CITIZENS & NORTHERN CORPORATION Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements.Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", "likely", "expect", "plan", "anticipate", "target", "forecast", and "goal". These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management's control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:
? changes in monetary and fiscal policies of the
? changes in general economic conditions
recent adverse developments in the banking industry highlighted by high-profile
bank failures and the potential impact of such developments on customer ? confidence, sources of liquidity and capital funding, and regulatory responses
to these developments (including potential increases in the cost of deposit
insurance assessments)
? the Corporation's credit standards and its on-going credit assessment processes
might not protect it from significant credit losses
? legislative or regulatory changes
? downturn in demand for loan, deposit and other financial services in the
Corporation's market area
? increased competition from other banks and non-bank providers of financial
services
? technological changes and increased technology-related costs
? information security breach or other technology difficulties or failures
? changes in accounting principles, or the application of generally accepted
accounting principles
? failure to achieve merger-related synergies and difficulties in integrating the
business and operations of acquired institutions
? the effect of the novel coronavirus (COVID-19) and related events
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
EARNINGS OVERVIEW
First Quarter 2023 as Compared to First Quarter 2022
First quarter 2023 net income was$6,253,000 , or$0.40 per diluted share. In comparison, first quarter 2022 net income was$6,895,000 , or$0.44 per diluted share. Significant variances were as follows:
First quarter 2023 net interest income of
the first quarter 2022 total. The increase in net interest income was mainly
driven by loan growth, as average earning assets increased
including an increase in average loans of
interest-bearing due from banks decreased
of
quarter 2022 while average borrowed funds increased
? interest margin was 3.71% in the first quarter 2023, down from 3.86% in the
first quarter 2022. The interest rate spread decreased 0.43%, as the average
rate on interest-bearing liabilities increased 0.96%, while the average yield
on earning assets increased 0.53%. Contributing to the comparatively lower
margin and spread, total interest and fees on loans in the first quarter 2022
included
in excess of previous carrying amounts with no comparable amount in the first
quarter 2023.
The credit for credit losses (reduction in expense) was
? quarter 2023 as compared to the first quarter 2022 provision for loan losses of
$891,000 . The credit for credit losses in the first quarter 2023 resulted mainly from a reduction in 38 Table of Contents
the allowance related to the commercial segment of the portfolio. Within the net
credit for credit losses on loans in the first quarter 2023, the provision
related to specific loans was
an increase in specific allowances on loans of
first quarter 2022 provision included a net charge of
specific loans (net charge-offs of
allowances on loans of
Noninterest income of
? from the first quarter 2022 amount. Significant variances included the
following:
Net gains from sale of loans of
o quarter 2022, reflecting a reduction in volume of residential mortgage loans
sold.
o Brokerage and insurance revenue of
quarter 2022, due to lower volume of new transactions.
Loan servicing fees, net of
o servicing rights decreased
increase of
Other noninterest income of
2022, including dividends on FHLB-Pittsburgh stock totaling
o increase of
premises and equipment of
quarter 2022.
Noninterest expense of
?
the following:
Salaries and employee benefits expense of
the first quarter 2022, including an increase in base salaries expense of
o increased by 10 (2.5%) to 412 in the first quarter 2023 as compared to the
first quarter 2022. Total cash and stock-based compensation expense increased
Corporation's partially self-insured plan.
Other noninterest expense of
o quarter 2022. Within this category, significant variances included the
following:
In the first quarter 2022 the allowance for SBA claim adjustments decreased,
? reflecting more favorable claim results than previously estimated, resulting in
a reduction in expense of
quarter 2023.
? Other operational losses totaled
? Net collection expense totaled
of
Advertising expense totaled
?
monitoring analysis.
Professional fees of
o conversion costs related to a change in Wealth Management platform for
providing brokerage and investment advisory services.
Data processing and telecommunications of
o the first quarter 2022, including the impact of increases in software licensing
and maintenance costs as well as costs related to enhancements of data
management capabilities.
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The income tax provision was
? first quarter 2023, as compared to
the fourth quarter 2022. The decrease in income tax provision reflected the
decrease in pre-tax income of
TABLE I - QUARTERLY FINANCIAL DATA
(Dollars In Thousands, For the Three Months Ended : Except Per Share Data) March 31, December 31, September 30, June 30, March 31, (Unaudited) 2023 2022 2022 2022 2022 Interest income$ 26,139 $ 25,855 $ 23,710 $ 21,309 $ 21,773 Interest expense 5,358 3,563 2,831 1,684 1,441 Net interest income 20,781 22,292 20,879 19,625 20,332 (Credit) provision for credit losses (352) 2,262 3,794 308 891 Net interest income after (credit) provision for credit losses 21,133 20,030 17,085 19,317 19,441 Noninterest income 5,616 6,109 5,671 6,829 5,823 Noninterest expense 19,087 16,587 17,443 17,039 16,886 Income before income tax provision 7,662 9,552 5,313 9,107 8,378 Income tax provision 1,409 1,773 858 1,618 1,483 Net income$ 6,253 $ 7,779 $ 4,455$ 7,489 $ 6,895 Net income attributable to common shares$ 6,201 $ 7,711 $ 4,416$ 7,419 $ 6,835 Basic earnings per common share$ 0.40 $ 0.50 $ 0.29$ 0.48 $ 0.44 Diluted earnings per common share$ 0.40 $ 0.50 $ 0.29$ 0.48 $ 0.44 NONINTEREST INCOME
TABLE II - COMPARISON OF NONINTEREST INCOME
(Dollars in Thousands) Three Months Ended
March 31, $ %
2023 2022 Change Change
Trust revenue $ 1,777 $ 1,786 $ (9) (0.5) %Brokerage and insurance revenue 430 522 (92) (17.6) % Service charges on deposit accounts 1,290 1,235 55 4.5 % Interchange revenue from debit card transactions 1,007 963 44 4.6 % Net gains from sales of loans 74 382 (308) (80.6) % Loan servicing fees, net 122 210 (88) (41.9) % Increase in cash surrender value of life insurance 138 135 3 2.2 % Other noninterest income 771 588 183 31.1 % Realized gains on available-for-sale debt securities, net 7 2 5 250.0 % Total noninterest income$ 5,616 $ 5,823 $ (207) (3.6) % NONINTEREST EXPENSE
TABLE III - COMPARISON OF NONINTEREST EXPENSE
(Dollars in Thousands) Three Months Ended
March 31, $ %
2023 2022 Change Change
Salaries and employee benefits $ 11,427 $ 10,607 $ 820 7.7 %
Net occupancy and equipment expense 1,402 1,411 (9) (0.6) %
Data processing and telecommunications expense 1,936 1,623 313 19.3 %
Automated teller machine and interchange expense 475 384 91 23.7 %
Pennsylvania shares tax 403 488 (85) (17.4) %
Professional fees 937 489 448 91.6 %
Other noninterest expense 2,507 1,884 623 33.1 %
Total noninterest expense $ 19,087 $ 16,886 $ 2,201 13.0 %
40
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Additional detailed information concerning fluctuations in the Corporation's earnings results and other financial information are provided in other sections of Management's Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with
Allowance for Credit Losses on Loans - A material estimate that is particularly susceptible to significant change is the determination of the allowance for credit losses (ACL) on loans. The Corporation maintains an ACL on loans which represents management's estimate of expected net charge-offs over the life of the loans. The ACL includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis). Management considers the determination of the ACL on loans to be critical because it requires significant judgment regarding estimates of expected credit losses based on the Corporation's historical loss experience, current conditions and economic forecasts. Management's evaluation is based upon a continuous review of the Corporation's loans, with consideration given to evaluations resulting from examinations performed by regulatory authorities. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for determining the ACL, and additional discussion of the ACL is provided in a separate section of Management's Discussion and Analysis. The ACL may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables, including new information regarding existing problem loans, identification of additional problem loans, changes in the fair value of underlying collateral, unforeseen events such as natural disasters and pandemics, and other factors. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly. Fair Value ofAvailable-For-Sale Debt Securities - Another material estimate is the calculation of fair values of the Corporation's debt securities. For most of the Corporation's debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. NET INTEREST INCOME The Corporation's primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables IV, V and VI include information regarding the Corporation's net interest income for the three-month periods endedMarch 31, 2023 and 2022. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.
Three-Month Periods Ended
For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) was$21,050,000 in 2023, which was$416,000 (2.0%) higher than in 2022. Interest income in the first quarter 2023 was$26,408,000 which was$4,333,000 higher as compared to 2022. Interest expense of$5,358,000 in 2023 was$3,917,000 higher than in 2022. As presented in Table V, the Net Interest Margin was 3.71% in 2023 as compared to 3.86% 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 3.30% in 2023 from 3.73% in 2022. The average yield on earning assets of 4.66% was 0.53% higher in 2023 as compared to 2022, and the average rate on interest-bearing liabilities of 1.36% in 2023 was 0.96% higher. Contributing to the comparatively lower margin and spread, total interest and fees on loans in the first quarter 41
Table of Contents
2022 included$1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable amount in the first quarter 2023.
INTEREST INCOME AND EARNING ASSETS
Interest income totaled
Interest and fees from loans receivable increased$4,022,000 in 2023 as compared to 2022. The fully taxable equivalent yield on loans in 2023 was 5.44% compared to 5.01% in 2022. Average outstanding loans receivable increased$178,002,000 (11.5%) to$1,725,863,000 in 2023 from$1,547,861,000 in 2022. In the first quarter 2022, total interest and fees on loans included$1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable income in 2023. Income from interest-bearing due from banks totaled$278,000 in 2023, an increase of$211,000 from the total for 2022. The average yield on interest-bearing due from banks was 3.56% in 2023 and 0.32% in 2022. The average balance of interest-bearing due from banks was$31,637,000 in 2023 as compared to$84,115,000 in 2022. Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with theFederal Reserve . Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased$104,000 in 2023 as compared to 2022, as the average balance (at amortized cost) of available-for-sale debt securities increased$6,867,000 . The average yield on available-for-sale debt securities was 2.23% for 2023, up slightly from 2.18% in 2022.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense increased$3,917,000 to$5,358,000 in 2023 from$1,441,000 in 2022. Interest expense on deposits increased$2,320,000 , as the average rate on interest-bearing deposits increased to 0.94% in 2023 from 0.26% in 2022. The increase in average rate on deposits includes increases of 1.13% on time deposits, 0.74% on money market accounts and 0.69% on interest checking accounts. Average total deposits (interest-bearing and noninterest-bearing) remained stable with$1,931,126,000 for the first quarter 2023 compared to$1,931,681,000 for the first quarter 2022. Average interest checking deposits increased$38,147,000 , average time deposits increased$35,092,000 and the average total balance of other categories of noninterest-bearing demand and other deposits increased$18,464,000 , while average money market accounts decreased$92,258,000 .
Interest expense on short-term borrowings in 2023 was
Interest expense on long-term borrowings (FHLB advances) increased$632,000 to$681,000 in 2023 from$49,000 in 2022. The average balance of long-term borrowings was$80,648,000 in 2023, up from an average balance of$26,102,000 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 3.42% in 2023 compared to 0.76% in 2022. Interest expense on subordinated debt decreased$133,000 to$230,000 in 2023 from$363,000 in 2022. The average balance of subordinated debt decreased to$24,620,000 in 2023 from$32,948,000 in 2022. The average rate on subordinated debt decreased to 3.79% in 2023 from 4.47% in 2022. In the second quarter 2022, the Corporation redeemed subordinated debt with aggregate par values of$8.5 million and a weighted average interest rate of 6.29%.
More information regarding the terms of borrowed funds is provided in Note 8 to the unaudited consolidated financial statements.
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Table of Contents
TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE
Three Months Ended
March 31, Increase/
(In Thousands) 2023 2022 (Decrease)
INTEREST INCOMEInterest-bearing due from banks$ 278 $ 67 $
211
Available-for-sale debt securities: Taxable 2,211 1,969
242
Tax-exempt 767 905
(138)
Total available-for-sale debt securities 2,978 2,874
104 Loans receivable: Taxable 22,428 17,974 4,454 Paycheck Protection Program 3 575 (572) Tax-exempt 713 573 140 Total loans receivable 23,144 19,122 4,022 Other earning assets 8 12 (4) Total Interest Income 26,408 22,075 4,333 INTEREST EXPENSE Interest-bearing deposits: Interest checking 987 194 793 Money market 873 262 611 Savings 63 61 2 Time deposits 1,307 393 914
Total interest-bearing deposits 3,230 910
2,320 Borrowed funds: Short-term 1,097 1 1,096 Long-term - FHLB advances 681 49 632 Senior notes, net 120 118 2 Subordinated debt, net 230 363 (133) Total borrowed funds 2,128 531 1,597 Total Interest Expense 5,358 1,441 3,917 Net Interest Income$ 21,050 $ 20,634 $ 416 Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis (a non-GAAP measure), using the Corporation's marginal federal income tax rate of 21%. The following table is a reconciliation of net interest income underU.S. GAAP as compared to net interest income as adjusted to a fully taxable-equivalent basis. (In Thousands) Three Months Ended March 31, Increase/ 2023 2022 (Decrease)
Net Interest Income Under U.S. GAAP$ 20,781 $ 20,332 $ 449 Add: fully taxable-equivalent interest income adjustment from tax-exempt securities 127 183
(56)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans 142 119 23 Net Interest Income as adjusted to a fully taxable-equivalent basis$ 21,050 $ 20,634 $ 416 43 Table of Contents
TABLE V - Analysis of Average Daily Balances and Rates
(Dollars in Thousands) Three Months Three Months
Ended Rate of Ended Rate of
3/31/2023 Return/ 3/31/2022 Return/
Average Cost of Average Cost of
Balance Funds % Balance Funds %
EARNING ASSETSInterest-bearing due from banks$ 31,637 3.56 %$ 84,115 0.32 % Available-for-sale debt securities, at amortized cost: Taxable 410,110 2.19 % 390,301 2.05 % Tax-exempt 131,392 2.37 % 144,334 2.54 % Total available-for-sale debt securities 541,502 2.23 % 534,635 2.18 % Loans receivable: Taxable 1,633,850 5.57 % 1,445,353 5.04 % Paycheck Protection Program 162 7.51 % 18,849 12.37 % Tax-exempt 91,851 3.15 % 83,659 2.78 % Total loans receivable 1,725,863 5.44 % 1,547,861 5.01 % Other earning assets 1,200 2.70 % 1,983 2.45 % Total Earning Assets 2,300,202 4.66 % 2,168,594 4.13 % Cash 22,276 20,703 Unrealized loss on securities (60,055) (2,508) Allowance for loan losses (17,053) (13,783) Bank-owned life insurance 31,267 30,720 Bank premises and equipment 21,518 21,043 Intangible assets 55,331 55,765 Other assets 67,333 44,952 Total Assets$ 2,420,819 $ 2,325,486 INTEREST-BEARING LIABILITIES Interest-bearing deposits: Interest checking$ 457,277 0.88 %$ 419,130 0.19 % Money market 364,646 0.97 % 456,904 0.23 % Savings 257,047 0.10 % 249,165 0.10 % Time deposits 312,497 1.70 % 277,405 0.57 % Total interest-bearing deposits 1,391,467 0.94 % 1,402,604 0.26 % Borrowed funds: Short-term 91,767 4.85 % 1,746 0.23 % Long-term - FHLB advances 80,648 3.42 % 26,102 0.76 % Senior notes, net 14,773 3.29 % 14,709 3.25 % Subordinated debt, net 24,620 3.79 % 32,948 4.47 % Total borrowed funds 211,808 4.07 % 75,505 2.85 % Total Interest-bearing Liabilities 1,603,275 1.36 % 1,478,109 0.40 % Demand deposits 539,659 529,077 Other liabilities 25,247 24,046 Total Liabilities 2,168,181 2,031,232 Stockholders' equity, excluding accumulated other comprehensive loss 299,599
295,996
Accumulated other comprehensive loss (46,961)
(1,742)
Total Stockholders' Equity 252,638
294,254
Total Liabilities and Stockholders' Equity$ 2,420,819 $
2,325,486
Interest Rate Spread 3.30 % 3.73 % Net Interest Income/Earning Assets 3.71 % 3.86 % Total Deposits (Interest-bearing and Demand)$ 1,931,126 $
1,931,681
Annualized rates of return on tax-exempt securities and loans are presented (1) on a fully taxable-equivalent basis, using the Corporation's marginal federal
income tax rate of 21%.
(2) Nonaccrual loans have been included with loans for the purpose of analyzing
net interest earnings.
(3) Rates of return on earning assets and costs of funds are presented on an
annualized basis.
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TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands) Three Months Ended 3/31/23 vs. 3/31/22
Change in Change in Total
Volume Rate Change
EARNING ASSETSInterest-bearing due from banks$ (67) $ 278 $ 211 Available-for-sale debt securities: Taxable 103 139 242 Tax-exempt (78) (60) (138) Total available-for-sale debt securities 25 79 104 Loans receivable: Taxable 2,480 1,974 4,454 Paycheck Protection Program (410)
(162) (572) Tax-exempt 59 81 140 Total loans receivable 2,129 1,893 4,022 Other earning assets (5) 1 (4) Total Interest Income 2,082 2,251 4,333 INTEREST-BEARING LIABILITIES Interest-bearing deposits: Interest checking 20 773 793 Money market (63) 674 611 Savings 2 0 2 Time deposits 56 858 914
Total interest-bearing deposits 15
2,305 2,320 Borrowed funds: Short-term 792 304 1,096 Long-term - FHLB advances 236 396 632 Senior notes, net 1 1 2 Subordinated debt, net (83) (50) (133) Total borrowed funds 946 651 1,597 Total Interest Expense 961 2,956 3,917 Net Interest Income$ 1,121 $ (705) $ 416
Changes in income on tax-exempt securities and loans are presented on a fully (1) taxable-equivalent basis, using the Corporation's marginal federal income tax
rate of 21%.
The change in interest due to both volume and rates has been allocated to (2) volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
INCOME TAXES
The income tax provision in interim periods is based on the Corporation's estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first quarter 2023 was$1,409,000 , which was$74,000 lower than the provision for the first quarter 2022. The effective tax rate (tax provision as a percentage of pre-tax income) was 18.4% in the first quarter 2023 compared to 17.7% in the first quarter 2022. The Corporation's effective tax rates differ from the statutory rate of 21% principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. 45 Table of Contents
The Corporation recognizes deferred tax assets and liabilities based on
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. The net deferred tax asset at
March 31, December 31,
(In Thousands) 2023 2022
Deferred tax assets:
Unrealized holding losses on securities $ 11,504 $ 13,391
Allowance for credit losses on loans 4,029 3,648
Purchase accounting adjustments on loans 573 938 Deferred compensation 1,198 1,149 Operating leases liability 876 907 Deferred loan origination fees 710
779
Net operating loss carryforward 630
659
Accrued incentive compensation 170 354 Other deferred tax assets 1,212 1,115 Total deferred tax assets 20,902 22,940 Deferred tax liabilities: Defined benefit plans - ASC 835 125 129 Bank premises and equipment 283 298 Core deposit intangibles 610 633 Right-of-use assets from operating leases 876
907
Other deferred tax liabilities 94
89
Total deferred tax liabilities 1,988 2,056 Deferred tax asset, net$ 18,914 $ 20,884 The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income. Management believes the recorded net deferred tax asset atMarch 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.
SECURITIES
Management continually evaluates several objectives in determining the size,
securities mix and other characteristics of the available-for-sale debt
securities (investment) portfolio. Key objectives include supporting liquidity
needs and maximizing return on earning assets within reasonable risk parameters.
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The composition of the available-for-sale debt securities portfolio at
(Dollars In Thousands) March 31, 2023 December
31, 2022 December 31, 2021
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost ValueObligations of the U.S. Treasury$ 33,924 $ 31,163 $ 35,166 $ 31,836 $ 25,058 $ 24,912 Obligations ofU.S. Government agencies 25,479 23,348 25,938 23,430 23,936 24,091 Bank holding company debt securities 28,947 24,723 28,945 25,386 18,000 17,987 Obligations of states and political subdivisions: Tax-exempt 128,285 117,812 146,149 132,623 143,427 148,028 Taxable 67,076 57,572 68,488 56,812 72,182 72,765 Mortgage-backed securities issued or guaranteed byU.S. Government agencies or sponsored agencies: Residential pass-through securities 109,028 97,807 112,782 99,941 98,048 98,181 Residential collateralized mortgage obligations 42,296 38,117 44,868 40,296 44,015 44,247 Commercial mortgage-backed securities 84,449 74,195 91,388 79,686 86,926 87,468 Private label commercial mortgage-backed securities 8,105 8,077 8,070 8,023 0 0 Total Available-for-Sale Debt Securities$ 527,589 $ 472,814 $ 561,794
Aggregate Unrealized (Loss) Gain$ (54,775) $ (63,761) $ 6,087 Aggregate Unrealized (Loss) Gain as a % of Amortized Cost (10.4) % (11.3) % 1.2 % Market Yield on 5-YearU.S. Treasury Obligations (a) 3.60 % 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$54,775,000 , or 10.4% atMarch 31, 2023 and$63,761,000 (11.3%) atDecember 31, 2022 . In comparison, the aggregate unrealized gain position was$6,087,000 (1.2%) atDecember 31, 2021 . The volatility in the fair value of the portfolio, including the significant reduction in fair value in 2022, resulted from changes in interest rates. As shown above, the market yield on the 5-yearU.S. Treasury Note was 0.39% lower atMarch 31, 2023 in comparison toDecember 31, 2022 , and 2.34% higher than atDecember 31, 2021 .
Additional information regarding the potential impact of interest rate changes on all of the Corporation's financial instruments is provided in Item 3, Quantitative and Qualitative Disclosures about Market Risk.
As described in Note 5 to the unaudited, consolidated financial statements, management determined the Corporation does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position atMarch 31, 2023 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation's holdings as ofMarch 31, 2023 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held atMarch 31, 2023 , other than securities issued or guaranteed byU.S. Government entities or agencies, is as follows:
Bank holding company debt securities - All of the Corporation's holdings of
bank holding company debt securities were investment grade and there have been
? no payment defaults. There were seven securities with face amounts ranging from
securities. All of the issuers have publicly traded common stock. At
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
on the amortized cost basis and reflecting the lowest enhanced or underlying
rating by Moody's, Standard & Poors or Fitch, is as follows:
- 23% of the portfolio; AA - 70%; A - 7%.
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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 March
31, 2023. FINANCIAL CONDITION This section includes information regarding the Corporation's lending activities or other significant changes or exposures that are not otherwise addressed in Management's Discussion and Analysis. Significant changes in the average balances of the Corporation's earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management's Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for credit losses and stockholders' equity, are discussed in separate sections of Management's Discussion and Analysis. Management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation's financial condition in 2023. Table VII shows the composition of the loan portfolio atMarch 31, 2023 and at year-end from 2018 through 2022. The segments presented in Table VII have been revised from those used in prior year disclosures to be consistent with the pools used in determining the collectively evaluated portion of the allowance for credit losses based on the CECL methodology in 2023. As presented in Table VII, total loans outstanding atMarch 31, 2023 of$1,745,139,000 was more than double the corresponding total atDecember 31, 2018 . The increase in loans outstanding includes the impact of acquisitions of banks located inSoutheastern Pennsylvania in 2018 and 2019. Primarily as a result of the acquisitions, as well as expansion by opening 2 offices in Southcentral Pennsylvania, the mix of the loan portfolio has changed to become predominantly commercial in nature. AtMarch 31, 2023 , commercial loans represented 74% of the portfolio while residential loans totaled 23% of the portfolio; in comparison, commercial loans totaled 48% and residential loans totaled 47% of the portfolio atDecember 31, 2018 . Table VII shows an increase in commercial and industrial loans to$222,923,000 atDecember 31, 2020 followed by reductions in 2021, 2022 and the first quarter 2023. The elevated balance of commercial and industrial loans atDecember 31, 2020 included Paycheck Protection Program (PPP) loans of$132,269,000 , a substantial portion of which were subsequently repaid. The outstanding balance of PPP loans was$155,000 atMarch 31, 2023 . AtMarch 31, 2023 , gross loans outstanding increased$5,099,000 fromDecember 31, 2022 . Gross loans outstanding atDecember 31, 2022 increased$175,191,000 , or 11.2%, from the total atDecember 31, 2021 . The pace of loan growth in 2023 will depend on the impact of potential further increases in interest rates, potential deterioration in economic conditions and other factors. While the Corporation's lending activities are primarily concentrated in its market areas, a portion of the Corporation's commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the "lead banks". Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Total participation loans outstanding amounted to$42,047,000 atMarch 31, 2023 , down from$44,723,000 atDecember 31, 2022 . AtMarch 31, 2023 , the total recorded investment in non-owner occupied commercial real estate loans for which the primary purpose is utilization of office space by third parties was$95,524,000 , or 5.5% of total gross loans receivable. Within this segment, atMarch 31, 2023 , there was 1 loan with a recorded investment of$2,615,000 risk rated as Special Mention with no related ACL, and 1 loan with a recorded investment of$1,379,000 risk rated as Substandard and nonaccrual with an ACL of$182,000 . The remainder of the non-owner occupied commercial real estate loans for the primary purpose of office space utilization totaling$91,530,000 were accruing interest and risk rated Pass atMarch 31, 2023 . The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks ofPittsburgh andChicago . 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 48
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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 ofPittsburgh andChicago . Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to theFederal Home Loan Bank of Pittsburgh . In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks ofPittsburgh andChicago . The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. ThroughMarch 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. AtMarch 31, 2023 , the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to$1,376,000 , and the corresponding total outstanding balance of repurchased loans atDecember 31, 2022 was$1,515,000 . AtMarch 31, 2023 , outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled$331,326,000 , including loans sold through the MPF Xtra program of$153,437,000 and loans sold through the Original program of$167,889,000 . AtDecember 31, 2022 , outstanding balances of loans sold and serviced through the two programs totaled$325,677,000 , including loans sold through the MPF Xtra program of$155,506,000 and loans sold through the Original Program of$170,171,000 . Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as ofMarch 31, 2023 andDecember 31, 2022 . The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA's underwriting and documentation requirements. Pursuant to an acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the purchased loans originated through the various SBA loan programs as ofJuly 1, 2020 and recorded an allowance for SBA claim adjustments. Determination of the allowance was subjective in nature and was based on the Corporation's assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation's total exposure related to SBA guarantees on purchased loans was$4,799,000 atMarch 31, 2023 and$4,847,000 atDecember 31, 2022 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of$90,000 atMarch 31, 2023 andDecember 31, 2022 . In the three months endedMarch 31, 2023 , the Corporation did not record an increase or reduction in other noninterest expense related to amounts realized on SBA claims in excess of prior estimates, as compared to a reduction of$242,000 in the three months
endedMarch 31, 2022 . 49 Table of Contents
TABLE VII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands) March 31, December 31,
2023 2022 2021 2020 2019 2018
Commercial real estate -
nonowner occupied:
Nonowner occupied $ 457,814 $ 454,386 $ 358,352 $ 328,662 $ 208,579 $ 115,128
Multi-family (5 or more)
residential 58,111 55,406 49,054 54,893 30,474 7,104
1-4 Family - commercial
purpose 166,773 165,805 175,027 198,918 147,121 35,176
Total commercial real estate
- nonowner occupied 682,698 675,597 582,433 582,473 386,174 157,408
Commercial real estate -
owner occupied 221,766 205,910 196,083 191,075 78,729 38,478
All other commercial loans:
Commercial and industrial 83,420 95,368 118,488 222,923 67,288 49,947
Commercial lines of credit 119,109 141,444 106,338 105,802 92,509 65,492
Political subdivisions 85,555 86,663 75,401 46,295 46,054 49,037
Commercial construction and
land 70,612 60,892 59,505 41,000 32,717 11,126
Other commercial loans 26,106 25,710 26,498 29,310 28,735 23,130
Total all other commercial
loans 384,802 410,077 386,230 445,330 267,303 198,732
Residential mortgage loans:
1-4 Family - residential 372,241 363,005 327,593 356,532 388,415 360,195
1-4 Family residential
construction 29,479 30,577 23,151 18,736 14,640 24,698
Total residential mortgage 401,720 393,582 350,744 375,268 403,055 384,893
Consumer loans:
Consumer lines of credit
(including HELOCs) 35,245 36,650 33,522 34,566 30,810 31,955
All other consumer 18,908 18,224 15,837 15,497 16,151 16,097
Total consumer 54,153 54,874 49,359 50,063 46,961 48,052
Total 1,745,139 1,740,040 1,564,849 1,644,209 1,182,222 827,563
Less: allowance for credit
losses on loans (18,346) (16,615) (13,537) (11,385) (9,836) (9,309)
Loans, net $ 1,726,793 $ 1,723,425 $ 1,551,312 $ 1,632,824 $ 1,172,386 $ 818,254 PROVISION AND ALLOWANCE FOR CREDIT LOSSES
OnJanuary 1, 2023 , the Corporation adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Note 1 to the unaudited consolidated financial statements provides a detailed explanation of the Corporation's adopted accounting policies related to the application of CECL. EffectiveJanuary 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 afterJanuary 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards ("Incurred Loss"). AtJanuary 1, 2023 , the impact of adopting CECL included an increase in gross loans receivable of$806,000 as compared toDecember 31, 2022 and an increase in the allowance for credit losses of$2,104,000 as compared to the allowance for loan losses determined under the Incurred Loss method atDecember 31, 2022 . The credit for credit losses (reduction in expense) was$352,000 in the first quarter 2023 as compared to the first quarter 2022 provision for loan losses of$891,000 . The credit for credit losses in the first quarter 2023 resulted mainly from a reduction in the allowance related to the commercial segment of the portfolio. The net credit for loan losses in the first quarter 2023 included the impact of a reduction in qualitative factors applied to commercial loan pools, mainly due to an improvement in data used to evaluate commercial real estate values in the Corporation's relevant market areas atMarch 31, 2023 as compared toJanuary 1, 2023 , along with a reduction in the 50
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historical net charge-off percentage for non-owner occupied commercial real estate. These adjustments were partially offset by the impact of an increase in the allowance atMarch 31, 2023 as compared toJanuary 1, 2023 based on changes in the economic forecast. Within the net credit for credit losses on loans in the first quarter 2023, the provision related to specific loans was$205,000 , including net charge-offs of$61,000 and an increase in specific allowances on loans of$144,000 . In comparison, the first quarter 2022 provision included a net charge of$147,000 related to specific loans (net charge-offs of$157,000 offset by a net decrease in specific allowances on loans of$10,000 ). Table X shows that total nonperforming assets as a percentage of total assets was 0.60% atMarch 31, 2023 , down from 1.04% atDecember 31, 2022 and lower than that at year-end 2018 through 2021. Total nonperforming assets were$14.6 million atMarch 31, 2023 , down from$25.6 million atDecember 31, 2022 . Similarly, total loans individually evaluated for credit loss decreased to$9.3 million atMarch 31, 2023 from$19.4 million atDecember 31, 2022 . The net decrease in nonperforming assets atMarch 31, 2023 compared toDecember 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 atDecember 31, 2022 . The reduction also included a paydown of$2,180,000 in the first quarter 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$474,000 atMarch 31, 2023 . These reductions were partially offset by the addition to nonaccrual of a commercial loan relationship totaling$1,931,000 atMarch 31, 2023 . Based on an estimate of the liquidation value of the real estate collateralizing the relationship, an allowance of$182,000 was recorded atMarch 31, 2023 . In the first quarter 2023, net charge-offs were minimal by historical standards, totaling$61,000 . Table VIII shows annual average net charge-off rates ranging from a high of 0.26% in 2022 to a low of 0.02% in 2018. Over the period 2018-2022 and the first three months of 2023, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on individual loans, and may significantly impact the provision for credit losses and the amount of total charge-offs reported in any one period. Management believes it has been conservative in its decisions concerning identification of loans requiring individual evaluation for credit loss, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as ofMarch 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 VIII through X present historical data related to loans and the allowance for credit losses.
TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
(Dollars In Thousands) Three Months Ended
March 31 , March 31 ,
Years Ended
2023 2022 2022 2021 2020 2019 2018
Balance, beginning of year $ 16,615 $ 13,537 $ 13,537 $ 11,385 $ 9,836 $ 9,309 $ 8,856
Increase due to adoption of
CECL 2,104 0 0 0 0 0 0
Charge-offs (67) (180) (4,245) (1,575) (2,465) (379) (497)
Recoveries 6 23 68 66 101 57 366Net charge-offs (61) (157) (4,177) (1,509) (2,364) (322) (131) (Credit) provision for credit losses (312) 891 7,255 3,661 3,913 849 584 Balance, end of period$ 18,346 $ 14,271 $ 16,615 $ 13,537 $ 11,385 $ 9,836 $ 9,309 Net charge-offs as a % of average loans 0.00 % 0.01 % 0.26 % 0.09 % 0.16 % 0.03 % 0.02 % 51 Table of Contents
TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES
UPON ADOPTION OF CECL
(In Thousands) March 31, January 1,
2023 2023
Loans individually evaluated $ 895 $ 751
Loans collectively evaluated:
Commercial real estate - nonowner occupied 9,045 9,641
Commercial real estate - owner occupied 1,759 1,765
All other commercial loans 3,477 3,914
Residential mortgage 2,864 2,407
Consumer 306 241
Total Allowance $ 18,346 $ 18,719
PRIOR TO CECL ADOPTION
(In Thousands) As of December 31,
2022 2021 2020 2019 2018
ASC 310 - Impaired loans -
individually evaluated $ 453 $ 740 $ 925 $ 1,051 $ 1,605
ASC 450 - Collectively evaluated:
Commercial 10,845 7,553 5,545 3,913 3,102
Residential mortgage 4,073 4,338 4,091 4,006 3,870
Consumer 244 235 239 281 233
Unallocated 1,000 671 585 585 499
Total Allowance $ 16,615 $ 13,537 $ 11,385 $ 9,836 $ 9,309 TABLE X - PAST DUE LOANS AND NONPERFORMING ASSETS
(Dollars In Thousands) March 31, As
of
2023 2022 2021 2020 2019 2018
Loans individually evaluated with
a valuation allowance $ 5,802 $ 3,460 $ 6,540 $ 8,082 $ 3,375 $ 4,851
Loans individually evaluated
without a valuation allowance 3,507 14,871 2,636 2,895 1,670 4,923
Purchased credit impaired loans 0 1,027 6,558 6,841 441 0
Total impaired loans $ 9,309 $ 19,358 $ 15,734 $ 17,818 $ 5,486 $ 9,774
Total loans past due 30-89 days
and still accruing $ 5,493 $ 7,079 $ 5,106 $ 5,918 $ 8,889 $ 7,142
Nonperforming assets:
Purchased credit impaired loans $ 0 $ 1,027 $ 6,558 $ 6,841 $ 441 $ 0
Other nonaccrual loans 12,876 22,058 12,441 14,575 8,777 13,113
Total nonaccrual loans 12,876 23,085 18,999 21,416 9,218 13,113
Total loans past due 90 days or
more and still accruing 1,216 2,237 2,219 1,975 1,207 2,906
Total nonperforming loans 14,092 25,322 21,218 23,391 10,425 16,019
Foreclosed assets held for sale
(real estate) 459 275 684 1,338 2,886 1,703
Total nonperforming assets $ 14,551 $ 25,597 $ 21,902
Total nonperforming loans as a %
of loans 0.81 % 1.46 % 1.36 % 1.42 % 0.88 % 1.94 %
Total nonperforming assets as a %
of assets 0.60 % 1.04 % 0.94 % 1.10 % 0.80 % 1.37 %
Allowance for credit losses as a
% of total loans 1.05 % 0.95 % 0.87 % 0.69 % 0.83 % 1.12 %
52
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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 theFederal Home Loan Bank of Pittsburgh , secured by various mortgage loans. The Corporation has a line of credit with theFederal Reserve Bank of Philadelphia's Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of$23,314,000 atMarch 31, 2023 .
The Corporation's outstanding, available, and total credit facilities at
Outstanding Available Total Credit
(In Thousands) March 31, December 31,
2023 2022 2023 2022 2023 2022
0 0 22,340 23,107 22,340 23,107
Other correspondent banks 0 0 95,000 95,000 95,000 95,000
Total credit facilities $ 201,357 $ 150,099 AtMarch 31, 2023 , the Corporation's outstanding credit facilities with theFederal Home Loan Bank of Pittsburgh consisted of overnight borrowings of$91,000,000 , long-term borrowings of$98,649,000 and letters of credit totaling$11,708,000 . AtDecember 31, 2022 , the Corporation's outstanding credit facilities with theFederal Home Loan Bank of Pittsburgh consisted of overnight borrowing of$77,000,000 , long-term borrowings of$62,272,000 and letters of credit totaling$10,827,000 . Additional information regarding borrowed funds is included in Note 8 to the unaudited consolidated financial statements. Additionally, the Corporation uses "RepoSweep" arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. In light of the unrealized loss atMarch 31, 2023 resulting from increases in interest rates in 2022, as described in more detail in the Securities section of Management's Discussion and Analysis, management would be more likely in the near term to utilize securities as collateral for borrowings than to sell securities in such an emergency situation. AtMarch 31, 2023 , the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was$269,763,000 . Deposits totaled$1,916,040,000 atMarch 31, 2023 , down$81,553,000 (4.1%) from$1,997,593,000 atDecember 31, 2022 . Average total deposits of$1,931,126,000 for the first quarter 2023 were down$96,020,000 (4.7%) from the fourth quarter 2022 and were flat as compared to average deposits of$1,931,681,000 for the first quarter 2022. The reduction in total deposits included a reduction in the estimated amount of deposits in excess ofFDIC insurance levels (uninsured deposit balances) of$75.6 million as compared toDecember 31, 2022 . The net reduction in deposits resulted from several factors, including the impact of customer funds transferred to higher-yielding investment alternatives and seasonal reductions in municipal deposits. AtMarch 31, 2023 , the Corporation's estimated uninsured deposits totaled$613.9 million , or 31.7% of total deposits, down from$689.4 million or 34.2% of total deposits atDecember 31, 2022 . Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling$189.2 million , or 9.8% of total deposits atMarch 31, 2023 . The highly liquid sources of available funds described above, including unused borrowing capacity with theFederal Home Loan Bank of Pittsburgh , unused availability on theFederal Reserve Bank of Philadelphia's discount window, available federal funds lines with other banks and unencumbered available-for-sale debt securities totaled$1.043 billion atMarch 31, 2023 . Available funding from these sources exceeded the amount of uninsured deposits noted above by 69.9% atMarch 31, 2023 . 53
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Despite the reduction in deposit balances in the first quarter 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
InAugust 2018 , theFederal 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, theFederal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of theFederal Reserve's small bank holding company policy statement and is therefore excluded from consolidated capital requirements atMarch 31, 2023 ; however,C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. Details concerning capital ratios atMarch 31, 2023 andDecember 31, 2022 are presented below. Management believes, as ofMarch 31, 2023 , thatC&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 andC&N Bank's capital ratios atMarch 31, 2023 andDecember 31, 2022 exceed the Corporation's Board policy
threshold levels.
(Dollars in Thousands) Minimum To Be
Minimum To Maintain Well
Minimum Capital Conservation Capitalized Under Minimum To Meet
Capital Buffer at Reporting Prompt Corrective the Corporation's
Actual Requirement Date Action Provisions Policy Thresholds
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
March 31, 2023 :
Total capital to
risk-weighted assets:
Consolidated $ 287,182 16.49 % N/A N/A N/A N/A N/A N/A $ 182,849 ?10.5 %
C&N Bank 268,292 15.44 % 138,989 ?8 % 182,423 ?10.5 % 173,736 ?10 % 182,423 ?10.5 %
Tier 1 capital to
risk-weighted assets:
Consolidated 243,024 13.96 % N/A N/A N/A N/A N/A N/A 148,021 ?8.5 %
C&N Bank 248,768 14.32 % 104,242 ?6 % 147,676 ?8.5 % 138,989 ?8 % 147,676 ?8.5 %
Common equity tier 1
capital to risk-weighted
assets:
Consolidated 243,024 13.96 % N/A N/A N/A N/A N/A N/A 121,900 ?7 %
C&N Bank 248,768 14.32 % 78,181 ?4.5 % 121,615 ?7.0 % 112,928 ?6.5 % 121,615 ?7 %
Tier 1 capital to
average assets:
Consolidated 243,024 10.07 % N/A N/A N/A N/A N/A N/A 193,026 ?8 %
C&N Bank 248,768 10.38 % 95,868 ?4 % N/A N/A 119,835 ?5 % 191,737 ?8 %
December 31, 2022:
Total capital to
risk-weighted assets:
Consolidated $ 285,397 15.72 % N/A N/A N/A N/A N/A N/A $ 190,590 ?10.5 %
C&N Bank 265,784 14.68 % 144,873 ?8 % 190,145 ?10.5 % 181,091 ?10 % 190,145 ?10.5 %
Tier 1 capital to
risk-weighted assets:
Consolidated 243,750 13.43 % N/A N/A N/A N/A N/A N/A 154,287 ?8.5 %
C&N Bank 248,744 13.74 % 108,654 ?6 % 153,927 ?8.5 % 144,873 ?8 % 153,927 ?8.5 %
Common equity tier 1
capital to risk-weighted
assets:
Consolidated 243,750 13.43 % N/A N/A N/A N/A N/A N/A 127,060 ?7 %
C&N Bank 248,744 13.74 % 81,491 ?4.5 % 126,764 ?7.0 % 117,709 ?6.5 % 126,764 ?7 %
Tier 1 capital to
average assets:
Consolidated 243,750 10.11 % N/A N/A N/A N/A N/A N/A 192,941 ?8 %
C&N Bank 248,744 10.38 % 95,826 ?4 % N/A N/A 119,783 ?5 % 191,652 ?8 %
In February 2021 , the Corporation amended its treasury stock repurchase program.
Under the amended program, the Corporation is authorized to repurchase up to
1,000,000 shares of its common stock. In the first quarter 2023, 77,430 shares
were repurchased for a total cost of $1,662,000 , at an average price of $21.47
per share. Cumulatively through March 31, 2023 , 752,130 shares have been
repurchased for a total cost of $18,249,000 , at an average price of $24.26
per
share.
54
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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 andC&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation's ability to pay dividends, repurchase stock or engage in other activities may be limited by theFederal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile. 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. AtMarch 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 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
The Corporation's total stockholders' equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive (loss) income within stockholders' equity. Accumulated other comprehensive (loss) income is excluded from the Bank'sand 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$43,271,000 atMarch 31, 2023 and$50,370,000 atDecember 31, 2022 . The increase in stockholders' equity in the first three months of 2023 from the change in accumulated other comprehensive loss resulted from a decrease in interest rates. Changes in accumulated other comprehensive loss are excluded from earnings and directly increase or decrease stockholders' equity. To the extent unrealized losses on available-for-sale debt securities result from credit losses, unrealized losses are recorded as a charge against earnings. The securities section of Management's Discussion and Analysis and Notes 1 and 5 to the unaudited consolidated financial statements provide additional information concerning management's evaluation of available-for-sale debt securities for credit losses atMarch 31, 2023 . 55
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