Citizens & Northern Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2020. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q3 2021 / Sep. 30, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income | $7.4; diluted EPS $0.47 | Q3 2020: $2.8; $0.18 per diluted share |
| Net interest income | $19.5 | Q3 2020: $19.3 |
| Net interest margin | 3.59% | Q3 2020: 3.57% |
| Total assets | $2,354.9 | Dec. 31, 2020: $2,239.1 |
| Loans, gross | $1,575.7 | Dec. 31, 2020: $1,644.2 |
| Deposits | $1,940.1 | Dec. 31, 2020: $1,820.5 |
| Stockholders’ equity | $299.4 | Dec. 31, 2020: $299.8 |
- For the first nine months, net income was $23.2 and diluted EPS was $1.46, versus $12.5 and $0.86 in 2020. Net interest income rose 21.8% to $58.2; the fully taxable-equivalent net interest margin was 3.70%, versus 3.67%.
- Q3 noninterest income was $6.4, down from $7.0; nine-month noninterest income was $19.5, up from $17.8. Q3 noninterest expense was $15.3, compared with $21.1, including $6.4 of merger expenses in Q3 2020. Excluding merger expenses, Q3 expense rose 4.8%; nine-month expense rose 16.6% on that basis.
- Operating cash flow for the nine months was $25.1, versus $14.6 in 2020. Cash and cash equivalents ended the period at $190.2, up from $96.0 at year-end 2020. Financing activities provided $98.7; investing activities used $29.7.
- Loan-loss provision was $1.5 for Q3 and $2.5 for nine months. The allowance was $12.7, or 0.81% of gross loans, versus $11.4, or 0.69%, at year-end 2020. Nonperforming loans were 1.48% of loans, up from 1.42%; nonperforming assets were 1.05% of assets, down from 1.10%.
- Borrowings at quarter-end included $38.7 of FHLB advances, $14.7 of senior notes and $33.0 of subordinated debt, alongside $1.9 of short-term borrowings. Total deposits increased $119.7 from year-end. The company reported $768.5 of available credit facilities and $163.6 of overnight interest-bearing deposits at the Federal Reserve and correspondent banks.
- C&N Bank reported a 10.35% Tier 1 leverage ratio and 16.35% total capital-to-risk-weighted-assets ratio; management stated the Bank exceeded well-capitalized thresholds.
Changes and management commentary
- The 2020 comparison is affected by the Covenant Financial acquisition, completed July 1, 2020. The acquisition added substantial loans, deposits and expenses; the nine-month 2021 period includes a full nine months of Covenant operations, versus three months in 2020.
- Management attributed nine-month net interest income growth principally to Covenant and PPP lending. Lower deposit and borrowing costs also supported results. Q3 average loans declined year over year, partly because of lower PPP balances, while average deposits increased.
- Gross loans declined $68.5 from year-end, including a $69.5 decrease in PPP loans as loans were forgiven or repaid. Excluding PPP, commercial loans increased; residential mortgage balances declined amid prepayments and sales to the secondary market.
- Management reported no COVID-related loan deferrals at September 30, 2021; 45 loans totaling $37.4 were in deferral at December 31, 2020. First- and second-draw PPP recorded investment totaled $62.7 at quarter-end.
- Available-for-sale securities increased to $437.9 from $349.3, while accumulated other comprehensive income fell to $6.4 from $11.8, reflecting unrealized securities losses. Management considered securities impairments temporary.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management cautioned that nine-month results may not indicate full-year results and said it believed liquidity and capital were adequate.
- Risks identified include COVID-19 and economic conditions, changes in interest rates and government policy, competition, technology and cybersecurity disruptions, regulation, and integration or synergy risks from acquisitions. Lending is regionally concentrated, and management noted that local economic conditions affect borrowers’ ability to repay.
- A Q3 partial charge-off of $1.2 related to a commercial loan with a $3.5 balance at the time of charge-off exceeded its prior specific allowance. Management said a small number of larger commercial relationships can materially affect credit losses and allowance estimates.
- The company issued $15.0 of 2.75% senior notes due 2026 and $25.0 of 3.25% fixed-to-floating subordinated notes due 2031 in May 2021, and redeemed $8.0 of older subordinated debt. The new subordinated notes are intended to qualify as Tier 2 capital.
- Trust-department tax-compliance matters remain a contingency: accrued liabilities included $0.429 for identified matters, and management could not estimate potential additional expense. It reported no Q3 2021 losses in this category. Management considered pending litigation unlikely to materially affect results or financial position.
- The company repurchased 292,100 shares for $7.2 through September 30 under a 1,000,000-share authorization. Future repurchases and dividends depend on earnings, capital, market conditions and regulatory limits.
- The expected-credit-loss standard (CECL) was scheduled for adoption on January 1, 2023; management was assessing its impact. The filing reported disclosure controls and procedures as effective.
Important facts for investors to verify
- How much future earnings depend on PPP fee recognition, purchase-accounting accretion and acquired-business contributions.
- Whether the rise in the allowance and commercial-loan credit exposure signals further deterioration; review large criticized, impaired and nonaccrual relationships.
- How interest-rate changes may affect net interest margin, securities fair values and accumulated other comprehensive income.
- The potential additional cost of identified trust tax-compliance matters, which the company said it could not estimate.
- Capital, liquidity and credit conditions, including available borrowing capacity, regional loan concentration and potential acquisition-related integration risks.