 2023 compared to December 31, 2022 included the impact of a $10.0 million payoff in the first quarter 2023 on a commercial loan relationship that was classified as nonaccrual at December 31, 2022. The reduction also included paydowns totaling $2,302,000 in 2023 on a commercial loan for which partial charge-offs totaling $3,942,000 were recorded in 2022. The remaining carrying value of this loan was $352,000 at December 31, 2023. These reductions were partially offset by the addition to nonaccrual of two commercial loan relationships totaling $4,457,000, including two commercial real estate loans with a primary purpose of office space utilization totaling $3,908,000, at December 31, 2023.
In 2023, net charge-offs were low by historical standards, totaling $264,000, or 0.01% of average outstanding loans. Table IX shows annual average net charge-off rates ranging from a high of 0.26% in 2022 to a low of 0.03% in 2019.
Over the period 2019-2023, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on individual loans and may significantly impact the provision for credit losses and the amount of total charge-offs reported in any one period.
Management believes it has been conservative in its decisions concerning identification of loans requiring individual evaluation for credit loss, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of December 31, 2023. Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.
Tables IX through XII present historical data related to loans and the allowance for credit losses.
.
32
Table of Contents
TABLE IX - ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES ON LOANS
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars In Thousands) | | | | | | | | | | | | | | | |
| | Years Ended December 31, | ||||||||||||||
| | 2023 | **** | 2022 | **** | 2021 | **** | 2020 | **** | 2019 | **** | |||||
| Balance, beginning of year | $ | 16,615 | | $ | 13,537 | | $ | 11,385 | | $ | 9,836 | | $ | 9,309 | |
| Adoption of ASU 2016-13 (CECL) | 2,104 | | 0 | | 0 | | 0 | | 0 | | |||||
| Charge-offs | (356) | | (4,245) | | (1,575) | | (2,465) | | (379) | | |||||
| Recoveries | 92 | | 68 | | 66 | | 101 | | 57 | | |||||
| Net charge-offs | (264) | | (4,177) | | (1,509) | | (2,364) | | (322) | | |||||
| Provision for credit losses | 753 | | 7,255 | | 3,661 | | 3,913 | | 849 | | |||||
| Balance, end of year | $ | 19,208 | | $ | 16,615 | | $ | 13,537 | | $ | 11,385 | | $ | 9,836 | |
| Net charge-offs as a % of average loans | 0.01 | % | 0.26 | % | 0.09 | % | 0.16 | % | 0.03 | % |
TABLE X - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES
UPON ADOPTION OF CECL
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | | December 31, | | January 1, | ||
| | | 2023 | | 2023 | ||
| Loans individually evaluated | | $ | 743 | | $ | 751 |
| Loans collectively evaluated: | | | | | | |
| Commercial real estate - nonowner occupied | | | 10,379 | | | 9,641 |
| Commercial real estate - owner occupied | | | 2,111 | | | 1,765 |
| All other commercial loans | | | 3,811 | | | 3,914 |
| Residential mortgage | | | 1,764 | | | 2,407 |
| Consumer | | | 400 | | | 241 |
| Total Allowance | | $ | 19,208 | | $ | 18,719 |
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 |
33
Table of Contents TABLE XI - PAST DUE AND NONPERFORMING ASSETS
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars In Thousands) | As of December 31, | ||||||||||||||
| | 2023 | **** | 2022 | **** | 2021 | **** | 2020 | **** | 2019 | **** | |||||
| Loans individually evaluated with a valuation allowance | $ | 7,786 | | $ | 3,460 | | $ | 6,540 | | $ | 8,082 | | $ | 3,375 | |
| Loans individually evaluated without a valuation allowance | 3,478 | | 14,871 | | 2,636 | | 2,895 | | 1,670 | | |||||
| Purchased credit impaired loans | | 0 | | | 1,027 | | | 6,558 | | | 6,841 | | | 441 | |
| Total individually evaluated loans | $ | 11,264 | | $ | 19,358 | | $ | 15,734 | | $ | 17,818 | | $ | 5,486 | |
| Total loans past due 30-89 days and still accruing | $ | 9,275 | | $ | 7,079 | | $ | 5,106 | | $ | 5,918 | | $ | 8,889 | |
| Nonperforming assets: | | | | | | ||||||||||
| Purchased credit impaired loans | $ | 0 | | $ | 1,027 | | $ | 6,558 | | $ | 6,841 | | $ | 441 | |
| Other nonaccrual loans | | 15,177 | | | 22,058 | | | 12,441 | | | 14,575 | | | 8,777 | |
| Total nonaccrual loans | | 15,177 | | | 23,085 | | | 18,999 | | | 21,416 | | | 9,218 | |
| Total loans past due 90 days or more and still accruing | 3,190 | | 2,237 | | 2,219 | | 1,975 | | 1,207 | | |||||
| Total nonperforming loans | 18,367 | | 25,322 | | 21,218 | | 23,391 | | 10,425 | | |||||
| Foreclosed assets held for sale (real estate) | 478 | | 275 | | 684 | | 1,338 | | 2,886 | | |||||
| Total nonperforming assets | $ | 18,845 | | $ | 25,597 | | $ | 21,902 | | $ | 24,729 | | $ | 13,311 | |
| | | | | | | | | | | | | | | | |
| Total nonperforming loans as a % of loans | 0.99 | % | 1.46 | % | 1.36 | % | 1.42 | % | 0.88 | % | |||||
| Total nonperforming assets as a % of assets | 0.75 | % | 1.04 | % | 0.94 | % | 1.10 | % | 0.80 | % | |||||
| Allowance for credit losses as a % of total loans | 1.04 | % | 0.95 | % | 0.87 | % | 0.69 | % | 0.83 | % |
34
Table of Contents TABLE XII – FIVE-YEAR HISTORY OF LOAN LOSSES
| | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars In Thousands) | **** | 2023 | **** | 2022 | **** | 2021 | **** | 2020 | **** | 2019 | **** | Average | **** | ||||||
| Average gross loans | | $ | 1,792,149 | | $ | 1,628,094 | | $ | 1,596,756 | | $ | 1,445,098 | | $ | 1,057,559 | | $ | 1,503,931 | |
| Year-end gross loans | | 1,848,139 | | 1,740,040 | | 1,564,849 | | 1,644,209 | | 1,182,222 | | $ | 1,595,892 | | |||||
| Year-end allowance for credit losses on loans | | 19,208 | | 16,615 | | 13,537 | | 11,385 | | 9,836 | | $ | 14,116 | | |||||
| Year-end nonaccrual loans | | 15,177 | | 23,085 | | 18,999 | | 21,416 | | 9,218 | | $ | 17,579 | | |||||
| Year-end loans 90 days or more past due and still accruing | | 3,190 | | 2,237 | | 2,219 | | 1,975 | | 1,207 | | 2,166 | | ||||||
| Net charge-offs | | 264 | | 4,177 | | 1,509 | | 2,364 | | 322 | | 1,727 | | ||||||
| Provision for credit losses on loans | | 753 | | 7,255 | | 3,661 | | 3,913 | | 849 | | 3,286 | | ||||||
| Earnings coverage of charge-offs | | 119 | x | 8 | x | 26 | x | 10 | x | 76 | x | 18 | x | ||||||
| Allowance coverage of charge-offs | | 73 | x | 4 | x | 9 | x | 5 | x | 31 | x | 8 | x | ||||||
| Net charge-offs as a % of provision for credit losses on loans | | 35.06 | % | 57.57 | % | 41.22 | % | 60.41 | % | 37.93 | % | 52.31 | % | ||||||
| Net charge-offs as a % of average gross loans | | 0.01 | % | 0.26 | % | 0.09 | % | 0.16 | % | 0.03 | % | 0.11 | % | ||||||
| Income before income taxes on a fully taxable equivalent basis | | 31,402 | | 33,576 | | 38,822 | | 24,192 | | 24,453 | | 30,489 | |
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The Corporation’s significant fixed and determinable contractual obligations as of December 31, 2023 include repayment obligations related to time deposits and borrowed funds. Information related to maturities of time deposits is provided in Note 10 to the consolidated financial statements. Information related to maturities of borrowed funds is provided in Note 11 to the consolidated financial statements. The Corporation’s operating lease commitments with terms of one year or less and other commitments at December 31, 2023 are immaterial. Information concerning operating lease commitments with terms greater than one year is provided in Note 15 to the consolidated financial statements. The Corporation’s significant off-balance sheet arrangements include commitments to extend credit and standby letters of credit. Off-balance sheet arrangements are described in Note 15 and the allowance for credit losses on off-balance sheet exposures is described in Note 7 to the consolidated financial statements.
As described in more detail in the Financial Condition section of Management’s Discussion and Analysis, the Corporation sells residential mortgage loans for which 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. At December 31, 2023, outstanding balances of such loans sold totaled $323,298,000.
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 securities with a carrying value of $20,829,000 at December 31, 2023. 35
Table of Contents The Corporation’s outstanding, available, and total credit facilities at December 31, 2023 and 2022 are as follows:
| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Outstanding | | Available | | Total Credit | ||||||||||||
| (In Thousands) | **** | December 31, | **** | December 31, | **** | December 31, | **** | December 31, | **** | December 31, | **** | December 31, | ||||||
| | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | ||||||
| Federal Home Loan Bank of Pittsburgh | | $ | 189,021 | | $ | 150,099 | | $ | 737,824 | | $ | 689,279 | | $ | 926,845 | | $ | 839,378 |
| Federal Reserve Bank Discount Window | | 0 | | 0 | | 19,982 | | 23,107 | | 19,982 | | 23,107 | ||||||
| Other correspondent banks | | 0 | | 0 | | 75,000 | | 95,000 | | 75,000 | | 95,000 | ||||||
| Total credit facilities | | $ | 189,021 | | $ | 150,099 | | $ | 832,806 | | $ | 807,386 | | $ | 1,021,827 | | $ | 957,485 |
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 with par values totaling $138,313,000 and letters of credit totaling $19,208,000. At December 31, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowing of $77,000,000, long-term borrowings of $62,272,000 and letters of credit totaling $10,827,000.
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 utilize available-for-sale debt securities as collateral for borrowings or sell securities to meet its obligations. At December 31, 2023, the carrying value of available-for-sale debt securities in excess of amounts required to meet pledging or repurchase agreement obligations was $256,058,000.
Deposits totaled $2,014,806,000 at December 31, 2023, up $17,213,000 (0.9%) from $1,997,593,000 at December 31, 2022. Average total deposits were 0.4% lower for the year ended December 31, 2023, as compared to the year ended December 31, 2022. Excluding brokered deposits, adjusted total deposits at December 31, 2023 were lower by $26,173,000 (1.3%) as compared to December 31, 2022. Brokered deposits, consisting mainly of short-term certificates of deposit, totaled $64,369,000 at December 31, 2023, an increase of $43,386,000 from December 31, 2022. The reduction in total deposits, excluding brokered deposits, included a reduction in the estimated amount of deposits in excess of FDIC insurance levels (uninsured deposit balances) of $97.2 million as compared to December 31, 2022. The net reduction in uninsured deposits resulted from several factors, including the impact of customer funds transferred to higher-yielding investment alternatives and increased use of reciprocal deposits that allow C&N Bank to place customer funds in excess of the FDIC insurance limit with other financial institutions through a deposit placement network in exchange for a matching amount of deposits from other network financial institutions. Reciprocal deposits totaled $223.5 million at December 31, 2023, up $121.7 million from December 31, 2022.
As shown in the table below, at December 31, 2023, estimated uninsured deposits totaled $592.2 million, or 29.2% of total deposits, down from $689.4 million or 34.2% of total deposits at December 31, 2022. Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling $151.0 million at December 31, 2023. As shown in the table below, total uninsured and uncollateralized deposits amounted to 21.7% of total deposits at December 31, 2023, down from 24.0% at December 31, 2022.
As summarized in the table that immediately follows, the Corporation’s highly liquid sources of available funds described above, including unused borrowing capacity with the Federal Home Loan Bank of Pittsburgh, unused availability on the Federal Reserve Bank of Philadelphia’s discount window, available federal funds lines with other banks and unencumbered available-for-sale debt securities totaled $1.1 billion at December 31, 2023, 2023. Available funding from these sources totaled 183.9% of uninsured deposits and 246.8% of total uninsured and uncollateralized deposits at December 31, 2023.
36
Table of Contents
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| Uninsured Deposits Information | | December 31, | December 31, | ||||
| | | 2023 | 2022 | ||||
| Total Deposits - C&N Bank | | $ | 2,030,909 | | $ | 2,016,666 | |
| | | | | | | | |
| Estimated Total Uninsured Deposits | | $ | 592,206 | | $ | 689,435 | |
| Portion of Uninsured Deposits that are | | | | | | | |
| Collateralized | | | 151,031 | | | 205,886 | |
| Uninsured and Uncollateralized Deposits | | $ | 441,175 | | $ | 483,549 | |
| | | | | | | | |
| Uninsured and Uncollateralized Deposits as | | | | | | | |
| a % of Total Deposits | | | 21.7 | % | | 24.0 | % |
| | | | | | | | |
| Available Funding from Credit Facilities | | $ | 832,806 | | $ | 807,386 | |
| Fair Value of Available-for-sale Debt | | | | | | | |
| Securities in Excess of Pledging Obligations | | | 256,058 | | | 272,475 | |
| Highly Liquid Available Funding | | $ | 1,088,864 | | $ | 1,079,861 | |
| | | | | | | | |
| Highly Liquid Available Funding as a % of | | | | | | | |
| Uninsured Deposits | | | 183.9 | % | | 156.6 | % |
| | | | | | | | |
| Highly Liquid Available Funding as a % of | | | | | | | |
| Uninsured and Uncollateralized Deposits | | | 246.8 | % | | 223.3 | % |
Despite the reduction in deposits, excluding brokered deposits, in 2023, based on the ample sources of highly liquid funds as described above, management believes the Corporation is well-positioned to meet its short-term and long-term funding obligations.
STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY
Details concerning capital ratios at December 31, 2023 and December 31, 2022 are presented in Note 17 to the consolidated financial statements. Management believes, as of December 31, 2023, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, the Corporation’s and C&N Bank’s capital ratios at December 31, 2023 and December 31, 2022 exceed the Corporation’s Board policy threshold levels. Management expects C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future.
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. These restrictions are described in Note 17 to the consolidated financial statements. 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 sufficient capital commensurate with its overall risk profile.
To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, C&N Bank 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 December 31, 2023, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
| | | | |
|---|---|---|---|
| Minimum common equity tier 1 capital ratio | 4.5 | % | |
| Minimum common equity tier 1 capital ratio plus capital conservation buffer | 7.0 | % | |
| Minimum tier 1 capital ratio | 6.0 | % | |
| Minimum tier 1 capital ratio plus capital conservation buffer | 8.5 | % | |
| Minimum total capital ratio | 8.0 | % | |
| Minimum total capital ratio plus capital conservation buffer | 10.5 | % |
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Table of Contents
A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:
| | | | |
|---|---|---|---|
| Capital Conservation Buffer | **** | Maximum Payout | **** |
| (as a % of risk-weighted assets) | | (as a % of eligible retained income) | **** |
| Greater than 2.5% | | No payout limitation applies | |
| ≤2.5% and >1.875% | | 60 | % |
| ≤1.875% and >1.25% | | 40 | % |
| ≤1.25% and >0.625% | | 20 | % |
| ≤0.625% | | 0 | % |
At December 31, 2023, C&N Bank’s Capital Conservation Buffer (determined based on the minimum total capital ratio) was 6.89%.
On September 25, 2023, the Corporation announced a new treasury stock repurchase program. Under the newly approved program, the Corporation is authorized to repurchase up to 750,000 shares of the Corporation’s common stock, or slightly less than 5% of the Corporation’s issued and outstanding shares at August 4, 2023. The new program was effective when publicly announced and will continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion. All shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plans and its equity compensation program. Through December 31, 2023, no shares were repurchased under the new program.
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 within stockholders’ equity. Accumulated other comprehensive loss 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 $38,878,000 at December 31, 2023 and $50,370,000 at December 31, 2022 as compared to the balance in accumulated other comprehensive income related to unrealized gains on available-for-sale debt securities, net of deferred income tax of $4,809,000 at December 31, 2021. The volatility in stockholders’ equity related to accumulated other comprehensive loss from available-for-sale debt securities has been caused by significant fluctuations in interest rates including overall significant increases in rates as compared to market rates when most of the Corporation’s securities were purchased. The securities section of Management’s Discussion and Analysis and Note 6 to the consolidated financial statements provide additional information concerning information management considered in evaluating debt and equity securities for credit losses at December 31, 2023.
ITEM 7A. QUANTITA TIVE 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. 38
Table of Contents INTEREST RATE RISK
The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the economic value of equity. For purposes of these calculations, the economic value of equity includes the discounted present values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects the amount of potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.
The projected results based on the model includes the impact of estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Further, the projected results are impacted by assumptions regarding the run-off and the extent of sensitivity to interest rate changes of deposits with no stated maturity (checking, savings and money market accounts). Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and economic value of equity. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.
The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in the economic value of equity from the baseline values based on current rates.
Table XIII, which follows this discussion, is based on the results of calculations performed using the simulation model as of December 31, 2023 and 2022. In the analysis based on December 31, 2023 data, the amounts of net interest income decrease, as compared to the amounts based on current interest rates, in both the upward and downward rate scenarios. Further, the economic value of equity is modeled to decrease in both the rising and falling rate scenarios. The results based on December 31, 2023 data as presented in Table XIII are significantly different from the results based on the modeling performed using December 31, 2022 data which showed the net interest income profile to be asset-sensitive. In the analysis based on December 31, 2023 data, management assumed that, in rising rate scenarios, the average rate to be paid on interest checking, savings and money market accounts would increase by a higher percentage of the baseline scenario as compared to the assumptions used in the December 31, 2022 analysis. This change reflects management’s assessment that, in light of significant increases in short-term interest rates that have occurred over the course of 2022 and 2023, the Corporation’s deposit rates would increase to a greater extent if such scenarios would occur. The change in results also reflects changes in deposit mix, as the carrying amount of total deposits without stated maturities was $112.0 million lower at December 31, 2023 as compared to December 31, 2022, while time deposits were higher by $129.3 million. Further, results in the downward rate scenarios reflect limitations on the benefit of falling rates on some deposit types due to a 0% assumed floor. The Table also shows that as of the respective dates, despite the impact of the modeling changes and changes in deposit mix, the changes in net interest income and changes in economic value were within the policy limits in all scenarios.
Under U.S. generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive income (loss) within stockholders’ equity. Increases in interest rates have caused the fair value of the Corporation’s available-for-sale debt securities to decrease, resulting in an accumulated other comprehensive loss of $38.9 million at December 31, 2023. In contrast, most of the Corporation’s other financial instruments, including loans receivable (held for investment), deposits and borrowed funds are carried on the balance sheet at historical cost without adjustment for the impact of changes in interest rates.
.
39
Table of Contents
TABLE XIII – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | % | | | | | |
40
Table of Contents
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2022 Data | | | | | | | | | | | | | | | |
| (In Thousands) | | Period Ending December 31, 2023 | |||||||||||||
| | | | | | | | | | | | | | | | |
| Basis Point | | | Interest | | | Interest | | | Net Interest | | NII | | | NII | |
| Change in Rates | | | Income | | | Expense | | | Income (NII) | | % Change | | | Risk Limit | |
| +400 | | $ | 131,145 | | $ | 34,767 | | $ | 96,378 | | 8.9 | % | | 25.0 | % |
| +300 | | | 125,127 | | | 30,816 | | | 94,311 | | 6.6 | % | | 20.0 | % |
| +200 | | | 119,561 | | | 26,864 | | | 92,697 | | 4.8 | % | | 15.0 | % |
| +100 | | | 113,703 | | | 22,912 | | | 90,791 | | 2.6 | % | | 10.0 | % |
| 0 | | | 107,451 | | | 18,961 | | | 88,490 | | 0.0 | % | | 0.0 | % |
| -100 | | | 101,048 | | | 15,516 | | | 85,532 | | (3.3) | % | | 10.0 | % |
| -200 | | | 94,854 | | | 13,240 | | | 81,614 | | (7.8) | % | | 15.0 | % |
| -300 | | | 89,405 | | | 11,325 | | | 78,080 | | (11.8) | % | | 20.0 | % |
| -400 | | | 85,076 | | | 9,439 | | | 75,637 | | (14.5) | % | | 25.0 | % |
| | | | | | | | | | | | | | | | |
| | | Economic Value of Equity at December 31, 2022 | | | | | | ||||||||
| | | | | | | | | | | | | | | | |
| | | | Present | | | Present | | | Present | | | | | | |
| Basis Point | | | Value | | | Value | | | Value | | | | | | |
| Change in Rates | | | Equity | | | % Change | | | Risk Limit | | | | | | |
| +400 | | $ | 498,368 | | | 0.3 | % | | 50.0 | % | | | | | |
| +300 | | | 496,186 | | | (0.1) | % | | 45.0 | % | | | | | |
| +200 | | | 501,422 | | | 1.0 | % | | 35.0 | % | | | | | |
| +100 | | | 501,991 | | | 1.1 | % | | 25.0 | % | | | | | |
| 0 | | | 496,650 | | | 0.0 | % | | 0.0 | % | | | | | |
| -100 | | | 485,332 | | | (2.3) | % | | 25.0 | % | | | | | |
| -200 | | | 468,195 | | | (5.7) | % | | 35.0 | % | | | | | |
| -300 | | | 445,129 | | | (10.4) | % | | 45.0 | % | | | | | |
| -400 | | | 417,505 | | | (15.9) | % | | 50.0 | % | | | | | |
41
Table of Contents **** ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
| | | | | | | |
|---|---|---|---|---|---|---|
| | **** | December 31, | **** | December 31, | ||
| (In Thousands, Except Share and Per Share Data) | | 2023 | | 2022 | ||
| ASSETS | | | ||||
| Cash and due from banks: | | | ||||
| Noninterest-bearing | | $ | 24,855 | | $ | 25,811 |
| Interest-bearing | | 32,023 | | 29,237 | ||
| Total cash and due from banks | | 56,878 | | 55,048 | ||
| Available-for-sale debt securities, at fair value | | 415,755 | | 498,033 | ||
| | | | | | | |
| Loans receivable | | 1,848,139 | | 1,740,040 | ||
| Allowance for credit losses | | (19,208) | | (16,615) | ||
| Loans, net | | 1,828,931 | | 1,723,425 | ||
| | | | | | | |
| Bank-owned life insurance | | 63,674 | | 31,214 | ||
| Accrued interest receivable | | 9,140 | | 8,653 | ||
| Bank premises and equipment, net | | 21,632 | | 21,574 | ||
| Foreclosed assets held for sale | | 478 | | 275 | ||
| Deferred tax asset, net | | 17,441 | | 20,884 | ||
| Goodwill | | 52,505 | | 52,505 | ||
| Core deposit intangibles, net | | 2,469 | | 2,877 | ||
| Other assets | | 46,681 | | 39,819 | ||
| TOTAL ASSETS | | $ | 2,515,584 | | $ | 2,454,307 |
| | | | | | | |
| LIABILITIES | | | | | ||
| Deposits: | | | | | ||
| Noninterest-bearing | | $ | 490,554 | | $ | 563,843 |
| Interest-bearing | | 1,524,252 | | 1,433,750 | ||
| Total deposits | | 2,014,806 | | 1,997,593 | ||
| Short-term borrowings | | 33,874 | | 80,062 | ||
| Long-term borrowings - FHLB advances | | 138,337 | | 62,347 | ||
| Senior notes, net | | | 14,831 | | | 14,765 |
| Subordinated debt, net | | 24,717 | | 24,607 | ||
| Accrued interest and other liabilities | | 26,638 | | 25,608 | ||
| TOTAL LIABILITIES | | 2,253,203 | | 2,204,982 | ||
| | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | ||
| Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation | | | | | ||
| preference per share; no shares issued | | 0 | | 0 | ||
| Common stock, par value $1.00 per share; authorized 30,000,000 shares; | | | | | ||
| issued 16,030,172 and outstanding 15,295,135 at December 31, 2023; | | | | | ||
| issued 16,030,172 and outstanding 15,518,819 at December 31, 2022 | | 16,030 | | 16,030 | ||
| Paid-in capital | | 144,388 | | 143,950 | ||
| Retained earnings | | 157,028 | | 151,743 | ||
| Treasury stock, at cost; 735,037 shares at December 31, 2023 and 511,353 | | | | | ||
| shares at December 31, 2022 | | (16,628) | | (12,520) | ||
| Accumulated other comprehensive loss | | (38,437) | | (49,878) | ||
| TOTAL STOCKHOLDERS' EQUITY | | 262,381 | | 249,325 | ||
| TOTAL LIABILITIES & STOCKHOLDERS' EQUITY | | $ | 2,515,584 | | $ | 2,454,307 |
The accompanying notes are an integral part of the consolidated financial statements.
42
Table of Contents Consolidated Statements of Income
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Years Ended December 31, | |||||||
| | | | | | | | | ||
| (In Thousands, Except Per Share Data) | | 2023 | | 2022 | | 2021 | |||
| INTEREST INCOME | | | | | | ||||
| Interest and fees on loans: | | | | | | ||||
| Taxable | | $ | 98,854 | | $ | 78,599 | | $ | 74,549 |
| Tax-exempt | | 2,225 | | 1,965 | | 1,770 | |||
| Income from available-for-sale debt securities: | | | | | | | |||
| Taxable | | 8,555 | | 8,360 | | 5,114 | |||
| Tax-exempt | | 2,427 | | 3,001 | | 2,684 | |||
| Other interest and dividend income | | 1,443 | | 722 | | 384 | |||
| Total interest and dividend income | | 113,504 | | 92,647 | | 84,501 | |||
| INTEREST EXPENSE | | | | ||||||
| Interest on deposits | | 24,233 | | 6,638 | | 4,538 | |||
| Interest on short-term borrowings | | 3,240 | | 429 | | 23 | |||
| Interest on long-term borrowings - FHLB advances | | 4,230 | | 896 | | 399 | |||
| Interest on senior notes, net | | | 479 | | | 477 | | | 293 |
| Interest on subordinated debt, net | | | 922 | | | 1,079 | | | 1,309 |
| Total interest expense | | 33,104 | | 9,519 | | 6,562 | |||
| Net interest income | | 80,400 | | 83,128 | | 77,939 | |||
| Provision for credit losses | | 186 | | 7,255 | | 3,661 | |||
| Net interest income after provision for credit losses | | 80,214 | | 75,873 | | 74,278 | |||
| NONINTEREST INCOME | | | | ||||||
| Trust revenue | | 7,413 | | 6,994 | | 7,234 | |||
| Brokerage and insurance revenue | | 1,675 | | 2,291 | | 1,860 | |||
| Service charges on deposit accounts | | 5,567 | | 5,019 | | 4,633 | |||
| Interchange revenue from debit card transactions | | 4,160 | | 4,148 | | 3,855 | |||
| Net gains from sale of loans | | 723 | | 757 | | 3,428 | |||
| Loan servicing fees, net | | 602 | | 960 | | 694 | |||
| Increase in cash surrender value of life insurance | | 2,703 | | 545 | | 573 | |||
| Other noninterest income | | 4,610 | | 3,698 | | 3,580 | |||
| Realized (losses) gains on available-for-sale debt securities, net | | | (3,036) | | | 20 | | | 24 |
| Total noninterest income | | 24,417 | | 24,432 | | 25,881 | |||
| NONINTEREST EXPENSE | | | | ||||||
| Salaries and employee benefits | | | 44,195 | | | 41,833 | | | 37,603 |
| Net occupancy and equipment expense | | | 5,357 | | | 5,533 | | | 4,984 |
| Data processing and telecommunications expense | | | 7,582 | | | 6,806 | | | 5,903 |
| Automated teller machine and interchange expense | | 1,682 | | 1,601 | | 1,433 | |||
| Pennsylvania shares tax | | 1,602 | | 1,956 | | 1,951 | |||
| Professional fees | | 2,497 | | 2,005 | | 2,243 | |||
| Other noninterest expense | | 11,233 | | 8,221 | | 8,355 | |||
| Total noninterest expense | | 74,148 | | 67,955 | | 62,472 | |||
| Income before income tax provision | | 30,483 | | 32,350 | | 37,687 | |||
| Income tax provision | | 6,335 | | 5,732 | | 7,133 | |||
| NET INCOME | | $ | 24,148 | | $ | 26,618 | | $ | 30,554 |
| EARNINGS PER COMMON SHARE - BASIC | | $ | 1.57 | | $ | 1.71 | | $ | 1.92 |
| EARNINGS PER COMMON SHARE - DILUTED | | $ | 1.57 | | $ | 1.71 | | $ | 1.92 |
The accompanying notes are an integral part of consolidated financial statements.
43
Table of Contents Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Years Ended December 31, | |||||||
| (In Thousands) | | 2023 | | 2022 | 2021 | ||||
| Net income | | $ | 24,148 | | $ | 26,618 | | $ | 30,554 |
| | | | | | | | | | |
| Available-for-sale debt securities: | | | | | | | |||
| Unrealized holding gains (losses) on available-for-sale debt securities | | | 11,512 | | | (69,828) | | | (8,669) |
| Reclassification adjustment for losses (gains) realized in income | | | 3,036 | | | (20) | | | (24) |
| Other comprehensive income (loss) on available-for-sale debt securities | | | 14,548 | | | (69,848) | | | (8,693) |
| | | | | | | | | | |
| Unfunded pension and postretirement obligations: | | | | | | | |||
| Changes from plan amendments and actuarial gains and losses | | (9) | | 389 | | 140 | |||
| Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | | (56) | | (42) | | (17) | |||
| Other comprehensive (loss) income on pension and postretirement obligations | | (65) | | 347 | | 123 | |||
| | | | | | | | | | |
| Other comprehensive income (loss) before income tax | | 14,483 | | (69,501) | | (8,570) | |||
| Income tax related to other comprehensive (income) loss | | (3,042) | | 14,597 | | 1,801 | |||
| | | | | | | | | | |
| Net other comprehensive income (loss) | | 11,441 | | (54,904) | | (6,769) | |||
| | | | | | | | | | |
| Comprehensive income (loss) | | $ | 35,589 | | $ | (28,286) | | $ | 23,785 |
The accompanying notes are an integral part of the consolidated financial statements.
44
Table of Contents Consolidated Statements of Changes in Stockholders’ Equity
(In Thousands Except Share and Per Share Data)
| | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | Accumulated | | | | | ||||||||
| | | | | | | | | | | | | | | Other | | | | | | | |
| | Common | | Treasury | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | | | |||||
| | Shares | | Shares | | Stock | | Capital | | Earnings | | Income (Loss) | | Stock | | Total | ||||||
| Balance, January 1, 2021 | 15,982,815 | **** | 70,831 | | $ | 15,983 | | $ | 143,644 | | $ | 129,703 | | $ | 11,795 | | $ | (1,369) | | $ | 299,756 |
| Net income | | | | | | 30,554 | | | | 30,554 | |||||||||||
| Other comprehensive loss, net | | | | | | | (6,769) | | | (6,769) | |||||||||||
| Cash dividends declared on common stock, 1.11 per share | | | | | | (17,645) | | | | (17,645) | |||||||||||
| Shares issued for dividend reinvestment plan | 36,368 | (31,877) | | 36 | | 845 | | | | 788 | | 1,669 | |||||||||
| Shares issued from treasury and redeemed related to exercise of stock options | | (13,169) | | | | (33) | | | | 245 | | 212 | |||||||||
| Restricted stock granted | 10,989 | (67,402) | | 11 | | (1,319) | | | | 1,308 | | 0 | |||||||||
| Forfeiture of restricted stock | | 5,290 | | | | 102 | | | | (102) | | 0 | |||||||||
| Stock-based compensation expense | | | | | 1,214 | | | | | | 1,214 | ||||||||||
| Purchase of restricted stock for tax withholding | | 8,350 | | | | | | | (174) | | (174) | ||||||||||
| Treasury stock purchases | | 299,059 | | | | | | | | | (7,412) | | (7,412) | ||||||||
| Balance, December 31, 2021 | 16,030,172 | **** | 271,082 | | | 16,030 | | | 144,453 | | | 142,612 | | | 5,026 | | | (6,716) | | | 301,405 |
| Net income | | | | | | 26,618 | | | | 26,618 | |||||||||||
| Other comprehensive loss, net | | | | | | | (54,904) | | | (54,904) | |||||||||||
| Cash dividends declared on common stock, 1.12 per share | | | | | | (17,487) | | | | (17,487) | |||||||||||
| Shares issued for dividend reinvestment plan | | (65,470) | | | | 8 | | | | 1,614 | | 1,622 | |||||||||
| Shares issued from treasury and redeemed related to exercise of stock options | | (9,178) | | | | (67) | | | | 227 | | 160 | |||||||||
| Restricted stock granted | | (78,243) | | | | (1,932) | | | | 1,932 | | 0 | |||||||||
| Forfeiture of restricted stock | | 10,782 | | | | 228 | | | | (228) | | 0 | |||||||||
| Stock-based compensation expense | | | | | 1,260 | | | | | | 1,260 | ||||||||||
| Purchase of restricted stock for tax withholding | | 6,964 | | | | | | | (175) | | (175) | ||||||||||
| Treasury stock purchases | | 375,416 | | | | | | | | | (9,174) | | (9,174) | ||||||||
| 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 | | | | | | 24,148 | | | | 24,148 | |||||||||||
| Other comprehensive income, net | | | | | | | 11,441 | | | 11,441 | |||||||||||
| Cash dividends declared on common stock, 1.12 per share | | | | | | (17,211) | | | | (17,211) | |||||||||||
| Shares issued for dividend reinvestment plan | | (81,930) | | | | (246) | | | | 1,888 | | 1,642 | |||||||||
| Shares issued from treasury and redeemed related to exercise of stock options | | (612) | | | | (30) | | | | 30 | | 0 | |||||||||
| Restricted stock granted | | (53,788) | | | | (1,314) | | | | 1,314 | | 0 | |||||||||
| Forfeiture of restricted stock | | 25,261 | | | | 556 | | | | (556) | | 0 | |||||||||
| Stock-based compensation expense | | | | | 1,472 | | | | | | 1,472 | ||||||||||
| Purchase of restricted stock for tax withholding | | 9,453 | | | | | | | (219) | | (219) | ||||||||||
| Treasury stock purchases | | 325,300 | | | | | | | | | (6,565) | | (6,565) | ||||||||
| Balance, December 31, 2023 | 16,030,172 | **** | 735,037 | | $ | 16,030 | | $ | 144,388 | | $ | 157,028 | | $ | (38,437) | | $ | (16,628) | | $ | 262,381 |
All values are in US Dollars.
The accompanying notes are an integral part of the consolidated financial statements.
45
Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Years Ended December 31, | ||||||||
| (In Thousands) | **** | 2023 | | 2022 | 2021 | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | ||||
| Net income | | $ | 24,148 | | $ | 26,618 | | $ | 30,554 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |||
| Provision for credit losses | | 186 | | 7,255 | | 3,661 | |||
| Realized losses (gains) on available-for-sale debt securities, net | | 3,036 | | (20) | | (24) | |||
| Net amortization of securities | | | 2,062 | | | 2,760 | | | 2,204 |
| Increase in cash surrender value of life insurance | | (2,703) | | (545) | | (573) | |||
| Depreciation and amortization of bank premises and equipment | | 2,151 | | 2,389 | | 2,130 | |||
| Net accretion of purchase accounting adjustments | | (288) | | (1,181) | | (2,124) | |||
| Stock-based compensation | | 1,472 | | 1,260 | | 1,214 | |||
| Deferred income taxes | | 836 | | (400) | | (1,381) | |||
| Decrease (increase) in fair value of servicing rights | | 200 | | (126) | | 68 | |||
| Gains on sales of loans, net | | (723) | | (757) | | (3,428) | |||
| Origination of loans held for sale | | (24,630) | | (26,231) | | (105,523) | |||
| Proceeds from sales of loans held for sale | | 25,106 | | 27,636 | | 107,797 | |||
| (Increase) decrease in accrued interest receivable and other assets | | (1,400) | | (3,532) | | 186 | |||
| Increase (decrease) in accrued interest payable and other liabilities | | 4,161 | | (589) | | 210 | |||
| Other | | (66) | | 62 | | (127) | |||
| Net Cash Provided by Operating Activities | | 33,548 | | 34,599 | | 34,844 | |||
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | |||
| Purchase of certificates of deposit | | | 0 | | | (250) | | | (4,500) |
| Proceeds from maturities of certificates of deposit | | 3,250 | | 2,000 | | 1,240 | |||
| Proceeds from sales of available-for-sale debt securities | | 60,819 | | 4,100 | | 2,027 | |||
| Proceeds from calls and maturities of available-for-sale debt securities | | 52,323 | | 58,673 | | 61,684 | |||
| Purchase of available-for-sale debt securities | | (23,414) | | (113,715) | | (243,925) | |||
| Redemption of Federal Home Loan Bank of Pittsburgh stock | | 22,634 | | 11,604 | | 2,517 | |||
| Purchase of Federal Home Loan Bank of Pittsburgh stock | | (23,680) | | (16,459) | | (2,110) | |||
| Purchase of Federal Reserve Bank stock | | | (6,252) | | | 0 | | | 0 |
| Net (increase) decrease in loans | | (107,356) | | (178,203) | | 78,746 | |||
| Purchase of bank-owned life insurance | | | (30,000) | | | 0 | | | 0 |
| Proceeds from bank-owned life insurance | | 363 | | 0 | | 287 | |||
| Proceeds from sales of premises and equipment | | | 0 | | | 0 | | | 627 |
| Purchase of premises and equipment | | (2,265) | | (3,288) | | (1,864) | |||
| Proceeds from sale of foreclosed assets | | 267 | | 647 | | 1,148 | |||
| Other | | 109 | | 203 | | 228 | |||
| Net Cash Used in Investing Activities | | (53,202) | | (234,688) | | (103,895) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |||
| Net increase in deposits | | 17,234 | | 72,689 | | 105,381 | |||
| Net (decrease) increase in short-term borrowings | | (46,188) | | 78,259 | | (18,154) | |||
| Proceeds from long-term borrowings - FHLB advances | | | 85,436 | | | 50,000 | | | 0 |
| Repayments of long-term borrowings - FHLB advances | | (9,395) | | (15,455) | | (26,095) | |||
| Proceeds from issuance of senior notes, net of issuance costs | | | 0 | | | 0 | | | 14,663 |
| Proceeds from issuance of subordinated debt, net of issuance costs | | | 0 | | | 0 | | | 24,437 |
| Redemption of subordinated debt | | | 0 | | | (8,500) | | | (8,000) |
| Sale of treasury stock | | 0 | | 160 | | 212 | |||
| Purchases of treasury stock | | (6,784) | | (9,349) | | (7,586) | |||
| Common dividends paid | | (15,569) | | (15,865) | | (15,976) | |||
| Net Cash Provided by Financing Activities | | 24,734 | | 151,939 | | 68,882 | |||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 5,080 | | (48,150) | | (169) | |||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | 47,698 | | 95,848 | | 96,017 | |||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 52,778 | | $ | 47,698 | | $ | 95,848 |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | ||||||
| (Decrease) increase in accrued purchase of available-for-sale debt securities | | $ | (2,000) | | $ | 2,000 | | $ | (994) |
| Assets acquired through foreclosure of real estate loans | | $ | 423 | | $ | 51 | | $ | 394 |
| Leased assets obtained in exchange for new operating lease liabilities | | $ | 0 | | $ | 904 | | $ | 739 |
| Interest paid | | $ | 31,936 | | $ | 9,497 | | $ | 8,174 |
| Income taxes paid | | $ | 6,383 | | $ | 5,561 | | $ | 10,098 |
The accompanying notes are an integral part of the consolidated financial statements.
46
Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION – 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”), as well as 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.
NATURE OF OPERATIONS – The Corporation’s principal office is located in Wellsboro, Pennsylvania. The Corporation’s operations are conducted in the Northern tier/Northcentral region of Pennsylvania and Southern tier of New York, Southeastern Pennsylvania (offices in Bucks and Chester Counties) and Southcentral Pennsylvania (offices in York and Lancaster counties).
The Corporation provides banking and related services to individual and corporate customers. Lending products include commercial, mortgage and consumer loans, as well as specialized instruments such as commercial letters-of-credit. Deposit products include various types of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, Individual Retirement Accounts and certificates of deposit.
The Corporation provides wealth management services through its trust department, including administration of trusts and estates, retirement plans, and other employee benefit plans, and investment management services. The Corporation offers a variety of personal and commercial insurance products through C&N Financial Services, LLC. C&N Financial Services, LLC also offers mutual funds, annuities, educational savings accounts and other investment products through registered agents.
Management has determined that the Corporation has one reportable segment, “Community Banking.” All of the Corporation’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others.
The Corporation is subject to competition from other financial institutions. It is also subject to regulation by certain federal and state agencies and undergoes periodic examination by those regulatory authorities.
USE OF ESTIMATES – The financial information is presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates.
Material estimates that are particularly susceptible to change include: (1) the allowance for credit losses and (2) fair values of available-for-sale debt securities based on estimates from independent valuation services or from brokers.
INVESTMENT SECURITIES – Investment securities are accounted for as follows:
Available-for-sale debt securities – includes debt securities not classified as held-to-maturity or trading. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (loss), net of tax. Premiums on non-amortizing available-for-sale debt securities are amortized using the level yield method to the earliest call date, while discounts on non-amortizing securities are amortized to the maturity date. Premiums and discounts on amortizing securities (mortgage-backed securities) are amortized using the level yield method over the remaining contractual life of the securities, adjusted for actual prepayments. Realized gains and losses on sales of available-for-sale securities are computed on the basis of specific identification of the adjusted cost of each security. Securities within the available-for-sale portfolio may be used as part of the Corporation’s asset and liability management strategy and may be sold in response to changes in interest rate risk, prepayment risk or other factors.
Allowance for Credit Losses- Available-for-Sale Debt Securities – For available-for-sale debt securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Corporation has the intent to sell the security or it is more likely than not that the Corporation will be required to sell 47
Table of Contents the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Corporation evaluates whether the decline in fair value is the result of credit losses or other factors. The Corporation has elected the practical expedient of zero credit loss estimates for securities issued or guaranteed by U.S. Government entities or agencies. In making the credit loss assessment of securities not issued or guaranteed by U.S. Government entities or agencies, the Corporation may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income (loss).
Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit losses when management believes an available-for-sale debt security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At December 31, 2023, there was no allowance for credit losses related to the available-for-sale portfolio.
Accrued interest receivable on available-for-sale debt securities totaled $2,018,000 at December 31, 2023 and was excluded from the estimate of credit losses.
Marketable equity security – The marketable equity security is carried at fair value with unrealized gains and losses included in other noninterest income in the consolidated statements of income.
Restricted equity securities – Restricted equity securities consist primarily of Federal Home Loan Bank of Pittsburgh and Federal Reserve Bank of Philadelphia stock, and are carried at cost and evaluated for impairment. Holdings of restricted equity securities are included in other assets in the consolidated balance sheets, and dividends received on restricted securities are included in other income in the consolidated statements of income.
DERIVATIVES – 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 banking customers were executed to enable the commercial banking customers to effectively exchange 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. Changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. Interest differentials paid or received under the swap agreements are reflected as adjustments to interest and fees on loans. The fair value of interest rate derivatives is included in the balance of other assets and other liabilities in the consolidated balance sheets.
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.” The fair value of the RPA In is included in accrued interest and other liabilities in the consolidated balance sheets.
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 fair value of the RPA Out is included in other assets in the consolidated balance sheets.
Fees paid and received associated with RPAs, as well as changes in fair value of the related derivatives, are included in other noninterest income in the consolidated statements of income.
LOANS HELD FOR SALE – Mortgage loans held for sale are reported at the lower of cost or fair value, determined in the aggregate. 48
Table of Contents LOANS RECEIVABLE – Loans originated by the Corporation which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at unpaid principal balances, less the allowance for credit losses and net deferred loan fees. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method.
Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest payments received on loans for which the risk of loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
PURCHASED LOANS – The Corporation purchased loans in business combinations, some of which had, at the acquisition dates, shown evidence of credit deterioration since origination. The purchased loans that showed evidence of credit impairment were designated as the purchased credit impaired (“PCI”) loans and were recorded at fair value, with no carryover of the allowance for loan losses. On January 1, 2023, the Corporation adopted Accounting Standard Update (ASU) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326) which replaced the prior accounting for PCI loans and required credit deteriorated (“PCD”) loans receive an initial allowance at the acquisition date that represents an adjustment to the amortized cost basis of the loan, with no impact to earnings. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adaption. On January 1, 2023, the amortized cost basis of PCD assets was adjusted to establish the allowance for credit losses. Essentially all of the PCD loans were reported as nonaccrual loans at January 1, 2023 and December 31, 2023.
**ALLOWANCE FOR CREDIT LOSSES ON LOANS –**As mentioned above, on January 1, 2023, the Corporation adopted 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. Effective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after December 31, 2022 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
Accrued interest receivable on loans totaled $7,099,000 at December 31, 2023 and was excluded from the estimate of credit losses.
The allowance for credit losses (“ACL”) includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis).
Evaluation of Expected Losses on Individual Loans
Loans evaluated on an individual basis are identified based on a detailed assessment of certain larger loan relationships, and their related credit risk ratings, by a management committee referred to as the Watch List Committee. The allowance is determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the 49
Table of Contents Corporation will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.
The scope of loans reviewed individually for credit loss each quarter includes all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Additionally, all PCD loans are evaluated individually for credit loss.
Collective Evaluation of Expected Losses – Pool Basis
The Corporation measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Corporation has identified the following portfolio segments and calculates the allowance for credit losses for each using the weighted-average remaining maturity (“WARM”) method:
| |
|---|
| Commercial real estate - nonowner occupied, further broken down into the following classes: |
| Non-owner occupied |
| Multi-family (5 or more) residential |
| 1-4 Family - commercial purpose |
| Commercial real estate - owner occupied |
| All other commercial loans, further broken down into the following classes: |
| Commercial and industrial |
| Commercial lines of credit |
| Political subdivisions |
| Commercial construction and land |
| Other commercial loans |
| Residential mortgage loans, further broken down into the following classes: |
| 1-4 Family – residential |
| 1-4 Family residential construction |
| Consumer loans, further broken down into the following classes: |
| Consumer lines of credit (including HELOCs) |
| All other consumer |
In determining the pools for collective evaluation, management uses a combination of loan purpose, collateral and payment type (for example, lines of credit vs. amortizing). The pools identified are similar to the loan classes used in the Corporation’s financial reporting for several years, with several exceptions including the following which are of the most significance:
| ● | Commercial real estate secured loans are broken out between non-owner occupied and owner-occupied |
|---|---|
| ● | Loans secured by 1-4 family residential mortgages are broken out between consumer-purpose and commercial-purpose |
| --- | --- |
| ● | Commercial lines of credit are broken out as an individual category |
| --- | --- |
Each of these changes was made to better sort loans into pools with similar risk and cash flow characteristics.
Estimation Method - WARM (Weighted-Average Remaining Maturity Method)
In applying the WARM method, for each pool identified above, the Corporation determines the annual net charge-offs as a percentage of average total loan balances (net charge-off percentage). For each loan pool, the average annualized net charge-off percentage is multiplied by the estimated weighted-average remaining average life of the loans to calculate the loss rate.
The calculation of the estimated weighted-average remaining life of each loan pool is based on instrument-level data, with contractual principal payments adjusted for the estimated impact of prepayments. Commercial lines of credit and other revolving credit facilities are generally assumed to be repaid after 1 year. The estimated weighted-average remaining life of the entire portfolio was calculated to be 4.48 years at December 31, 2023 and 4.36 years at January 1, 2023.
50
Table of Contents Qualitative Factors
The allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are deemed likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments generally increase allowance levels and include adjustments for factors deemed relevant, including: the nature and volume of portfolio changes, including loan portfolio growth; concentrations of credit based on loan type (such as non-owner occupied commercial real estate) or industry; the volume and severity of past due, nonaccrual or adversely classified loans; trends in real estate or other collateral values; lending policies and procedures, including changes in underwriting and collections practices; credit review function; lending, credit and other relevant management experience and risk tolerance; external factors and economic conditions not already captured.
Economic Forecast
ASC 326 requires management to consider forward-looking information that is both reasonable and supportable and relevant to the collectability of cash flows. Reasonable and supportable forecasts may extend over the entire contractual term of a financial asset or a period shorter than the contractual term. In that regard, management has selected a forecast period of 2 years, which is shorter than the estimated weighted-average remaining life of the loan portfolio.
The Corporation calculates an additional expected credit loss based on establishing a correlation between past loss experience and an economic statistic. This additional credit loss is added to the allowance calculation, conceptually for the first 2 years of the weighted-average remaining life of the portfolio after which time the credit loss for each pool is determined based on the WARM historical loss rate as adjusted for qualitative factors.
ALLOWANCE FOR CREDIT LOSSES ON OFF-BALANCE SHEET EXPOSURES
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Corporation records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Corporation’s statements of income. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for off-balance sheet exposures is included in accrued interest and other liabilities in the Corporation’s consolidated balance sheets and the related credit expense is recorded in the provision for credit losses in the consolidated statements of income.
BANK PREMISES AND EQUIPMENT – Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Repair and maintenance expenditures which extend the useful lives of assets are capitalized, and other repair and maintenance expenditures are expensed as incurred. Depreciation and amortization expense is computed using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS – The Corporation reviews long-lived assets, such as premises and equipment and intangibles, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. These changes in circumstances may include a significant decrease in the market value of an asset or the manner in which an asset is used. If there is an indication the carrying value of an asset may not be recoverable, future undiscounted cash flows expected to result from use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset, a loss is recognized for the difference between the carrying value and fair market value of the asset.
FORECLOSED ASSETS HELD FOR SALE – Foreclosed assets held for sale consist of real estate acquired by foreclosure and are initially recorded at fair value, less estimated selling costs, establishing a new cost basis.
GOODWILL – Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill is tested at least annually at December 31 for impairment, or more often if events or circumstances indicate there may be impairment. The 51
Table of Contents Corporation has the option of performing a qualitative assessment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually.
CORE DEPOSIT INTANGIBLES – Amortization of core deposit intangibles is calculated using an accelerated method. In determining amortization using the accelerated method for any given period, the amount of expected cash flows for that period that were used in determining the acquisition-date fair value is divided by the total amount of expected cash flows over the life of the asset. That percentage is multiplied by the initial carrying amount of the asset to arrive at amortization expense for that period. If the Corporation’s cash flow patterns differ significantly from the initial estimates, the amortization schedule would be adjusted prospectively.
SERVICING RIGHTS – The estimated fair value of servicing rights related to mortgage loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. The valuation of servicing rights is adjusted quarterly, with changes in fair value included in loan servicing fees, net, in the consolidated statements of income. Significant inputs to the valuation include expected net servicing income to be received, the expected life of the underlying loans and the discount rate. The servicing rights asset is included in other assets in the consolidated balance sheets.
INCOME TAXES – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence. Tax benefits from investments in limited partnerships that have qualified for federal low-income tax credits are recognized as a reduction in the provision for income tax over the term of the investment using the effective yield method. The Corporation includes income tax penalties in the provision for income tax. The Corporation has no accrued interest related to unrecognized tax benefits.
STOCK-BASED COMPENSATION –Stock-based compensation is accounted for under the fair value method as required by U.S. GAAP. The fair value of restricted stock is based on the current market price on the date of grant. The expense associated with stock-based compensation is recognized over the vesting period of each individual arrangement.
TREASURY STOCK – Common stock held in treasury is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. The shares may be purchased in the open market or in privately negotiated transactions from time to time depending upon market conditions and other factors**.**
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS – In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
CASH FLOWS – The Corporation utilizes the net reporting of cash receipts and cash payments for certain deposit and lending activities. Cash equivalents include federal funds sold and all cash and amounts due from depository institutions and interest-bearing deposits in other banks with original maturities of three months or less.
REVENUE RECOGNITION – The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in the determination of the amount and timing of revenue from contracts with customers.
Additional disclosures related to the Corporation’s largest sources of noninterest income within the consolidated statements of income from contracts with customers that are subject to ASC Topic 606 are as follows:
Trust and financial management revenue – C&N Bank’s trust department provides a wide range of financial services, including wealth management services for individuals, businesses and retirement funds, administration of 401(k) and other retirement plans, retirement planning, estate planning and estate settlement services. Trust clients are located primarily within the Corporation’s geographic markets. Assets held in a fiduciary capacity by C&N Bank are not the Corporation’s assets and are therefore not included in the consolidated balance sheets. The fair value of trust assets under management was approximately $1,188,082,000 at December 31, 52
Table of Contents 2023 and $1,063,615,000 at December 31, 2022. Trust revenue is included within noninterest income in the consolidated statements of income.
Trust revenue is recorded on a cash basis, which is not materially different from the accrual basis. The majority (approximately 81%, based on annual 2023 results) of trust revenue is earned and collected monthly, with the amount determined based on a percentage of the fair value of the trust assets under management. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The services provided under such a contract represent a single performance obligation under ASC 606 because it embodies a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. None of the contracts with trust customers provide for incentive-based fees. In addition to wealth management fees, trust revenue includes fees for provision of services, including employee benefit plan administration, tax return preparation and estate planning and settlement. Fees for such services are billed based on contractual arrangements or established fee schedules and are typically billed upon completion of providing such services. The costs of acquiring trust customers are incremental and recognized within noninterest expense in the consolidated statements of income.
Service charges on deposit accounts – Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts. All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within noninterest expense in the consolidated statements of income.
Interchange revenue from debit card transactions – The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements of income.
- RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issues Accounting Standard Updates (ASUs) to communicate changes to the FASB Accounting Standard Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the foreseeable future.
Recent Accounting Pronouncements – Adopted
As described in Note 1, on January 1, 2023, the Corporation adopted ASC 326. This standard replaced the incurred loss methodology for measuring credit losses on financial instruments with an expected loss methodology that is referred to as the CECL methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses.
In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Corporation adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale debt securities was not necessary. 53
Table of Contents Effective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after December 31, 2022 are presented under CECL while prior period amounts continue to be reported using the Incurred Loss methodology. The following table illustrates the impact from the adoption of ASC 326:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | **** | As Reported | **** | | **** | | |||
| | | Under | | Pre-ASC 326 | | Impact of | |||
| | | ASC 326 | | Adoption | | ASC 326 | |||
| (In Thousands) | | January 1, 2023 | | December 31, 2022 | | Adoption | |||
| Loans receivable | | $ | 1,740,846 | | $ | 1,740,040 | | $ | 806 |
| Allowance for credit losses on loans | | $ | 18,719 | | $ | 16,615 | | $ | 2,104 |
| Allowance for credit losses on off-balance sheet exposures (included in accrued interest and other liabilities) | | 1,218 | | 425 | | 793 | |||
| Deferred tax asset, net | | 21,323 | | 20,884 | | 439 | |||
| Retained earnings | | 150,091 | | 151,743 | | (1,652) |
ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This update reduces the complexity of accounting for Troubled Debt Restructurings (“TDRs”) by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation adopted ASU 2022-02 on January 1, 2023. Changes in disclosure requirements in accordance with ASU 2022-02 are reflected in Note 7. The adoption of ASU 2022-02 did not have a material impact on the consolidated financial statements.
Recent Issued but Not Yet Effective Accounting Pronouncements
In December 2023*,the FASB issued ASU 2023-09,* Income Taxes (Topic 740): Improvements to Income Tax Disclosures which improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU No. 2023-09 is effective for public business entities 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 related disclosures related to income taxes.
54
Table of Contents 3. 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) | **** | Years Ended | |||||||
| | | December 31, | | December 31, | | December 31, | |||
| | 2023 | | 2022 | 2021 | |||||
| Basic | | | | | |||||
| Net income | | $ | 24,148 | | $ | 26,618 | | $ | 30,554 |
| Less: Dividends and undistributed earnings allocated to participating securities | | (186) | | (237) | | (241) | |||
| Net income attributable to common shares | | $ | 23,962 | | $ | 26,381 | | $ | 30,313 |
| Basic weighted-average common shares outstanding | | 15,241,859 | | 15,455,432 | | 15,765,639 | |||
| Basic earnings per common share (a) | | $ | 1.57 | | $ | 1.71 | | $ | 1.92 |
| Diluted | | | | ||||||
| Net income attributable to common shares | | $ | 23,962 | | $ | 26,381 | | $ | 30,313 |
| Basic weighted-average common shares outstanding | | 15,241,859 | | 15,455,432 | | 15,765,639 | |||
| Dilutive effect of potential common stock arising from stock options | | 0 | | 3,099 | | 6,316 | |||
| Diluted weighted-average common shares outstanding | | 15,241,859 | | 15,458,531 | | 15,771,955 | |||
| Diluted earnings per common share (a) | | $ | 1.57 | | $ | 1.71 | | $ | 1.92 |
| Weighted-average nonvested restricted shares outstanding | | 118,122 | | 138,617 | | 125,539 | |||
| (a) | Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares with nonforfeitable dividends (participating securities). | ||||||||
| --- | --- |
Anti-dilutive stock options are excluded from net income per share calculations. There were no anti-dilutive instruments in 2022 or 2021. Weighted-average common shares available from anti-dilutive instruments totaled 8,963 shares in 2023.
55
Table of Contents 4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income (loss). The components of other comprehensive income (loss), and the related tax effects, are as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | **** | Before-Tax | **** | Income Tax | **** | Net-of-Tax | |||
| | | Amount | | Effect | | Amount | |||
| 2023 | | | | ||||||
| Available-for-sale debt securities: | | | | | | | | | |
| Unrealized holding gains on available-for-sale debt securities | | $ | 11,512 | | $ | (2,418) | | $ | 9,094 |
| Reclassification adjustment for losses realized in income | | | 3,036 | | | (638) | | | 2,398 |
| Other comprehensive income from available-for-sale debt securities | | | 14,548 | | | (3,056) | | | 11,492 |
| Unfunded pension and postretirement obligations: | | | | ||||||
| Changes from plan amendments and actuarial gains and losses | | | (9) | | | 2 | | | (7) |
| Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | | (56) | | 12 | | (44) | |||
| Other comprehensive loss on unfunded retirement obligations | | | (65) | | | 14 | | | (51) |
| Total other comprehensive income | | $ | 14,483 | | $ | (3,042) | | $ | 11,441 |
| 2022 | | | | ||||||
| Available-for-sale debt securities: | | | | | | | | | |
| Unrealized holding losses on available-for-sale debt securities | | $ | (69,828) | | $ | 14,665 | | $ | (55,163) |
| Reclassification adjustment for (gains) realized in income | | | (20) | | | 4 | | | (16) |
| Other comprehensive loss from available-for-sale debt securities | | | (69,848) | | | 14,669 | | | (55,179) |
| Unfunded pension and postretirement obligations: | | | | ||||||
| Changes from plan amendments and actuarial gains and losses | | | 389 | | | (81) | | | 308 |
| Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | | (42) | | 9 | | (33) | |||
| Other comprehensive income on unfunded retirement obligations | | | 347 | | | (72) | | | 275 |
| Total other comprehensive loss | | $ | (69,501) | | $ | 14,597 | | $ | (54,904) |
| 2021 | | | | ||||||
| Available-for-sale debt securities: | | | | | | | | | |
| Unrealized holding losses on available-for-sale debt securities | | $ | (8,669) | | $ | 1,821 | | $ | (6,848) |
| Reclassification adjustment for (gains) realized in income | | | (24) | | | 5 | | | (19) |
| Other comprehensive loss from available-for-sale debt securities | | | (8,693) | | | 1,826 | | | (6,867) |
| Unfunded pension and postretirement obligations: | | | | ||||||
| Changes from plan amendments and actuarial gains and losses | | | 140 | | | (29) | | | 111 |
| Amortization of prior service cost and net actuarial loss included in net periodic benefit cost | | (17) | | 4 | | (13) | |||
| Other comprehensive income on unfunded retirement obligations | | | 123 | | | (25) | | | 98 |
| Total other comprehensive loss | | $ | (8,570) | | $ | 1,801 | | $ | (6,769) |
Items reclassified out of each component of accumulated other comprehensive (loss) income are as follows:
| | | |
|---|---|---|
| | | Affected Line Item in the |
| Description | **** | Consolidated Statements of Income |
| Reclassification adjustment for losses (gains) realized in income (before-tax) | | Realized (losses) gains on available-for-sale debt securities, net |
| Amortization of prior service cost and net actuarial loss included in net periodic benefit cost (before-tax) | Other noninterest expense | |
| Income tax effect | | Income tax provision |
56
Table of Contents Changes in the components of accumulated other comprehensive (loss) income, included in stockholders’ equity, are as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
| (In Thousands) | **** | | | **** | | | Accumulated | ||
| | | Unrealized | | Unfunded | | Other | |||
| | **** | (Losses) Gains | **** | Retirement | **** | Comprehensive | |||
| | **** | on Securities | **** | Obligations | **** | (Loss) Income | |||
| 2023 | | | | ||||||
| Balance, beginning of period | | $ | (50,370) | | $ | 492 | | $ | (49,878) |
| Other comprehensive income (loss) during year ended December 31, 2023 | | 11,492 | | (51) | | 11,441 | |||
| Balance, end of period | | $ | (38,878) | | $ | 441 | | $ | (38,437) |
| 2022 | | | | ||||||
| Balance, beginning of period | | $ | 4,809 | | $ | 217 | | $ | 5,026 |
| Other comprehensive (loss) income during year ended December 31, 2022 | | (55,179) | | 275 | | (54,904) | |||
| Balance, end of period | | $ | (50,370) | | $ | 492 | | $ | (49,878) |
| 2021 | | | | ||||||
| Balance, beginning of period | | $ | 11,676 | | $ | 119 | | $ | 11,795 |
| Other comprehensive (loss) income during year ended December 31, 2021 | | (6,867) | | 98 | | (6,769) | |||
| Balance, end of period | | $ | 4,809 | | $ | 217 | | $ | 5,026 |
- CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2023 and 2022 include the following:
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | **** | December 31, | **** | December 31, | ||
| | | 2023 | | 2022 | ||
| Cash and cash equivalents | | $ | 52,778 | | $ | 47,698 |
| Certificates of deposit | | 4,100 | | 7,350 | ||
| Total cash and due from banks | | $ | 56,878 | | $ | 55,048 |
Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit. The Corporation has not experienced any losses in such accounts.
57
Table of Contents 6. SECURITIES
Amortized cost and fair value of available-for-sale debt securities at December 31, 2023 and 2022 are summarized as follows:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (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 |
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | **** | December 31, 2022 | ||||||||||
| | | | | | Gross | | Gross | | | | ||
| | | | | | Unrealized | | Unrealized | | | | ||
| | **** | Amortized | **** | Holding | **** | Holding | **** | Fair | ||||
| | **** | Cost | **** | Gains | **** | Losses | **** | Value | ||||
| | | | | | | | | | | | | |
| Obligations of the U.S. Treasury | | $ | 35,166 | | $ | 0 | | $ | (3,330) | | $ | 31,836 |
| Obligations of U.S. Government agencies | | | 25,938 | | | 0 | | | (2,508) | | | 23,430 |
| Bank holding company debt securities | | | 28,945 | | | 0 | | | (3,559) | | | 25,386 |
| Obligations of states and political subdivisions: | | | | | | | | |||||
| Tax-exempt | | 146,149 | | 319 | | (13,845) | | 132,623 | ||||
| Taxable | | 68,488 | | 0 | | (11,676) | | 56,812 | ||||
| Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | | | | | ||||||||
| Residential pass-through securities | | 112,782 | | 0 | | (12,841) | | 99,941 | ||||
| Residential collateralized mortgage obligations | | 44,868 | | 0 | | (4,572) | | 40,296 | ||||
| Commercial mortgage-backed securities | | 91,388 | | 0 | | (11,702) | | 79,686 | ||||
| Private label commercial mortgage-backed securities | | | 8,070 | | | 2 | | | (49) | | | 8,023 |
| Total available-for-sale debt securities | | $ | 561,794 | | $ | 321 | | $ | (64,082) | | $ | 498,033 |
58
Table of Contents The following table presents gross unrealized losses and fair value of available-for-sale debt securities aggregated by length of time that individual securities have been in a continuous unrealized loss position at December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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) |
| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2022 | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||
| (In Thousands) | | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | ||||||
| | **** | Value | **** | Losses | **** | Value | **** | Losses | **** | Value | **** | Losses | ||||||
| Obligations of the U.S. Treasury | | $ | 20,192 | | $ | (1,939) | | $ | 11,644 | | $ | (1,391) | | $ | 31,836 | | $ | (3,330) |
| Obligations of U.S. Government agencies | | | 8,509 | | | (430) | | | 12,921 | | | (2,078) | | | 21,430 | | | (2,508) |
| Bank holding company debt securities | | | 14,248 | | | (1,697) | | | 11,138 | | | (1,862) | | | 25,386 | | | (3,559) |
| Obligations of states and political subdivisions: | | | | | | | | | | | | | | | | | | |
| Tax-exempt | | | 106,204 | | | (11,023) | | | 15,153 | | | (2,822) | | | 121,357 | | | (13,845) |
| Taxable | | 28,901 | | (4,739) | | 27,761 | | (6,937) | | 56,662 | | (11,676) | ||||||
| Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | | | | | | | | |||||||||||
| Residential pass-through securities | | | 45,410 | | | (4,226) | | | 54,531 | | | (8,615) | | | 99,941 | | | (12,841) |
| Residential collateralized mortgage obligations | | 28,670 | | (2,042) | | 11,626 | | (2,530) | | 40,296 | | (4,572) | ||||||
| Commercial mortgage-backed securities | | 40,408 | | (2,585) | | 39,278 | | (9,117) | | 79,686 | | (11,702) | ||||||
| Private label commercial mortgage-backed securities | | | 4,762 | | | (49) | | | 0 | | | 0 | | | 4,762 | | | (49) |
| Total | | $ | 297,304 | | $ | (28,730) | | $ | 184,052 | | $ | (35,352) | | $ | 481,356 | | $ | (64,082) |
Gross realized gains and losses from available-for-sale securities and the related income tax provision were as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | 2023 | | 2022 | | 2021 | |||
| Gross realized gains from sales | | $ | 89 | | $ | 48 | | $ | 27 |
| Gross realized losses from sales | | (3,125) | | (28) | | (3) | |||
| Net realized (losses) gains | | $ | (3,036) | | $ | 20 | | $ | 24 |
| Income tax provision related to net realized (losses) gains | | $ | (638) | | $ | 4 | | $ | 5 |
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Table of Contents The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of December 31, 2023. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | | December 31, 2023 | ||||
| | | Amortized | | Fair | ||
| | **** | Cost | **** | Value | ||
| Due in one year or less | | $ | 13,200 | | $ | 12,937 |
| Due from one year through five years | | 27,951 | | 26,299 | ||
| Due from five years through ten years | | 77,246 | | 67,709 | ||
| Due after ten years | | 106,183 | | 92,101 | ||
| Sub-total | | 224,580 | | 199,046 | ||
| Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | | | ||||
| Residential pass-through securities | | 105,549 | | 95,405 | ||
| Residential collateralized mortgage obligations | | 50,212 | | 46,462 | ||
| Commercial mortgage-backed securities | | 76,412 | | 66,682 | ||
| Private label commercial mortgage-backed securities | | | 8,215 | | | 8,160 |
| Total | | $ | 464,968 | | $ | 415,755 |
The Corporation’s mortgage-backed securities 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 $232,437,000 at December 31, 2023 and $277,302,000 at December 31, 2022 were pledged as collateral for public deposits, trusts and certain other deposits, as provided by law, totaling $136,494,000 at December 31, 2023 and $196,760,000 at December 31, 2022. See Note 11 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 December 31, 2023 and 2022 is provided below.
Debt Securities
As reflected in the table above, gross unrealized holding losses on available-for-sale debt securities totaled $49,564,000 at December 31, 2023 and $64,082,000 at December 31, 2022. At December 31, 2023, the Corporation does not have the intent to sell, nor is it more likely than not it will be required to sell, these securities before it is able to recover the amortized cost basis. The unrealized holding losses were consistent with significant increases in market interest rates that occurred in 2022 and 2023.
At December 31, 2023 and December 31, 2022, management performed an assessment for possible credit losses of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. At December 31, 2023 and 2022, all of the Corporation’s holdings of bank holding company debt securities, obligations of states and political subdivisions and private label commercial mortgage-backed securities were investment grade and there have been no payment defaults.
Based on the results of the assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at December 31, 2023 and 2022.
Equity Securities
C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in other assets in the consolidated balance sheets, was $15,214,000 at December 31, 2023 and 60
Table of Contents $14,168,000 at December 31, 2022. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at December 31, 2023 and 2022. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.
In July 2023, C&N Bank became a member of the Federal Reserve System. As a member, C&N Bank is required to purchase and maintain stock in the Federal Reserve Bank of Philadelphia. There is no active market for Federal Reserve Bank stock, and it must ordinarily be redeemed by the Federal Reserve Bank of Philadelphia in order to be liquidated. C&N Bank’s investment in Federal Reserve Bank stock, included in other assets in the consolidated balance sheets, was $6,252,000 at December 31, 2023.
The Corporation’s marketable equity security, with a carrying value of $871,000 at December 31, 2023 and $859,000 at December 31, 2022 consisted exclusively of one mutual fund. There was an unrealized loss of $129,000 on the mutual fund at December 31, 2023 and $141,000 at December 31, 2022. Changes in the unrealized gains or losses on this security, which are included in other noninterest income in the consolidated statements of income, were a gain of $12,000 in 2023, a loss of $112,000 in 2022 and a loss of $29,000 in 2021. There were no sales of equity securities in 2023, 2022 and 2021.
- LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans receivable at December 31, 2023 and 2022 are summarized as follows:
Summary of Loans by Type
(In Thousands)
| | | | | | | |
|---|---|---|---|---|---|---|
| | **** | December 31, | **** | December 31, | ||
| | **** | 2023 | | 2022 | ||
| Commercial real estate - non-owner occupied | | $ | 737,342 | | $ | 675,597 |
| Commercial real estate - owner occupied | | | 237,246 | | | 205,910 |
| All other commercial loans | | | 399,693 | | | 410,077 |
| Residential mortgage loans | | | 413,714 | | | 393,582 |
| Consumer loans | | | 60,144 | | | 54,874 |
| Total | | | 1,848,139 | | | 1,740,040 |
| Less: allowance for credit losses on loans | | | (19,208) | | | (16,615) |
| Loans, net | | $ | 1,828,931 | | $ | 1,723,425 |
(1) Total loans at December 31, 2022 include purchased credit impaired loans of $1,027,000.
In the table above, outstanding loan balances are presented net of deferred loan origination fees of $4,459,000 at December 31, 2023 and $4,725,000 at December 31, 2022.
The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in Northcentral Pennsylvania, the Southern tier of New York State, Southeastern Pennsylvania and Southcentral Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region.
Acquired loans were initially recorded at fair value, with adjustments made to gross amortized cost based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequently, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on performing loans. For the year ended December 31, 2023 and 2022, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:
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| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | | Year Ended | ||||
| | | December 31, | | December 31, | ||
| | | 2023 | | 2022 | ||
| Market Rate Adjustment | | | ||||
| Adjustments to gross amortized cost of loans at beginning of period | | $ | (916) | | $ | (637) |
| Amortization recognized in interest income | | | (54) | | | (279) |
| Adjustments to gross amortized cost of loans at end of period | | $ | (970) | | $ | (916) |
| Credit Adjustment on Non-impaired Loans | | | | | | |
| Adjustments to gross amortized cost of loans at beginning of period | | $ | (1,840) | | $ | (3,335) |
| Accretion recognized in interest income | | 677 | | 1,495 | ||
| Adjustments to gross amortized cost of loans at end of period | | $ | (1,163) | | $ | (1,840) |
The following table presents an analysis of past due loans as of December 31, 2023:
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (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 following table presents an analysis of past due loans as of December 31, 2022:
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | As of December 31, 2022 | |||||||||||||
| | | Past Due | | Past Due | | | | | | | | ||||
| | | 30-89 | | 90+ | | Nonaccrual | | Current | | Total | |||||
| | | Days | | Days | | Loans | | Loans | | Loans | |||||
| Commercial real estate - non-owner occupied | | $ | 644 | | $ | 947 | | $ | 6,350 | | $ | 667,656 | | $ | 675,597 |
| Commercial real estate - owner occupied | | 723 | | 141 | | 19 | | 204,099 | | 204,982 | |||||
| All other commercial loans | | | 537 | | | 151 | | | 11,528 | | | 397,762 | | | 409,978 |
| Residential mortgage loans | | | 4,540 | | | 866 | | | 3,974 | | | 384,202 | | | 393,582 |
| Consumer loans | | | 635 | | | 132 | | | 187 | | | 53,920 | | | 54,874 |
| Purchased credit impaired | | 0 | | 0 | | 1,027 | | 0 | | 1,027 | |||||
| Total | | $ | 7,079 | | $ | 2,237 | | $ | 23,085 | | $ | 1,707,639 | | $ | 1,740,040 |
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” column in the table that follows.
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Table of Contents The following table presents the recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | Term Loans by Year of Origination | | | | | | | ||||||||||||||||
| | | 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 |
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Table of Contents
The following table presents the recorded investment in loans by credit quality indicators as of December 31, 2022:
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | ||||
| | | | | Special | | | | | | | |||||
| (In Thousands) | | Pass | | Mention | | Substandard | | Doubtful | | Total | |||||
| Commercial real estate - non-owner occupied | | $ | 654,430 | | $ | 9,486 | | $ | 11,681 | | $ | 0 | | $ | 675,597 |
| Commercial real estate - owner occupied | | 202,702 | | 1,909 | | 371 | | 0 | | 204,982 | |||||
| All other commercial loans | | | 383,846 | | | 2,516 | | | 23,616 | | | 0 | | | 409,978 |
| Residential mortgage loans | | | 387,944 | | | 0 | | | 5,638 | | | 0 | | | 393,582 |
| Consumer loans | | | 54,353 | | | 0 | | | 521 | | | 0 | | | 54,874 |
| Purchased credit impaired | | 0 | | 0 | | 1,027 | | 0 | | 1,027 | |||||
| Total | | $ | 1,683,275 | | $ | 13,911 | | $ | 42,854 | | $ | 0 | | $ | 1,740,040 |
The following table is a summary of the Corporation’s nonaccrual loans by major categories for the periods indicated.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2023 | | December 31, 2022 | ||||||||
| | | Nonaccrual Loans with | | Nonaccrual Loans | | Total Nonaccrual | | | ||||
| (In Thousands) | | No Allowance | | with an Allowance | | Loans | | Nonaccrual Loans | ||||
| Commercial real estate - non-owner occupied | | $ | 1,111 | | $ | 7,301 | | $ | 8,412 | | $ | 6,350 |
| Commercial real estate - owner occupied | | 1,281 | | 294 | | 1,575 | | 19 | ||||
| All other commercial loans | | | 1,132 | | | 191 | | | 1,323 | | | 11,528 |
| Residential mortgage loans | | | 3,627 | | | 0 | | | 3,627 | | | 3,974 |
| Consumer loans | | 240 | | 0 | | 240 | | 187 | ||||
| Purchased credit impaired | | 0 | | 0 | | 0 | | 1,027 | ||||
| Total | | $ | 7,391 | | $ | 7,786 | | $ | 15,177 | | $ | 23,085 |
The Corporation recognized $932,000 of interest income on nonaccrual loans during the year ended December 31, 2023.
The following table presents the accrued interest receivable written off by reversing interest income during the year ended December 31, 2023:
| | | | |
|---|---|---|---|
| | | Year Ended | |
| (In Thousands) | | December 31, 2023 | |
| Commercial real estate - non-owner occupied | | $ | 48 |
| Residential mortgage loans | | | 28 |
| Consumer loans | | 3 | |
| Total | | $ | 79 |
The Corporation has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:
| ● | Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. |
|---|---|
| ● | All other commercial loans are typically secured by business assets including inventory, equipment and receivables. |
| --- | --- |
| ● | Residential mortgage loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage. |
| --- | --- |
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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:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | December 31, 2023 | ||||
| | | Amortized | | | ||
| (In Thousands) | | Cost | | Allowance | ||
| Commercial real estate - non-owner occupied | | $ | 8,412 | | $ | 648 |
| Commercial real estate - owner occupied | | 1,575 | | 5 | ||
| All other commercial loans | | | 1,277 | | | 90 |
| Total | | $ | 11,264 | | $ | 743 |
The following table summarizes the activity related to the ACL for the year ended December 31, 2023 under the CECL methodology.
| | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Commercial | | Commercial | | All | | | | | | | | | | | | ||||
| | real estate - | | real estate - | | other | | Residential | | | | | | | | | |||||
| | nonowner | | owner | | commercial | | mortgage | | Consumer | | | | | | ||||||
| (In Thousands) | occupied | | occupied | | loans | | loans | | loans | | Unallocated | | Total | |||||||
| Balance, 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) | | | (311) | | | 0 | | | (356) |
| Recoveries | | 0 | | | 0 | | | 44 | | | 11 | | | 37 | | | 0 | | | 92 |
| (Credit) provision for credit losses on loans | 1,942 | | 167 | | (1,168) | | (621) | | 433 | | 0 | | 753 | |||||||
| Balance, December 31, 2023 | $ | 12,010 | | $ | 2,116 | | $ | 2,918 | | $ | 1,764 | | $ | 400 | | $ | 0 | | $ | 19,208 |
Prior to the adoption of ASC 326 on January 1, 2023, the Corporation calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosed related to the allowance for loan losses in prior period.
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| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2022 | **** | Loans: | | Allowance for Loan Losses: | ||||||||||||||
| (In Thousands) | | | | | | | | | | | | | | | | | | |
| | | Individually | | Collectively | | | | | Individually | | Collectively | | | |||||
| | Evaluated | Evaluated | Totals | Evaluated | Evaluated | Totals | ||||||||||||
| Commercial: | | | | | | | | | | | | | ||||||
| Commercial loans secured by real estate | | $ | 7,154 | | $ | 675,095 | | $ | 682,249 | | $ | 427 | | $ | 6,647 | | $ | 7,074 |
| Commercial and industrial | | 11,223 | | 167,048 | | 178,271 | | 26 | | 2,883 | | 2,909 | ||||||
| Paycheck Protection Program - 1st Draw | | 0 | | 5 | | 5 | | 0 | | 0 | | 0 | ||||||
| Paycheck Protection Program - 2nd Draw | | | 0 | | | 163 | | | 163 | | | 0 | | | 0 | | | 0 |
| Political subdivisions | | 0 | | 90,719 | | 90,719 | | 0 | | 0 | | 0 | ||||||
| Commercial construction and land | | 244 | | 73,719 | | 73,963 | | 0 | | 647 | | 647 | ||||||
| Loans secured by farmland | | 76 | | 12,874 | | 12,950 | | 0 | | 112 | | 112 | ||||||
| Multi-family (5 or more) residential | | 0 | | 55,886 | | 55,886 | | 0 | | 411 | | 411 | ||||||
| Agricultural loans | | 57 | | 2,378 | | 2,435 | | 0 | | 21 | | 21 | ||||||
| Other commercial loans | | 0 | | 14,857 | | 14,857 | | 0 | | 124 | | 124 | ||||||
| Total commercial | | 18,754 | | 1,092,744 | | 1,111,498 | | 453 | | 10,845 | | 11,298 | ||||||
| Residential mortgage: | | | | | | | ||||||||||||
| Residential mortgage loans - first liens | | | 506 | | | 509,276 | | | 509,782 | | | 0 | | | 3,413 | | | 3,413 |
| Residential mortgage loans - junior liens | | 30 | | 24,919 | | 24,949 | | 0 | | 167 | | 167 | ||||||
| Home equity lines of credit | | 68 | | 43,730 | | 43,798 | | 0 | | 282 | | 282 | ||||||
| 1-4 Family residential construction | | 0 | | 30,577 | | 30,577 | | 0 | | 211 | | 211 | ||||||
| Total residential mortgage | | 604 | | 608,502 | | 609,106 | | 0 | | 4,073 | | 4,073 | ||||||
| Consumer | | 0 | | 19,436 | | 19,436 | | 0 | | 244 | | 244 | ||||||
| Unallocated | | | | | | | | | | | | 1,000 | ||||||
| | | | | | | | | | | | | | | | | | | |
| Total | | $ | 19,358 | | $ | 1,720,682 | | $ | 1,740,040 | | $ | 453 | | $ | 15,162 | | $ | 16,615 |
| | | | | | | | | | | | | | | | | | | |
|---|
Prior to the adoption of ASU 2016-13, loans were classified as impaired when, based on current information and events, it was probable that the Corporation would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment was measured on a loan-by-loan basis for commercial loans by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.
The scope of loans reviewed individually each quarter to determine if they were impaired included all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there was at least one extension of credit graded Special Mention, Substandard or Doubtful. All loans classified as troubled debt restructurings and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, were individually evaluated for impairment.
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Summary information related to impaired loans at December 31, 2022 is provided in the table immediately below.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | December 31, 2022 | |||||||
| | | Unpaid | | | | | | | |
| | | Principal | | Recorded | | Related | |||
| | **** | Balance | **** | Investment | **** | Allowance | |||
| With no related allowance recorded: | | | | ||||||
| Commercial loans secured by real estate | | $ | 8,563 | | $ | 3,754 | | $ | 0 |
| Commercial and industrial | | 12,926 | | 11,163 | | 0 | |||
| Residential mortgage loans - first liens | | | 506 | | | 506 | | | 0 |
| Residential mortgage loans - junior liens | | 68 | | 30 | | 0 | |||
| Home equity lines of credit | | | 68 | | 68 | | 0 | ||
| Loans secured by farmland | | 76 | | 76 | | 0 | |||
| Agricultural loans | | | 57 | | | 57 | | | 0 |
| Construction and other land loans | | | 244 | | | 244 | | | 0 |
| Multi-family (5 or more) residential | | | 0 | | | 0 | | | 0 |
| Total with no related allowance recorded | | 22,508 | | 15,898 | | 0 | |||
| | | | | | | | | | |
| With a related allowance recorded: | | | | | | | |||
| Commercial loans secured by real estate | | | 3,400 | | | 3,400 | | | 427 |
| Commercial and industrial | | 60 | | 60 | | 26 | |||
| Total with a related allowance recorded | | 3,460 | | 3,460 | | 453 | |||
| Total | | $ | 25,968 | | $ | 19,358 | | $ | 453 |
The average balance of impaired loans and interest income recognized on these impaired loans is as follows:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | | | | ||||||||
| | | Average Investment in | | Interest Income Recognized on | ||||||||
| | | Impaired Loans | | Impaired Loans on a Cash Basis | ||||||||
| | | Year Ended December 31, | | Year Ended December 31, | ||||||||
| | | 2022 | | 2021 | | 2022 | 2021 | |||||
| Commercial: | | | | | | | | | | | ||
| Commercial loans secured by real estate | | $ | 9,757 | | $ | 11,617 | | $ | 657 | | $ | 557 |
| Commercial and industrial | | | 2,078 | | | 2,636 | | 210 | | 34 | ||
| Commercial construction and land | | | 72 | | | 48 | | 3 | | 3 | ||
| Loans secured by farmland | | | 80 | | | 84 | | 0 | | 1 | ||
| Multi-family (5 or more) residential | | | 197 | | | 1,583 | | | 1,156 | | | 133 |
| Agricultural loans | | | 60 | | | 67 | | 4 | | 4 | ||
| Other commercial loans | | | 0 | | | 0 | | | 0 | | | 0 |
| Total commercial | | | 12,244 | | | 16,035 | | 2,030 | | 732 | ||
| Residential mortgage: | | | | | | | | | | | ||
| Residential mortgage loans - first lien | | | 575 | | | 1,647 | | | 24 | | | 78 |
| Residential mortgage loans - junior lien | | | 33 | | | 361 | | 7 | | 11 | ||
| Home equity lines of credit | | | 43 | | | 0 | | 4 | | 0 | ||
| Total residential mortgage | | | 651 | | | 2,008 | | 35 | | 89 | ||
| Total | | $ | 12,895 | | $ | 18,043 | | $ | 2,065 | | $ | 821 |
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
67
Table of Contents Because the effect of most modifications made to borrowers experiencing financial difficulty, such as extensions of terms, insignificant payment delays and interest rate reductions, is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.
Occasionally, the Corporation modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
Modifications Made to Borrowers Experiencing Financial Difficulty
In 2023, there were two loan modifications made to borrowers experiencing financial difficulty at the time of modification, described in the following table:
| | | | | | | | | |
|---|---|---|---|---|---|---|---|---|
| (Dollars in Thousands) | | Term Extension | ||||||
| | | **** | | **** | | **** | ||
| | | | | | **** | | | |
| | | Amortized Cost | | % of Total | **** | | | |
| | | Basis | | Loan Type | **** | Financial Effect | | |
| Commercial Real Estate - Non-owner Occupied: | | | ||||||
| Non-owner occupied | $ | 3,907 | | | 0.53 | % | Extended the maturity of one loan for 6 months and another loan for 12 months. | |
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. At December 31, 2023, the amortized cost basis of the loan included in the table above where the maturity was extended for 6 months was $1,381,000, with a specific allowance of $38,000 and the contractual payments on the loan were 117 days past due. At December 31, 2023, the amortized cost basis of the loan where the maturity was extended for 12 months was $2,526,000 with a specific allowance of $486,000 and the contractual payments were current. There were no commitments to lend additional funds to these two borrowers.
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 consolidated balance sheets) is as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | | December 31, | December 31, | |||
| | | 2023 | | 2022 | ||
| Foreclosed residential real estate | | $ | 47 | | $ | 256 |
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) | | December 31, | December 31, | |||
| | | 2023 | | 2022 | ||
| Residential real estate in process of foreclosure | | $ | 1,227 | | $ | 1,229 |
The Corporation maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse, when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). Additional information related to commitments to extend credit and standby letter of credits is provided in Note 15. 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 68
Table of Contents $690,000 at December 31, 2023 and $425,000 at December 31, 2022, is included in accrued interest and other liabilities on the consolidated balance sheets.
The following table presents the balance and activity in the allowance for credit losses for off-balance sheet exposures for the year ended December 31, 2023.
| | | | |
|---|---|---|---|
| | | Year Ended | |
| (In Thousands) | | December 31, 2023 | |
| Beginning Balance | | $ | 425 |
| Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13 | | | 793 |
| Recoveries | | | 39 |
| Credit for unfunded commitments | | | (567) |
| Balance, December 31, 2023 | | $ | 690 |
8. BANK PREMISES AND EQUIPMENT
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | | December 31, | ||||
| | | 2023 | | 2022 | ||
| Land | | $ | 3,573 | | $ | 3,623 |
| Buildings and improvements | | | 32,582 | | | 32,332 |
| Furniture and equipment | | | 14,618 | | | 14,886 |
| Construction in progress | | | 614 | | | 1,532 |
| Total | | | 51,387 | | | 52,373 |
| Less: accumulated depreciation | | | (29,755) | | | (30,799) |
| Net | | $ | 21,632 | | $ | 21,574 |
Depreciation and amortization expense is included in the following line items of the consolidated statements of income:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | 2023 | | 2022 | | 2021 | |||
| Net occupancy and equipment expense | | $ | 1,915 | | $ | 2,049 | | $ | 1,723 |
| Data processing and telecommunications expense | | | 236 | | | 340 | | | 407 |
| Total | | $ | 2,151 | | $ | 2,389 | | $ | 2,130 |
- GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. There were no changes in the carrying amount of goodwill in 2023 and 2022. The balance in goodwill was $52,505,000 at December 31, 2023 and 2022. The Corporation did not complete any acquisitions in 2023 or 2022.
In testing goodwill for impairment at December 31, 2023, the Corporation by-passed performing a qualitative assessment and performed a quantitative assessment based on comparison of the Corporation’s market capitalization to its stockholders’ equity, resulting in the determination that the fair value of its reporting unit, its community banking operation, exceeded it’s carrying amount. Accordingly, there was no goodwill impairment at December 31, 2023. 69
Table of Contents There were no goodwill impairment charges recorded in the years ended December 31, 2023, 2022 and 2021.
Information related to the core deposit intangibles is as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | **** | | December 31, | |||
| | **** | 2023 | | | 2022 | |
| Gross amount | | $ | 6,639 | | $ | 6,639 |
| Accumulated amortization | | (4,170) | | | (3,762) | |
| Net | | $ | 2,469 | | $ | 2,877 |
Amortization expense related to core deposit intangibles is included in other noninterest expense in the consolidated statements of income, as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | Year Ended December 31, | |||||||
| | | 2023 | | 2022 | | | 2021 | ||
| Amortization expense | | $ | 408 | | $ | 439 | | $ | 535 |
The amount of amortization expense to be recognized in each of the ensuing five years is as follows:
| | | | |
|---|---|---|---|
| (In Thousands) | **** | | |
| 2024 | | $ | 390 |
| 2025 | | 424 | |
| 2026 | | 396 | |
| 2027 | | 361 | |
| 2028 | | 304 |
- DEPOSITS
At December 31, 2023 the scheduled maturities of time deposits are as follows:
| | | | |
|---|---|---|---|
| (In Thousands) | | | |
| 2024 | | $ | 290,068 |
| 2025 | | | 84,413 |
| 2026 | | | 36,610 |
| 2027 | | | 6,817 |
| 2028 | | | 6,541 |
| Total | | $ | 424,449 |
Time deposits of more than $250,000 totaled $134,085,000 at December 31, 2023 and $85,640,000 at December 31, 2022. As of December 31, 2023, the remaining maturities or time to next re-pricing of time deposits more than $250,000 was as follows:
| | | | |
|---|---|---|---|
| (In Thousands) | | | |
| Three months or less | | $ | 47,773 |
| Over 3 months through 12 months | | | 45,663 |
| Over 1 year through 3 years | | | 40,104 |
| Over 3 years | | | 545 |
| Total | | $ | 134,085 |
70
Table of Contents 11. BORROWED FUNDS
SHORT-TERM BORROWINGS
Short-term borrowings (initial maturity within one year) include the following:
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | | December 31, | **** | December 31, | ||
| | | 2023 | | 2022 | ||
| FHLB-Pittsburgh borrowings | | $ | 31,500 | | $ | 77,000 |
| Customer repurchase agreements | | 2,374 | | 3,062 | ||
| Total short-term borrowings | | $ | 33,874 | | $ | 80,062 |
The weighted average interest rate on total short-term borrowings outstanding was 5.23% at December 31, 2023 and 4.28% at December 31, 2022. The maximum amount of total short-term borrowings outstanding at any month-end was $120,290,000 in 2023, $90,042,000 in 2022 and $17,353,000 in 2021.
The Corporation had available credit with other correspondent banks totaling $75,000,000 at December 31, 2023 and $95,000,000 at December 31, 2022. These lines of credit are primarily unsecured. No amounts were outstanding at December 31, 2023 or 2022.
The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At December 31, 2023, the Corporation had available credit in the amount of $19,982,000 on this line with no outstanding advances. At December 31, 2022, the Corporation had available credit in the amount of $23,107,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $20,829,000 at December 31, 2023 and $24,113,000 at December 31, 2022.
The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10% at December 31, 2023 and 2022. The carrying value of the underlying securities was $2,400,000 at December 31, 2023 and $3,080,000 at December 31, 2022.
The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $1,323,008,000 at December 31, 2023 and $1,209,179,000 at December 31, 2022. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in other assets) were $15,214,000 at December 31, 2023 and $14,168,000 at December 31, 2022. The Corporation’s total credit facility with FHLB-Pittsburgh was $926,845,000 at December 31, 2023, including an unused (available) amount of $737,824,000. At December 31, 2022, the Corporation’s total credit facility with FHLB-Pittsburgh was $839,378,000, including an unused (available) amount of $689,279,000.
At December 31, 2023, the 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%. At December 31, 2022, the overnight borrowing from FHLB-Pittsburgh was $77,000,000 at an interest rate of 4.45% with no other short-term advances.
LONG-TERM BORROWINGS – FHLB ADVANCES
Long-term borrowings from FHLB-Pittsburgh are as follows:
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| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | | December 31, | **** | December 31, | ||
| | | 2023 | | 2022 | ||
| Loans matured in 2023 | | $ | 0 | | $ | 9,303 |
| Loans maturing in 2024 with a weighted-average rate of 3.09% | | | 32,161 | | | 29,813 |
| Loans maturing in 2025 with a weighted-average rate of 4.30% | | | 44,627 | | | 23,231 |
| Loans maturing in 2026 with a weighted-average rate of 4.51% | | | 35,518 | | | 0 |
| Loans maturing in 2027 with a weighted-average rate of 4.00% | | | 24,031 | | | 0 |
| Loan maturing in 2028 with a rate of 3.72% | | | 2,000 | | | 0 |
| Total long-term FHLB-Pittsburgh borrowings | | $ | 138,337 | | $ | 62,347 |
Note: Weighted-average rates are presented as of December 31, 2023. ****
SENIOR NOTES
In 2021, the Corporation issued and sold $15.0 million in aggregate principal amount of 2.75% Fixed Rate Senior Unsecured Notes due 2026 (the "Senior Notes"). The Senior Notes mature on June 1, 2026 and bear interest at a fixed annual rate of 2.75%. The Corporation is not entitled to redeem the Senior Notes, in whole or in part, at any time prior to maturity and the Senior Notes are not subject to redemption by the holders. The Senior Notes are unsecured and unsubordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation.
The Senior Notes were recorded, net of debt issuance costs of $337,000, at an initial carrying amount of $14,663,000. Debt issuance costs are amortized over the term of the Senior Notes as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Senior Notes totaling $66,000 in 2023, $64,000 in 2022 and $38,000 in 2021 was included in interest expense in the consolidated statements of income.
At December 31, 2023 and December 31, 2022, outstanding Senior Notes are as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | **** | December 31, | **** | December 31, | ||
| | | 2023 | | 2022 | ||
| Senior Notes with an aggregate par value of $15,000,000; bearing interest at 2.75% with an effective interest rate of 3.23%; maturing in June 2026 | | $ | 14,831 | | $ | 14,765 |
| Total carrying value | | $ | 14,831 | | $ | 14,765 |
SUBORDINATED DEBT
In 2021, the Corporation issued and sold $25.0 million in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Subordinated Notes"). The Subordinated Notes mature on June 1, 2031 and bear interest at a fixed annual rate of 3.25%, to June 1, 2026. From June 1, 2026 to maturity or early redemption, the interest rate will reset quarterly to an interest rate per annum equal to the three-month Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York plus 259 basis points. The Corporation is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after June 1, 2026, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required.
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 $110,000 in 2023, $106,000 in 2022, and $63,000 in 2021 was included in interest expense in the consolidated statements of income. 72
Table of Contents At December 31, 2023 and 2022, outstanding subordinated debt agreements are as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | **** | December 31, | **** | December 31, | ||
| | | 2023 | | 2022 | ||
| Agreements with a par value of $25,000,000; bearing interest at 3.25% with an effective interest rate of 3.74%; maturing in June 2031 and redeemable at par in June 2026 | | $ | 24,717 | | $ | 24,607 |
| Total carrying value | | $ | 24,717 | | $ | 24,607 |
- EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS
DEFINED BENEFIT PLANS
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. The plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at December 31, 2023 and 2022 and are not expected to significantly affect the Corporation’s future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.
In an acquisition in 2007, the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan. This plan covers certain employees who were employed by Citizens Trust Company on December 31, 2002, when the plan was amended to discontinue admittance of any future participant and to freeze benefit accruals. Information related to the Citizens Trust Company Retirement Plan has been included in the tables that follow. The Corporation uses a December 31 measurement date for this plan.
The following table shows the funded status of the defined benefit plans:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | Pension | **** | Postretirement | ||||||||
| (In Thousands) | **** | 2023 | | 2022 | **** | 2023 | | 2022 | ||||
| CHANGE IN BENEFIT OBLIGATION: | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 946 | | $ | 1,128 | | $ | 935 | | $ | 1,297 |
| Service cost | | 0 | | 0 | | 54 | | 63 | ||||
| Interest cost | | 31 | | 22 | | 48 | | 34 | ||||
| Plan participants' contributions | | 0 | | 0 | | 129 | | 137 | ||||
| Actuarial loss (gain) | | 63 | | (199) | | 37 | | (394) | ||||
| Benefits paid | | | (5) | | | (5) | | | (190) | | | (202) |
| Settlement of plan obligation | | (139) | | 0 | | 0 | | 0 | ||||
| Benefit obligation at end of year | | $ | 896 | | $ | 946 | | $ | 1,013 | | $ | 935 |
| | | | | | | | | | | | | |
| CHANGE IN PLAN ASSETS: | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 1,001 | | $ | 1,175 | | $ | 0 | | $ | 0 |
| Actual return on plan assets | | 89 | | (169) | | 0 | | 0 | ||||
| Employer contribution | | 0 | | 0 | | 61 | | 65 | ||||
| Plan participants' contributions | | 0 | | 0 | | 129 | | 137 | ||||
| Benefits paid | | | (5) | | | (5) | | | (190) | | | (202) |
| Settlement of plan obligation | | (139) | | 0 | | 0 | | 0 | ||||
| Fair value of plan assets at end of year | | $ | 946 | | $ | 1,001 | | $ | 0 | | $ | 0 |
| | | | | | | | | | | | | |
| Funded status at end of year | | $ | 50 | | $ | 55 | | $ | (1,013) | | $ | (935) |
At December 31, 2023 and 2022, the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance sheets:
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Table of Contents
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Pension | | Postretirement | ||||||||
| (In Thousands) | **** | 2023 | **** | 2022 | **** | 2023 | 2022 | |||||
| Other assets | | $ | 50 | | $ | 55 | | $ | 0 | | $ | 0 |
| Accrued interest and other liabilities | | | 0 | | | 0 | | | 1,013 | | | 935 |
At December 31, 2023 and 2022, the following items included in accumulated other comprehensive loss had not been recognized as components of expense:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | Pension | | Postretirement | ||||||||
| (In Thousands) | **** | 2023 | | 2022 | **** | 2023 | | 2022 | ||||
| Prior service cost | | $ | 0 | | $ | 0 | | $ | (124) | | $ | (155) |
| Net actuarial loss (gain) | | 139 | | | 179 | | (573) | | | (646) | ||
| Total | | $ | 139 | | $ | 179 | | $ | (697) | | $ | (801) |
For the defined benefit pension plan, amortization of the net actuarial loss is expected to be $6,000 in 2024. For the postretirement plan, effective in January 2024, adjustments to the plan resulted in an increase of $413,000 in unrecognized prior service cost. In 2024, the estimated reduction in expense related to prior service cost is $481,000, including a curtailment of $469,000 related to the plan adjustments. Also in 2024 for the postretirement plan, the net actuarial gain to be amortized as a reduction in expense is $77,000.
The accumulated benefit obligation for the defined benefit pension plan was $896,000 at December 31, 2023 and $946,000 at December 31, 2022.
The components of net periodic benefit costs from defined benefit plans are as follows:
| | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | Pension | | Postretirement | ||||||||||||||
| (In Thousands) | **** | 2023 | | 2022 | **** | 2021 | **** | 2023 | | 2022 | **** | 2021 | ||||||
| Service cost | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 54 | | $ | 63 | | $ | 63 |
| Interest cost | | 31 | | | 22 | | | 20 | | 48 | | | 34 | | | 33 | ||
| Expected return on plan assets | | (18) | | | (35) | | | (30) | | 0 | | | 0 | | | 0 | ||
| Amortization of prior service cost | | 0 | | | 0 | | | 0 | | (31) | | | (31) | | | (31) | ||
| Recognized net actuarial loss (gain) | | 11 | | | 8 | | | 19 | | (36) | | | (19) | | | (5) | ||
| Settlement of plan obligation | | | 21 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
| Total net periodic benefit cost | | $ | 45 | | $ | (5) | | $ | 9 | | $ | 35 | | $ | 47 | | $ | 60 |
The weighted-average assumptions used to determine net periodic benefit cost are as follows:
| | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | Pension | | Postretirement | |||||||||
| | **** | 2023 | **** | 2022 | **** | 2021 | **** | 2023 | **** | 2022 | **** | 2021 | **** |
| Discount rate | 5.05 | % | 2.60 | % | 2.30 | % | 3.00 | % | 3.00 | % | 2.50 | % | |
| Expected return on plan assets | 4.22 | % | 5.00 | % | 4.81 | % | N/A | N/A | N/A | | |||
| Rate of compensation increase | N/A | N/A | N/A | N/A | N/A | N/A | |
The weighted-average assumptions used to determine benefit obligations as of December 31, 2023 and 2022 are as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | **** | Pension | Postretirement | | |||||
| | **** | 2023 | **** | 2022 | **** | 2023 | **** | 2022 | |
| Discount rate | 4.80 | % | 5.05 | % | 5.00 | % | 5.25 | % | |
| Rate of compensation increase | N/A | N/A | N/A | N/A | |
74
Table of Contents Estimated future benefit payments, including only estimated employer contributions for the postretirement plan, which reflect expected future service, are as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | **** | Pension | **** | Postretirement | ||
| 2024 | | $ | 570 | | $ | 74 |
| 2025 | | 8 | | 85 | ||
| 2026 | | 14 | | 98 | ||
| 2027 | | 8 | | 88 | ||
| 2028 | | 260 | | 97 | ||
| 2029-2033 | | 36 | | 493 |
No estimated minimum contribution to the defined benefit pension plan is required in 2024, though the Corporation may make discretionary contributions.
The expected return on pension plan assets is a significant assumption used in the calculation of net periodic benefit cost. This assumption reflects the average long-term rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation.
The fair values of pension plan assets at December 31, 2023 and 2022 are as follows:
| | | | | | |
|---|---|---|---|---|---|
| | **** | 2023 | **** | 2022 | **** |
| Mutual funds invested principally in: | | | | | |
| Cash and cash equivalents | 54 | % | 3 | % | |
| Debt securities | 18 | % | 39 | % | |
| Equity securities | 24 | % | 50 | % | |
| Alternative funds | 4 | % | 8 | % | |
| Total | 100 | % | 100 | % |
C&N Bank’s Wealth Management Department manages the investment of the pension plan assets. The Plan’s securities include mutual funds invested principally in cash and cash equivalents, debt securities, a diversified mix of large, mid- and small-capitalization U.S. stocks, foreign stocks and alternative asset classes such as real estate, commodities, and inflation-protected securities. The fair values of plan assets are determined based on Level 1 inputs (as described in Note 20). The Plan’s assets do not include any shares of the Corporation’s common stock.
PROFIT SHARING AND DEFERRED COMPENSATION PLANS
The Corporation has a profit sharing plan that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation’s matching contributions to the Plan depend upon the tax deferred contributions of employees. The Corporation’s total basic and matching contributions were $1,419,000 in 2023, $1,415,000 in 2022 and $1,299,000 in 2021.
The Corporation has an Employee Stock Ownership Plan (ESOP). Contributions to the ESOP are discretionary, and the ESOP uses funds contributed to purchase Corporation stock for the accounts of ESOP participants. These purchases are made in the market (not directly from the Corporation), and employees are not permitted to purchase Corporation stock under the ESOP. The ESOP includes a diversification feature, which allows participants, upon reaching age 55 and 10 years of service (as defined), to sell up to 50% of their Corporation shares over a period of 6 years. As of December 31, 2023 and 2022, there were no shares allocated for repurchase by the ESOP.
Dividends paid on shares held by the ESOP are charged to retained earnings. All Corporation shares owned through the ESOP are included in the calculation of weighted-average shares outstanding for purposes of calculating earnings per share – basic and diluted. The ESOP held 579,567 shares of Corporation stock at December 31, 2023, 564,353 shares at December 31, 2022 and 513,494 shares at December 31, 2021, all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled $1,244,000 in 2023, $1,170,000 in 2022 and $1,040,000 in 2021. 75
Table of Contents The Corporation has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were $489,000 in 2023, $391,000 in 2022 and $301,000 in 2021.
In connection with an acquisition, the Corporation assumed an obligation to provide a supplemental retirement benefit to a former executive. Under the terms of the agreement, the executive or his heirs will receive monthly payments totaling $1 million over a 10-year period starting in October 2025. The Corporation recorded expense of $13,000 in 2023, $14,000 in 2022 and $13,000 in 2021, which is included in pensions and other employee benefits in the consolidated statements of income, representing the effective interest cost on the obligation. The discount rate used to measure the liability is 1.5%. The balance of the liability, which is included in accrued interest and other liabilities in the consolidated balance sheets, is $905,000 at December 31, 2023 and $892,000 at December 31, 2022.
The Corporation also has a nonqualified deferred compensation plan that allows selected officers the option to defer receipt of cash compensation, including base salary and any cash bonuses or other cash incentives. This nonqualified deferred compensation plan does not provide for Corporation contributions.
STOCK-BASED COMPENSATION PLANS
At the Annual Meeting of Shareholders on April 20, 2023, the Citizens & Northern Corporation 2023 Equity Incentive Plan (“2023 Equity Incentive Plan”) was approved. A total of 500,000 shares of common stock may be issued under the 2023 Equity Incentive Plan. Awards may be made to participating employees and independent directors under the 2023 Equity Incentive Plan in the form of qualified options (“Incentive Stock Options,” as defined in the Internal Revenue Code), nonqualified options, restricted stock units or restricted stock, any or all of which can be granted with performance-based vesting conditions. As of December 31, 2023, no awards had been granted under this plan.
Outstanding restricted stock awards granted prior to adoption of the 2023 Equity Incentive Plan, including awards made in 2023, are governed under the 1995 Stock Incentive Plan and the Independent Directors Stock Incentive Plan. The restricted stock awards in 2023 under the 1995 Stock Incentive Plan and the Independent Directors Stock Incentive Plan are the final awards under these plans.
Total stock-based compensation expense is as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | **** | 2023 | | 2022 | **** | 2021 | |||
| Restricted stock | | $ | 1,472 | | $ | 1,260 | | $ | 1,214 |
| Stock options | | 0 | | | 0 | | | 0 | |
| Total | | $ | 1,472 | | $ | 1,260 | | $ | 1,214 |
The following summarizes non-vested restricted stock activity for the year ended December 31, 2023:
| | | | | | |
|---|---|---|---|---|---|
| | **** | Weighted | |||
| | | | | Average | |
| | | Number | | Grant Date | |
| | **** | of Shares | **** | Fair Value | |
| Outstanding, December 31, 2022 | 135,220 | | $ | 23.23 | |
| Granted | 53,788 | | $ | 23.35 | |
| Vested | (53,738) | | $ | 23.46 | |
| Forfeited | (25,261) | | $ | 22.11 | |
| Outstanding, December 31, 2023 | 110,009 | | $ | 23.44 |
Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. As of December 31, 2023, there was $1,262,000 total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted average period of 1.3 years. 76
Table of Contents In 2023 and 2022, the Corporation awarded shares of restricted stock under the Stock Incentive Plan, as follows:
| | | | | |
|---|---|---|---|---|
| | **** | 2023 | **** | 2022 |
| Time-based awards to independent directors | | 11,000 | | 9,588 |
| Time-based awards to employees | 31,684 | 51,638 | ||
| Performance-based awards to employees | 11,104 | 17,017 | ||
| Total | 53,788 | 78,243 |
Time-based restricted stock awards granted to independent (non-employee) directors in 2023 and 2022 vest over one-year terms. Time-based restricted stock awards granted to employees in 2023 and 2022 vest ratably over three-year terms, subject to continued employment and satisfactory job performance. Performance-based restricted stock awards granted in 2023 and 2022 vest ratably over three-year terms, with vesting contingent upon meeting conditions based on the Corporation’s earnings as specified in the agreements.
There were no stock options granted in 2023, 2022, or 2021. A summary of stock option activity is presented below.
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | 2023 | **** | 2022 | | 2021 | |||||||||
| | | | | Weighted | | | | Weighted | | | | Weighted | |||
| | | | | Average | | | | Average | | | | Average | |||
| | | | | Exercise | | | | Exercise | | | | Exercise | |||
| | **** | Shares | **** | Price | **** | Shares | **** | Price | | Shares | **** | Price | |||
| Outstanding, beginning of year | 10,564 | | $ | 20.45 | 24,218 | | $ | 20.01 | 57,111 | | $ | 18.92 | |||
| Granted | 0 | | | 0 | | | 0 | | | ||||||
| Exercised | (8,288) | | $ | 20.45 | (13,654) | | $ | 19.67 | (22,429) | | $ | 18.96 | |||
| Forfeited | (1,630) | | $ | 20.45 | 0 | | | | (3,156) | | $ | 19.20 | |||
| Expired | 0 | | | | 0 | | | | (7,308) | | $ | 15.06 | |||
| Outstanding, end of year | 646 | | $ | 20.45 | 10,564 | | $ | 20.45 | 24,218 | | $ | 20.01 | |||
| Options exercisable at year-end | 646 | | $ | 20.45 | 10,564 | | $ | 20.45 | 24,218 | | $ | 20.01 | |||
| Weighted-average fair value of options forfeited | | | $ | 5.50 | | | | N/A | | | $ | 4.59 |
The 646 shares of outstanding stock options at December 31, 2023 expired on January 3, 2024. The aggregate intrinsic value of stock options outstanding was $1,000 at December 31, 2023. The total intrinsic value of options exercised was $14,000 in 2023, $76,000 in 2022 and $97,000 in 2021.
In January 2024, the Corporation granted 53,514 shares of time-based restricted stock awards under the 2023 Equity Incentive Plan. Of the 53,514 restricted shares, 43,514 vest ratably over three years while 10,000 issued to independent directors’ vest over one year. In February 2024, the Corporation granted 19,346 shares of performance-based restricted stock awards. These performance-based restricted stock awards vest ratably over three years, with vesting contingent upon meeting earnings-related conditions specified in agreements. Total estimated stock-based compensation expense for 2024 is $1,500,000. The restricted stock awards made in January and February 2024 are not included in the tables above.
77
Table of Contents 13. INCOME TAXES
The net deferred tax asset at December 31, 2023 and 2022 represents the following temporary difference components:
| | | | | | | |
|---|---|---|---|---|---|---|
| | **** | December 31, | | December 31, | ||
| (In Thousands) | **** | 2023 | **** | 2022 | ||
| Deferred tax assets: | | | | | | |
| Unrealized holding losses on securities | | $ | 10,335 | | $ | 13,391 |
| Allowance for credit losses on loans | | | 4,230 | | | 3,648 |
| Purchase accounting adjustments on loans | | 470 | | 938 | ||
| Deferred compensation | | 1,352 | | 1,149 | ||
| Operating leases liability | | 787 | | 907 | ||
| Deferred loan origination fees | | 731 | | 779 | ||
| Net operating loss carryforward | | | 541 | | | 659 |
| Accrued incentive compensation | | | 463 | | | 354 |
| Other deferred tax assets | | 1,316 | | 1,115 | ||
| Total deferred tax assets | | 20,225 | | 22,940 | ||
| | | | | | | |
| Deferred tax liabilities: | | | ||||
| BOLI surrender | | | 950 | | | 0 |
| Defined benefit plans - ASC 835 | | 119 | | 129 | ||
| Bank premises and equipment | | 291 | | 298 | ||
| Core deposit intangibles | | 544 | | 633 | ||
| Right-of-use assets from operating leases | | | 787 | | | 907 |
| Other deferred tax liabilities | | 93 | | 89 | ||
| Total deferred tax liabilities | | 2,784 | | 2,056 | ||
| Deferred tax asset, net | | $ | 17,441 | | $ | 20,884 |
The provision for income taxes includes the following:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | **** | 2023 | | 2022 | **** | 2021 | |||
| Currently payable | | $ | 5,499 | | $ | 5,998 | | $ | 8,386 |
| Tax expense resulting from allocations of certain tax benefits<br>to equity or as a reduction in other assets | | 0 | | | 134 | | | 128 | |
| Deferred | | 836 | | | (400) | | | (1,381) | |
| Total provision | | $ | 6,335 | | $ | 5,732 | | $ | 7,133 |
A reconciliation of income tax at the statutory rate to the Corporation’s effective rate is as follows:
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | 2023 | | 2022 | | 2021 | |||||||||
| (Dollars In Thousands) | **** | Amount | **** | % | | Amount | **** | % | **** | Amount | **** | % | |||
| Expected provision | | $ | 6,401 | 21.0 | | $ | 6,794 | 21.0 | | $ | 7,914 | 21.0 | |||
| Tax-exempt interest income | | (964) | (3.2) | | (1,029) | (3.2) | | (921) | (2.4) | ||||||
| Increase in cash surrender value and other income from life insurance, net | | (586) | (1.9) | | (103) | (0.3) | | (118) | (0.3) | ||||||
| ESOP dividends | | (143) | (0.5) | | (130) | (0.4) | | (120) | (0.3) | ||||||
| Initiated surrender of bank-owned life insurance | | | 950 | | 3.1 | | | 0 | | 0.0 | | | 0 | | 0.0 |
| State income tax, net of Federal benefit | | 329 | 1.1 | | 296 | 0.9 | | 375 | 1.0 | ||||||
| Nondeductible interest expense | | 283 | 0.9 | | 87 | | 0.3 | | | 52 | | 0.1 | |||
| Other, net | | 65 | 0.3 | | (183) | (0.6) | | (49) | (0.1) | ||||||
| Effective income tax provision | | $ | 6,335 | 20.8 | | $ | 5,732 | 17.7 | | $ | 7,133 | 18.9 |
78
Table of Contents The Corporation has a net operating loss (“NOL”) available to be carried forward against future federal taxable income. Availability of the NOL does not expire; however, the amount that may be offset against taxable income is limited to approximately $563,000 per year and further limited annually to no more than 80% of taxable income without regard to the NOL. At December 31, 2023, the unused amount of the NOL is $2.6 million.
The Corporation has no unrecognized tax benefits, nor pending examination issues related to tax positions taken in preparation of its income tax returns. With limited exceptions, the Corporation is no longer subject to examination by the Internal Revenue Service for years prior to 2020.
- RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiaries and any associates of the foregoing persons are as follows:
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | Beginning | **** | New | **** | **** | | **** | Other | **** | Ending | ||||
| (In Thousands) | **** | Balance | **** | Loans | **** | Repayments | **** | Changes | **** | Balance | |||||
| 11 directors, 11 executive officers 2023 | | $ | 14,504 | | $ | 549 | | $ | (823) | | $ | (255) | | $ | 13,975 |
| 13 directors, 9 executive officers 2022 | | $ | 13,911 | | $ | 1,949 | | $ | (1,886) | | $ | 530 | | $ | 14,504 |
| 13 directors, 9 executive officers 2021 | | $ | 18,445 | | $ | 1,249 | | $ | (6,034) | | $ | 251 | | $ | 13,911 |
In the table above, other changes represent net changes in the balance of existing lines of credit and transfers in and out of the related party category.
Deposits from related parties held by the Corporation amounted to $9,014,000 at December 31, 2023 and $10,882,000 at December 31, 2022.
- OFF-BALANCE SHEET RISK
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. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at December 31, 2023 and 2022 are as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| (In Thousands) | **** | 2023 | **** | 2022 | ||
| Commitments to extend credit | | $ | 395,997 | | $ | 433,725 |
| Standby letters of credit | | 19,158 | | 15,822 |
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, for extensions of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the Corporation guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending 79
Table of Contents loan facilities to customers. Some of the standby letters of credit are collateralized by real estate or other assets, and others are unsecured. The extent to which proceeds from liquidation of collateral would be expected to cover the maximum potential amount of future payments related to standby letters of credit is not estimable.
Standby letters of credit as of December 31, 2023 expire as follows:
| | | | |
|---|---|---|---|
| Year of Expiration | **** | (In Thousands) | |
| 2024 | | $ | 18,694 |
| 2025 | | 411 | |
| 2026 | | | 25 |
| 2027 | | | 0 |
| 2028 | | | 28 |
| Total | | $ | 19,158 |
Information related to the allowance for credit losses on off-balance sheet exposures is provided in Note 7.
- OPERATING LEASE COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
Operating leases in which the Corporation is the lessee are recorded as operating lease Right of Use ("ROU") assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated balance sheets. The Corporation does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease.
The Corporation leases certain branch locations, office space and equipment. All leases are classified as operating leases. Operating lease expense, which is comprised of amortization of the ROU assets and the implicit interest accreted on the operating lease liability, is recognized on a straight line basis over the remaining lease term of the operating lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
Certain leases include options to renew, with renewal terms that can extend the lease term from one to eight years that are reasonably certain of being exercised. The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption of ASU 2017-02 and as of the lease commencement date for leases subsequently entered into after January 1, 2019. At December 31, 2023, discount rates ranged from 0.84% to 4.16% with a weighted-average discount rate of 1.96%. At December 31, 2023, the weighted-average remaining lease term was 4.6 years. At December 31, 2022, the weighted-average discount rate was 1.98% and the weighted-average remaining lease term was 5.1 years.
At December 31, 2023, right-of-use assets of $3,570,000 were included in other assets, and the related lease liabilities totaling the same amount were included in accrued interest and other liabilities, in the consolidated balance sheets. At December 31, 2022, right of use assets and the related liabilities totaled $4,133,000.
| | | | | | | |
|---|
80
Table of Contents In 2023, 2022 and 2021, operating lease expenses are included in the following line item of the consolidated statements of income:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | **** | 2023 | | 2022 | **** | 2021 | |||
| Net occupancy and equipment expense | | $ | 644 | | $ | 599 | | $ | 492 |
| Total | | $ | 644 | | $ | 599 | | $ | 492 |
A maturity analysis of the Corporation’s lease liabilities at December 31, 2023 is as follows:
(In Thousands)
Lease Payments Due
| | | | |
|---|---|---|---|
| 2024 | $ | 623 | |
| 2025 | | 593 | |
| 2026 | | 533 | |
| 2027 | | 509 | |
| 2028 | | 419 | |
| Thereafter | | 1,147 | |
| Total lease payments | | 3,824 | |
| Discount on cash flows | | (254) | |
| Total lease liabilities | | $ | 3,570 |
Litigation 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.
- REGULATORY MATTERS
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 December 31, 2023; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
Details concerning capital ratios at December 31, 2023 and 2022 are presented below. Management believes, as of December 31, 2023, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at December 31, 2023 and 2022 exceed the Corporation’s Board policy threshold levels.
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Table of Contents
| | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | **** | **** | **** | **** | **** | **** | **** | **** | **** | **** | | Minimum To Be Well | | | **** | **** | **** | | ||
| | **** | | | **** | | **** | Minimum | | Minimum To Maintain | | Capitalized Under | | Minimum To Meet | | |||||||||
| | **** | | | **** | | **** | Capital | | Capital Conservation | | Prompt Corrective | | the Corporation's | | |||||||||
| | **** | Actual | | Requirement | **** | Buffer at Reporting Date | | Action Provisions | | Policy Thresholds | | ||||||||||||
| (Dollars In Thousands) | **** | | Amount | **** | Ratio | **** | Amount | **** | Ratio | **** | Amount | **** | Ratio | **** | Amount | **** | Ratio | **** | Amount | **** | Ratio | | |
| 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 | ³11 | % | |||||||
| C&N Bank | | 275,307 | 14.89 | % | 147,925 | ³8 | % | 194,151 | ³10.5 | % | 184,906 | ³10 | % | 203,396 | ³11 | % | |||||||
| 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 | ³9 | % | |||||||||
| C&N Bank | | 255,409 | 13.81 | % | 110,943 | ³6 | % | 157,170 | ³8.5 | % | 147,925 | ³8 | % | 166,415 | ³9 | % | |||||||
| 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 | ³7.5 | % | |||||||||
| C&N Bank | | 255,409 | 13.81 | % | 83,208 | ³4.5 | % | 129,434 | ³7.0 | % | 120,189 | ³6.5 | % | 138,679 | ³7.5 | % | |||||||
| 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 | ³8 | % | |||||||||
| C&N Bank | | 255,409 | 10.32 | % | 99,010 | ³4 | % | N/A | N/A | 123,762 | ³5 | % | 198,020 | ³8 | % | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022: | | | | ||||||||||||||||||||
| Total capital to risk-weighted assets: | | | | ||||||||||||||||||||
| Consolidated | | $ | 285,397 | 15.72 | % | N/A | N/A | N/A | N/A | N/A | N/A | | $ | 190,590 | ³10.5 | % | |||||||
| C&N Bank | | 265,784 | 14.68 | % | 144,873 | ³8 | % | 190,145 | ³10.5 | % | 181,091 | ³10 | % | 190,145 | ³10.5 | % | |||||||
| Tier 1 capital to risk-weighted assets: | | | | | | | | | |||||||||||||||
| Consolidated | | 243,750 | 13.43 | % | N/A | N/A | N/A | N/A | N/A | N/A | | 154,287 | ³8.5 | % | |||||||||
| C&N Bank | | 248,744 | 13.74 | % | 108,654 | ³6 | % | 153,927 | ³8.5 | % | 144,873 | ³8 | % | 153,927 | ³8.5 | % | |||||||
| Common equity tier 1 capital to risk-weighted assets: | | | | ||||||||||||||||||||
| Consolidated | | 243,750 | 13.43 | % | N/A | N/A | N/A | N/A | N/A | N/A | | 127,060 | ³7 | % | |||||||||
| C&N Bank | | 248,744 | 13.74 | % | 81,491 | ³4.5 | % | 126,764 | ³7.0 | % | 117,709 | ³6.5 | % | 126,764 | ³7 | % | |||||||
| Tier 1 capital to average assets: | | | | | | | | ||||||||||||||||
| Consolidated | | 243,750 | 10.11 | % | N/A | N/A | N/A | N/A | N/A | N/A | | 192,941 | ³8 | % | |||||||||
| C&N Bank | | 248,744 | 10.38 | % | 95,826 | ³4 | % | N/A | N/A | 119,783 | ³5 | % | 191,652 | ³8 | % |
Federal regulatory authorities impose a capital rule providing that, 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 December 31, 2023, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:
| | | | |
|---|---|---|---|
| Minimum common equity tier 1 capital ratio | 4.5 | % | |
| Minimum common equity tier 1 capital ratio plus capital conservation buffer | 7.0 | % | |
| Minimum tier 1 capital ratio | 6.0 | % | |
| Minimum tier 1 capital ratio plus capital conservation buffer | 8.5 | % | |
| Minimum total capital ratio | 8.0 | % | |
| Minimum total capital ratio plus capital conservation buffer | 10.5 | % |
A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar 82
Table of Contents 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 December 31, 2023, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 6.89%.
Banking regulators limit the amount of dividends that may be paid by C&N Bank to the Corporation. Retained earnings against which dividends may be paid without prior approval of the banking regulators amounted to approximately $101,550,000 at December 31, 2023, subject to the minimum capital ratio requirements noted above.
Restrictions imposed by federal law prohibit the Corporation from borrowing from C&N Bank unless the loans are secured in specific amounts. Such secured loans to the Corporation are generally limited to 10% of C&N Bank’s tangible stockholder’s equity (excluding accumulated other comprehensive loss) or $25,277,000 at December 31, 2023.
- PARENT COMPANY ONLY
The following is condensed financial information for Citizens & Northern Corporation:
| | | | | | | |
|---|---|---|---|---|---|---|
| CONDENSED BALANCE SHEET | **** | Dec. 31, | **** | Dec. 31, | ||
| (In Thousands) | | 2023 | | 2022 | ||
| ASSETS | | | ||||
| Cash | | $ | 14,822 | | $ | 17,867 |
| Investment in subsidiaries: | | | ||||
| Citizens & Northern Bank | | 272,286 | | 254,809 | ||
| Citizens & Northern Investment Corporation | | 11,087 | | 12,453 | ||
| Bucktail Life Insurance Company | | 3,733 | | 3,637 | ||
| Other assets | | 200 | | 33 | ||
| TOTAL ASSETS | | $ | 302,128 | | $ | 288,799 |
| | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | ||||
| Senior notes, net | | $ | 14,831 | | $ | 14,765 |
| Subordinated debt, net | | 24,717 | | 24,607 | ||
| Other liabilities | | 199 | | 102 | ||
| Stockholders' equity | | 262,381 | | 249,325 | ||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 302,128 | | $ | 288,799 |
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| CONDENSED INCOME STATEMENT | | | | | | | |||
| (In Thousands) | **** | 2023 | | 2022 | **** | 2021 | |||
| Dividends from Citizens & Northern Bank | | $ | 19,405 | | $ | 19,483 | | $ | 20,200 |
| Dividends from Citizens & Northern Investment Corporation | | | 1,800 | | | 0 | | | 0 |
| Expenses | | (2,003) | | (1,695) | | (1,691) | |||
| Income before equity in undistributed income of subsidiaries | | 19,202 | | 17,788 | | 18,509 | |||
| Equity in undistributed income of subsidiaries | | 4,946 | | 8,830 | | 12,045 | |||
| NET INCOME | | $ | 24,148 | | $ | 26,618 | | $ | 30,554 |
83
Table of Contents
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| CONDENSED STATEMENT OF CASH FLOWS | | | | | | ||||
| (In Thousands) | **** | 2023 | | 2022 | **** | 2021 | |||
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Net income | | $ | 24,148 | | $ | 26,618 | | $ | 30,554 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | ||||||
| Accretion of purchase accounting adjustment | | | 0 | | | (14) | | | (43) |
| Amortization of debt issuance costs | | 176 | | 170 | | 101 | |||
| Equity in undistributed income of subsidiaries | | (4,946) | | (8,830) | | (12,045) | |||
| Increase in other assets | | (167) | | 0 | | (29) | |||
| Increase (decrease) in other liabilities | | 97 | | (41) | | (16) | |||
| Net Cash Provided by Operating Activities | | 19,308 | | 17,903 | | 18,522 | |||
| | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | ||||||
| Proceeds from issuance of senior notes and subordinated debt | | 0 | | 0 | | 39,100 | |||
| Repayment of subordinated debt | | 0 | | (8,500) | | (8,000) | |||
| Proceeds from sale of treasury stock | | 0 | | 160 | | 212 | |||
| Purchase of treasury stock | | (6,784) | | (9,349) | | (7,586) | |||
| Dividends paid | | (15,569) | | (15,865) | | (15,976) | |||
| Net Cash (Used in) Provided by Financing Activities | | (22,353) | | (33,554) | | 7,750 | |||
| | | | | | | | | | |
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | (3,045) | | (15,651) | | 26,272 | |||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | 17,867 | | 33,518 | | 7,246 | |||
| CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 14,822 | | $ | 17,867 | | $ | 33,518 |
| | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION, | | | | ||||||
| Interest paid | | $ | 1,234 | | $ | 1,433 | | $ | 1,567 |
84
Table of Contents 19. 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 $150,028,000 at December 31, 2023 and $155,214,000 at December 31, 2022. There were no interest rate swaps originated in 2023 and one interest rate swap originated with a notional amount of $24,000,000 in 2022. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at December 31, 2023. The net impact of interest rate swaps on interest income on loans was an increase of $1,796,000 in 2023, compared to reductions of $342,000 in 2022 and $1,347,000 in 2021. In 2022, there was fee income on the interest swap originated of $290,000 included in other noninterest income in the consolidated statements of income.
The Corporation has entered into an RPA with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA In.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation purchased an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA Out.” The net impact on the consolidated statements of income from RPAs was an increase in other noninterest income of $18,000 in 2023 and a decrease in other noninterest income of $14,000 in 2022. The Corporation did not enter into any RPAs prior to 2022.
The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | At December 31, 2023 | | At December 31, 2022 | ||||||||||||||||||||
| | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives | ||||||||||||||||
| | Notional | | Fair | | Notional | | Fair | | Notional | | Fair | | Notional | | Fair | ||||||||
| | Amount | | Value (1) | | Amount | | Value (2) | | Amount | | Value (1) | | Amount | | Value (2) | ||||||||
| Interest rate swap agreements | $ | 75,014 | | $ | 2,783 | | $ | 75,014 | | $ | 2,783 | | $ | 77,607 | | $ | 3,638 | | $ | 77,607 | | $ | 3,638 |
| RPA Out | | 7,082 | | | 11 | | | 0 | | | 0 | | | 7,200 | | | 0 | | | 0 | | | 0 |
| RPA In | | 0 | | | 0 | | | 10,000 | | | 13 | | | 0 | | | 0 | | | 10,000 | | | 19 |
| (1) | Included in other assets in the consolidated balance sheets. |
|---|---|
| (2) | Included in accrued interest and other liabilities in the consolidated balance sheets. |
| --- | --- |
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 $1,360,000 in interest-bearing cash pledged as collateral against the Corporation’s liability related to the interest rate swaps at December 31, 2023.
85
Table of Contents 20. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB ASC 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. 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 through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets 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 becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.
At December 31, 2023 and 2022, assets measured at fair value and the valuation methods used are as follows:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 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: | | | | | ||||||||
| Loans individually evaluated for credit loss, net | | $ | 0 | | $ | 0 | | $ | 7,786 | | $ | 7,786 |
| Foreclosed assets held for sale | | 0 | | 0 | | 478 | | 478 | ||||
| Total nonrecurring fair value measurements, assets | | $ | 0 | | $ | 0 | | $ | 8,264 | | $ | 8,264 |
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Table of Contents
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2022 | ||||||||||
| | | 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 | | $ | 31,836 | | $ | 0 | | $ | 0 | | $ | 31,836 |
| Obligations of U.S. Government agencies | | | 0 | | | 23,430 | | | 0 | | | 23,430 |
| Bank holding company debt securities | | | 0 | | | 25,386 | | | 0 | | | 25,386 |
| Obligations of states and political subdivisions: | | | | | | | ||||||
| Tax-exempt | | 0 | | 132,623 | | 0 | | 132,623 | ||||
| Taxable | | 0 | | 56,812 | | 0 | | 56,812 | ||||
| Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: | | | | | ||||||||
| Residential pass-through securities | | 0 | | 99,941 | | 0 | | 99,941 | ||||
| Residential collateralized mortgage obligations | | 0 | | 40,296 | | 0 | | 40,296 | ||||
| Commercial mortgage-backed securities | | 0 | | 79,686 | | 0 | | 79,686 | ||||
| Private label commercial mortgage-backed securities | | 0 | | 8,023 | | 0 | | 8,023 | ||||
| Total available-for-sale debt securities | | 31,836 | | 466,197 | | 0 | | 498,033 | ||||
| Marketable equity security | | 859 | | 0 | | 0 | | 859 | ||||
| Servicing rights | | 0 | | 0 | | 2,653 | | 2,653 | ||||
| Interest rate swap agreements, assets | | | 0 | | | 3,638 | | | 0 | | | 3,638 |
| Total recurring fair value measurements, assets | | $ | 32,695 | | $ | 469,835 | | $ | 2,653 | | $ | 505,183 |
| | | | | | | | | | | | | |
| Recurring fair value measurements, liabilities, | | | | | | | | | | | | |
| RPA In | | $ | 0 | | $ | 19 | | $ | 0 | | $ | 19 |
| Interest rate swap agreements, liabilities | | | 0 | | | 3,638 | | | 0 | | | 3,638 |
| Total recurring fair value measurements, liabilities | | $ | 0 | | $ | 3,657 | | $ | 0 | | $ | 3,657 |
| | | | | | | | | | | | | |
| Nonrecurring fair value measurements, assets: | | | | | ||||||||
| Impaired loans, net | | $ | 0 | | $ | 0 | | $ | 3,007 | | $ | 3,007 |
| Foreclosed assets held for sale | | 0 | | 0 | | 275 | | 275 | ||||
| Total nonrecurring fair value measurements, assets | | $ | 0 | | $ | 0 | | $ | 3,282 | | $ | 3,282 |
87
Table of Contents 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. The following table shows quantitative information regarding significant techniques and inputs used at December 31, 2023 and 2022 for servicing rights assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | 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 | ||
| | | | | | Servicing fees | | | 0.25 | % | of loan balances | ||
| | | | | | | | | | 4.00 | % | of payments are late | |
| | | | | | | | | | 5.00 | % | late fees assessed | |
| | | | | | | | | | $ | 1.94 | | Miscellaneous fees per account per month |
| | | | | | Servicing costs | | $ | 6.00 | | Monthly servicing cost per account | ||
| | | | | | | | | | $ | 24.00 | | Additional monthly servicing cost per loan on loans more than 30 days delinquent |
| | | | | | | | | | 1.50 | % | of loans more than 30 days delinquent | |
| | | | | | | | | 3.00 | % | annual increase in servicing costs |
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | **** | Fair Value at | | |||||||||
| | | 12/31/2022 | | Valuation | | Unobservable | | | | | Method or Value As of | |
| Asset | | (In Thousands) | | Technique | | Input(s) | | | | | 12/31/2022 | |
| Servicing rights | | $ | 2,653 | Discounted cash flow | Discount rate | | 13.00 | % | Rate used through modeling period | |||
| | | | | | Loan prepayment speeds | | | 133.00 | % | Weighted-average PSA | ||
| | | | | | Servicing fees | | | 0.25 | % | of loan balances | ||
| | | | | | | | | | 4.00 | % | of payments are late | |
| | | | | | | | | | 5.00 | % | late fees assessed | |
| | | | | | | | | | $ | 1.94 | | Miscellaneous fees per account per month |
| | | | | | Servicing costs | | $ | 6.00 | | Monthly servicing cost per account | ||
| | | | | | | | | | $ | 24.00 | | Additional monthly servicing cost per loan on loans more than 30 days delinquent |
| | | | | | | | | | 1.50 | % | of loans more than 30 days delinquent | |
| | | | | | | | | 3.00 | % | annual increase in servicing costs |
The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans.
Following is a reconciliation of activity for Level 3 assets (servicing rights) measured at fair value on a recurring basis:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | | Years Ended December 31, | |||||||
| | **** | 2023 | | 2022 | **** | 2021 | |||
| Servicing rights balance, beginning of period | | $ | 2,653 | | $ | 2,329 | | $ | 1,689 |
| Originations of servicing rights | | 206 | | 198 | | 708 | |||
| Unrealized (loss) gain included in earnings | | (200) | | 126 | | (68) | |||
| Servicing rights balance, end of period | | $ | 2,659 | | $ | 2,653 | | $ | 2,329 |
88
Table of Contents Loans are individually evaluated for credit loss when they do not share similar risk characteristics as similar loans within its loan pool. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For individually evaluated loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
At December 31, 2023 and 2022, quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (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 | | 12/31/2023 | | 12/31/2023 | | 12/31/2023 | | Technique | | Inputs | | 12/31/2023 | | |||
| | | | | | | | | | | | | | | | | |
| Loans individually evaluated for credit loss: | | | | | | |||||||||||
| Commercial real estate - nonowner 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 | | 0%-93% (57) | % |
| 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 | | | |
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars In Thousands) | **** | | | | | Range (Weighted | ||||||||||
| | | | | Valuation | | | | | | Average) | ||||||
| | | Balance at | | Allowance at | | Fair Value at | | Valuation | | Unobservable | | Discount at | **** | |||
| Asset | | 12/31/2022 | | 12/31/2022 | | 12/31/2022 | | Technique | | Inputs | | 12/31/2022 | **** | |||
| | | | | | | | | | | | | | | | | |
| Impaired loans: | | | | | | |||||||||||
| Commercial: | | | | | | | | | ||||||||
| Commercial loans secured by real estate | | $ | 3,400 | | $ | 427 | | $ | 2,973 | Sales comparison | Discount to appraised value | | 25% (25) | % | ||
| Commercial and industrial | | | 60 | | | 26 | | | 34 | | Liquidation of assets | | Discount to appraised value | | 33% (33) | % |
| Total impaired loans | | $ | 3,460 | | $ | 453 | | $ | 3,007 | | | |||||
| Foreclosed assets held for sale - real estate: | | | | | | | ||||||||||
| Commercial real estate | | $ | 275 | | $ | 0 | | $ | 275 | Sales comparison | Discount to appraised value | | 50% (50) | % | ||
| Total foreclosed assets held for sale | | $ | 275 | | $ | 0 | | $ | 275 | | | |
Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation. 89
Table of Contents 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 | | December 31, 2023 | | December 31, 2022 | ||||||||
| | | Hierarchy | | Carrying | | Fair | | Carrying | | Fair | ||||
| | **** | Level | **** | Amount | **** | Value | **** | Amount | **** | Value | ||||
| Financial assets: | | | | | ||||||||||
| Cash and cash equivalents | Level 1 | | $ | 52,778 | | $ | 52,778 | | $ | 47,698 | | $ | 47,698 | |
| Certificates of deposit | Level 2 | | 4,100 | | 3,859 | | 7,350 | | 6,956 | |||||
| Restricted equity securities (included in other assets) | Level 2 | | 21,716 | | 21,716 | | 14,418 | | 14,418 | |||||
| Loans, net | Level 3 | | 1,828,931 | | 1,750,336 | | 1,723,425 | | 1,674,002 | |||||
| Accrued interest receivable | Level 2 | | 9,140 | | 9,140 | | 8,653 | | 8,653 | |||||
| | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | ||||||||||
| Deposits with no stated maturity | Level 2 | | 1,590,357 | | 1,590,357 | | 1,702,404 | | 1,702,404 | |||||
| Time deposits | Level 2 | | 424,449 | | 423,643 | | 295,189 | | 293,814 | |||||
| Short-term borrowings | Level 2 | | 33,874 | | 33,874 | | 80,062 | | 80,062 | |||||
| Long-term borrowings | Level 2 | | 138,337 | | 137,775 | | 62,347 | | 60,944 | |||||
| Senior debt | | Level 2 | | | 14,831 | | | 12,706 | | | 14,765 | | | 9,712 |
| Subordinated debt | | Level 2 | | | 24,717 | | | 22,750 | | | 24,607 | | | 16,186 |
| Accrued interest payable | Level 2 | | 1,525 | | 1,525 | | 461 | | 461 |
90
Table of Contents Report of Independent R egistered Public Accounting Firm
Stockholders and Board of Directors of
Citizens & Northern Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries (the "Corporation") as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As described in Notes 1 and 2 to the consolidated financial statements, the Corporation has changed its method of accounting for the recognition and measurement of the allowance for credit losses effective January 1, 2023 due to the adoption of ASC 326, Financial Instruments – Credit Losses.
Basis for Opinions
The Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation's consolidated financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the 91
Table of Contents maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Qualitative Factors
Critical Audit Matter Description
As disclosed in Note 1 and Note 7 to the Corporation’s consolidated financial statements, the allowance for credit losses as calculated under the current expected credit loss (CECL) methodology consists of two primary components: (1) an allowance established on loans with similar risk characteristics collectively evaluated for credit losses (collective basis), and (2) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individually evaluated).
The allowance for loans evaluated on a collective basis is comprised of the following components: (1) an allowance determined by the weighted-average remaining maturity method (WARM), (2) qualitative factors and (3) an economic forecast calculated using third party economic data. The allowance determined by the WARM method represents a calculated average annual net loss rate applied over the remaining life of the loans. The qualitative factors are applied to each loan pool evaluated on a collective basis and represent management’s adjustments for changes not reflected in historical loss rates or other quantitative components. Qualitative factors can include adjustments related to 1) the nature and volume of portfolio changes, including loan growth, 2) concentrations of credit based on loan type or industry, 3) the volume and severity of past due, nonaccrual or adversely classified loans, 4) trends in real estate or collateral values, 5) lending policies and procedures, 6) credit review function, 7) lending, credit and other relevant management experience and risk tolerance and 8) external factors and economic conditions not already captured. The qualitative factor component requires significant estimates and subjective assumptions which require a high degree of judgment relating to how those assumptions impact the estimated credit losses for the remaining average life of the loan portfolio. Changes in these assumptions could have a material effect on the Corporation’s financial results.
We identified auditing the qualitative factor component of the allowance for credit losses on loans evaluated on a collective basis as a critical audit matter as auditing the underlying qualitative factors requires significant auditor judgment as amounts determined by management involve a high degree of subjectivity.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included, among others:
| ● | Obtaining an understanding, evaluating the design, and testing the operating effectiveness of the Corporation’s internal controls over the allowance for credit losses process, including controls addressing: |
|---|
92
Table of Contents
| ● | Management’s review of qualitative factors |
|---|---|
| ● | Review of the relevance and reliability of data used to determine the estimates |
| --- | --- |
| ● | Information technology general controls and applications |
| --- | --- |
| ● | Substantively testing management’s process including evaluating their judgments and assumptions for developing the allowance for credit losses on loans on a collective basis. This included: |
|---|
| ● | Evaluating the appropriateness of the Corporation’s methodology and accounting policies involved in the application of its CECL methodology |
|---|---|
| ● | Evaluating the reasonableness of management’s judgments related to qualitative factor adjustments to determine if they are calculated in accordance with management’s policies and consistently applied |
| --- | --- |
| ● | Testing the completeness, accuracy, relevance and reliability of the underlying data used to estimate the qualitative factors |
| --- | --- |
| ● | Testing the mathematical accuracy of the calculation, including the qualitative factor component |
| --- | --- |
/s/ Baker Tilly US, LLP
We have served as the Corporation’s auditor since 1979.
Pittsburgh, Pennsylvania March 11, 2024
93
Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE 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.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Corporation’s management is responsible for establishing and maintaining effective internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Corporation’s system of internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Corporation’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Corporation’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of the Corporation’s management and directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
There were no changes in the Corporation’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2023, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on that assessment, we concluded that, as of December 31, 2023, the Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).
Baker Tilly US, LLP, the independent registered public accounting firm that audited the Corporation’s consolidated financial statements, has issued an audit report on the Corporation’s internal control over financial reporting as of December 31, 2023. That report appears immediately prior to this report.
| March 11, 2024 | By: | /s/ J. Bradley Scovill |
|---|---|---|
| Date | President and Chief Executive Officer | |
| March 11, 2024 | By: | /s/ Mark A. Hughes |
| Date | Treasurer and Chief Financial Officer |
94
Table of Contents ITEM 9B. OTHER INFORMATION
During the three months ended December 31, 2023, no director or officer of the Corporation adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement”, as each term is defined in Item 408(a) of Regulation S-K.
There was no information the Corporation was required to disclose in a report on Form 8-K during the fourth quarter 2023 that was not disclosed.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning Directors and Executive Officers is incorporated herein by reference to disclosure under the captions “Proposal 1 – Election of Directors,” “Executive Officers,” “Information Concerning Security Ownership” and “Meetings and Committees of the Board of Directors” of the Corporation’s proxy statement dated March 15, 2024 for the annual meeting of stockholders to be held on April 25, 2024.
The Corporation’s Board of Directors has adopted a Code of Ethics, available on the Corporation’s web site at www.cnbankpa.com for the Corporation’s employees, officers and directors. (The provisions of the Code of Ethics are also included in the Corporation’s employee handbook.)
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by reference to disclosure under the captions “Compensation Discussion and Analysis” and “Executive Compensation Tables” of the Corporation’s proxy statement dated March 15, 2024 for the annual meeting of stockholders to be held on April 25, 2024.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to disclosure under the caption “Beneficial Ownership of Executive Officers and Directors” of the Corporation’s proxy statement dated March 15, 2024 for the annual meeting of stockholders to be held on April 25, 2024.
“Equity Compensation Plan Information” as required by Item 201(d) of Regulation S-K is incorporated by reference herein from Item 5 (Market for Registrant’s Common Equity and Related Stockholder Matters) of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning loans and deposit balances with Directors and Executive Officers is provided in Note 15 to the Consolidated Financial Statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K. Additional information, including information concerning director independence, is incorporated herein by reference to disclosure appearing under the captions “Director Independence” and “Related Person Transactions and Policies” of the Corporation’s proxy statement dated March 15, 2024 for the annual meeting of stockholders to be held on April 25, 2024.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning services provided by the Corporation’s independent auditor Baker Tilly US, LLP, the audit committee’s pre-approval policies and procedures for such services, and fees paid by the Corporation to that firm, is incorporated herein by reference to disclosure under the caption “Fees of Independent Public Accountants” of the Corporation’s proxy statement dated March 15, 2024 for the annual meeting of stockholders to be held on April 25, 2024.
95
Table of Contents PART IV
ITEM 15. EX HIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | (1). The following consolidated financial statements are set forth in Part II, Item 8: |
|---|
| Page | |
|---|---|
| Report of Independent Registered Public Accounting Firm (PCAOB ID: 23) | 91-93 |
| Financial Statements: | |
| Consolidated Balance Sheets - December 31, 2023 and 2022 | 42 |
| Consolidated Statements of Income - Years Ended December 31, 2023, 2022 and 2021 | 43 |
| Consolidated Statements of Comprehensive Income (Loss) - Years Ended December 31, 2023, 2022 and 2021 | 44 |
| Consolidated Statements of Changes in Stockholders’ Equity - Years Ended December 31, 2023, 2022 and 2021 | 45 |
| Consolidated Statements of Cash Flows - Years Ended December 31, 2023, 2022 and 2021 | 46 |
| Notes to Consolidated Financial Statements | 47-90 |
| (a) | (2) Financial statement schedules are not applicable or included in the financial statements or related notes. |
|---|
| 2. Plan of acquisition, reorganization, arrangement, liquidation or succession | Not applicable | ||
|---|---|---|---|
| 3.1 Articles of Incorporation | Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 10-Q filed May 6, 2022 | ||
| 3.2 By-laws | Incorporated by reference to Exhibit 3.1 of the Corporation's Form 8-K filed February 18, 2022 | ||
| 4. Instruments defining the rights of securities holders, including Indentures: | |||
| | 4.1 Indenture, dated May 19, 2021 between Citizens & Northern Corporation and UMB Bank, National Association, as trustee | | Incorporated by reference to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021 |
| | | ||
| | 4.2 Form of Subordinated Note | | Incorporated by reference to Exhibit A-2 to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021 |
| | | ||
| | 4.3 Form of Senior Note | | Incorporated by reference to Exhibit 4.3 of the Corporation’s Form 8-K filed May 19, 2021 |
| | | ||
| 4.4 Description of registrant’s securities | Incorporated by reference to Exhibit 4.(vi) of the Corporation’s Form 10-K filed February 20, 2020 | ||
| 9. Voting trust agreement | Not applicable | ||
| 10. Material contracts: | |||
| | | | |
| 10.1 Form of Time-Based Restricted Stock agreement dated January 31, 2024 between the Corporation and Executive Officers pursuant to the Citizens & Northern Corporation 2023 Equity Incentive Plan | Filed herewith |
96
| Table of Contents | 10.17 Form of Indemnification Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins | Incorporated by reference to Exhibit 10.6 filed with Corporation’s Form 10-K on February 15, 2018 | ||
|---|---|---|---|---|
| 10.18 Form of Indemnification Agreement dated February 11, 2015 between the Corporation and Stan R. Dunsmore | Incorporated by reference to Exhibit 10.9 filed with Corporation’s Form 10-K on February 26, 2015 | |||
| 10.19 Form of Indemnification Agreement dated January 19, 2011 between the Corporation and John M. Reber | Incorporated by reference to Exhibit 10.8 filed with Corporation’s Form 10-K on March 1, 2011 | |||
| 10.20 Form of Indemnification Agreements dated May 2004 between the Corporation and the Directors and certain officers | Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-K on March 14, 2005 | |||
| 10.21 Form of Indemnification Agreement dated February 16, 2021 between the Corporation and Blair T. Rush | Incorporated by reference to Exhibit 10.23 filed with Corporation’s Form 10-K on March 5, 2021 | |||
| 10.22 Change in Control Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins | Incorporated by reference to Exhibit 10.7 filed with Corporation’s Form 10-K on February 15, 2018 | |||
| 10.23 Change in Control Agreement dated March 17, 2015 between the Corporation and Stan R. Dunsmore | Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on May 8, 2015 | |||
| 10.24 Change in Control Agreement dated January 20, 2005 between the Corporation and John M. Reber | Incorporated by reference to Exhibit 10.18 filed with Corporation’s Form 10-K on February 18, 2016 | |||
| 10.25 Change in Control Agreement dated December 31, 2003 between the Corporation and Thomas L. Rudy, Jr. | Incorporated by reference to Exhibit 10.2 filed with the Corporation’s Form 10-K on March 14, 2005 | |||
| 10.26 Fifth Amendment to Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.1 filed with Form 8-K on December 21, 2018 | |||
| | | | ||
| | 10.27 Fourth Amendment to Citizens & Northern Corporation Stock Incentive Plan and Annual Incentive Plan | | Incorporated by reference to Exhibit 10.6 filed with Corporation’s Form 8-K on September 19, 2013 | |
| 10.28 Third Amendment to Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit A to the Corporation’s proxy statement dated March 18, 2008 for the annual meeting of stockholders held on April 15, 2008 | |||
| 10.29 Second Amendment to Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.5 filed with the Corporation’s Form 10-K on March 10, 2004 | |||
| 10.30 First Amendment to Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.6 filed with the Corporation’s Form 10-K on March 10, 2004 | |||
| 10.31 Citizens & Northern Corporation Stock Incentive Plan | Incorporated by reference to Exhibit 10.7 filed with the Corporation’s Form 10-K on March 10, 2004 | 98 |
| Table of Contents | 10.32 Second Amendment to Citizens & Northern Independent Directors Stock Incentive Plan | Incorporated by reference to Exhibit 10.2 filed with Form 8-K on December 21, 2018 | ||
|---|---|---|---|---|
| 10.33 First Amendment to Citizens & Northern Corporation Independent Directors Stock Incentive Plan | Incorporated by reference to Exhibit B to the Corporation’s proxy statement dated March 18, 2008 for the annual meeting of stockholders held on April 15, 2008 | |||
| 10.34 Citizens & Northern Corporation Independent Directors Stock Incentive Plan | Incorporated by reference to Exhibit A to the Corporation’s proxy statement dated March 19, 2001 for the annual meeting of stockholders held on April 17, 2001. | |||
| | | | ||
| | 10.35 Citizens & Northern Corporation 2023 Equity Incentive Plan | | Incorporated by reference to Exhibit A to the Corporation’s proxy statement dated March 10, 2023 for the annual meeting of stockholders held on April 20, 2023 | |
| 10.36 Citizens & Northern Corporation Supplemental Executive Retirement Plan (as amended and restated) | Incorporated by reference to Exhibit 10.21 filed with the Corporation’s Form 10-K on March 6, 2009 | |||
| 10.37 Form of Indemnification Agreements dated May 24, 2018 between the Corporation and Directors Bobbi J. Kilmer, Terry L. Lehman, Frank G. Pellegrino and Aaron K. Singer | Incorporated by reference to Exhibit 10.1 filed with the Corporation’s Form 10-Q filed August 6, 2018 | |||
| 10.38 Form of Indemnification Agreement dated July 16, 2020 between the Corporation and Stephen M. Dorwart | Incorporated by reference to Exhibit 10.4 filed with the Corporation's Form 10-Q on August 6, 2020 | |||
| 10.39 Form of Indemnification Agreement dated July 16, 2020 between the Corporation and Robert G. Loughery | Incorporated by reference to Exhibit 10.5 filed with the Corporation's Form 10-Q on August 6, 2020 | |||
| | 10.40 Form of Indemnification Agreement dated April 27, 2021 between the Corporation and Helen S. Santiago | | Incorporated by reference to Exhibit 10.2 filed with the Corporation’s Form 10-Q on August 6, 2021 | |
| | | |||
| | 10.41 Form of Indemnification Agreement dated July 12, 2021 between the Corporation and Kate Shattuck | | Incorporated by reference to Exhibit 10.1 filed with the Corporation’s Form 10-Q on November 8, 2021 | |
| | | |||
| 11. Statement re: computation of per share earnings | Information concerning the computation of earnings per share is provided in Note 3 to the Consolidated Financial Statements, which is included in Part II, Item 8 of Form 10-K | |||
| 12. Statements re: computation of ratios | Not applicable | |||
| 13. Annual report to security holders, Form 10-Q or quarterly report to security holders | Not applicable | |||
| 14. Code of ethics | The Code of Ethics is available through the Corporation’s website at www.cnbankpa.com. To access the Code of Ethics, click on “About,” “Investor Relations,” “Corporate Governance Policies,” and “Code of Ethics.” | |||
| 16. Letter re: change in certifying accountant | Not applicable | 99 |
Table of Contents
| 18. Letter re: change in accounting principles | Not applicable | ||
|---|---|---|---|
| 21. Subsidiaries of the registrant | Filed herewith | ||
| 22. Published report regarding matters submitted to vote of security holders | Not applicable | ||
| 23. Consent of Independent Registered Public Accounting Firm | Filed herewith | ||
| 24. Power of attorney | Not applicable | ||
| 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 | ||
| 33. Report on assessment of compliance with servicing criteria for asset-backed securities | Not applicable | ||
| 34. Attestation report on assessment of compliance with servicing criteria for asset-backed securities | Not applicable | ||
| 35. Service compliance statement | Not applicable | ||
| | | | |
| | 97 Executive Compensation Recoupment Policy | | Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 8-K on September 19, 2013 |
| | | | |
| 99. Additional exhibits: | |||
| 99.1 Additional information mailed or made available online to shareholders with proxy statement and Form 10-K on March 11, 2024 | 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. Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101) | Filed herewith |
100
Table of Contents SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
| By: | /s/ J. Bradley Scovill |
|---|---|
| President and Chief Executive Officer | |
| Date: March 11, 2024 | |
| By: | /s/ Mark A. Hughes |
| Treasurer and Principal Accounting Officer | |
| Date: March 11, 2024 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
BOARD OF DIRECTORS
| /s/ | Stephen M. Dorwart | /s/ | Frank G. Pellegrino |
|---|---|---|---|
| Stephen M. Dorwart | Frank G. Pellegrino | ||
| Date: March 11, 2024 | Date: March 11, 2024 | ||
| /s/ | Robert G. Loughery | /s/ | Helen S. Santiago |
| Robert G. Loughery | Helen S. Santiago | ||
| Date: March 11, 2024 | Date: March 11, 2024 | ||
| /s/ | Susan E. Hartley | /s/ | J. Bradley Scovill |
| Susan E. Hartley | J. Bradley Scovill | ||
| Date: March 11, 2024 | Date: March 11, 2024 | ||
| /s/ | Bobbi J. Kilmer | /s/ | Kate Shattuck |
| Bobbi J. Kilmer | Kate Shattuck | ||
| Date: March 11, 2024 | Date: March 11, 2024 | ||
| /s/ | Leo F. Lambert | /s/ | Aaron K. Singer |
| Leo F. Lambert | Aaron K. Singer | ||
| Date: March 11, 2024 | Date: March 11, 2024 | ||
| /s/ | Terry L. Lehman | | |
| Terry L. Lehman | | ||
| Date: March 11, 2024 | | ||
| | | | |
101
INCENTIVE STOCK OPTION AGREEMENT
EXHIBIT 10.1
CITIZENS & NORTHERN CORPORATION
2023 EQUITY INCENTIVE PLAN
TIME-BASED RESTRICTED STOCK AGREEMENT - EMPLOYEES
RESTRICTED STOCK AGREEMENT dated as of the 31st day of January 2024, by and between Citizens & Northern Corporation (the "Corporation") and _____ **_____ _______________________**an employee of the Corporation or of a subsidiary (the "Recipient").
Pursuant to the Citizens & Northern Corporation 2023 Equity Incentive Plan (the "Plan"), the Compensation Committee of the Board of Directors (the "Committee") has determined that the Recipient is to be granted, on the terms and conditions set forth herein, **_________**Restricted Shares of the Corporation's common stock (“Stock”) and hereby grants such Restricted Shares.
1.Number of Shares and Price. Restricted Stock shall consist of shares of Stock that will be acquired by and issued to the Recipient at a designated time approved by the Committee, for no purchase price, and under and subject to such transfer, forfeiture and other restrictions, conditions or terms as shall be determined by the Committee, including but not limited to prohibitions against transfer and substantial risks of forfeiture within the meaning of Section 83 of the Internal Revenue Code of 1986 as amended (“Code”).
2.Rights of Recipient. Except as otherwise provided in the Plan or the Restricted Stock Agreement, the Recipient shall have all of the rights of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends thereon provided,however, that dividends payable with respect to Restricted Stock Awards (whether paid in cash or shares of Stock) shall be subject to the same vesting conditions applicable to the Restricted Stock and shall, if vested, be delivered or paid at the same time as the restrictions on the Restricted Stock to which they relate lapse. Also, during the time period of any restrictions, conditions or terms applicable to such Restricted Stock, the shares thereof and the right to vote the same and receive dividends thereon shall not be sold, assigned, transferred, exchanged, pledged, hypothecated, encumbered or otherwise disposed of except as permitted by the Plan or the Restricted Stock Agreement.
3.Holding of Restricted Shares. Each certificate for shares of Restricted Stock shall be deposited with the Secretary of the Corporation, or the office thereof, and shall bear a legend in substantially the following form and content:
This Certificate and the shares of Stock hereby represented are subject to the provisions of the Corporation’s 2023 Equity Incentive Plan and a certain agreement entered into between the owner and the Corporation pursuant to said Plan. The release of the Certificate and the shares of Stock hereby represented from such provision shall occur only as provided by said Plan and Agreement, a copy of which are on file in the office of the Secretary of the Corporation.
Upon the lapse or satisfaction of the restrictions, conditions and terms applicable to such Restricted Stock, a certificate for the shares of Stock without such legend shall be issued to the Recipient.
4.Release and Lapse of Restricted Shares. The release of restrictions or expiration of restricted shares awarded under this agreement shall occur over a period of three years. **** One-third of the total shares will be distributed on the last business day in January of each of the three years immediately following the award. The shares released may be in certificate form or may be directed to be held in a custodial account designated by the Recipient.
5.Effect of Termination of Service. For purposes of this Section 5, the terms “Termination of Service” and “Disability” are defined in Article 8 of the Plan. Upon Termination of Service for reason of Disability or death, all restricted shares awarded under this agreement shall vest at the date of Termination of Service. Upon a Recipient’s Termination of Service for any reason other than due to Disability or death, any restricted shares awarded under this agreement that have not vested as of the date of Termination of Service shall expire and be forfeited. Notwithstanding the provisions of this Section 5, the effect of a Change in Control on the vesting of the restricted shares awarded under this agreement is set forth in Section 7.
6.Non- Transferability of Restricted Stock. The Restricted Stock and this Restricted Stock Agreement shall not be transferable.
| 7. | Change in Control. If a Change in Control, as defined in Section 4.2 of the Plan occurs, all shares of Restricted Stock shall become fully vested immediately. |
|---|---|
| 8. | Notices. Any notice required or permitted under this Restricted Stock Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Recipient either at his or her address as reflected in the Corporation’s records as the Recipient’s last known address. |
| --- | --- |
| 9. | Failure to Enforce Not a Waiver. The failure of the Corporation to enforce at any time any provision of this Restricted Stock Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof. |
| --- | --- |
| 10. | Governing Law. This Restricted Stock Agreement shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania. |
| --- | --- |
| 11. | Incorporation of Plan. The Plan is hereby incorporated by reference and made a part hereof, and the Restricted Stock and this Restricted Stock Agreement are subject to all terms and conditions of the Plan. |
| --- | --- |
12.Amendments. This Restricted Stock Agreement may be amended or modified at any time by an instrument in writing signed by the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Restricted Stock Agreement on the day and year first above written.
By
J. Bradley Scovill – President & CEO
The undersigned hereby accepts and agrees to all the terms and provisions of the foregoing Restricted Stock Agreement and to all the terms and provisions of the Citizens & Northern Corporation 2023 Equity Incentive Plan herein incorporated by reference.
Recipient
EXHIBIT 10.2
CITIZENS & NORTHERN CORPORATION
2023 EQUITY INCENTIVE PLAN
PERFORMANCE-BASED RESTRICTED STOCK AGREEMENT
RESTRICTED STOCK AGREEMENT dated as of the 20th day of February 2024, by and between Citizens & Northern Corporation (the "Corporation") and ________ an employee of the Corporation or of a subsidiary (the "Recipient").
Pursuant to the Citizens & Northern Corporation 2023 Equity Incentive Plan (the "Plan"), as amended, the Compensation Committee of the Board of Directors (the "Committee") has determined that the Recipient is to be granted, on the terms and conditions set forth herein, ________ Restricted Shares of the Corporation's common stock (“Stock”) and hereby grants such Restricted Shares.
1.Number of Shares and Price. Restricted Stock shall consist of shares of Stock that will be acquired by and issued to the Recipient at a designated time approved by the Committee, for no purchase price, and under and subject to such transfer, forfeiture and other restrictions, conditions or terms as shall be determined by the Committee, including but not limited to prohibitions against transfer and substantial risks of forfeiture within the meaning of Section 83 of the Internal Revenue Code of 1986, as amended ("Code”).
2.Rights of Recipient. Except as otherwise provided in the Plan or the Restricted Stock Agreement, the Recipient shall have all of the rights of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends thereon provided,however, that dividends payable with respect to Restricted Stock Awards (whether paid in cash or shares of Stock) shall be subject to the same vesting conditions applicable to the Restricted Stock and shall, if vested, be delivered or paid at the same time as the restrictions on the Restricted Stock to which they relate lapse. Also, during the time period of any restrictions, conditions or terms applicable to such Restricted Stock, the shares thereof and the right to vote the same and receive dividends thereon shall not be sold, assigned, transferred, exchanged, pledged, hypothecated, encumbered or otherwise disposed of except as permitted by the Plan or the Restricted Stock Agreement.
| 3. | Holding of Restricted Shares. Each certificate for shares of Restricted Stock shall be deposited with the Secretary of the Corporation, or the office thereof, and shall bear a legend in substantially the following form and content: |
|---|
This Certificate and the shares of Stock hereby represented are subject to the provisions of the Corporation’s 2023 Equity Incentive Plan and a certain agreement entered into between the owner and the Corporation pursuant to said Plan. The release of the Certificate and the shares of Stock hereby represented from such provision shall occur only as provided by said Plan and Agreement, a copy of which are on file in the office of the Secretary of the Corporation.
Upon the lapse or satisfaction of the restrictions, conditions and terms applicable to such Restricted Stock, a certificate for the shares of Stock without such legend shall be issued to the Recipient.
4.Release and Lapse of Restricted Shares. The release of restrictions or expiration of restricted shares awarded under this agreement shall occur over a period of three years. **** On each anniversary date of this award, up to one-third of the total shares will be distributed based on the Corporation’s attainment of earnings-based performance standards, based on the following criteria:
●Release of 50% (one-sixth of the total shares awarded) each year will be based on the Corporation achieving a percent ranking of at least 35% of the Pre-tax, Pre-Provision Net Revenue Minus Net Charge-
offs as a Percentage of Average Equity (PPNR/Average Equity) within a defined peer group of bank holding companies and thrifts for the defined measurement period as determined by the Committee.
●Release of 50% (one-sixth of the total shares awarded) each year will be based on the Corporation achieving a percent ranking of at least 65% of the Pre-tax, Pre-Provision Net Revenue Minus Net Charge-offs as a Percentage of Average Assets (PPNR/Average Assets) within a defined peer group of bank holding companies and thrifts for the defined measurement period as determined by the Committee.
For the purpose of determining PPNR/Average Assets and PPNR/Average Equity, the provision for credit losses will be excluded, and net charge-offs or recoveries of loans receivable and off-balance sheet exposures will be included, from the Corporation’s and the peer group’s earnings results. Also, for the purpose of determining PPNR/Average Assets and PPNR/Average Equity, nonrecurring items, as determined by the Committee (to include nonrecurring acquisition expenses), and securities gains and losses, will be excluded from the Corporation’s and the peer group’s earnings results. The peer group shall include selected publicly traded Commercial Banks and Thrifts within a geographic region reflective of Citizens & Northern’s market area and with total assets of approximately one-half to 2 times those of Citizens & Northern.
The Committee reserves the right to change the composition of the peer group, as well as the method of evaluating the Corporation’s earnings performance as compared to the peer group, based on mergers or acquisitions involving members of the peer group, changes in size of the Corporation or members of the peer group, or other factors deemed appropriate by the Committee.
All Restricted Shares not distributed due to the Corporation failing to achieve the defined earnings-based performance standards shall expire and revert back to the Corporation as of the anniversary date on which such determinations are made. No partial shares may be released, thus an amount equal to the next whole share amount will be released subject to the specified performance criteria at each anniversary. The shares released may be in certificate form or may be directed to be held in a custodial account designated by the Recipient.
| 5. | Terms of Forfeiture. If a Recipient’s employment with the Corporation, or a subsidiary, ceases for any reason prior to the lapse of the restrictions, conditions or terms applicable to his or her Restricted Stock, all of the Recipient’s Restricted Stock still subject to unexpired restrictions, conditions or terms shall be forfeited absolutely by the Recipient to the Corporation without payment or delivery of any consideration or other thing of value by the Corporation or its affiliates, and thereupon and thereafter neither the Recipient nor his or her heirs, personal or legal representatives, successors, assigns, beneficiaries, or any claimants under the Recipient’s Last Will or laws of descent and distribution, shall have any rights or claims to or interests in the forfeited Restricted Stock or any certificates representing shares thereof, or claims against the Corporation or its affiliates with respect thereto. Except in the case of disability, employment ceases with the Corporation, or its Subsidiary, on the first to occur of the day the Recipient’s employment is terminated with or without cause, or on their date of death. In the event of disability, the Recipient’s employment is considered terminated on the date for which the Recipient receives the final payment under the Corporation’s, or Subsidiary’s, short-term disability program. |
|---|---|
| 6. | Non- Transferability of Restricted Stock. The Restricted Stock and this Restricted Stock Agreement shall not be transferable. |
| --- | --- |
| 7. | Change in Control. If a change in control as defined in Section 4.2 of the Plan occurs, all shares of Restricted Stock will vest based on the greater of the target level of performance or actual annualized performance measured as of the most recent completed fiscal quarter. |
| --- | --- |
| 8. | Notices. Any notice required or permitted under this Restricted Stock Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Recipient either at his or her last known address on file with the Corporation. |
| --- | --- |
| 9. | Failure to Enforce Not a Waiver. The failure of the Corporation to enforce at any time any provision of this Restricted Stock Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof. |
| --- | --- |
| 10. | Governing Law. This Restricted Stock Agreement shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania. |
|---|---|
| 11. | Incorporation of Plan. The Plan is hereby incorporated by reference and made a part hereof, and the Restricted Stock and this Restricted Stock Agreement are subject to all terms and conditions of the Plan. |
| --- | --- |
| 12. | Amendments. This Restricted Stock Agreement may be amended or modified at any time by an instrument in writing signed by the parties hereto. |
| --- | --- |
IN WITNESS WHEREOF, the parties have executed this Restricted Stock Agreement on the day and year first above written.
By
J. Bradley Scovill - President & CEO
The undersigned hereby accepts and agrees to all the terms and provisions of the foregoing Restricted Stock Agreement and to all the terms and provisions of the Citizens & Northern Corporation 2023 Equity Incentive Plan herein incorporated by reference.
Recipient
INCENTIVE STOCK OPTION AGREEMENT
EXHIBIT 10.3
CITIZENS & NORTHERN CORPORATION
2023 EQUITY INCENTIVE PLAN
TIME-BASED RESTRICTED STOCK AGREEMENT – INDEPENDENT DIRECTORS
RESTRICTED STOCK AGREEMENT dated as of the 31st day of January 2024, by and between Citizens & Northern Corporation (the "Corporation") and _____ _____ ________________________________________ a member of the Board of Directors of the Corporation or of a subsidiary (the "Recipient").
Pursuant to the Citizens & Northern Corporation 2023 Equity Incentive Plan (the "Plan"), the Compensation Committee of the Board of Directors (the "Committee") has determined that the Recipient is to be granted, on the terms and conditions set forth herein, 1,000 Restricted Shares of the Corporation's common stock (“Stock”) and hereby grants such Restricted Shares.
1.Number of Shares and Price. Restricted Stock shall consist of shares of Stock that will be acquired by and issued to the Recipient at a designated time approved by the Committee, for no purchase price, and under and subject to such transfer, forfeiture and other restrictions, conditions or terms as shall be determined by the Committee, including but not limited to prohibitions against transfer and substantial risks of forfeiture within the meaning of Section 83 of the Internal Revenue Code of 1986 as amended (“Code”).
2.Rights of Recipient. Except as otherwise provided in the Plan or the Restricted Stock Agreement, the Recipient shall have all of the rights of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends thereon provided,however, that dividends payable with respect to Restricted Stock Awards (whether paid in cash or shares of Stock) shall be subject to the same vesting conditions applicable to the Restricted Stock and shall, if vested, be delivered or paid at the same time as the restrictions on the Restricted Stock to which they relate lapse. Also, during the time period of any restrictions, conditions or terms applicable to such Restricted Stock, the shares thereof and the right to vote the same and receive dividends thereon shall not be sold, assigned, transferred, exchanged, pledged, hypothecated, encumbered or otherwise disposed of except as permitted by the Plan or the Restricted Stock Agreement.
3.Holding of Restricted Shares. Each certificate for shares of Restricted Stock shall be deposited with the Secretary of the Corporation, or the office thereof, and shall bear a legend in substantially the following form and content:
This Certificate and the shares of Stock hereby represented are subject to the provisions of the Corporation’s 2023 Equity Incentive Plan and a certain agreement entered into between the owner and the Corporation pursuant to said Plan. The release of the Certificate and the shares of Stock hereby represented from such provision shall occur only as provided by said Plan and Agreement, a copy of which are on file in the office of the Secretary of the Corporation.
Upon the lapse or satisfaction of the restrictions, conditions and terms applicable to such Restricted Stock, a certificate for the shares of Stock without such legend shall be issued to the Recipient.
4.Release and Lapse of Restricted Shares. The release of restrictions or expiration of restricted shares awarded under this agreement shall occur over a period of one year. **** All of the total shares will be distributed on the last business day in January 2025. The shares released may be in certificate form or may be directed to be held in a custodial account designated by the Recipient.
5.Effect of Termination of Service. For purposes of this Section 5, the terms “Termination of Service,” “Disability” and “Mandatory Retirement” are defined in Article 8 of the Plan. Upon a Recipient’s Termination of Service, for any reason other than due to Disability, death or Mandatory Retirement, any restricted shares awarded under this agreement that have not vested as of the date of Termination of Service shall expire and be forfeited. Upon Termination of Service for reason of Disability or death, all restricted shares awarded under this agreement shall vest at the date of Termination of Service. In the event of Termination of Service due to Mandatory Retirement, any Restricted Stock Award that has not vested as of the date of Termination of Service shall vest, pro rata, by multiplying the number of outstanding, unvested shares by a fraction, the numerator of which is the number of days the Recipient was in Service since the date the unvested awards were granted and the denominator of which is 365. Notwithstanding the provisions of this Section 5, the effect of a Change in Control on the vesting of the restricted shares awarded under this agreement is set forth in Section 7.
| 6. | Non- Transferability of Restricted Stock. The Restricted Stock and this Restricted Stock Agreement shall not be transferable. |
|---|---|
| 7. | Change in Control. If a Change in Control, as defined in Section 4.2 of the Plan occurs, all shares of Restricted Stock shall become fully vested immediately. |
| --- | --- |
| 8. | Notices. Any notice required or permitted under this Restricted Stock Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Recipient either at his or her address as reflected in the Corporation’s records as the Recipient’s last known address. |
| --- | --- |
| 9. | Failure to Enforce Not a Waiver. The failure of the Corporation to enforce at any time any provision of this Restricted Stock Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof. |
| --- | --- |
| 10. | Governing Law. This Restricted Stock Agreement shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania. |
| --- | --- |
| 11. | Incorporation of Plan. The Plan is hereby incorporated by reference and made a part hereof, and the Restricted Stock and this Restricted Stock Agreement are subject to all terms and conditions of the Plan. |
| --- | --- |
12.Amendments. This Restricted Stock Agreement may be amended or modified at any time by an instrument in writing signed by the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Restricted Stock Agreement on the day and year first above written.
By
J. Bradley Scovill – President & CEO
The undersigned hereby accepts and agrees to all the terms and provisions of the foregoing Restricted Stock Agreement and to all the terms and provisions of the Citizens & Northern Corporation 2023 Equity Incentive Plan herein incorporated by reference.
Recipient
CITIZENS & NORTHERN BANK
EXHIBIT 10.4
2024 Annual Performance Incentive Award Plan (*)
Part I: Plan Administration
Section 1: Purpose of the Plan
The purpose of the Performance Incentive Award Plan ("the Plan") is to provide variable compensation to those employees in key positions who attain and sustain consistently high levels of performance by meeting and exceeding goals and expectations that contribute to the success, profitability, and return to the shareholders of Citizens & Northern Corporation and affiliated Employer(s). The Plan is designed to support operational objectives and financial goals as defined by the long-range and short-range strategic and financial Plans. Additionally, the Plan is designed to provide a component of the management compensation package essential to retaining and attracting quality employees to key positions that contribute significantly to the bank’s financial performance. A key position for the purpose of this plan is a job role that is typically, within the community banking and financial services industries, eligible for performance-based incentive compensation.
Section 2: General Description
There are three components of the Plan: (1) corporate performance; (2) unit/functional performance; and (3) individual performance. The corporate performance component will be subject to the Corporation’s attainment of financial goals relative to a defined peer group. To receive the corporate bonus payout, the company must achieve at least the threshold level.
The unit/functional component is based on the attainment of pre-established goals by the participant and often a team of participants in a given business unit, e.g., retail branch system, commercial lending team. Depending upon the participant’s function, Key Performance Indicators for the participant’s region, or the corporation as a whole, also may be evaluated to determine the unit/functional bonus. To receive the unit/functional bonus payout, the participant must achieve at least the threshold level.
Further, the individual performance component will be subject to an evaluation of the participants’ overall contributions to the “team”. To earn the individual component, the participant must attain at least the threshold performance level.
Even after attaining at least the Threshold performance, the plan permits the participant’s supervisor or the executive officer for the participant’s area to recommend no bonus payout, or a reduced amount (Corporate, Unit/Functional or Individual) if aspects of the participant’s performance are deemed unsatisfactory.
(*) Employees who are actively engaged in interviewing residential real estate mortgage applicants, processing the applications and closing the loans are excluded from this plan. The Corporation has a separate incentive award plan for such employees.
The Plan protects shareholders' interests by requiring that the goals established will enhance bottom line performance while not encouraging excessive risk-taking and that a minimum level of performance is achieved before any incentive award can be made. At the same time the Plan provides management with a means to retain and attract top performers who increase the organization’s financial performance by attaining their performance goals. The Plan requires that management perform an annual assessment and establishment of goals and provides a performance review and measurement system. The Plan requires management to consider non-financial goals designed to improve operational and risk management effectiveness, as well as financial goals, as appropriate for each participant’s position. The Plan permits future inclusion of additional positions during a Plan year, if the need arises.
The calculation of the bonus to be distributed to the Plan participants, and the incentive formulas, are constructed to provide awards consistent with strong corporate financial performance and the participant’s exceptional performance in his/her unit/functional area. The incentive formulas ensure a level of incentive award that is competitive with comparable positions and job levels in similar financial institutions, thus enabling Citizens & Northern to attract, retain, and motivate high-performing personnel and support continued growth and profitability. The determination of the bonus payable is described in Part II of this Plan.
The Plan is established to augment regular salary and benefit programs already in existence. The Incentive Plan is not meant to be a substitute for salary increases but supplemental to salary and as stated earlier, a reward for “exceptional" performance.
The Plan has been developed to recognize that the amount of incentive bonus award attainable by key executives should vary depending upon the executive’s position with the company and the competitive levels of incentive bonus for those positions within the banking and financial service industry. Thus threshold, target and maximum Incentive Opportunities are established for each position.
Section 3: Other Payment Conditions
Termination for Reasons Other Than Death, Permanent Disability or Retirement – In the event of termination of employment for reasons other than death, permanent disability or retirement, the participant, at the discretion of the committee, may forfeit all unpaid incentive awards.
The Compensation Committee of the Board, and management, reserve the right to deny or modify an award to any participant. Such action may be due to, but not limited to, the failure of the participant to properly perform during the Plan year. Economic or other circumstances and considerations may dictate that incentive bonuses be reduced or eliminated in any given year. Accordingly, the Board of Directors may amend, alter or terminate the Plan at any time.
In the event a participant becomes disabled for a period greater than two (2) weeks, any salary continuation as a result of the Corporation’s short and long-term disability programs will not be included in the base salary used for the incentive bonus calculation.
Page 2 of 7
Section 4: Administration of the Plan
Throughout this Plan, reference to the actions and authority of the Compensation Committee of the Board of Directors ("the Committee") also presumes that the Committee will recommend, and the board of directors will approve or disapprove, final disposition of all matters pertaining to administration of the Plan. The Committee, with board approval, has the responsibility to interpret, administer, and amend the Plan as necessary. The recommendations of the Committee as approved by the board, affecting the construction, interpretation, and administration of the Plan shall be final and binding on all parties, including the Corporation, its subsidiaries and employees.
At or before the beginning of each Plan year, the Committee will review and may revise the operating rules. Performance targets the Incentive Bonus Plan Performance Matrix, and the Incentive Opportunity levels for corporate, individual and unit/functional awards for attaining those targets may be changed in order to emphasize specific goals and objectives of the Plan and to maintain a competitive incentive program. However, it is expected that the Plan will require modification only when significant changes in the organization, goals, personnel, or performance occur. The Chief Executive Officer shall be the Plan Administrator with the power to control and oversee proper administration of the Plan, and may recommend to the Committee proposed changes to the operating rules. Additionally, the Committee may engage a third party expert to review and amend the plan.
An individual or individuals designated by the Chief Executive Officer will perform the computation of incentive awards. Maintenance of participant payment records shall be the responsibility of the Human Resource Director.
Finally, the committee, with board approval, may exclude extraordinary occurrences, which could affect the performance awards, either positively or negatively, but are by their nature outside the significant influence of Plan participants. The characteristics of such extraordinary occurrences are generally that they involve the senior management and the board of directors in:
| ● | The original decision to take some action. |
|---|
| ● | Mission-driven strategic Initiatives that sacrifice short-term income for long-term gain. |
|---|
| ● | Issues most related to a restructuring of assets, or unusual expense or income realization. |
|---|
Extraordinary occurrences may be excluded when calculating performance results to ensure that the best interests of the shareholders are protected and are not brought into conflict with the intent of the Plan. When and if extraordinary occurrences are excluded from the calculation of corporate performance measures, they should also be excluded in calculating the bonus.
Page 3 of 7
Section 5: Plan Participants
Executive management shall select and recommend for participation in the Plan employees in those job positions that are responsible for directing, implementing and performing functions that have a significant influence on the profitability and operational performance of the bank (key employees). Those job positions which are selected for participation in the Plan will be in positions that normally include an incentive bonus component in the compensation package offered by similar financial institutions.
At or before the beginning of each Plan year, the Committee shall review the recommendations of management on the selection of those positions eligible for participation in the Plan for that year. Management shall recommend the Incentive Bonus Plan Performance Matrix for the year. Additionally, management shall recommend a threshold, target and maximum Incentive Opportunity percentage of base salary for each position. Participants shall be notified of their eligibility as soon as selection is completed and the board of directors has adopted the Plan. The Committee shall review and recommend the inclusion of participants to the full board for their approval.
Positions and thus participants may be added during the Plan year at the discretion of management and the Committee, and the incentive award will be prorated from date of entry into the Plan.
Section 6: Payment of Individual Incentive Compensation Awards
Within 60 days following the end of the Plan year and as soon as the participant’s performance has been evaluated and the financial and operating results are known, participants will receive their incentive payment as determined by the Incentive Bonus Plan Performance Matrix.
Section 7: Incentive Compensation Plan Operating Rules
Before the beginning of each Plan year, the Committee may review and revise, if deemed appropriate, Part II: Operating Rules of the Plan for the year then beginning. The operating rules shall include the following:
| a) | Identification of positions selected for participation in the Plan |
|---|
| b) | The method for determining the amount of the total bonus to be paid to Plan participants, including the Incentive Bonus Plan Performance Matrix. |
|---|
| c) | Schedules and formulas for determining the amount of the incentive compensation awards to Plan participants for the Plan year then beginning, including threshold, target and maximum performance measures and the percentage of bonus award determined by corporate, functional/unit and individual performances. Participants will be informed at or before the Plan year of the manner in which performance will be evaluated. |
|---|
| d) | Other administrative and procedural rules, which the committee considers appropriate. |
|---|
After approval by the Committee and the board of directors, management shall, as soon as practical, inform each of the participants of the operating rules for the Plan year then beginning.
Page 4 of 7
Section 8: Performance Progress Reporting
Semi-annually the Plan Administrator will be responsible for communicating attainment of corporate goals during the course of the Plan year. Participants and their direct supervisors will meet periodically to review their performance relative to the established unit/functional and individual goals.
Section 9: Amendment or Termination of Plan
The committee, with concurrence of the board of directors, may terminate, amend, or modify this Plan at any time. The termination, amendment, or modification of the Plan may affect a participant's right to unpaid incentive compensation awards under this Plan.
Section 10: Other Considerations
Recoupment- Amounts allocated or paid pursuant to this Plan shall be subject to recovery by the Corporation under any claw back, recovery, recoupment or similar policy hereafter adopted by the Corporation, whether in connection with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended from time to time, or otherwise, whether or not required by law.
Active Employment Contingency- Except in the case of a retirement, if a participant voluntarily terminates his or her employment with the Corporation or Bank prior to the date of bonus payout, the bonus will be forfeited.
Right of Assignment - No right or interest of any participant in the Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including levy, garnishment, attachment, pledge, or bankruptcy.
Right of Employment - The participation in or the receipt of an award under this Plan shall not guarantee any employee any right to continued employment; the right to dismiss any employee is specifically reserved to the organization. The receipt of an award for any one year shall not guarantee an employee the right to receive an award for any subsequent year.
Change of Position – If a participant transfers to another position in the organization that is not included in the Incentive Compensation Plan, they will cease being a Plan participant. At the time of the position change a determination will be made as to whether the participant will be eligible for a bonus for the period during which they were a participant.
Withholding for Taxes - The organization shall have the right to deduct from all payments under this Plan any federal, state or local taxes which in the opinion of the Committee are required by law to be withheld with respect to such payments.
Salary - Salary is defined as base earnings for the year, which includes any increase in weekly rate of pay but not including any referral awards, brokerage or insurance commissions, taxable fringe benefits or prior bonus payments.
Board Prerogatives – It will be the right of the Board of Directors to amend, alter and/or terminate the plan in its sole discretion at any time.
Page 5 of 7
Part II: Operating Rules
Section l: General
The following Incentive Compensation Plan Operating Rules will be in effect for the 2024 plan year and until revised. These operating rules are subject to change by the Committee, with the approval of the board of directors. It is anticipated that the rules for 2024 will be revised only if significant changes occur in organization, operations, industry compensation practices, or other pertinent factors.
Section 2: Corporate Performance Component - Incentive Bonus Plan Performance Matrix for 2024
The corporate performance component of the Incentive Bonus is calculated based on comparison of C&N’s percent ranking of Pre-tax, Pre-Provision Net Revenue Minus Net Charge-offs as a Percentage of Average Equity (PPNR/Average Equity) within a defined peer group of bank holding companies and thrifts for the defined measurement period as determined by the Committee.
For the purpose of determining PPNR/Average Equity, the provision for credit losses will be excluded from, and net charge-offs or recoveries of loans receivable and off-balance sheet exposures will be included in, the Corporation’s and the peer group’s earnings results. Further, the provision for income taxes will be excluded from the Corporation’s and the peer group’s earnings results. Also, for the purpose of determining PPNR/Average Equity, nonrecurring items, as determined by the Committee (to include nonrecurring acquisition expenses and securities gains and losses) will be excluded from the Corporation’s and the peer group’s earnings results. The peer group shall include selected publicly traded Commercial Banks and Thrifts within a geographic region reflective of Citizens & Northern’s market area and with total assets of approximately one-half to 2 times those of Citizens & Northern.
The Committee reserves the right to change the composition of the peer group, as well as the method of evaluating the Corporation’s earnings performance as compared to the peer group, based on mergers or acquisitions involving members of the peer group, changes in size of the Corporation or members of the peer group, or other factors deemed appropriate by the Committee.
The chart below will determine the Incentive Opportunity percentage of base salary from which the corporate performance component of a participant’s bonus would be paid:
Page 6 of 7
| C&N's | Corporate |
|---|---|
| Percent | Award as |
| ROAE Rank | % of |
| vs Peer | Target |
| 25 | 33% |
| 30 | 46.4% |
| 35 | 59.8% |
| 40 | 73.2% |
| 45 | 86.6% |
| 50 | 100% |
| 55 | 110.0% |
| 60 | 120.0% |
| 65 | 130.0% |
| 70 | 140.0% |
| 75 | 150% |
| 80 | 150% |
| 85 | 150% |
| 90 | 150% |
| 95 | 150% |
| 100 | 150% |
| >100 | 150% |
****************************************************************
*The Peer Group shall include selected publicly traded commercial banks and thrifts within MD, NJ, NY, OH, PA, and WV with total assets between approximately $1.2 billion and $5.0 Billion.
Page 7 of 7
EXHIBIT 10.5
2024 Annual Performance Incentive Award Plan — Mortgage Lenders
Section l: Purpose of the Plan
The purpose of the Performance Incentive Award Plan ("the Plan") is to provide variable compensation to Citizens & Northern employees who are actively engaged in interviewing residential real estate applicants, processing the applications and closing the loans. The Plan is designed to reward mortgage lending employees who attain and sustain consistently high levels of performance by meeting and exceeding defined goals and to provide a component of the compensation package essential to retaining and attracting quality employees in mortgage lending positions. Incentive awards are not directly tied to Company/mortgage business profits nor the terms of the closed-end mortgage transaction or a proxy for a transaction term. The expense of the plan is incorporated into the Company's operating budget. The objective is to align the interests of these employees with the interests of the Company in obtaining superior performance results while being in compliance with the SAFE Act and 12 CFR Part 1026.36 (Regulation Z).
Section 2: General Description
There are two components of the Plan: (l) unit/functional performance; and (2) individual performance. The individual performance component will be subject to an evaluation of the participants' overall contributions to the "team". To earn the individual component, the participant must attain at least the threshold performance level. The unit/functional component is based on the attainment of pre-established goals by the applicable branch or mortgage lending business unit. To receive the unit/functional bonus payout, the participant must achieve at least the threshold level.
In addition to goals based on production, the Plan requires management to consider non-financial goals designed to improve operational and risk management effectiveness, as appropriate for each participant's position. The Plan permits future inclusion of additional positions during a Plan year, if the need arises.
The incentive formulas ensure a level of incentive award that is competitive with comparable positions and job levels in similar financial institutions, thus enabling Citizens & Northern to attract, retain, and motivate high-performing mortgage lending employees.
The Plan is established to augment regular salary and benefit programs already in existence. The Incentive Plan is not meant to be a substitute for salary increases but supplemental to salary and as stated earlier, a reward for "exceptional" performance.
The Plan has been developed to recognize that the amount of incentive bonus award attainable by key mortgage lending employees should vary depending upon the employee's position with the company and the competitive levels of incentive bonus for those positions within the banking and financial service industry. Thus threshold, target and maximum Incentive Opportunities are established for each position.
Section 3: Other Payment Conditions
Termination for Reasons Other Than Death, Permanent Disability or Retirement — In the event of termination of employment for reasons other than death, permanent disability or retirement, the participant, at the discretion of the committee, may forfeit all unpaid incentive awards.
In the event a participant becomes disabled for a period greater than two (2) weeks, any salary continuation as a result of the Corporation's short and long-term disability programs will not be included in the base salary used for the incentive bonus calculation.
Section 4: Administration of the Plan
Throughout this Plan, reference to the actions and authority of the Compensation Committee of the Board of Directors ("the Committee") presumes that the Committee will recommend, and the board of directors will approve or disapprove, final disposition of all matters pertaining to administration of the Plan. The Committee, with board approval, has the responsibility to interpret, administer, and amend the Plan as necessary. The recommendations of the Committee as approved by the board, affecting the construction, interpretation, and administration of the Plan shall be final and binding on all parties, including the Corporation, its subsidiaries and employees.
At or before the beginning of each Plan year, the Committee will review and may revise the operating rules. The Incentive Opportunity levels for individual and unit/functional awards for attaining those targets may be changed in order to maintain a competitive incentive program. However, it is expected that the Plan will require modification only when significant changes in the organization, goals, personnel, or performance occur. The Chief Executive Officer shall be the Plan Administrator with the power to control and oversee proper administration of the Plan, and may recommend to the Committee proposed changes to the operating rules. Additionally, the Committee may engage a third party expert to review and amend the plan.
An individual or individuals designated by the Chief Executive Officer will perform the computation of incentive awards. Maintenance of participant payment records shall be the responsibility of the Chief Human Resource Officer.
Section 5: Plan Participants
Executive management shall select and recommend for participation in the Plan employees in those job positions that are responsible for mortgage lending functions. Those job positions which are selected for Page 2 of 4
Section 9: Amendment or Termination of Plan
The Committee, with concurrence of the board of directors, may terminate, amend, or modify this Plan at any time. The termination, amendment, or modification of the Plan will not affect a participant's right to unpaid incentive compensation awards under this Plan.
Section 10: Other Considerations
Recoupment- Amounts allocated or paid pursuant to this Plan shall be subject to recovery by the Corporation under any claw back, recovery, recoupment or similar policy hereafter adopted by the Corporation, whether in connection with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended from time to time, or otherwise, whether or not required by law.
Active Employment Contingency- Except in the case of a retirement, if a participant voluntarily is not actively employed by the Corporation prior to the date of bonus payout, the bonus will be forfeited.
Right of Assignment - No right or interest of any participant in the Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including levy, garnishment, attachment, pledge, or bankruptcy.
Right of Employment - The participation in or the receipt of an award under this Plan shall not guarantee any employee any right to continued employment; the right to dismiss any employee is specifically reserved to the organization. The receipt of an award for any one year shall not guarantee an employee the right to receive an award for any subsequent year.
Change of Position — If a participant transfers to another position in the organization that is not included in the Incentive Compensation Plan, they will cease being a Plan participant. At the time of the position change a determination will be made as to whether the participant will be eligible for a bonus for the period during which they were a participant.
Withholding for Taxes - The organization shall have the right to deduct from all payments under this Plan any federal, state or local taxes required by law to be withheld with respect to such payments.
Salary - Salary is defined as base earnings for the year, which includes any increase in weekly rate of pay but not including any referral awards, brokerage or insurance commissions, golden nugget payments, taxable fringe benefits or prior bonus payments.
Board Prerogatives — It will be the right of the Board of Directors to amend, alter and/or terminate the plan in its sole discretion at any time. Any Incentive Bonus earned by the Participant at the time of amendment, alteration and/or termination shall remain due and payable as stated. Page 4 of 4
EXHIBIT 21
| | | | |
|---|---|---|---|
| | Jurisdiction or | **** | |
| Name | | State of Incorporation | |
| Citizens & Northern Bank (A) | | Pennsylvania | |
| Bucktail Life Insurance Company (A) | | Arizona | |
| Citizens & Northern Investment Corporation (A) | | Delaware | |
| C&N Financial Services, LLC (B) | | Pennsylvania | |
| Northern Tier Holding LLC (B) | | Pennsylvania | |
(A) Wholly-owned subsidiary of Citizens & Northern Corporation
(B) Wholly-owned subsidiary of Citizens & Northern Bank
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-162279 and 333-160682) and Form S-8 (No. 333-150517 and 333-138398) of Citizens & Northern Corporation and subsidiaries of our report dated March 11, 2024, relating to the consolidated financial statements and the effectiveness of Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting, which appears in this annual report on Form 10-K for the year ended December 31, 2023.
| | |
|---|---|
| /s/ Baker Tilly US, LLP | |
Baker Tilly US, LLP
Pittsburgh, Pennsylvania
March 11, 2024
EXHIBIT 31.1
CERTIFICATION
I, J. Bradley Scovill, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Citizens & Northern Corporation; |
|---|
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
|---|
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
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| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
|---|
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|---|
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|---|
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|---|
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
|---|
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|---|
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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| | | | |
|---|---|---|---|
| March 11, 2024 | | By: | /s/ J. Bradley Scovill |
| Date | | President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Mark A. Hughes, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Citizens & Northern Corporation; |
|---|
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
|---|
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
|---|
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
|---|
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|---|
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|---|
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|---|
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|---|
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
|---|
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|---|
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|---|
| | | | |
|---|---|---|---|
| March 11, 2024 | | By: | /s/ Mark A. Hughes |
| Date | | Treasurer and Chief Financial Officer |
EXHIBIT 32
SECTION 1350 CERTIFICATIONS
In connection with the Annual Report of Citizens & Northern Corporation (the “Corporation”) on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to each of the undersigned’s best knowledge and belief:
| (a) | the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and |
|---|
| (b) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. |
|---|
| | | | |
|---|---|---|---|
| March 11, 2024 | | By: | /s/ J. Bradley Scovill |
| Date | | President and Chief Executive Officer |
| | | | |
|---|---|---|---|
| March 11, 2024 | | By: | /s/ Mark A. Hughes |
| Date | | Treasurer and Chief Financial Officer |
Exhibit 99.1
| ADAPTABILITY<br> AGILITY:<br>2023 Annual Highlights<br>Navigating New Landscapes<br>From Storms to Strength,<br>Building a Legacy of Endurance |
|---|
| CONTENTS<br>2023 ANNUAL HIGHLIGHTS<br>President&CEO – Shareholder Letter 4<br>Lead&Guide – C&N Leadership 8<br>Dollars&Sense – C&N Financial Profile 10<br>Quarterly Share Data<br>Operations Comparisons<br>End of Period Balances<br>Consolidated Financial Data<br>C&N Wealth Management<br>Awards&Recognition 16<br>Community&Commitment 18 |
| --- |
| From Storms to Strength, Building<br>a Legacy of Endurance Navigating<br>New Landscapes |
| --- |
| Every year throughout its long history, C&N is<br>presented with new challenges, yet 2023 was<br>unique and extraordinary from the beginning. As<br>we turned the calendar from 2022 into 2023, the<br>Federal Reserve continued its fight on inflation<br>with continued rate increases. After reducing the<br>fed funds rate target to 0%- 0.25% at the onset of<br>COVID in 2020, between March of 2022 and July<br>of 2023, it raised the target rate 11 times to 5.25%<br>to 5.50%, the fastest and largest increase in more<br>than 40 years. While both short- and long-term<br>rates increased, the pace of change on the short<br>end produced an inverted yield curve that has<br>persisted into early 2024. With an inverted yield<br>PRESIDENT&CEO<br>curve generally heralding recession, economists<br>have debated when (and if) a recession would<br>materialize, as higher rates have slowed the<br>economy.<br>In March, Silicon Valley Bank and Signature Bank<br>were closed followed by the failure of First Republic<br>Bank in May. While there have been few bank<br>failures in recent years, these were three of the<br>four largest failures in U.S. banking history. While<br>the government and federal regulators took swift<br>action to guarantee these banks’ deposits and<br>reassure customers, there were fears across the<br>country regarding liquidity, challenging all bankers<br>to restore confidence in their banks and the overall<br>system.<br>The industry responded well to these events,<br>calming fears and reducing deposit churn as the<br>months progressed. The C&N team took action<br>to reinforce customer confidence emphasizing<br>the strength of our capital position, diverse local<br>depositor base, low level of uninsured deposits, and<br>access to substantial additional sources of liquidity.<br>These strengths remain today.<br>“The C&N team took action to reinforce<br>customer confidence emphasizing the strength<br>of our capital position, diverse local depositor<br>base, low level of uninsured deposits, and<br>access to substantial additional sources of<br>liquidity. These strengths remain today.”<br>2023 ANNUAL HIGHLIGHTS 04<br>Dear Shareholder, |
| --- |
| This environment highlighted our adaptability and<br>agility as the entire team heightened our focus on<br>sustaining and building our strong deposit base.<br>Generating core deposits has always been a key<br>part of our relationship model that focuses on<br>creating value for our clients, not simply paying<br>the highest rates. This model provides both solid<br>liquidity and supports our historically strong net<br>interest margin and earnings. I am pleased to<br>report that the team’s pivot and collective efforts<br>accomplished our goals. Our performance for the<br>year was solid and our strong financial position and<br>risk profile supports our plans for growth.<br>C&N posted a net income of $24.1 million or $1.57<br>per share in 2023, compared to $26.6 million or<br>$1.71 per share in 2022. 2023 results include a<br>net charge to earnings of $.08 per share, a result<br>of repositioning a portion of our securities portfolio<br>and investments in bank-owned life insurance.<br>One of the most significant factors impacting<br>2023 results was the lack of growth in net interest<br>income. While we did sustain our strong deposit<br>base and generated solid loan growth, the cost of<br>deposits and other funding sources increased more<br>than the yield on loans and investments causing a<br>decline in this key revenue source. Offsetting this<br>revenue decrease, the provision for credit losses<br>declined substantially, reflecting strong and stable<br>credit quality in the loan portfolio. Non-interest<br>income, excluding the impact of the balance<br>sheet restructuring in the fourth quarter, increased<br>somewhat. And the increase in noninterest<br>expenses reflects the impact of inflation as well as<br>ongoing investments in our capacity to deliver value<br>for customers and position for growth.<br>4<br>Bank stock prices were generally volatile during<br>2023, C&N included. The December 31,2023<br>closing price was $22.43, about 2% lower than a<br>year earlier. However, the 52-week high and low<br>were $23.90 and $16.71, respectively. All through<br>these fluctuations, C&N shares retained a strong<br>valuation relative to the industry as measured by<br>price-to-book value and price earnings multiples.<br>Supporting this strength and reflecting confidence<br>in the future of C&N, total cash dividends to<br>shareholders for 2023 remained at $1.12 per share.<br>This represents a 4.99% annualized yield on C&N<br>common stock based on the December 31, 2023,<br>closing price of $22.43 per share.<br>Branches&Roots<br>With the disrupted banking environment of 2023,<br>our Branch Delivery teams went above and beyond<br>to educate and inform customers on the details of<br>deposit insurance, while meeting their needs and<br>creating value.<br>As always, we worked to enhance our ability to<br>provide outstanding service by asking customers<br>and our teams to consider the hallmarks of a great<br>C&N experience and how we can know when we’ve<br>delivered. Utilizing this feedback, our customer<br>Experience Coordinator and dedicated Customer<br>Experience Team developed formal standards that<br>will serve as a framework for providing consistent,<br>streamlined, excellent service.<br>This means instead of simply recommending a<br>product or service without context, our teams<br>are seeking to understand customer needs, and<br>recommend appropriate solutions based on their<br>05 2023 ANNUAL HIGHLIGHTS |
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| existing “connection points” with C&N, whether<br>that’s depositing a check with your Personal<br>Banker, or assessing retirement options with a<br>Financial Advisor.<br>We’re also deepening the connection with our<br>Southeast and Southcentral Pennsylvania regions.<br>In August, we welcomed three new members to<br>our Southeast Wealth Management team and in<br>January 2024 we welcomed three new commercial<br>lenders to serve the Lancaster area, ensuring we<br>are well-positioned to pursue opportunities in each<br>market.<br>Technology&Data<br>We continued to make significant, targeted<br>investments in technology that will help us to<br>anticipate our customers’ needs and provide<br>the means for following up promptly across<br>departments when a need is recognized.<br>We’re also making our products, services and<br>platforms even easier and more streamlined. Our<br>new small business lending platform, for example,<br>will allow small business customers to quickly<br>apply for a loan with a few clicks or swipes on their<br>phone!<br>In May, we updated our C&N Lifetime credit card<br>platform with significantly improved functionality<br>and several enhanced features. This new portal<br>allows for a fully digital application process, mobile<br>friendly website, greater utility and value for<br>business customers, and easy access to account<br>services.<br>We also advanced technology with the introduction<br>of “Andy”, our virtual assistant, that helps<br>customers answer questions 24/7! And in the<br>coming months, we will be introducing significant<br>enhancements to our online deposit platforms<br>that will provide a seamless, convenient digital<br>experience for both personal and business banking.<br>Teams &Culture<br>In January 2023, Kelley Cwiklinski joined the<br>executive team as our Chief Commercial Lending<br>Officer. In addition to her broad experience, Kelley’s<br>leadership and commitment to creating value for<br>customers is a great fit for C&N and was important<br>as we navigated the challenging marketplace in<br>2023.<br>Our teams have again shone their dedication to our<br>2023 ANNUAL HIGHLIGHTS 06<br>“Our performance for the year was solid and<br>our strong financial position and risk profile<br>supports our plans for growth.” |
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| communities with our Giving Back, Giving together<br>initiatives. Last May, we closed our Emergency<br>Services campaign, bringing in over $100,000 to<br>support local emergency services organizations.<br>Our current cause of supporting local seniors<br>has already earned over $50,000, halfway to our<br>$100,000 goal! C&N is partnered with 33 local<br>senior organizations on their mission, and our<br>teams will continue to support this cause across all<br>markets in 2024!<br>We also had a record year for our financial literacy<br>programs, reaching over 1,700 students with our<br>Teach Children to Save and Get Smart About Credit<br>in-school presentations. These achievements<br>reflect our unwavering commitment to financial<br>education and community engagement. And in<br>January we began our Safe Banking for Seniors<br>program; an initiative that helps seniors navigate<br>financial topics like avoiding scams, understanding<br>power of attorney, and preventing identify theft.<br>As we reflect on the events of 2023, it’s clear we<br>would not be here without the engagement and<br>resilience of our teams. Through all the challenges<br>of this most unique year, they remained focused on<br>creating value for our customers, reaffirming our<br>commitment to serving the community, while also<br>building capacity to pursue our strategy for growth.<br>It is their effort that will continue to generate long-term value for you, our shareholders.<br>Our current cause of<br>supporting local seniors has<br>already earned over $50,000,<br>halfway to our $100,000 goal!<br>We’re also making our<br>products, services & platforms<br>even easier and more<br>streamlined. Our new small<br>business lending platform<br>will allow small business<br>customers to quickly apply<br>for a loan with a few clicks or<br>swipes on their phone!<br>07 2023 ANNUAL HIGHLIGHTS<br>J. Bradley Scovill<br>President & CEO |
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| LEAD&GUIDE<br>2023 ANNUAL HIGHLIGHTS 08<br>Mark A.<br>Hughes<br>Treasurer<br>Elizabeth<br>Pivirotto<br>Executive<br>Assistant to the<br>CEO<br>Glenn<br>James<br>EVP & General<br>Counsel &<br>Corporate<br>Secretary<br>J. Bradley<br>Scovill<br>President<br>& CEO<br>CORPORATE OFFICERS<br>Alex<br>Balagour<br>EVP & Chief<br>Information Officer<br>Matthew<br> Bower<br>EVP & Chief Wealth<br>Management<br>Officer<br>Kelley<br>Cwiklinski<br>EVP & Chief<br>Commercial<br>Lending Officer<br>Stan R.<br>Dunsmore<br>EVP &<br>Chief Credit<br>Officer<br>Hal F.<br>Hoose, III<br>EVP &<br>Chief Revenue<br>Officer<br>Mark A.<br>Hughes<br>EVP &<br>Chief Financial<br>Officer<br>Glenn<br>James<br>EVP & General<br>Counsel &<br>Corporate<br>Secretary<br>John M.<br>Reber<br>EVP & Chief Risk<br>Management<br>Officer<br>Thomas L.<br>Rudy, Jr.<br>EVP &<br>Chief Delivery<br>Officer<br>Blair T.<br>Rush<br>EVP &<br>Regional<br>President<br>J. Bradley<br>Scovill<br>President<br>&<br>CEO<br>Tracy E.<br>Watkins<br>EVP & Chief<br>Human Resource<br>Officer<br>EXECUTIVE TEAM |
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| 09 2023 ANNUAL HIGHLIGHTS<br>North Region<br>John A. Abplanalp<br>Evan R. Barnes<br>Brian A. Bicksler<br>Casandra K. Blaney<br>Krystle R. Bristol<br>James N. Capriotti<br>Laura C. Cimino<br>Matthew S. DeCamp<br>D. Mark Errick<br>Byron Farnsworth Jr.<br>Zachary R. Gates<br>Brandon E. Hackett<br>Lindsay R. Harding<br>Mark R. Howe<br>John S. Johnston<br>Joseph R. Kightlinger<br>Taunya Knolles Rosenbloom<br>J. Wesley Kocsis<br>Dr. Stephen D. Laudermilch<br>Danielle M. Lee<br>Scott E. Lewis<br>Kimberly J. Mastrantonio<br>David C. Murdock<br>Mary C. Owlett<br>Jeffrey B. Paul<br>Damian M. Rossettie<br>William B. Saxe<br>Eric Schoonover<br>Ray E. Wheeland<br>Andrew R. Wilcox<br>Andrea F. Streich<br>Northcentral Region<br>Robert T. Beiter<br>Stanley Cary Jr.<br>John M. Confer<br>Nichole B. Crawford<br>Andrew J. Girio<br>Benjamin D. Meckbach<br>Jeffrey M. Patterson<br>Tyler L. Rhone<br>David A. Schall<br>Allison Savoy Staiman<br>Southcentral Region<br>Thomas K. Baughman<br>Matthew R. Doran<br>Nicholas E. Hauck<br>Ryan A. Myers<br>Alex E. Snyder<br>Southeast Region<br>Glenda R. Childs<br>Linda J. Kilroy<br>Daniel P. Marrazzo<br>Karen J. Miller<br>Louis Quattrocchi<br>Gary B. Rubin<br>Michael J. Rush<br>Irving N. Stein<br>David E. Thompson<br>James Watts<br>ADVISORY BOARD<br>Terry L.<br>Lehman, CPA<br>Chairman, Retired<br>Certified Public<br>Accountant<br>Stephen M.<br>Dorwart, CPA<br>Fischer<br>Dorwart, P.C.<br>Susan E.<br>Hartley<br>Attorney<br>at Law<br>Bobbi J.<br>Kilmer<br>Retired President<br>& CEO, Claverack<br>Rural Electric<br>Leo F.<br>Lambert<br>Former President/<br>GM Fitzpatrick &<br>Lambert, Inc.<br>Robert G.<br>Loughery<br>President, Nehemiah<br>Development<br>Company<br>Frank G.<br>Pellegrino<br>Owner &<br>Developer, Carlton<br>Associates, LLC<br>Helen S.<br>Santiago, CPA<br>LaBarr and<br>LaBarr<br>J. Bradley<br>Scovill<br>President<br>& CEO,<br>C&N<br>Katherine W.<br>Shattuck<br>Consultant, Senior<br>Client Partner,<br>Korn Ferry<br>Aaron K.<br>Singer<br>President & CEO,<br>Metalkraft<br>Industries, Inc.<br>BOARD OF DIRECTORS<br>We are grateful to our Board of Directors & Advisory Board members for lending their expertise to further<br>the mission of C&N and for providing us with valuable insight into the communities we serve. |
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| DOLLARS&SENSE<br>2023 ANNUAL HIGHLIGHTS 10<br>2023 QUARTERLY<br>SHARE PRICE DATA<br>$30.00<br>$20.00<br>$10.00<br>$0.00<br>First Quarter Second Quarter Third Quarter Fourth Quarter<br>High<br>Low<br>2023 HIGH LOW<br>DIVIDEND<br>DECLARED<br>PER<br>QUARTER 2022 HIGH LOW<br>DIVIDEND<br>DECLARED<br>PER<br>QUARTER<br>First quarter $23.90 $20.06 $0.28 First quarter $27.50 $23.82 $0.28<br>Second quarter 21.72 16.71 0.28 Second quarter 25.20 23.21 0.28<br>Third quarter 21.71 21.38 0.28 Third quarter 25.77 23.29 0.28<br>Fourth quarter 23.50 16.92 0.28 Fourth quarter 25.20 22.67 0.28 |
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| DILUTED EARNINGS PER SHARE<br>(In Thousands)<br>11 2023 ANNUAL HIGHLIGHTS4<br>2023 2022 2021 2020 2019<br>FIVE-YEAR SUMMARY<br>Operations Comparison<br>INCOME STATEMENT (In Thousands) 2023 2022 2021 2020 2019<br>Interest and dividend income $113,504 $92,647 $84,501 $77,160 $64,771<br>Interest expense 33,104 9,519 6,562 9,595 10,283<br>Net interest income 80,400 83,128 77,939 67,565 54,488<br>Provision for credit losses 186 7,255 3,661 3,913 849<br>Net interest income after provision for credit losses 80,214 75,873 74,278 63,652 53,639<br>Noninterest income excluding securities (losses) gains 27,453 24,412 25,857 24,344 19,284<br>Net realized (losses) gains on available-for-sale debt<br>securities (3,036) 20 24 169 23<br>Loss on prepayment of borrowings 0 0 0 1,636 0<br>Merger-related expenses 0 0 0 7,708 4,099<br>Noninterest expense excluding loss on prepayment of<br>borrowings and merger-related expenses 74,148 67,955 62,472 55,609 45,438<br>Income before income tax provision 30,483 32,350 37,687 23,212 23,409<br>Income tax provision 6,335 5,732 7,133 3,990 3,905<br>Net income $24,148 $26,618 $30,554 $19,222 $19,504<br>Net income attributable to common shares $23,962 $26,381 $30,313 $19,106 $19,404<br>PER COMMON SHARE DATA 2023 2022 2021 2020 2019<br>Basic earnings per share $1.57 $1.71 $1.92 $1.30 $1.46<br>Diluted earnings per share $1.57 $1.71 $1.92 $1.30 $1.46<br>Cash dividends declared per share $1.12 $1.12 $1.11 $1.08 $1.18<br>Book value per common share at period-end $17.15 $16.07 $19.13 $18.84 $17.82<br>Tangible book value per common share at period-end $13.56 $12.50 $15.58 $15.30 $15.66<br>Weighted average common shares outstanding - basic 15,241,859 15,455,432 15,765,639 14,743,386 13,298,736<br>Weighted average common shares outstanding - diluted 15,241,859 15,458,531 15,771,955 14,747,048 13,321,559<br>CASH DIVIDENDS DECLARED<br>PER SHARE<br>$1.20<br>$1.00<br>$0.80<br>$0.60<br>$0.40<br>$0.20<br>$0.00<br>$2.10<br>$1.75<br>$1.40<br>$1.05<br>$0.70<br>$0.35<br>$0.00<br>2023 2022 2021 2020 2019 |
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| 2023 ANNUAL HIGHLIGHTS 12<br>FIVE-YEAR SUMMARY<br>End of Period Balances<br>END OF PERIOD BALANCES(In Thousands) 2023 2022 2021 2020 2019<br>Available-for-sale debt securities $415,755 $498,033 $517,679 $349,332 $346,723<br>Gross loans 1,848,139 1,740,040 1,564,849 1,644,209 1,182,222<br>Allowance for credit losses on loans 19,208 16,615 13,537 11,385 9,836<br>Total assets 2,515,584 2,454,307 2,327,648 2,239,100 1,654,145<br>Deposits 2,014,806 1,997,593 1,925,060 1,820,469 1,252,660<br>Borrowings, senior notes and subordinated debt 211,759 181,781 77,555 91,183 144,847<br>Stockholders' equity 262,381 249,325 301,405 299,756 244,452<br>Accumulated other comprehensive (loss) income (38,437) (49,878) 5,026 11,795 3,691<br>Common shares outstanding 15,295,135 15,518,819 15,759,090 15,911,984 13,716,445<br>AVERAGE BALANCES (In Thousands) 2023 2022 2021 2020 2019<br>Total assets 2,462,856 2,372,788 2,319,234 2,009,825 1,540,469<br>Earning assets 2,341,617 2,240,199 2,145,475 1,856,487 1,437,993<br>Gross loans 1,792,149 1,628,094 1,596,756 1,445,098 1,057,559<br>Deposits 1,971,926 1,980,412 1,905,400 1,586,409 1,213,687<br>Stockholders' equity 248,494 265,093 301,226 273,351 229,446<br>TOTAL ASSETS<br>(In Thousands)<br>$2,800,000<br>$2,400,000<br>$2,200,000<br>$2,000,000<br>$1,800,000<br>$1,600,000<br>$1,400,000<br>2023 2022 2021 2020 2019<br>GROSS LOANS<br>(In Thousands)<br>$2,000,000<br>$1,800,000<br>$1,600,000<br>$1,400,000<br>$1,200,000<br>$1,000,000<br>$800,000<br>2023 2022 2021 2020 2019 |
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| 13 2023 ANNUAL HIGHLIGHTS4<br>(1) Rates of return on tax-exempt securities and loans are calculated on a fully taxable equivalent basis.<br>(2) The efficiency ratio is calculated by dividing: (a) total noninterest expense excluding merger-related expenses and losses from<br>prepayment of debt, by (b) the sum of net interest income (including income from tax-exempt securities and loans on a fully-taxable<br>equivalent basis) and noninterest income excluding securities gains or losses and enhancement fee of $2.1 million included in<br>noninterest income related to purchase of Bank-Owned Life Insurance in 2023.<br>KEY RATIOS 2023 2022 2021 2020 2019<br>Return on average assets 0.98% 1.12% 1.32% 0.96% 1.27%<br>Return on average equity 9.72% 10.04% 10.14% 7.03% 8.50%<br>Average equity to average assets 10.09% 11.17% 12.99% 13.60% 14.89%<br>Net interest margin (1) 3.47% 3.77% 3.69% 3.69% 3.86%<br>Efficiency (2) 69.51% 62.48% 59.54% 59.87% 60.73%<br>Cash dividends as a % of diluted earnings per share 71.34% 65.50% 57.81% 83.08% 80.82%<br>Tier 1 leverage 9.87% 10.11% 10.53% 10.34% 13.10%<br>Tier 1 risk-based capital 13.27% 13.43% 15.22% 15.58% 19.19%<br>Total risk-based capital 15.67% 15.72% 18.21% 17.49% 20.70%<br>Tangible common equity/tangible assets 8.43% 8.08% 10.81% 11.15% 13.22%<br>Nonperforming assets/total assets 0.75% 1.04% 0.94% 1.10% 0.80%<br>Nonperforming loans/total loans 0.99% 1.46% 1.36% 1.42% 0.88%<br>Allowance for credit losses/total loans 1.04% 0.95% 0.87% 0.69% 0.83%<br>Net charge-offs/average loans 0.01% 0.26% 0.09% 0.16% 0.03%<br>FIVE-YEAR SUMMARY<br>End of Period Balances<br>STOCKHOLDERS’ EQUITY<br>(In Thousands)<br>$350,000<br>$300,000<br>$250,000<br>$200,000<br>$150,000<br>$100,000<br>$0<br>2023 2022 2021 2020 2019<br>DEPOSITS<br>(In Thousands)<br>$2,100,000<br>$1,800,000<br>$1,500,000<br>$1,200,000<br>$900,000<br>$600,000<br>0<br>2023 2022 2021 2020 2019 |
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| 2023 ANNUAL HIGHLIGHTS 14<br>2023 (In Thousands Except Per Share Data)<br>(Unaudited)<br>1st quarter<br>March 31<br>2nd quarter<br>June 30<br>3rd quarter<br>Sept. 30<br>4th quarter<br>Dec. 31<br>Interest income $26,139 $28,011 $29,118 $30,236<br>Interest expense 5,358 7,649 9,455 10,642<br>Net interest income 20,781 20,362 19,663 19,594<br>(Credit) provision for credit losses (352) 812 (1,225) 951<br>Net interest income after (credit) provision for credit losses 21,133 19,550 20,888 18,643<br>Other income 5,609 6,635 6,489 8,720<br>Net realized gains (losses) on available-for-sale debt securities 7 (1) 0 (3,042)<br>Other expenses 19,087 18,722 17,940 18,399<br>Income before income tax provision 7,662 7,462 9,437 5,922<br>Income tax provision 1,409 1,419 1,846 1,661<br>Net income $6,253 $6,043 $7,591 $4,261<br>Net income attributable to common shares $6,201 $5,996 $7,534 $4,231<br>Net income per share – basic $0.40 $0.39 $0.50 $0.28<br>Net income per share – diluted $0.40 $0.39 $0.50 $0.28<br>2022 (In Thousands Except Per Share Data)<br>(Unaudited)<br>1st quarter<br>March 31<br>2nd quarter<br>June 30<br>3rd quarter<br>Sept. 30<br>4th quarter<br>Dec. 31<br>Interest income $21,773 $21,309 $23,710 $25,855<br>Interest expense 1,441 1,684 2,831 3,563<br>Net interest income 20,332 19,625 20,879 22,292<br>Provision for credit losses 891 308 3,794 2,262<br>Net interest income after provision for credit losses 19,441 19,317 17,085 20,030<br>Other income 5,821 6,830 5,651 6,110<br>Net realized gains (losses) on available-for-sale debt securities 2 (1) 20 (1)<br>Other expenses 16,886 17,039 17,443 16,587<br>Income before income tax provision 8,378 9,107 5,313 9,552<br>Income tax provision 1,483 1,618 858 1,773<br>Net income $6,895 $7,489 $4,455 $7,779<br>Net income attributable to common shares $6,835 $7,419 $4,416 $7,711<br>Net income per share – basic $0.44 $0.48 $0.29 $0.50<br>Net income per share – diluted $0.44 $0.48 $0.29 $0.50<br>QUARTERLY CONSOLIDATED FINANCIAL DATA<br>The following table presents summarized financial data for 2022 & 2023 |
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| 15 2023 ANNUAL HIGHLIGHTS4<br>TRUST<br>REVENUE<br>(In Thousands)<br>$7,500<br>$6,000<br>$4,500<br>$3,000<br>$1,500<br>$0<br>$1,300,000<br>$1,040,000<br>$780,000<br>$520,000<br>$260,000<br>$0<br>TRUST ASSETS UNDER<br>MANAGEMENT<br>(In Thousands)<br>Some products are not FDIC insured or guaranteed, not a deposit or other obligation of the bank, not guaranteed by the bank and are subject<br>to investment risk, including possible loss of the principal amount invested and are not insured by any other federal government agency.<br>2023 2022 2021 2020 2019 2023 2022 2021 2020 2019<br>WEALTH MANAGEMENT<br>(In Thousands) 2023 2022 2021 2020 2019<br>Assets $1,188,082 $1,063,615 $1,232,919 $1,103,228 $1,007,113<br>Revenue $7,413 $6,994 $7,234 $6,321 $6,106<br>INVESTMENTS (In Thousands) 2023 2022 2021 2020 2019<br>Mutual Funds $732,876 $680,475 $797,336 $697,010 $611,539<br>Stocks 230,120 207,227 250,765 223,543 207,847<br>Bonds 111,457 90,447 95,427 104,833 101,966<br>Savings and money market funds 98,919 69,352 75,140 63,069 71,936<br>Real Estate 8,796 9,294 6,012 6,797 6,349<br>Miscellaneous 5,899 6,736 8,145 7,873 7,346<br>Mortgages 15 84 94 103 130<br>Total $1,188,082 $1,063,615 $1,232,919 $1,103,228 $1,007,113<br>ACCOUNTS (In Thousands) 2023 2022 2021 2020 2019<br>Pension/profit sharing $452,395 $424,157 $498,714 $439,739 $402,062<br>Investment management 418,393 345,753 391,777 344,688 307,068<br>Trusts 201,450 192,426 227,821 209,273 196,660<br>Custody 103,906 94,769 104,562 99,273 89,241<br>Guardianships 4,028 3,421 3,852 3,328 2,907<br>Estates 7,910 3,089 6,193 6,927 9,175<br>Total $1,188,082 $1,063,615 $1,232,919 $1,103,228 $1,007,113<br>WEALTH MANAGEMENT DATA<br>The following table presents summarized financial<br>data for C&N Wealth Management. |
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| AWARDS&RECOGNITION<br>2023 ANNUAL HIGHLIGHTS 16<br>Retirements<br>11 C&N team members were recognized for their combined 236 years of service. C&N is proud and appreciative of<br>their dedication to the organization.<br>45 Years of Service<br>Virginia Reap<br>Sayre<br>22 Years of Service<br>Janis Bartlett<br>Muncy<br>18 Years of Service<br>Diane Egly<br>Williamsport<br>6 Years of Service<br>Karen Pangrazzi<br>Wellsboro<br>43 Years of Service<br>Mark Miller<br>Wellsboro<br>21 Years of Service<br>Teri Snyder<br>Sayre<br>15 Years of Service<br>Toni Bolt<br>Tioga<br>3 Years of Service<br>Patrick Davis<br>Doylestown<br>36 Years of Service<br>Christopher Bolt<br>Wellsboro<br>19 Years of Service<br>Darci Baird<br>Sayre<br>8 Years of Service<br>Lynne Povish<br>Old Lycoming<br>Years of Service Milestones<br>38 C&N team members were recognized for their combined 455 years of service. C&N is proud and appreciative of<br>their dedication to the organization.<br>35 Years of Service<br>Dianne E. Zimmerman<br>30 Years of Service<br> Leslie R. Raymond<br> Wendy J. Smith<br>25 Years of Service<br> Peter J. Boergermann<br> Victoria S. Harrison<br>20 Years of Service<br>Amy S. Bowser<br>Christopher J. Rell<br>20 Years of Service<br> Tracy E. Watkins<br> Nadine M. Wingrove<br>15 Years of Service<br> Cassie J. Brelo<br> Laeken M. Cook<br> Chrissi L. Hume<br>10 Years of Service<br> Rachel M. Brill<br> Kori A. Casselberry<br> Felicia M. Crumb<br>10 Years of Service<br>Patricia H. Ibach<br>Amy L. Long<br>Wesley A. O’Neil<br>Amanda M. Reed<br>Lynne M. Smith<br>5 Years of Service<br>Deana M. Campbell<br>Riley S. Collins<br>Christian A. Cuff<br>Angela M. Day<br>Kristine L. Drake<br>5 Years of Service<br>Ryan L. Eck<br>Michael J. Hickey<br>Phylis A. Jensen<br>Susan C. Kehler<br>Corinne B. Mast<br>Alyssa A. Morey<br>Maureen L. Putnam<br>Tyler R. Sones<br>Ryan J. Tevlin<br>Jessica R. Walton<br>Shelby H. Wheeler<br>The Teri L. Mitchell Scholarship<br>The Teresa (Teri) L. Mitchell Scholarship honors Teri’s 37 years of devoted service at<br>C&N, encapsulating her commitment to professional growth. Established in her memory,<br>the scholarship supports C&N teammates displaying dedication to ongoing professional<br>development and a strong work ethic.<br>Congratulations to the 2023 Scholarship winners, embodying the values cherished by<br>Teri. This legacy scholarship provides recipients with the opportunity to attend the PA<br>Bankers Association’s Women in Banking Conference, echoing Teri’s appreciation for<br>educational opportunities.<br>• Lindsay Bickley<br>• Rachel Brill<br>• Jessika Garner<br>• Samantha Pecynski<br>• Maria Ryan<br>• Kristen Summerson |
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| 4<br>AWARDS&RECOGNITION<br>17 2023 ANNUAL HIGHLIGHTS<br>Best Team Partner Award<br>Training & Development Team<br>Best Team Partner Award<br>Accounting Team<br>Impactful Awards<br>Spirit of Service<br>Award<br>Brittany Weiskopff<br>(left), Executive Assistant,<br>Wellsboro, presented<br>by Hal Hoose.<br>Jessica Walton<br>(right), Trust Administrator,<br>Sayre, presented<br>by Tom Rudy.<br>Spirit of Service<br>Award<br>Top Performing<br>Team<br>Phylis Jensen<br>(right), AVP - Retail Operations<br>Coordinator, Wellsboro,<br> presented by Cassie Brelo.<br>Commercial Lending Team<br>accepted on behalf of the team<br>by Kelley A. Cwiklinski, Chief<br>Commercial Lending Officer<br>Achievement<br>Award<br>Top Performer<br>Award<br>Joselyn Remphrey<br>(right), Retail Operations<br>Coordinator, Muncy<br>presented by Tom Rudy.<br>Tracy Merrick<br>(left), Universal Client Contact<br>Specialist, Wellsboro,<br>presented by Hal Hoose. |
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| COMMUNITY&COMMITMENT<br>2023 ANNUAL HIGHLIGHTS 18<br>C&N’s story isn’t confined to balance sheets and teller<br>windows; it’s woven into the very fabric of the communities<br>we serve. We’re more than just a bank, we’re neighbors,<br>friends, and partners, dedicated to building a brighter future<br>for everyone<br>GIVING BACK, GIVING TOGETHER:<br>C&N’s “Giving Back, Giving Together” initiative works to<br>rewrite the story for local seniors. As of December 2023,<br>this remarkable effort has already surpassed $50,000,<br>but the true measure lies not in dollars, but in the 317<br>essential items donated, the 55 volunteer hours shared,<br>and the countless smiles painted on faces that truly define<br>this effort. Every dollar raised stays within our community,<br>supporting 33 local senior organizations who know our<br>seniors best.<br>We don’t just deliver warmth; we remind our seniors they’re<br>valued, their stories treasured, their lives worth enriching.<br>Join us in rewriting the narrative! Every donation, every<br>volunteer hour, every item brought with a compassionate<br>heart brings us closer to that $100,000 goal, and closer to<br>warming the hearts of countless seniors, all year round.<br>FINANCIAL WELLNESS PROGRAMS<br>Building a brighter future starts with financial literacy.<br>Through a partnership with the American Bankers<br>Association Foundation, our teammates provide financial<br>wellness programs that reach across generations, touching<br>the lives of children, teens, and even seniors, paving the<br>way for brighter financial futures.<br>• Teach Children to Save (TCTS): 1,254 children, as<br>of December 2023, have learned early lessons in<br>financial responsibility, equipped with the confidence to<br>navigate their future financial journeys.<br>“C&N’s commitment to community is woven into<br>the very core of our being. It’s not confined to<br>financial transactions, but extends into the realm<br>of year-round support and empowerment.” |
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| 19 2023 ANNUAL HIGHLIGHTS4<br>• Get Smart About Credit (GSAC): 450 teens<br>have been empowered with vital credit knowledge,<br>fostering positive financial habits that will guide<br>them throughout their lives. A special shout-out to<br>the Emporium Team, whose dedication reached 122<br>teens and earned them the internal competition win!<br>But the impact goes beyond numbers. Even the<br>smallest of presentations, the quietest whispers of<br>financial wisdom, make a difference. We recognize this,<br>applauding not just our top performers but every team<br>member and office staff who contributes to our success.<br>This dedication shines through in our exciting initiative<br>for 2024: “Safe Banking for Seniors.” Aligning with our<br>core values of customer protection and community<br>support, this program will provide easy-to-use materials<br>and resources to protect and educate senior customers,<br>ensuring their financial security and peace of mind.<br>BUILDING BRIGHTER FUTURES, TOGETHER<br>C&N’s commitment to community is woven into the<br>very core of our being. It’s not confined to financial<br>transactions, but extends into the realm of year-round<br>support and empowerment, from winter warmth for<br>seniors to financial literacy for generations to come. Our<br>dedication is an inspiration, our impact undeniable. As<br>we move forward, we are proud to continue our tradition<br>of weaving threads of kindness, knowledge, and support<br>into the fabric of our communities, one empowered<br>individual, one brighter future at a time. |
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