Citizens & Northern Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. The fourth-quarter results shown below are unaudited. The company is a community-banking holding company operating mainly in north-central Pennsylvania and southern New York.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Interest and fee income | $50.3 million | $45.9 million |
| Net interest income | $45.7 million | $41.9 million |
| Noninterest income, including securities items | $20.6 million | $16.4 million |
| Net income | $22.0 million | $13.4 million |
| Diluted EPS | $1.79 | $1.10 |
| Net interest margin | 3.90% | 3.82% |
| Efficiency ratio | 60.19% | 60.74% |
| Return on average assets / equity | 1.72% / 11.72% | 1.08% / 7.11% |
Fourth-quarter net income was $5.7 million and diluted EPS was $0.46, compared with $1.9 million and $0.16 in fourth-quarter 2017. Total interest and noninterest income was $71.0 million for 2018, versus $62.3 million in 2017.
- Cash flow: Operating activities provided $25.9 million; investing activities used $21.6 million; financing activities used $8.4 million. Cash and cash equivalents ended the year at $32.8 million, down $4.2 million.
- Balance sheet: Total assets were $1.291 billion, deposits $1.034 billion, gross loans $827.6 million, and stockholders’ equity $197.4 million. Net loans were $818.3 million.
- Debt and liquidity: Borrowings totaled $48.8 million ($12.9 million short-term and $35.9 million long-term), down from $71.0 million. Credit facilities totaled $421.9 million, of which $379.0 million was available. Management described liquidity as strong.
- Capital and credit quality: The Bank’s total risk-based capital ratio was 21.75%; its capital conservation buffer was 13.75%. Nonperforming assets were $17.7 million, or 1.37% of assets; the allowance for loan losses was $9.3 million, or 1.12% of loans.
- Shareholder returns: Annual dividends declared were $1.08 per share, up from $1.04. No shares were repurchased under the authorized 600,000-share program.
Changes versus 2017
- Reported net income rose 64%, but the comparison reflects tax-related and other unusual items. Management’s non-GAAP adjusted net income, excluding the 2017 deferred-tax write-down and securities-related items in both years, increased 32.3% to $20.4 million; adjusted pre-tax income increased 19.2%.
- Net interest income increased 9.0% on a fully taxable-equivalent basis, supported by loan growth and higher yields. Average loans rose 5.3%; net interest margin improved 8 basis points. Deposit interest expense increased as rates paid rose.
- Noninterest income excluding securities gains rose 15.1%, led by trust and brokerage revenue, deposit service charges, and debit-card interchange. Noninterest expense increased 6.8%, including higher compensation, data-processing and professional fees.
- Gross loans increased 1.5% year-end to year-end, while deposits rose 2.5%. Nonperforming loans declined to 1.94% of loans from 2.10%; net charge-offs fell to 0.02% of average loans from 0.05%.
- Available-for-sale securities had a $5.5 million net unrealized loss at year-end, versus a $2.4 million loss in 2017. The company attributed the decline in fair value principally to rising interest rates and stated it considered the losses temporary.
Outlook, risks and notable items
- No specific earnings or revenue guidance is provided. Management expected the Bank to remain above well-capitalized regulatory standards and stated it was positioned to meet foreseeable liquidity needs.
- The pending Monument Bancorp acquisition, announced in September 2018, had estimated consideration of approximately $42.7 million and was expected to close in the second quarter of 2019, subject to shareholder, regulatory and customary approvals. Monument reported $363 million of assets at year-end 2018. Consideration was structured for an overall 80% stock and 20% cash election mix.
- 2018 earnings included a $2.321 million gain from sale of Visa Class B shares and a $0.288 million net loss on available-for-sale debt securities. The 2017 comparison included a $2.159 million tax expense from remeasurement of deferred tax assets following the federal corporate tax-rate reduction.
- Other notable items included a $250,000 donation expense from the Towanda banking facility, with the company leasing the site while it sought a replacement location, and $158,000 of Monument-related professional fees.
- Principal risks include concentrated regional lending and local economic exposure, borrower and collateral risk, interest-rate sensitivity (including long-term fixed-rate assets funded partly by shorter-term deposits), competition, cybersecurity and technology dependence, regulation, securities-market valuation, and execution of the Monument merger.
- Mortgage-loan servicing and sale exposures include $171.7 million of loans sold and serviced, $2.1 million of repurchased loans associated with identified noncompliance, and a $4.2 million maximum credit-enhancement obligation under the MPF Original program; a $328,000 related allowance was recorded.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Merger closing status, final consideration, integration costs, and the effect on capital and earnings.
- Underlying earnings trends excluding the Visa gain, securities results, and 2017 tax-rate remeasurement; also assess the sustainability of the lower effective tax rate.
- Credit performance and allowance adequacy, particularly impaired commercial relationships, participation loans, and collateral values.
- Net interest margin sensitivity as market rates change and deposit costs reprice.
- Liquidity availability and refinancing terms for FHLB borrowings, plus the scale of securities unrealized losses.
- Mortgage representation-and-warranty exposure and the MPF Original credit-enhancement obligation.