Executive Summary / Key Takeaways

• Citizens & Northern Corporation reported a solid start to 2025, with first quarter net income increasing to $6.29 million, or $0.41 per diluted share, up from $5.31 million, or $0.35 per diluted share, in Q1 2024, driven by improved net interest income and controlled credit losses.
• Net interest margin expanded to 3.38% in Q1 2025 from 3.29% in Q1 2024, as the yield on earning assets increased more than the cost of interest-bearing liabilities, despite rising deposit costs.
• The announced acquisition of Susquehanna Community Financial, Inc. (SQCF), expected to close in Q4 2025, is a significant strategic move aimed at expanding the company's footprint in Central Pennsylvania and is anticipated to be accretive to earnings per share starting in the first year post-closing, excluding one-time charges.
• The company maintains a strong liquidity position with $1.10 billion in highly liquid available funds at March 31, 2025, covering 182.7% of uninsured deposits, and CN Bank remains well-capitalized, exceeding all regulatory requirements and internal policy thresholds.
• While credit quality metrics show some mixed trends with an increase in past due loans and collateral dependent loans, overall nonperforming assets remain below historical highs, and management believes its allowance for credit losses is prudent, though actual losses could vary.

Setting the Scene: A Community Bank's Strategic Evolution

Citizens & Northern Corporation (NASDAQ: CZNC) operates as a financial holding company rooted in community banking, primarily through its subsidiary, Citizens Northern Bank (CN Bank). With a history shaped by strategic expansion, including acquisitions in recent years, the Corporation has built a presence across Northcentral and Southcentral Pennsylvania and the Southern tier of New York State. Its core business revolves around traditional banking services: lending, deposits, investments, and trust services, all managed within a single reportable segment focused on community banking operations.

In a competitive landscape populated by both larger regional players like Northwest Bancshares (NWBI) and smaller community-focused institutions such as First Citizens Community Bank (FCCB) and ACNB Corporation (ACNB), CZNC positions itself on the strength of its community brand, historical longevity, and a focus on personalized service. While direct quantitative comparisons of market share across all specific niches are challenging to ascertain, CZNC holds an estimated 0.4-0.6% aggregate market share in its primary markets. Its historical revenue growth has been around 4-5% annually, which trails the industry average and some competitors like FCCB (~6%) and NWBI (~5%).

CZNC's competitive standing is bolstered by certain operational capabilities. Notably, its reinsurance activities contribute to an estimated 10-15% lower risk-adjusted costs compared to peers, translating into superior margins (potentially 2-3% higher net margins) and stronger cash flow generation. This capability provides a resilience in lending operations, particularly in volatile markets, which can help differentiate it from competitors like FCCB. Furthermore, its long-standing presence, dating back to 1864, fosters strong customer loyalty, estimated to be 15-20% higher than some rivals, contributing to stable revenue streams and better capital efficiency, offering an advantage over less diversified competitors like ACNB.

However, CZNC faces vulnerabilities. Its relatively limited geographic scale with 31 branches results in higher customer acquisition costs (estimated 10-15% higher than NWBI). The company also appears to lag in technological innovation, with estimated processing speeds 10-15% slower than some competitors, potentially impacting operational efficiency and competitiveness against rivals like FCCB and NWBI who have invested more aggressively in digital banking platforms. While data processing and ATM/interchange expenses are part of its cost structure, specific R&D initiatives or new technological developments with quantifiable targets or timelines aimed at closing this gap are not detailed. The focus appears to be on leveraging existing operational structures, including the reinsurance model, rather than pioneering new banking technologies.

Looking ahead, a pivotal strategic initiative is the pending acquisition of Susquehanna Community Financial, Inc. (SQCF), announced on April 23, 2025. This merger, expected to close in the fourth quarter of 2025, will add SQCF's 7 banking offices and approximately $598 million in assets (as of March 31, 2025), significantly expanding CZNC's footprint in Central Pennsylvania. This move is a direct response to the need for scale and market expansion in a competitive environment.

Financial Performance and Operational Strength

Citizens & Northern Corporation demonstrated improved financial performance in the first quarter of 2025. Net income rose to $6.29 million, a notable increase from $5.31 million in the same period last year. This translated to basic and diluted earnings per common share of $0.41, up from $0.35 in Q1 2024.

The primary driver of this improvement was a stronger net interest income, which reached $19.98 million in Q1 2025, up $934,000 from $19.04 million in Q1 2024. This growth was supported by an expanded net interest margin of 3.38%, compared to 3.29% in the prior year quarter. The interest rate spread also increased to 2.69% from 2.62%, indicating that the yield on earning assets grew faster than the cost of interest-bearing liabilities. Specifically, the average yield on earning assets increased by 0.13%, while the average rate on interest-bearing liabilities rose by a more modest 0.06%.

Average total loans receivable contributed positively, increasing by $40.19 million, or 2.2%, to $1.90 billion. The fully taxable equivalent yield on loans improved to 6.03% from 5.92%, reflecting the impact of higher rates on new originations. Average interest-bearing due from banks also saw a significant increase, rising by $35.17 million to $67.90 million, contributing to interest income despite a lower average yield (4.31% vs. 4.71%). Interest income from available-for-sale debt securities also increased, benefiting from a higher average yield (2.65% vs. 2.41%) even as the average balance decreased.

Interest expense increased by $439,000, primarily due to higher costs on deposits. Interest expense on deposits rose by $701,000, driven by both a $64.45 million increase in the average balance of interest-bearing deposits and a higher average rate (2.45% vs. 2.35%). Notably, average time deposits increased substantially by $65.13 million, while average brokered deposits decreased significantly to $26.58 million from $84.32 million, albeit at a lower average rate. Interest expense on borrowed funds decreased overall, as a large reduction in average short-term borrowings offset an increase in interest expense on long-term FHLB advances.

The provision for credit losses saw a significant decrease, falling to $236,000 in Q1 2025 from $954,000 in Q1 2024. This reduction reflected changes in the allowance for credit losses (ACL), including an increase related to qualitative factors partially offset by a decrease stemming from the Corporation's average net charge-off experience. Net charge-offs were lower at $91,000 in Q1 2025 compared to $145,000 in Q1 2024. The ACL as a percentage of gross loans receivable remained stable at 1.06% at March 31, 2025.

Noninterest income increased by $333,000 to $7.01 million, driven by higher trust revenue (consistent with appreciation in U.S. equity markets), increased service charges on deposit accounts (reflecting higher volume), and growth in other noninterest income, including fees from a new Federal Housing Administration loan program. Loan servicing fees, however, decreased due to a change in the fair value of servicing rights. Noninterest expense increased by $739,000 to $19.04 million, largely attributable to higher other noninterest expense, which included a smaller reduction in postretirement medical plan expense compared to the prior year, and an increase in salaries and employee benefits, primarily due to higher incentive compensation and payroll taxes.

Balance Sheet Strength and Risk Management

CZNC maintains a solid balance sheet, characterized by ample liquidity and strong capital ratios. At March 31, 2025, total assets stood at $2.61 billion. The Corporation's liquidity position is supported by borrowing facilities with the Federal Home Loan Bank of Pittsburgh, correspondent banks, and the Federal Reserve Bank's Discount Window, totaling $1.04 billion in available credit facilities. Highly liquid available funds, including unused borrowing capacity and unencumbered available-for-sale securities, amounted to $1.10 billion at March 31, 2025. This provides robust coverage for uninsured deposits ($621.50 million, or 29.3% of total deposits), covering 182.7% of uninsured deposits and 234.9% of total uninsured and uncollateralized deposits ($483.36 million, or 22.8% of total deposits). Management believes this positions the Corporation well to meet its funding obligations.

Capital adequacy remains a key strength. While currently excluded from consolidated capital requirements under the small bank holding company policy statement, CN Bank is subject to and exceeds all regulatory capital requirements. At March 31, 2025, CN Bank's capital ratios significantly surpassed minimum requirements, including a Capital Conservation Buffer of 7.23%, well above the level that would trigger limitations on capital distributions. The Corporation's own capital ratios also exceeded internal policy thresholds. Stockholders' equity totaled $281.83 million at March 31, 2025. However, accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of tax, amounted to $33.05 million, reflecting the impact of higher interest rates on the fair value of the securities portfolio. Management does not intend to sell these securities at a loss and found no credit-related declines in fair value.

Credit risk remains a focus area. Collateral dependent loans increased to $30.80 million at March 31, 2025, up from $30.12 million at December 31, 2024, including a relationship totaling $10.97 million that was paid off in April 2025. Total nonperforming assets saw a slight increase to $24.33 million (0.93% of total assets) from $24.14 million (0.92%) at year-end 2024, though remaining below levels seen in 2020-2022. Loans past due 30-89 days also increased to $8.45 million from $5.66 million. Management acknowledges that a limited number of large commercial relationships have required significant monitoring and could impact future credit losses, but believes its current ACL is prudent.

Interest rate risk is actively managed using simulation models. While the models project decreases in net interest income and economic value of equity in both rising and falling rate scenarios compared to current rates, the modeled changes remain within the Board's policy limits. The results reflect assumptions about deposit rate sensitivity and a floor on falling rates for certain deposit types.

The Corporation is also managing litigation risk. A class action lawsuit filed in March 2024 related to accounts at CN Bank saw a favorable development with the court granting CN Bank's motion to dismiss for lack of personal jurisdiction in March 2025. While plaintiffs have not yet appealed, management does not believe a loss is probable at this time and has recorded no liability.

Strategic Outlook and Key Considerations

The most significant element shaping CZNC's near-term outlook is the pending acquisition of SQCF. This transaction represents a clear strategic commitment to growth through expansion into contiguous markets. The expected closing in the fourth quarter of 2025 is contingent on regulatory and shareholder approvals. Management anticipates the acquisition will be accretive to earnings per share starting in the first year after closing, excluding one-time transaction and integration costs.

However, the integration of SQCF presents execution risks. Combining operations, systems, and cultures could lead to the loss of key personnel, disruption of ongoing business activities, and potential inconsistencies in standards and policies. Substantial expenses are expected in connection with the merger, and failure to complete the acquisition would mean these costs are incurred without realizing the anticipated benefits. Furthermore, the focus on the acquisition could divert management attention from other opportunities. The success in SQCF's market will also depend on CZNC's ability to attract and retain talent and differentiate itself from existing competitors in that region. The acquisition is also expected to subject the holding company to consolidated capital requirements, a change from its current status.

Beyond the acquisition, CZNC's future performance will depend on its ability to navigate the prevailing interest rate environment, manage credit quality in its existing and expanding loan portfolios, and continue to grow core deposits. The treasury stock repurchase program, with 723,966 shares available for repurchase at March 31, 2025, provides flexibility for capital management, subject to maintaining strong financial condition, future earnings, and regulatory requirements. Management has indicated that operating results from the first quarter of 2025 might not be indicative of the results for the full year, suggesting potential variability or anticipated changes over the coming quarters.

Conclusion

Citizens & Northern Corporation has commenced 2025 with a solid financial performance, marked by increased net income and an expanding net interest margin. The company's balance sheet exhibits robust liquidity and strong capital levels, providing a stable foundation. Strategically, the pending acquisition of Susquehanna Community Financial represents a significant opportunity for geographic expansion and is expected to contribute positively to future earnings, although successful integration is paramount.

The investment thesis for CZNC hinges on its ability to effectively execute the SQCF merger, leverage its community banking model and operational advantages like reinsurance to drive profitable growth in an expanded market, and prudently manage credit and interest rate risks in a dynamic economic environment. While challenges exist, particularly regarding integration and the need for technological advancement to match some competitors, the company's current financial health and strategic direction suggest a focused approach to enhancing long-term value. Investors should closely monitor the progress and impact of the SQCF acquisition, trends in asset quality, and the company's ability to maintain its competitive edge in core banking operations.