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 bank"), the lead subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the company’s durable, branch-based deposit franchise with a footprint largely in secondary Pennsylvania markets. As such, CZNC carries a stable NIB deposit base representing a solid 24% of noninterest bearing deposits, supporting a lower cost funding base with the cost of total deposits at 1.97% for 4Q24, compared to similarly rated peers at 2.45%. In addition, the company maintains a stable funding profile reflected by a core deposit to total funding ratio of 84% (5-year average of 87%), supported by its market footprint and scale contributing to funding and cost stability. Furthermore, CZNC reflects a consistent earnings profile evidenced by an ROA of 1.00% for FY24 (5-yr average 1.15%), underpinned by an above peer average NIM (3.30% at 2024) attributable to the earning asset mix leaning more towards higher-yielding loans, with loans to average earning assets at 77%. Moreover, supporting the earnings base is the company’s diversified revenue stream with noninterest income generally comprising 25% of total revenues, largely in stable trust and fee revenue. The ratings consider the elevated NPA ratio, though acknowledge that it is within historic norms. That said, the bank has historically demonstrated minimal credit losses attributable to management’s proactive credit practices and solid recourse protection as the annual NCO ratio has tracked below 0.30% since 2017. CZNC has exhibited negative credit migration, though not uncommon among the banking industry, as classified and criticized loan balances remained elevated at 2.6% and 2.3% of total loans, respectively, as of 3Q24. The ratings reflect disciplined capital management with a solid CET1 ratio tracking above similarly rated peers at 13.6% at 4Q24, which is supported by a relatively lower risk profile (RWA density of 73% at 4Q24) in addition to a consistent track record of earnings generation. KBRA recognizes CZNC’s disciplined approach to acquisitions and successful integrations, though also acknowledges the inherent integration risk.

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 continued minimal loss content and 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 elevated credit losses, could cause rating pressure.

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