Citizens & Northern Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023 unless noted. Citizens & Northern is a regional bank holding company operating primarily in Pennsylvania and nearby parts of New York. Amounts below are in U.S. dollars; financial statement amounts are in millions unless specified.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $19.0 million | $20.8 million in Q1 2023 |
| Net interest margin | 3.29% | 3.71% in Q1 2023 |
| Noninterest income | $6.7 million | $5.6 million in Q1 2023 |
| Noninterest expense | $18.3 million | $19.1 million in Q1 2023 |
| Provision for credit losses | $954,000 expense | $352,000 credit in Q1 2023 |
| Net income; diluted EPS | $5.3 million; $0.35 | $6.3 million; $0.40 in Q1 2023 |
| Operating cash flow | $5.7 million | $9.5 million in Q1 2023 |
| Total assets; stockholders’ equity | $2,521.5 million; $261.7 million | $2,515.6 million; $262.4 million at Dec. 31, 2023 |
| Gross loans; allowance for loan losses | $1,872.4 million; $20.0 million | $1,848.1 million; $19.2 million at Dec. 31, 2023 |
| Deposits | $1,995.9 million | $2,014.8 million at Dec. 31, 2023 |
| Borrowings | $237.2 million total | $211.8 million at Dec. 31, 2023 |
| Cash and cash equivalents | $42.3 million at quarter-end | $52.8 million at Dec. 31, 2023 |
Net interest income plus noninterest income, a common bank revenue measure, was $25.7 million, down from $26.4 million in Q1 2023. Comprehensive income was $3.0 million, compared with $13.3 million a year earlier, reflecting an after-tax $2.3 million other comprehensive loss, primarily from available-for-sale securities.
Material changes and drivers
- Net income declined 15% year over year. Interest and dividend income increased, but interest expense rose faster: $11.3 million versus $5.4 million, including deposit interest expense of $8.9 million versus $3.2 million.
- Average earning-asset yield increased to 5.22% from 4.66%, while the average rate on interest-bearing liabilities rose to 2.60% from 1.36%. Management attributed the margin decline to liability repricing, particularly deposit costs.
- Noninterest income increased 19%, supported by higher earnings on bank-owned life insurance, trust and brokerage revenue, loan sales, and FHLB and Federal Reserve stock dividends. Noninterest expense decreased 4%, including lower professional fees and a postretirement-plan curtailment gain.
- Gross loans grew $24.3 million from year-end, led by owner-occupied commercial real estate and other commercial lending. Deposits decreased $18.9 million; management cited seasonal reductions in municipal deposits, partly offset by growth in brokered deposits.
- Nonperforming assets increased to $19.8 million, or 0.78% of assets, from $18.8 million, or 0.75%, at year-end. Nonaccrual loans rose to $19.1 million; net charge-offs remained low at $145,000 for the quarter.
Liquidity, capital, risks and contingencies
- Management reported $1.07 billion of highly liquid available funding, including unused borrowing capacity and unpledged securities. This equaled 187.7% of estimated uninsured deposits and 249.2% of uninsured and uncollateralized deposits. Estimated uninsured deposits were $568.1 million, or 28.2% of deposits.
- At March 31, C&N Bank’s total risk-based capital ratio was 14.77%, its common equity tier 1 ratio was 13.67%, and its capital conservation buffer was 6.77%. Management stated the bank met applicable capital requirements.
- Available-for-sale securities had a net unrealized loss of approximately $52.0 million before tax, reflecting higher interest rates. Management stated it did not intend, and was not more likely than not required, to sell the securities before recovering amortized cost; it recorded no credit-loss allowance on them.
- Interest-rate simulations showed lower modeled net interest income and economic value of equity in all tested up- and down-rate scenarios; results were within company policy limits. The +400-basis-point scenario modeled a 18.0% decrease in one-year net interest income and a 19.8% decrease in economic value of equity. Results depend on assumptions about deposits, prepayments and rates.
- A putative class action filed March 27, 2024 alleges that C&N Bank aided violations connected to an alleged Ponzi scheme involving a customer. The bank had not yet responded, said it believed it had substantial defenses, and did not consider a loss probable; no accrual or loss range was recorded.
- Management highlighted sensitivity to interest rates and economic conditions, credit losses, deposit competition and customer confidence, technology and cybersecurity risks, regulatory changes, and fraud risks including those associated with expanding artificial-intelligence use. The filing reports no material change to previously disclosed risk factors.
- The quarter included surrender of bank-owned life insurance, with $14.3 million reflected as an increase in other assets; management attributed higher life-insurance earnings partly to a $30 million policy purchase in December 2023.
Outlook: The filing provides no specific earnings, margin, loan-growth or deposit guidance. Management said it believed liquidity was adequate to meet short- and long-term funding needs. It cautioned that first-quarter results may not indicate full-year 2024 results.
Important facts for investors to verify
- Whether deposit pricing and mix stabilize enough to support net interest margin after the substantial year-over-year rise in funding costs.
- Trends in commercial credit quality, especially nonaccrual and individually evaluated loans, the allowance, and the identified construction/land and office-related exposures.
- Deposit levels, brokered-deposit reliance, uninsured-deposit estimates, and the availability and terms of contingent borrowing capacity.
- Whether the securities portfolio’s unrealized losses, interest-rate sensitivity and reported capital position change materially as rates and deposit behavior evolve.
- Developments in the class-action litigation, including any response, loss assessment or change to the current no-accrual position.