Citizens & Northern Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Citizens & Northern is a community banking holding company operating mainly in north-central Pennsylvania and southern New York. The filing reports one business segment: community banking.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Interest and fee income | $48.9 million | $56.6 million |
| Net interest income | $43.1 million | $47.6 million |
| Net income | $18.6 million | $22.7 million |
| Diluted earnings per share | $1.50 | $1.85 |
| Net interest margin, fully taxable-equivalent | 4.05% | 4.26% |
| Efficiency ratio | 53.27% | 48.82% |
| Total assets, year-end | $1.238 billion | $1.287 billion |
| Deposits, year-end | $954.5 million | $1.006 billion |
| Gross loans, year-end | $644.3 million | $683.9 million |
| Borrowings, year-end | $96.7 million | $89.4 million |
Net interest income fell 9.4%, as lower loan and securities yields and lower average loan balances outweighed reduced funding costs. Average gross loans declined 6.2%; the average yield on loans fell to 5.73% from 6.11%, while the average cost of interest-bearing liabilities declined to 0.67% from 0.97%.
Operating cash flow was $30.6 million, compared with $27.7 million in 2012. Investing activities provided $8.9 million; financing activities used $55.9 million, including a $51.6 million net decline in deposits, repayments of long-term borrowings, and $10.9 million in common dividends paid. Cash and cash equivalents ended the year at $38.6 million, down from $55.0 million.
Liquidity sources included $22.7 million in overnight interest-bearing deposits and $376.0 million of available credit facilities. Management said it believed liquidity was adequate to meet obligations. Regulatory capital remained well above minimums: consolidated Tier 1 leverage was 13.78%, Tier 1 risk-based capital 25.15%, and total risk-based capital 26.60% at year-end.
Material changes and notable items
- Net income declined 18.1%; diluted EPS fell from $1.85 to $1.50. Fourth-quarter 2013 net income was $4.2 million, or $0.34 per diluted share, versus $5.9 million, or $0.48, in fourth-quarter 2012.
- The loan-loss provision rose to $2.0 million from $0.3 million, including an allowance of approximately $1.5 million tied to one commercial borrower. Nonaccrual loans increased to $14.9 million from $7.4 million; nonperforming assets rose to 1.53% of assets from 0.82%. Two large commercial loans were a principal factor in the deterioration.
- The allowance for loan losses increased to $8.7 million, or 1.34% of gross loans, from $6.9 million, or 1.00%. Net charge-offs were low at $0.2 million, equal to 0.04% of average loans.
- Noninterest income excluding securities gains was nearly flat at $16.5 million. Mortgage loan-sale gains increased to $2.2 million, while trust and financial management revenue rose 6.2% to $4.1 million. Trust assets under management reached $796.1 million, up 12.5%.
- Noninterest expense excluding debt-prepayment losses increased 1.7%. Professional fees rose $1.0 million, largely due to consulting engagements. The company reported $1.0 million of losses from prepaying borrowings in 2013, versus $2.3 million in 2012.
- Higher long-term interest rates reduced the fair value of available-for-sale securities; year-end fair value was $482.7 million versus amortized cost of $484.2 million. The resulting after-tax securities-related accumulated other comprehensive loss was $1.0 million, compared with income of $11.6 million a year earlier. Management considered the securities’ unrealized losses temporary.
- Common dividends declared increased to $1.00 per share from $0.84. Book value per common share was $14.49, compared with $14.89.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management expected capital levels to remain above “well-capitalized” regulatory standards and estimated 2014 capital purchases of approximately $1.7 million. It described potential ongoing benefits from 2013 consulting work: approximately $1.3 million in annual pretax benefit from revenue-related recommendations and $1.9 million of electronic funds processing expense reductions over roughly five years. These are estimates, dependent on implementation and other variables.
Key risks include local economic concentration and the continued slowdown in Marcellus Shale-related activity; credit losses and collateral values; sensitivity to interest rates; competition; regulatory changes; technology and information-security failures; and potential mortgage-loan repurchases under the MPF Xtra program. Mortgage loans sold and serviced totaled $146.0 million; repurchased loans tied to identified noncompliance totaled $1.4 million.
Management’s interest-rate model estimated that an immediate 400-basis-point rise would reduce modeled one-year net interest income by 24.4% and portfolio equity value by 28.5%; results were within company policy limits. The model depends on assumptions about cash flows and does not capture all possible deposit or management responses. The new Basel III-based capital rule was scheduled to apply beginning January 1, 2015, with a phased-in capital conservation buffer.
Management said pending legal matters were not expected to materially affect financial condition or results. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Review the status, collateral support, and loss estimates for the large commercial credits driving the 2013 increase in impaired and nonaccrual loans.
- Assess whether loan growth and net interest income can stabilize amid declining loan balances, lower yields, and the local energy-sector slowdown.
- Compare actual results with management’s estimated benefits from consulting initiatives and the costs required to achieve them.
- Monitor interest-rate effects on securities values, earnings, deposit behavior, and the timing of mortgage prepayments.
- Confirm liquidity availability and borrowing costs, and assess the effect of the new capital rules on dividends and capital planning.