Citizens & Northern Corporation — FY 2021 Form 10-K
Business context and reporting period. Citizens & Northern Corporation is a community-bank holding company operating mainly in Pennsylvania and Southern New York. This filing covers the fiscal year ended December 31, 2021; comparisons are with FY 2020 unless noted. The 2020 comparison includes Covenant Bank for only six months following its July 1, 2020 acquisition, while 2021 includes a full year.
Financial performance and condition
| Metric | FY 2021 / year-end | FY 2020 / comparison |
|---|---|---|
| Net interest income (GAAP) | $77.9 million | $67.6 million |
| Net interest margin | 3.69% | 3.69% |
| Net income | $30.6 million | $19.2 million |
| Diluted earnings per share | $1.92 | $1.30 |
| Noninterest income | $25.9 million | $24.5 million |
| Noninterest expense | $62.5 million | $65.0 million |
| Operating cash flow | $34.8 million | $24.8 million |
| Total assets | $2.33 billion | $2.24 billion |
| Deposits | $1.93 billion | $1.82 billion |
| Gross loans | $1.56 billion | $1.64 billion |
| Allowance for loan losses | $13.5 million; 0.87% of loans | $11.4 million; 0.69% of loans |
Net interest income on a fully taxable-equivalent basis was $79.1 million, up 15.4%. Lower funding costs and growth in average earning assets supported the increase; the Covenant acquisition and PPP lending also contributed. PPP interest and fees were $6.5 million, versus $2.9 million in 2020. Noninterest income excluding securities gains rose 6.2%, with trust, debit-card interchange and deposit-service revenue gains partly offset by lower mortgage-loan sale gains.
Noninterest expense fell year over year as 2020 included $7.7 million of Covenant merger costs and a $1.6 million loss on prepaid borrowings. Excluding those items, expense rose 12.3% to $62.5 million, led by salaries and benefits, data processing and occupancy costs. The effective tax rate was 18.9%, compared with 17.2%.
Year-end cash and cash equivalents were $95.8 million. The company reported $79.1 million in overnight interest-bearing deposits with the Federal Reserve and correspondent banks. Total credit facilities were $815.5 million, of which $782.2 million was available. Management described liquidity as strong. Year-end borrowings included $28.0 million of FHLB advances, $1.8 million of short-term borrowings, $14.7 million of senior notes and $33.0 million of subordinated debt. C&N Bank’s Tier 1 leverage ratio was 10.52%, total risk-based capital ratio 16.04%, and capital conservation buffer 8.04%.
Material changes versus FY 2020
- Net income increased 59%, but the comparison is affected by the partial-year contribution of Covenant in 2020 and 2020 merger and debt-prepayment costs.
- Assets and deposits increased, while gross loans declined 4.8%, largely because PPP balances fell by $105.4 million as loans were forgiven or repaid. Commercial lending remained the largest portfolio segment.
- The securities portfolio’s amortized cost increased to $511.6 million from $334.6 million. Rising rates reduced its net unrealized gain to $6.1 million from $14.8 million; the company considered loss positions temporary.
- Nonperforming assets declined to $21.9 million from $24.7 million. Nonperforming loans were 1.36% of loans versus 1.42%; the allowance increased to $13.5 million, including a higher collectively determined reserve.
- Net charge-offs were $1.5 million, including $1.46 million of partial charge-offs on one commercial loan. A separate $2.22 million commercial-loan charge-off had affected 2020.
- 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, and redeemed $8 million of subordinated notes. Dividends declared rose to $1.11 per share from $1.08; the company repurchased 299,059 shares during 2021.
Outlook, risks and unusual items
The filing gives no quantitative earnings or revenue guidance. Management expected the Bank to remain above well-capitalized regulatory thresholds over the next 12 months and foreseeable future. It noted the Federal Reserve’s anticipated rate increases and end of asset purchases, while cautioning that interest-rate changes can affect earnings and securities values. The Corporation has exposure to local economic conditions, credit losses, competition, acquisition integration and execution, cybersecurity and technology, regulation, and liquidity availability.
COVID-related loan deferrals had ended by December 31, 2021; none remained in deferral status, compared with 45 loans totaling $37.4 million at year-end 2020. PPP balances and related fee income continued to run off. The filing identifies the allowance for loan losses as a significant estimate and the qualitative factors used in its general reserve as the audit’s critical audit matter. It also discloses trust-department tax-compliance losses of $164,000 in 2021 and a $465,000 accrual for identified matters; management could not estimate any additional expense. Management said pending litigation was not expected to have a material effect. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
The company expected to adopt the current expected credit losses standard (CECL) on January 1, 2023; the filing does not provide a quantified adoption impact.
Important facts for investors to verify
- Whether reported earnings growth persists after accounting for the acquisition-related comparison, PPP fee runoff, and rising operating costs.
- Commercial-loan performance, particularly the remaining balance and collateral recovery on the loan partially charged off in 2021, and the hotel-related impaired loans.
- The sensitivity of net interest income and securities values to rate changes, including the sizable available-for-sale portfolio and its unrealized gains.
- Future capital distributions and funding needs in light of new senior and subordinated debt, share repurchases, and regulatory limits on dividends.
- The eventual cost, if any, of trust tax-compliance matters and the financial effect of CECL adoption.