Citizens & Northern Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2020. The filing is unaudited. C&N is a Pennsylvania-based bank holding company. Its July 2020 Covenant acquisition materially increased the scale of its balance sheet and operations.
Financial performance and condition
- Profit: Net income was $8.8 million, compared with $4.2 million in Q1 2020. Diluted EPS was $0.55 versus $0.30. Management reported Q1 2021 EPS 7.8% above Q4 2020 adjusted non-GAAP EPS of $0.51; these adjusted comparisons exclude specified items.
- Interest income and margin: GAAP net interest income was $20.1 million versus $14.3 million a year earlier. Net interest margin was 4.00%, up from 3.83% on a fully taxable-equivalent basis. The filing attributes much of the increase to Covenant-related balance growth and lower funding costs; purchase-accounting adjustments added $952,000 to Q1 net interest income.
- Other income and expenses: Noninterest income rose 28.4% to $6.8 million, including $1.1 million of net gains on loan sales. Noninterest expense increased 20.3% to $15.7 million, primarily reflecting acquired operations and higher employee costs. There were no merger-related expenses in Q1 2021, versus $141,000 in Q1 2020. The effective tax rate was 19.4%, compared with 16.4%.
- Assets and loans: Total assets were $2.334 billion, up from $2.239 billion at year-end. Gross loans were $1.615 billion, down from $1.644 billion at year-end but up $447.1 million year over year, largely due to Covenant and PPP lending. Available-for-sale securities were $366.4 million.
- Deposits, debt and liquidity: Deposits were $1.924 billion, up $103.5 million from year-end. Short- and long-term borrowings totaled $60.2 million, with $16.5 million of subordinated debt. Cash and cash equivalents ended at $199.3 million; operating cash flow was $5.7 million. The company reported $763.1 million of available borrowing capacity across FHLB, Federal Reserve and correspondent-bank facilities.
- Capital and equity: Stockholders’ equity was $300.1 million. C&N Bank’s Tier 1 leverage ratio was 10.66% and total risk-based capital ratio was 16.51%; management said the bank exceeded well-capitalized thresholds. Q1 comprehensive income was $4.0 million, including a $4.8 million after-tax other comprehensive loss, mainly from unrealized securities losses.
Changes, outlook and key risks
- Year-over-year earnings growth reflected higher net interest income and lower loan-loss provision ($259,000 versus $1.5 million in Q1 2020). Q1 2020 provision included a specific commercial-loan allowance; a $2.2 million charge-off on that loan was recorded later in 2020.
- PPP recorded investment was $137.8 million at March 31, 2021. First-draw PPP loans declined to $71.7 million from $132.3 million at year-end as loans were forgiven or repaid; second-draw loans totaled $66.1 million.
- Credit quality warrants monitoring: nonperforming loans were $23.4 million, or 1.45% of loans, versus 1.42% at year-end; nonperforming assets were $24.9 million, or 1.07% of assets. The allowance for loan losses was $11.7 million, or 0.72% of gross loans. Twenty-five COVID-related modified loans totaling $26.0 million remained in deferral status, including $19.5 million in hotel loans. Management said the pandemic’s ultimate economic and portfolio effects were not determinable.
- Management provided no specific earnings or financial guidance and cautioned that quarterly results may not indicate full-year results. It cited uncertainty around COVID-19, economic conditions, interest-rate and government policies, competition, technology costs, regulation and integration of acquired businesses.
- Other items: the company recorded $107,000 of Q1 losses related to pre-2020 trust tax-compliance matters; accrued liabilities for identified matters were $429,000, and additional costs could not be estimated. Management did not expect pending litigation to have a material adverse effect. The board authorized repurchases of up to 1.0 million shares; none had been repurchased under the program by quarter-end.
- Disclosure controls were deemed effective. However, integration of Covenant’s processes, systems and internal controls was still in progress, and the controls evaluation did not include Covenant-related internal control over financial reporting.
Important facts for investors to verify
- Whether PPP forgiveness and repayment, deposit growth and the unusually high cash position persist, and how they affect future margins and loan growth.
- Trends in nonperforming and impaired loans, hotel and other pandemic-exposed credits, remaining deferrals, and the adequacy of the allowance as conditions evolve.
- The sustainability of earnings growth after separating acquisition effects, PPP fee income, purchase-accounting accretion and loan-sale gains from recurring performance.
- Progress and costs of Covenant integration, including completion of internal-control changes; potential additional trust tax-compliance costs are not quantified.
- Interest-rate sensitivity and the effect of securities valuation changes on accumulated other comprehensive income and equity.