Citizens & Northern Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The company is a bank holding company operating through Citizens & Northern Bank and related subsidiaries.
Financial performance and condition
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Net interest income | $20.36 million | $19.63 million in Q2 2022 |
| Net interest margin | 3.53% | 3.62% in Q2 2022 |
| Provision for credit losses | $0.81 million | $0.31 million in Q2 2022 |
| Noninterest income | $6.63 million | $6.83 million in Q2 2022 |
| Noninterest expense | $18.72 million | $17.04 million in Q2 2022 |
| Net income / diluted EPS | $6.04 million / $0.39 | $7.49 million / $0.48 in Q2 2022 |
- For the first six months, net interest income was $41.14 million, net income was $12.30 million and diluted EPS was $0.80, versus $39.96 million, $14.38 million and $0.92, respectively, in 2022. Six-month net interest margin was 3.62%, down from 3.74%.
- Interest income growth was led by loans, but higher deposit and borrowing costs outpaced the increase in asset yields. Q2 interest expense rose to $7.65 million from $1.68 million a year earlier. Noninterest expense also increased, including salaries, data processing, legal costs and FDIC insurance.
- Total assets were $2.47 billion at June 30, 2023, versus $2.45 billion at year-end 2022. Gross loans were $1.81 billion, up $74.5 million; deposits were $2.01 billion, up $12.5 million. Stockholders’ equity was $248.1 million, down from $249.3 million.
- Cash and cash equivalents were $46.2 million. Six-month operating cash flow was $17.3 million; investing cash use was $21.4 million and financing cash provided was $2.5 million.
- Borrowings totaled approximately $186.2 million at quarter-end: $31.4 million short-term borrowings, $115.3 million FHLB advances, $14.8 million senior notes and $24.7 million subordinated debt. The filing reports $842.3 million of available credit facilities and $257.5 million of unpledged available-for-sale securities; together, these sources contributed to $1.10 billion in highly liquid available funding.
- Available-for-sale securities had fair value of $445.7 million versus amortized cost of $507.1 million. Gross unrealized losses were $61.7 million; accumulated other comprehensive loss related to securities was $48.5 million, net of tax. Management attributed the unrealized losses principally to higher market interest rates and reported no credit-loss allowance on the portfolio.
Material changes and credit quality
- Loan growth and higher loan yields supported net interest income, while rising deposit rates and increased FHLB funding costs compressed margins. Average loans grew 12.5% year over year in Q2; average borrowed funds increased substantially.
- Nonperforming assets declined to $14.5 million, or 0.58% of assets, from $25.6 million, or 1.04%, at year-end 2022. Nonaccrual loans were $12.8 million versus $23.1 million. Management cited a $10.0 million commercial-loan payoff and other paydowns as key reductions; one commercial relationship was newly placed on nonaccrual.
- The loan allowance was $19.1 million, or 1.05% of gross loans, at June 30. Net charge-offs for the first half were $187,000, or 0.01% of average loans. The company adopted CECL on January 1, 2023; adoption reduced retained earnings by $1.65 million and increased the loan allowance by $2.10 million and the off-balance-sheet allowance by $0.79 million.
- Estimated uninsured deposits were $605.8 million, including $173.0 million collateralized; uninsured and uncollateralized deposits were $432.8 million, or 21.4% of deposits. Excluding brokered deposits, deposits declined $37.1 million from year-end; brokered deposits rose $49.7 million to $70.7 million.
Outlook, risks and other notable items
- The filing gives no numerical earnings or margin guidance. Management said second-half loan growth will depend on interest rates, economic conditions and other factors, and stated it believes available liquidity is sufficient for funding obligations.
- Interest-rate modeling at June 30 indicated net interest income would decline in both rising- and falling-rate scenarios; modeled declines remained within company policy limits. Results differed from year-end modeling, partly because management increased assumed deposit-rate sensitivity.
- Key risks include interest-rate and funding pressures, potential loss of depositor confidence and banking-industry contagion, credit losses, local economic conditions, competition, regulation and technology/security risks. Commercial loans represented approximately 75% of the portfolio; nonowner-occupied commercial real estate was $733.8 million. Management cautioned that actual losses on monitored commercial relationships could differ materially from current estimates.
- The bank reported capital ratios above applicable requirements and a 7.37% capital conservation buffer. The company repurchased 314,617 shares for $6.30 million in the first half; the 1,000,000-share program was completed in July 2023, and no new program was announced. Legal proceedings were not expected by management to materially affect results or financial condition.
Most important facts for investors to verify
- Whether deposit pricing, deposit mix and reliance on brokered deposits or borrowings continue to pressure net interest margin and funding costs.
- Performance and risk concentrations in commercial real estate, especially nonowner-occupied properties, and changes in nonaccrual loans, criticized credits and the allowance.
- Liquidity under stress, including the availability and collateral requirements of borrowing facilities and the level of uninsured, uncollateralized deposits.
- Changes in the fair value of securities and accumulated other comprehensive loss as interest rates move, and any effect on capital or liquidity decisions.
- Whether loan growth, expenses and credit costs develop consistently with management’s commentary; the filing cautions that interim results may not indicate full-year performance.