Citizens & Northern Corporation (NASDAQ: CZNC) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. Comparisons are with Q1 2021 unless otherwise noted. Balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Business context and financial results
The company is a Pennsylvania-based bank holding company serving customers concentrated in Northcentral, Southcentral and Southeastern Pennsylvania and the Southern Tier of New York. Commercial lending represented about 62% of the loan portfolio at quarter-end; residential mortgages represented about 36%.
| Metric | Q1 2022 / March 31, 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $20.3 | $20.1; up 1.2% |
| Net interest margin | 3.86% | 4.00% in Q1 2021 |
| Net income | $6.9 | $8.8; down 21.5% |
| Diluted EPS | $0.44 | $0.55 |
| Provision for loan losses | $0.9 | $0.3 |
| Noninterest income | $5.8 | $6.8; down 14.1% |
| Noninterest expense | $16.9 | $15.7; up 7.5% |
| Net cash from operating activities | $5.6 | $5.7 |
At March 31, total assets were $2,330.4, net loans $1,523.9, available-for-sale securities at fair value $532.9, deposits $1,961.0 and stockholders’ equity $276.2. Cash and cash equivalents were $105.2. Total borrowings were approximately $70.7, comprising short-term borrowings, FHLB advances, senior notes and subordinated debt. For Q1, investing activities used $18.1 and financing activities provided $21.9; cash and cash equivalents increased $9.4 to $105.2.
Changes and notable items
- Net interest income increased modestly, but net interest margin declined 14 basis points. Lower PPP income and reduced average loans weighed on results; higher securities income and lower deposit interest expense partly offset those effects.
- Q1 net income included $1.4 of income from repayments on purchased credit-impaired loans exceeding their carrying amounts; there was no comparable Q1 2021 income. PPP loan interest and fees fell to $0.6 from $2.0.
- Noninterest income fell mainly because loan-sale gains declined and Q1 2021 included tax-credit-related income. Management said comparable Pennsylvania education tax-credit donations and related credits were expected in Q2 2022.
- Higher salaries and benefits, data-processing costs and occupancy costs contributed to increased expenses. Management cited a 5.2% increase in FTE employees to 403, including staffing for the Lancaster market and technology and other functions.
- Loans declined $26.7 from year-end, including lower PPP and residential mortgage balances. Commercial lending opportunities had grown, while residential mortgage activity had slowed amid rising rates.
- Net other comprehensive loss was $25.2, principally from a $32.0 pretax unrealized loss on available-for-sale securities. Accumulated other comprehensive income shifted from $5.0 at year-end to a $20.2 loss, and equity declined $25.2. Management attributed the securities declines to higher market rates and said it found no credit-related impairment and considered the losses temporary.
Liquidity, credit, capital and outlook
Management described liquidity as strong, citing elevated cash, $788.9 of available credit facilities and $328.9 of available-for-sale securities not required for pledging or repurchase arrangements. The company reported no outstanding advances on its Federal Reserve discount-window or correspondent-bank facilities. C&N Bank’s reported total capital, Tier 1 capital and common equity Tier 1 ratios were 16.26%, 15.29% and 15.29%, respectively; management said the Bank met applicable capital requirements.
The allowance for loan losses was $14.3, or 0.93% of loans, versus $13.5, or 0.87%, at year-end. Nonperforming loans were $18.4, or 1.19% of loans, down from $21.2, or 1.36%; nonperforming assets were 0.81% of assets. Management cautioned that estimates for certain individually monitored commercial relationships could differ materially from realized losses. The loan portfolio is geographically concentrated, making borrower performance partly dependent on local economic conditions.
The company’s interest-rate simulation characterized it as asset-sensitive: a modeled immediate 100-basis-point increase projected a 4.7% rise in one-year net interest income, while a 100-basis-point decrease projected a 4.4% decline. These are model estimates, not earnings guidance, and management noted limitations in assumptions about deposit behavior and future cash flows. The Federal Reserve had begun raising rates and indicated further increases could be appropriate; management also discussed elevated inflation and uncertainty around economic conditions. No specific full-year earnings guidance was provided.
Other risks include credit losses, competition, regulation, technology and cybersecurity, and changes in interest rates and economic conditions. The company reported pending or threatened litigation but did not expect it to materially affect financial position or results. Adoption of the expected-credit-loss standard was scheduled for January 1, 2023; management was assessing implementation. Disclosure controls were reported effective, with no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $1.4 of purchased credit-impaired loan recoveries is repeatable, and how results develop excluding this unusual income.
- Whether net interest margin stabilizes or improves as rates rise, including actual deposit pricing and mix compared with the company’s modeled rate sensitivity.
- Whether commercial loan growth materializes and credit quality, provisioning and nonperforming loans remain controlled.
- How securities fair-value losses and accumulated other comprehensive loss evolve, and whether management’s assessment that losses are temporary remains supportable.
- Whether staffing and technology cost increases, loan-sale activity and tax-credit timing affect subsequent-period earnings and expenses.