Citizens & Northern Corporation — Q1 2017 Form 10-Q
Business context and reporting period. Citizens & Northern Corporation is a bank holding company operating principally in Pennsylvania and New York. This unaudited quarterly report covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Unless otherwise noted, amounts below are in millions of dollars.
Key financial results and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior date |
|---|---|---|
| Interest and dividend income | $11.112 | $10.937 in Q1 2016 |
| Net interest income | $10.159 reported; $10.841 fully taxable-equivalent | $10.033 reported; $10.744 fully taxable-equivalent in Q1 2016 |
| Net interest margin | 3.78% | 3.81% in Q1 2016 |
| Total other income | $4.009, including $0.145 in securities gains | $4.073, including $0.383 in securities gains, in Q1 2016 |
| Provision for loan losses | $0.452 | $0.368 in Q1 2016 |
| Noninterest expense | $9.298 | $9.072 in Q1 2016 |
| Net income / diluted EPS | $3.434 / $0.28 | $3.573 / $0.29 in Q1 2016 |
| Return on average assets / equity | 1.11% / 7.38%, annualized | Not stated here for Q1 2016 |
| Operating cash flow | $4.175 | $3.737 in Q1 2016 |
| Cash and cash equivalents | $29.055 | $28.621 at December 31, 2016 |
| Total assets / deposits | $1,233.924 / $980.251 | $1,242.292 / $983.843 at December 31, 2016 |
| Loans, net / allowance for loan losses | $753.277 / $8.744 | $743.362 / $8.473 at December 31, 2016 |
| Total borrowings | $59.132 | $64.629 at December 31, 2016 |
| Stockholders’ equity | $187.350 | $186.008 at December 31, 2016 |
Material changes versus Q1 2016
- Net income declined $0.139 million, or about 3.9%; diluted EPS fell from $0.29 to $0.28. Management cited higher loan-loss provision and expenses, and lower securities gains, as offsets to modest net interest and noninterest income growth.
- Net interest income increased $0.126 million (1.3%) on a reported basis. Average loans rose 8.2% to $759.4 million, but the margin narrowed to 3.78% from 3.81%; loan and securities yields declined while funding costs rose.
- Noninterest income before securities gains rose $0.174 million (4.7%), supported by debit-card interchange, trust revenue, tax-credit income and loan-servicing fees. Deposit service charges fell $0.054 million as consumer overdraft revenue declined.
- Noninterest expense increased $0.226 million (2.5%), notably from loan collection and other-real-estate costs, employee benefits, card expenses and software subscriptions. Securities gains decreased $0.238 million year over year.
- Loans outstanding grew 1.4% from year-end to $762.0 million. Deposits declined 0.4%; short-term borrowings fell to $20.7 million from $26.2 million.
- Comprehensive income was $3.857 million versus $6.441 million, principally because unrealized securities gains in other comprehensive income were substantially smaller than in Q1 2016.
Credit, liquidity, capital and risk outlook
- Credit quality: The allowance was 1.15% of loans, versus 1.13% at year-end. Net charge-offs were $0.181 million. Nonperforming loans were $13.945 million (1.83% of loans), down from $15.574 million (2.07%) at year-end, and nonperforming assets were $15.823 million (1.28% of assets), down from $17.754 million (1.43%). Nonaccrual loans nevertheless increased to $11.231 million from $8.736 million, including a newly nonaccrual commercial real-estate loan of approximately $2.7 million. Management cautioned that outcomes on a limited number of larger commercial relationships could materially affect losses and the allowance.
- Liquidity and debt: Management said the Corporation was well positioned to meet obligations. It reported $382.9 million of available credit facilities, including $320.7 million from the Federal Home Loan Bank of Pittsburgh, and $197.6 million of available-for-sale securities in excess of amounts required for pledging or repurchase agreements. A $27 million repurchase borrowing bears 3.595%, is putable quarterly by the issuer and has an effective maturity in December 2017; management described collateral and refinancing risks.
- Capital: At March 31, consolidated total capital to risk-weighted assets was 23.72%, Tier 1 capital was 22.57%, and common equity Tier 1 was 22.57%. Management stated that the Corporation and bank exceeded regulatory requirements and expected to maintain capital above well-capitalized standards and required buffers over the next 12 months and foreseeable future. Future dividends remain subject to earnings, capital and regulatory requirements.
- Interest-rate exposure: The bank’s assets include long-term fixed-rate loans and securities funded mainly by shorter-term deposits and borrowings. The simulation showed a modeled 21.0% decline in one-year net interest income under an immediate 400-basis-point rate increase; reported scenarios were within policy limits. Management noted that actual results may differ because of model assumptions and potential changes in deposit behavior.
- Other risks and contingencies: Lending is concentrated in the local Pennsylvania/New York market; management also disclosed participation and leveraged loans. Mortgage-sale representation-and-warranty exposure had no recorded allowance; the MPF Original program had a $0.212 million credit-enhancement allowance. Securities unrealized losses were assessed as temporary, with no other-than-temporary impairment recorded. Management believed pending legal proceedings would not materially affect results. No material changes to previously disclosed risk factors were reported.
- Guidance and unusual items: No earnings or revenue guidance was provided. Management said Q1 results may not indicate full-year results. It expects 2017 stock-based compensation of approximately $0.652 million, potentially $0.123 million higher if specified executive ROAE targets are met. Proposed corporate tax-rate reductions could require a charge to reduce the $4.616 million net deferred tax asset; the company said it believed that asset was fully realizable under current assumptions.
Important facts for investors to verify
- Whether loan growth can continue to support earnings as margin pressure and deposit-funding costs evolve.
- Performance and collateral recovery for the newly nonaccrual commercial real-estate loan and other larger monitored relationships; adequacy of the $8.744 million allowance.
- The maturity, quarterly put terms and refinancing or collateral implications of the $27 million repurchase borrowing due effectively in December 2017.
- Whether noninterest expense growth and reduced securities-gain contribution persist, and whether fee-income improvements are sustainable.
- Potential effects of interest-rate changes, local economic conditions and any future tax-rate changes on earnings, securities values, liquidity and deferred taxes.