Citizens & Northern Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited interim results; the company cautions that six-month results may not indicate full-year performance. The corporation is a Pennsylvania-based banking company, with lending concentrated in Pennsylvania and the Southern Tier of New York.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $19.6 million | $18.7 million | $40.0 million | $38.8 million |
| Net income | $7.5 million | $7.1 million | $14.4 million | $15.8 million |
| Diluted EPS | $0.48 | $0.44 | $0.92 | $0.99 |
| Provision for loan losses | $0.3 million | $0.7 million | $1.2 million | $1.0 million |
| Noninterest income | $6.8 million | $6.3 million | $12.7 million | $13.1 million |
| Noninterest expense | $17.0 million | $15.4 million | $33.9 million | $31.1 million |
- Net interest margin: 3.62% in Q2, up from 3.52% a year earlier; 3.74% for the first half, compared with 3.75%. Fully taxable-equivalent net interest income was $19.9 million in Q2 and $40.6 million for the first half.
- Margins and costs: Q2 average earning-asset yield rose 7 basis points to 3.92%, while the cost of interest-bearing liabilities fell 3 basis points to 0.45%. First-half expense growth reflected employee costs, technology spending and higher health claims.
- Cash flow: First-half operating cash flow was $14.0 million; investing activities used $160.5 million, principally reflecting $92.7 million of securities purchases and $92.3 million of net loan growth. Financing provided $111.0 million, including deposit growth and short-term borrowing. Cash and cash equivalents ended at $60.3 million, down from $95.8 million at year-end 2021.
Balance sheet, debt and liquidity
- At June 30, total assets were $2.411 billion, up from $2.328 billion at December 31, 2021. Gross loans were $1.658 billion, up $92.8 million; deposits were $1.964 billion, up $39.2 million.
- Stockholders’ equity fell to $258.6 million from $301.4 million. A $41.0 million after-tax other comprehensive loss, mainly from falling available-for-sale securities values, was the principal factor; this loss is recorded outside earnings.
- Available-for-sale debt securities had $526.8 million fair value against $572.8 million amortized cost, an aggregate unrealized loss of $46.0 million (8.0%). Management attributed the decline to higher market interest rates and reported no credit-related impairment, considering the losses temporary.
- Short-term borrowings rose to $90.0 million, including $88.5 million of overnight FHLB advances; long-term FHLB advances were $36.8 million. Senior notes were $14.7 million and subordinated debt $24.6 million. The company redeemed $8.5 million of subordinated debt during the first half.
- Available credit facilities totaled $892.4 million, of which $760.8 million was unused. Management said it believed the company was well-positioned to meet funding needs. The bank reported a 15.05% total risk-based capital ratio and a 7.05% capital conservation buffer.
- The company repurchased 365,147 shares in the first half for $9.1 million; 335,569 shares remained authorized under its 1-million-share program at quarter-end. Dividends declared were $0.56 per share for the first half.
Performance changes and asset quality
- Q2 net income rose 6.1% year over year, while first-half net income fell 9.2%. Higher net interest income supported results, but first-half earnings were affected by lower loan-sale gains, greater operating costs and changes in loan-related income.
- Q2 net interest income improved by $0.9 million. Securities income benefited from a larger portfolio, while PPP loan interest and fees declined sharply as loans were forgiven or repaid. Excluding PPP, average loans grew 6.6% in Q2 and 4.4% for the first half year over year.
- First-half noninterest income declined $0.4 million, chiefly because loan-sale gains fell $1.4 million. Noninterest expense increased $2.8 million, including a $2.5 million rise in salaries and benefits. Q2 expense also included $0.8 million of donations, largely related to Pennsylvania tax-credit programs.
- Loan-loss allowance was $14.5 million, or 0.88% of gross loans, versus $13.5 million and 0.87% at year-end. Nonperforming loans declined to $14.3 million from $21.2 million; nonperforming assets were 0.62% of assets versus 0.94%. Management cited improving portfolio credit quality, while noting that a small number of commercial relationships can materially affect losses.
Outlook, risks and unusual items
- No specific earnings or loan-growth guidance was provided. Management said the pace of loan growth for the rest of 2022 would depend on further interest-rate increases, potential economic deterioration and other factors. It noted that some commercial borrowers accelerated transactions ahead of possible rate increases.
- Management described the bank as asset-sensitive: its model projects higher net interest income under rising-rate scenarios and lower income under falling rates. Model outcomes depend on assumptions about deposit behavior, loan repayments and securities prepayments and may differ materially from actual results.
- Inflation was 9.1% for the 12 months ended June 30, 2022. The filing discussed Federal Reserve rate increases and expected continued tightening, identifying rates, economic conditions, credit losses, competition, technology and cybersecurity, regulation, COVID-19 and acquisition integration as risks.
- Unusual earnings items included $1.4 million of first-half income from repayments on purchased credit-impaired loans above carrying values; a $0.3 million reversal of previously accrued Trust Department tax-compliance penalties; and timing-related tax-credit income associated with charitable donations. These items affect comparability.
- The company said pending and threatened litigation was not expected to materially affect results. No material change in previously disclosed risk factors was reported. Disclosure controls were considered effective, with no significant change in internal control over financial reporting.
- The expected-credit-loss accounting standard (CECL) was scheduled for adoption January 1, 2023; the company was evaluating its impact. The filing does not provide a clear quantified estimate of that impact.
Important facts for investors to verify
- Whether deposit costs rise as short-term rates increase, and how quickly loan yields reprice relative to deposits and borrowings.
- Whether commercial loan growth continues and whether credit quality, nonperforming loans and the allowance remain consistent with management’s improving-credit assessment.
- Whether the large unrealized securities losses remain temporary and how they affect equity, liquidity or potential securities sales.
- How much of first-half results reflects nonrecurring or timing-sensitive items, including purchased-credit-impaired loan recoveries, tax-credit income and the penalty reversal.
- Whether liquidity and capital remain adequate if deposit flows, loan demand or market conditions weaken, and whether buybacks and dividends remain supportable.
- The eventual CECL adoption effect and any material changes in legal, SBA-guarantee or mortgage-sale representation-and-warranty exposures.