Citizens & Northern Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. The company is a regional bank holding company serving markets in Pennsylvania and southern New York. Financial amounts below are in U.S. dollars; “million” is used for readability.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Net interest income | $20.8 million | Up $0.4 million from Q1 2022 |
| Net interest margin | 3.71% | 3.86% in Q1 2022 |
| Net income / diluted EPS | $6.3 million / $0.40 | $6.9 million / $0.44 in Q1 2022 |
| Total assets | $2.43 billion | Down $24.4 million from year-end 2022 |
| Loans, gross | $1.75 billion | Up $5.1 million from year-end 2022 |
| Deposits | $1.92 billion | Down $81.6 million, or 4.1%, from year-end 2022 |
| Cash and cash equivalents | $46.1 million | $47.7 million at year-end 2022 |
| Stockholders’ equity | $255.6 million | $249.3 million at year-end 2022 |
- Interest income was $26.1 million and interest expense was $5.4 million. Noninterest income was $5.6 million; noninterest expense was $19.1 million. The effective tax rate was 18.4%.
- Net cash provided by operating activities was $9.5 million; investing activities provided $26.5 million; financing activities used $37.6 million. Cash and cash equivalents decreased $1.6 million during the quarter.
- Loans were $1.75 billion before an $18.3 million allowance for credit losses. Nonaccrual loans were $12.9 million; nonperforming assets totaled $14.6 million, or 0.60% of assets, versus $25.6 million and 1.04% at year-end 2022.
- Borrowings included $93.4 million of short-term debt, $98.7 million of FHLB advances, $14.8 million of senior notes and $24.6 million of subordinated debt. The Bank’s total capital ratio was 15.44%, and its common equity tier 1 ratio was 14.32%.
Material changes versus Q1 2022 and year-end 2022
- Net income declined 9.3% year over year, and diluted EPS fell from $0.44 to $0.40. Net interest income rose 2.2%, but net interest margin fell 15 basis points to 3.71%.
- Interest expense increased $3.9 million, chiefly from higher deposit costs and increased short- and long-term borrowings. Average interest-bearing deposit cost rose to 0.94% from 0.26%; average cost of borrowed funds rose to 4.07% from 2.85%.
- Noninterest expense increased $2.2 million, or 13.0%. Salaries, data processing, professional fees and other expenses rose; professional fees included $389,000 in Wealth Management platform conversion costs.
- Noninterest income decreased $207,000, primarily reflecting lower gains on loan sales and lower brokerage and insurance revenue.
- Deposits fell $81.6 million in the quarter. Management attributed the decline partly to seasonal municipal outflows and customer funds moving to higher-yielding alternatives. Estimated uninsured deposits were $613.9 million, or 31.7% of deposits, down from $689.4 million at year-end.
- Available-for-sale securities had $55.1 million of gross unrealized losses at quarter-end, down from $64.1 million at year-end. The company reported no credit-loss allowance for these securities and said it did not intend, nor expect to be required, to sell them before recovery.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautioned that Q1 results may not indicate full-year results; loan growth may depend on interest rates, economic conditions and other factors.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $2.1 million and the off-balance-sheet credit allowance by $793,000, reducing retained earnings by $1.7 million after tax. Q1 included a $352,000 credit for credit losses, versus an $891,000 provision in Q1 2022.
- Management cited recent bank failures and industry turmoil as risks that could weaken customer confidence, affect funding and liquidity, raise regulatory costs or create reputational impacts. The company reported $1.043 billion of highly liquid funding sources, exceeding estimated uninsured deposits by 69.9%, and said it believed it could meet funding obligations.
- Interest-rate sensitivity modeling changed materially: at March 31, the model projected net interest income down 13.6% under an immediate 400-basis-point increase, compared with a 8.9% increase in the December 31 model. Management attributed the shift mainly to higher assumed deposit-rate sensitivity; modeled results remained within policy limits. Actual outcomes may differ materially.
- Management said legal proceedings were not expected to materially affect financial condition or results. The filing notes ongoing risks from credit quality, regional economic conditions, deposit competition, technology and cybersecurity, and changes in rates and regulation.
- Q1 comprehensive income was $13.3 million, including $7.1 million of net other comprehensive income, mainly from improved unrealized values on securities. The company repurchased 77,430 shares for $1.7 million and declared dividends of $0.28 per share.
Important facts for investors to verify
- Whether deposit outflows continue, especially among uninsured and rate-sensitive balances, and how funding costs affect margin.
- Trends in net interest margin and borrowings as deposit pricing and market rates change.
- Credit performance in commercial real estate and other commercial lending, including nonaccrual loans, allowance adequacy and collateral values.
- Whether the securities portfolio’s unrealized losses or liquidity needs could lead to security sales or additional funding pressure.
- How CECL estimates, economic forecasts and future credit conditions affect provisions and capital.
- Whether operating expenses, including technology and platform-conversion costs, moderate after their year-over-year increase.