Citizens & Northern Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Unaudited consolidated results. Citizens & Northern is a Pennsylvania banking company. The July 2020 Covenant acquisition materially increased the scale of the business, affecting year-over-year comparisons.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest and dividend income | $20.4 million | $16.5 million | $42.2 million | $33.6 million |
| Net interest income | $18.7 million | $14.2 million | $38.8 million | $28.5 million |
| Provision for loan losses | $0.7 million | $(0.2) million credit | $1.0 million | $1.4 million |
| Noninterest income | $6.3 million | $5.5 million | $13.1 million | $10.8 million |
| Noninterest expense | $15.4 million | $13.3 million | $31.1 million | $26.3 million |
| Net income | $7.1 million | $5.4 million | $15.8 million | $9.6 million |
| Diluted EPS | $0.44 | $0.39 | $0.99 | $0.70 |
- Margins: Net interest margin was 3.52% in Q2, down from 3.65% a year earlier; first-half margin was 3.75%, up from 3.73%. The quarterly comparison reflects lower asset yields, partly offset by lower funding costs.
- Cash flow: First-half operating cash flow was $15.4 million versus $5.8 million in 2020. Cash and cash equivalents ended the period at $201.0 million, up from $96.0 million at year-end 2020.
- Balance sheet and liquidity: Total assets were $2.34 billion; deposits $1.92 billion; and shareholders’ equity $304.1 million. Deposits grew $96.3 million from year-end, while gross loans fell $46.4 million to $1.60 billion. Available credit facilities totaled $765.4 million, including $705.8 million unused FHLB capacity and $45.0 million at correspondent banks.
- Debt: At June 30, borrowings included $44.3 million of long-term FHLB advances, $14.7 million carrying value of senior notes and $33.0 million of subordinated debt. In May, the company issued $15 million of 2.75% senior notes due 2026 and $25 million of 3.25% fixed-to-floating subordinated notes due 2031; it redeemed $8 million of older subordinated debt in June.
- Credit quality: The allowance for loan losses was $12.4 million, or 0.77% of loans, versus $11.4 million and 0.69% at year-end. Nonperforming loans were $24.9 million, or 1.56% of loans, compared with $23.4 million and 1.42%. Net charge-offs were $13,000 for the first half.
Material changes and management commentary
- Q2 net income rose 29.8% year over year; first-half net income rose 65.0%. Management attributed much of the increase in net interest income to Covenant-related growth and PPP lending. Average loans and deposits were substantially higher year over year, while Q2 net interest margin declined.
- Q2 noninterest expense increased $2.1 million year over year, despite no merger-related costs in 2021; excluding 2020 merger costs, expense rose $3.1 million. Higher staffing, occupancy and technology costs reflected Covenant, business expansion and operating needs. First-half expense, excluding 2020 merger costs, increased $5.9 million.
- COVID-related loan deferrals had declined to 12 loans totaling $6.7 million at June 30, from $26.0 million at March 31 and $241.2 million at June 30, 2020. Deferrals were scheduled to expire in Q3 2021; management said further requests would be assessed individually. PPP loans totaled $110.3 million recorded investment, including $72.4 million of second-draw loans.
- Bank capital ratios remained above regulatory thresholds: C&N Bank’s total risk-based capital ratio was 16.40% and leverage ratio 10.31%. Management described liquidity and capital as adequate to meet funding needs and absorb potential losses.
- No formal earnings or financial guidance is provided. Management cautioned that first-half results may not indicate full-year performance.
Risks, contingencies and unusual items
- Credit estimates are sensitive to borrower conditions and regional economic performance; management noted that a limited number of larger commercial relationships can materially affect impairments, allowances and charge-offs. Commercial lending is concentrated in the company’s regional markets, with some participation and leveraged loans outside those markets.
- The filing identifies COVID-19 effects, interest-rate and monetary-policy changes, economic conditions, competition, regulatory changes, cybersecurity and vendor interruptions, technology costs, and integration or synergy risks as factors that could affect results.
- Available-for-sale securities were $391.9 million at fair value. Management considered unrealized losses temporary; accumulated other comprehensive income related to securities declined to $9.2 million from $11.7 million at year-end.
- Trust-department tax compliance matters generated $107,000 of first-half losses. Accrued liabilities included $429,000 for identified matters, and management said additional expenses could not be estimated. Management did not expect pending legal proceedings to materially affect results.
- The company reported effective disclosure controls and procedures and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth, deposit balances and net interest margin hold up as PPP balances run off and market rates or deposit competition change.
- Trends in nonperforming loans, larger commercial exposures, remaining COVID deferrals and adequacy of the loan-loss allowance.
- Whether Covenant-related revenue and cost synergies offset higher staffing, technology and other operating expenses.
- Capital and liquidity capacity after new debt issuance, dividends and share repurchases; the company repurchased 61,696 shares in the first half for $1.5 million.
- Potential additional costs from trust tax compliance matters and the treatment of securities valuation changes in equity.