Citizens & Northern Corporation (NASDAQ: CZNC) — FY 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it is not a standalone fourth-quarter report. The Pennsylvania-based community banking holding company operates through Citizens & Northern Bank, with 29 branches across Pennsylvania and New York. Its business includes commercial, residential and consumer lending, deposits, trust and wealth management, and insurance services. The company continued its expansion strategy, including opening in newer Southcentral Pennsylvania markets; it closed two branches in November 2022.
Financial performance and condition
| Metric | FY 2022 / December 31, 2022 | Comparison |
|---|---|---|
| Net income | $26.6 million; diluted EPS $1.71 | Down from $30.6 million and $1.92 in 2021 |
| Net interest income (GAAP) | $83.1 million | Up 6.7% from $77.9 million |
| Net interest margin | 3.77% | Up from 3.69% |
| Provision for loan losses | $7.3 million | Up from $3.7 million |
| Noninterest income | $24.4 million | Down 5.6%; loan-sale gains fell to $0.8 million from $3.4 million |
| Noninterest expense | $68.0 million | Up 8.8%, including higher compensation, data-processing and occupancy costs |
| Total assets | $2.45 billion | Up from $2.33 billion |
| Loans, net | $1.72 billion | Up from $1.55 billion; gross loans rose 11.2% |
| Deposits | $2.00 billion | Up from $1.93 billion |
| Stockholders’ equity | $249.3 million | Down from $301.4 million, largely reflecting securities-related accumulated other comprehensive losses |
Cash flow and liquidity. Operating cash flow was $34.6 million, investing cash outflow was $234.7 million, and financing cash inflow was $151.9 million. Cash and cash equivalents ended the year at $47.7 million, down $48.2 million. The company reported $807.4 million of available credit facilities, principally through the FHLB, and stated that it believes it is well positioned to meet obligations. Total borrowings across short-term and long-term FHLB advances, senior notes and subordinated debt were approximately $181.8 million at year-end, compared with $77.6 million a year earlier.
Credit quality. The allowance for loan losses was $16.6 million, or 0.95% of gross loans, versus $13.5 million, or 0.87%, in 2021. Net charge-offs increased to $4.2 million (0.26% of average loans) from $1.5 million (0.09%). Nonperforming loans were $25.3 million, or 1.46% of loans, up from $21.2 million, or 1.36%; nonperforming assets were 1.04% of assets versus 0.94%.
Material changes and unusual items
- Higher market rates supported 2022 net interest income: average earning-asset yield rose to 4.19% from 3.99%, while the average rate on interest-bearing liabilities increased to 0.62% from 0.44%. Management describes the balance sheet as asset-sensitive.
- Loan growth was led by commercial lending, up $133.1 million, and residential mortgages, up $39.8 million. Average loans excluding PPP loans rose 8.0%. Residential mortgage originations and sales declined as higher rates dampened market activity.
- The 2022 loan-loss provision included $3.942 million of partial charge-offs on a commercial real-estate participation loan to a healthcare borrower. The remaining recorded investment was $2.654 million at year-end and $0.474 million at March 7, 2023, after settlement payments.
- Available-for-sale securities had a $63.8 million unrealized loss at year-end, equal to 11.3% of amortized cost, compared with a $6.1 million unrealized gain in 2021. Management attributed the decline to rising rates, reported no credit-related declines, and recorded no other-than-temporary impairment. The securities-related after-tax accumulated other comprehensive loss was $50.4 million.
- Shareholders received $1.12 per share in dividends declared during 2022. The company repurchased 375,416 shares during the year for $9.2 million; no shares were repurchased in the fourth quarter.
- There were no acquisition-related expenses in 2022. By comparison, 2020 included $7.7 million of Covenant merger expenses and a $1.6 million loss on prepaid borrowings.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management expects the Bank to maintain capital above well-capitalized regulatory standards for the next 12 months and foreseeable future; the Bank’s capital conservation buffer was 6.68% at year-end.
- CECL adoption began January 1, 2023. Management estimated an increase of $2 million to $4 million in the credit-loss allowance and a $1 million to $3 million reduction in retained earnings, net of tax. Estimates were still being finalized; management did not expect to use the optional three-year regulatory capital phase-in.
- Key risks include interest-rate and deposit-cost changes, credit losses and collateral values, geographic concentration, competition, acquisition integration, cybersecurity and technology dependence, regulation, and access to funding. Management cautions that securities losses could deepen if rates rise further and that liquidity needs could require asset sales at a loss.
- Off-balance-sheet commitments included $433.7 million to extend credit and $15.8 million of standby letters of credit. The company also had a maximum $6.4 million credit-enhancement obligation under the MPF Original mortgage program, with a $0.425 million allowance. Management said pending legal matters were not expected to materially affect financial condition or results.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- Whether higher rates continue to improve net interest income after deposit repricing, competition for deposits and funding costs are considered.
- Developments in the healthcare-related participation loan and the trend in nonperforming loans, charge-offs and commercial credit grades.
- The final CECL allowance and retained-earnings adjustment compared with management’s preliminary ranges.
- Available liquidity and funding access under stressed conditions, including the company’s reliance on FHLB facilities and potential effects of selling securities.
- Whether securities unrealized losses remain temporary and how they affect reported equity, capital flexibility and potential liquidity decisions.
- Future dividend and repurchase plans, which the company says depend on earnings, capital, financial condition and regulatory requirements.