KBRA Affirms Ratings for Citizens & Northern Corporation

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Wellsboro, Pennsylvania-based Citizens & Northern Corporation (NASDAQ: CZNC) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Citizens & Northern Bank, the lead subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

CZNC’s ratings are supported by a strong earnings profile, evidenced by a ROAA that consistently exceeds 1% (5-year average: ~1.20%), further bolstered by a lower cost funding profile, minimal charge-off activity, and the continued maintenance of a solid capital position. The company reflects a lower rate sensitive, rural core deposit franchise balanced by ample access to secondary sources of liquidity (notably FHLB availability) accounting for ~30% of total assets as of 4Q23, which covers uninsured deposits by over 120%. Additionally, CZNC has historically relied less on noncore funding sources as the company reflects a core deposit to total funding ratio of ~85%, supported by its market footprint and scale from recent acquisitions leading to funding and cost stability. The company also benefits from a solid ~30% in noninterest bearing deposits, and as a result, total deposit costs were ~170 bps in 4Q23, appearing to be well contained. NIM has traditionally tracked in the upper 3% range, but, due to the rise in funding costs, has recently trended downward to 3.34% for 4Q23. Going forward, management expects NIM to return to historical norms as funding costs begin to stabilize. Regarding credit quality, the company’s current level of NPAs is elevated compared to peers, although the company has historically demonstrated an ability to manage troubled credits by realizing limited loss content. That said, classified and criticized loan balances remained elevated at near 5% of total loans as of 4Q23. CZNC’s notable commercial loan concentration included 6% of total loans in industrial loans, 5% in retail, 5% in office, and 4% in hotels as of 4Q23. While the company plans to moderate growth into a more selective clientele base, CZNC will continue investing in infrastructure (both in personnel and technology) to further support legacy markets and expand its treasury platform. Furthermore, KBRA views the higher than peer capital ratios, including a CET1 ratio above 13%, as integral to the ratings. During 2023, the company sustained a dividend payout ratio which accounted for ~70% of CZNC's earnings, though capital metrics remain strong. The ratings are somewhat constrained by a narrow geographic footprint compared to similarly rated peers and inherent integration risk associated with the company’s active M&A strategy. However, KBRA recognizes CZNC’s disciplined approach to acquisitions and successful track record of integration. Overall, the Stable Outlook reflects KBRA’s view toward the bank’s robust deposit franchise, access to liquidity owing to a lower risk balance sheet composition, and solid risk adjusted earnings.

Rating Sensitivities

Further scale within economically robust MSAs and the continuation of earnings diversification, including lower-risk or uncorrelated fee income sources, as well as the continued maintenance of solid capital metrics, may lead to positive rating momentum over time. Conversely, unexpected deterioration in the funding profile impacting the overall liquidity position of the bank, weakened profitability, outsized growth that materially impacts the core capital position, or asset quality metrics deteriorating beyond our expectations through the credit cycle, could have negative rating implications.

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