Citizens & Northern Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; dollar amounts below are in millions unless noted. The company is a regional bank holding company. The filing cautions that nine-month results may not indicate full-year performance.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $19.7 | $20.9 | $60.8 | $60.8 |
| Noninterest income | $6.5 | $5.7 | $18.7 | $18.3 |
| Noninterest expense | $17.9 | $17.4 | $55.7 | $51.4 |
| Net income | $7.6 | $4.5 | $19.9 | $18.8 |
| Diluted EPS | $0.50 | $0.29 | $1.29 | $1.21 |
| Net interest margin | 3.35% | 3.69% | 3.53% | 3.72% |
- Q3 net income rose about 70% year over year; nine-month net income rose about 6%. Q3 pretax income increased $4.1 million, while a $1.2 million decline in net interest income was more than offset by a $5.0 million improvement in credit-loss expense and higher noninterest income.
- Interest expense rose sharply as deposit and borrowing costs increased. In Q3, interest expense increased $6.6 million, including $5.3 million on deposits; interest and dividend income rose $5.4 million. The nine-month pattern was similar: expense increased $16.5 million against a $16.5 million increase in interest income.
- Q3 and nine-month credit-loss results were credits of $1.2 million and $0.8 million, respectively, versus provisions of $3.8 million and $5.0 million in the comparable 2022 periods. Management cited changes in forecast-related and qualitative allowance factors and lower historical net charge-off experience. The 2022 Q3 provision included a $2.2 million partial charge-off on a commercial real estate participation loan.
- Higher trust revenue, deposit service charges and other income contributed to noninterest income growth. Expenses increased, particularly over nine months, with higher salaries, data-processing costs, professional fees, FDIC assessments and other expense, including check-fraud losses.
Financial position, cash flow and liquidity
- At September 30, 2023, total assets were $2.484 billion, loans receivable were $1.831 billion (up $90.6 million from year-end 2022), deposits were $2.025 billion (up $27.4 million), and stockholders’ equity was $240.2 million (down $9.1 million).
- Cash and due from banks were $52.7 million, including $48.3 million of cash and cash equivalents. For the first nine months, operating cash flow was $25.8 million, investing cash flow was negative $40.4 million, and financing cash flow was positive $15.2 million; cash and cash equivalents increased $0.6 million.
- Borrowings at quarter-end included $23.3 million short-term and $125.3 million of FHLB advances, plus $14.8 million senior notes and $24.7 million subordinated debt. Short-term borrowings fell from $80.1 million at year-end 2022, while long-term FHLB advances rose from $62.3 million.
- Management reported $1.096 billion of highly liquid available funding, including unused credit facilities and unencumbered securities, equal to 181.8% of estimated uninsured deposits. Estimated uninsured deposits were $603.0 million, or 29.5% of deposits; uninsured and uncollateralized deposits were $414.0 million, or 20.3% of deposits. Brokered deposits were $62.5 million, up $41.5 million from year-end.
- The bank’s total risk-based capital ratio was 15.07%, common equity tier 1 ratio 14.03%, and tier 1 leverage ratio 10.40%. The bank’s capital conservation buffer was 7.07%; management said the bank met applicable capital requirements.
Material changes, outlook and risks
- Loan growth was concentrated in commercial real estate and residential mortgages. Commercial loans represented approximately 75% of the portfolio. Nonperforming assets declined to $17.4 million, or 0.70% of assets, from $25.6 million, or 1.04%, at year-end 2022. Nonaccrual loans were $15.5 million; the allowance for credit losses was $18.1 million, or 0.99% of gross loans. Management noted new nonaccrual commercial relationships, including two office-related CRE loans totaling $4.0 million.
- Available-for-sale securities had $505.4 million amortized cost and $429.1 million fair value, a $76.3 million pretax unrealized loss, primarily attributed to higher market interest rates. The after-tax accumulated other comprehensive loss on securities was $60.3 million. Management reported no securities credit-loss allowance and said it did not intend, nor expect to be required, to sell the securities before recovery of amortized cost.
- Interest-rate sensitivity modeling changed materially from year-end 2022: the modeled one-year net interest income response at September 30 was negative in both rising- and falling-rate scenarios, compared with an asset-sensitive profile at year-end 2022. A hypothetical +400-basis-point move showed a 21.1% modeled NII decline; management said modeled results remained within policy limits. Actual outcomes may differ because the model depends on assumptions about deposit pricing, mix and cash flows.
- Management described liquidity and capital as adequate. No quantitative earnings guidance was provided. The filing identifies risks including changing rates and economic conditions, deposit competition and customer confidence, credit losses, regulatory changes and costs, technology and cybersecurity risks, and banking-industry turmoil. Loan concentrations and local economic conditions are also relevant; the loan portfolio is geographically concentrated in Pennsylvania and nearby New York markets.
- The company completed its prior 1.0 million-share repurchase authorization and announced a new authorization for up to 750,000 shares. No shares had been repurchased under the new program by September 30. Management reported no material effect expected from pending litigation and no material change in disclosure controls.
Important facts for investors to verify
- Whether deposit pricing, brokered and reciprocal deposit usage, and funding costs continue to pressure net interest margin.
- Developments in CRE credit quality, especially office-related exposures, nonaccruals, and the allowance under the newly adopted CECL methodology.
- Liquidity and capital trends alongside uninsured deposit levels and reliance on FHLB or other borrowing capacity.
- The size and persistence of unrealized securities losses, related interest-rate sensitivity, and any effect on funding flexibility or equity.
- Whether expense growth, one-time items, and repurchases align with future earnings and capital needs; the filing provides no formal earnings outlook.