Citizens & Northern Corporation — 2020 Form 10-K Summary
Business context and reporting period
Community banking holding company reporting for the fiscal year ended December 31, 2020; comparisons are primarily with 2019. The company completed its acquisition of Covenant Financial on July 1, 2020, expanding into southeastern Pennsylvania. The results include Covenant only from the acquisition date. The company also acquired Monument in 2019.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Interest income | $77.2 million | $64.8 million |
| Net interest income (GAAP) | $67.6 million | $54.5 million |
| Net interest margin (fully taxable-equivalent) | 3.69% | 3.86% |
| Net income | $19.2 million | $19.5 million |
| Diluted earnings per share | $1.30 | $1.46 |
| Operating cash flow | $24.8 million | $22.5 million |
- Total noninterest income was $24.5 million, up 27.0%; mortgage loan sale gains rose to $5.4 million from $0.9 million. Total noninterest expense was $65.0 million, up 31.1%.
- Provision for loan losses rose to $3.9 million from $0.8 million. Net charge-offs were $2.4 million, including a $2.2 million charge-off on one commercial loan.
- At year-end, total assets were $2.239 billion, loans net of allowance were $1.633 billion, deposits were $1.820 billion, and stockholders’ equity was $299.8 million. Total deposits differ from the $1.828 billion figure cited elsewhere in the filing’s business discussion.
- Cash and cash equivalents ended the year at $96.0 million. Available credit facilities totaled $830.9 million, with $758.6 million available. Total borrowings and subordinated debt were approximately $91.2 million.
- The Bank reported a 10.12% Tier 1 leverage ratio and a 15.98% total capital-to-risk-weighted-assets ratio; its capital conservation buffer was 7.98%. The filing states the Bank exceeded well-capitalized thresholds.
Material changes versus 2019
- Assets increased 35.4% year over year, and gross loans increased 39.1%, principally reflecting the Covenant acquisition and loan growth. Average loans rose 36.6% and average deposits rose 30.7%.
- Net interest income increased 24.0%, but net interest margin declined 17 basis points to 3.69%, as lower earning-asset yields more than offset reduced funding costs.
- Net income declined 1.4%; diluted EPS fell from $1.46 to $1.30, alongside higher share count following acquisition-related stock issuance.
- Merger-related expenses were $7.7 million versus $4.1 million. The company also recorded a $1.6 million loss from prepaying $48.0 million of long-term borrowings.
- Nonperforming loans increased to $23.4 million, or 1.42% of loans, from $10.4 million, or 0.88%. The allowance for loan losses rose to $11.4 million, but declined as a percentage of gross loans to 0.69% from 0.83%.
Outlook, commentary, risks and unusual items
- Management provided no formal earnings guidance. It estimated the use of excess cash to prepay borrowings would improve 2021 net interest margin by approximately 0.11 percentage points versus prior internal projections, with the prepayment loss expected to be recovered in about two years.
- Management reported 45 COVID-related loan deferrals outstanding at year-end, totaling $37.4 million; 27 were commercial loans totaling $35.0 million. These were not reported as past due, nonaccrual or troubled debt restructurings under applicable relief guidance. The company also had $132.3 million in recorded PPP loans.
- The company increased its allowance by $785,000 due to qualitative factors related to potential economic deterioration. Management said the pandemic’s ultimate impact on the loan portfolio was not determinable.
- Other notable items included $571,000 of estimated trust-department tax-compliance losses, with $322,000 accrued and additional costs not estimable; $340,000 of estimated penalties related to certain information returns; and a $200,000 estimated state tax-reporting accrual.
- Key risks include pandemic-related borrower stress, commercial credit and collateral risk, interest-rate sensitivity, limited geographic concentration, acquisition integration and realization of expected benefits, competition, cybersecurity and dependence on third-party technology. The company reported no material expected impact from pending legal proceedings.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The control assessment and audit excluded Covenant’s controls, representing approximately 22.7% of consolidated assets; integration of Covenant processes and controls was not complete at year-end.
Important facts for investors to verify
- Reconcile the filing’s $1.828 billion business-section deposit figure with $1.820 billion on the audited balance sheet.
- Review the performance and credit quality of the enlarged commercial loan portfolio, including remaining COVID deferrals, acquired impaired loans and the large commercial charge-off.
- Assess whether PPP fee income, elevated mortgage sales and acquisition-related purchase-accounting accretion are sustainable contributors to earnings.
- Track Covenant integration, remaining costs, control remediation and realization of acquisition benefits.
- Evaluate the effect of lower rates and the borrowing prepayment on future margin and earnings; confirm dividend capacity against capital and regulatory requirements.