Citizens & Northern Corporation — 2018 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The interim financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and financial performance
The Corporation operates through Citizens & Northern Bank and related subsidiaries, serving customers concentrated in Pennsylvania and New York. Its principal earnings source is net interest income.
- Third quarter: Interest and dividend income was $12.800 million, interest expense $1.241 million, and net interest income $11.559 million. Net income was $5.586 million ($0.45 per diluted share), versus $3.936 million ($0.32) a year earlier.
- First nine months: Net interest income was $33.711 million and net income $16.332 million ($1.33 per diluted share), versus $31.162 million and $11.491 million ($0.94) in 2017.
- Net interest margin: Fully taxable-equivalent margin was 3.87% for Q3 versus 3.83%; for the first nine months it was 3.86% versus 3.81%.
- Noninterest income: $5.031 million in Q3 and $15.594 million year to date. These totals include Visa Class B stock gains of $0.571 million in Q3 and $2.321 million year to date. Excluding Visa gains and net securities gains or losses, management reported adjusted net income of $5.136 million in Q3, up 30.6%, and $14.723 million year to date, up 30.0%.
- Expenses and taxes: Noninterest expense was $9.833 million in Q3, up 7.0%, and $29.412 million year to date, up 6.7%. Effective tax rates were 16.6% and 16.5%, respectively, compared with 24.3% and 24.0% in 2017, principally reflecting the lower federal tax rate.
- Cash flow: For the first nine months, operating activities provided $18.457 million; investing activities used $16.675 million; financing activities used $2.755 million. Cash and cash equivalents ended the period at $36.031 million.
Balance sheet, funding and credit quality
- At September 30, total assets were $1,285.4 million, loans net of allowance $813.7 million, deposits $1,043.9 million, and stockholders’ equity $190.0 million. At December 31, 2017, assets were $1,277.0 million, deposits $1,008.4 million, and equity $188.4 million.
- Gross loans rose 0.8% from year-end to $822.5 million; deposits increased $35.5 million. Noninterest-bearing deposits were $261.0 million.
- Short-term borrowings fell to $8.4 million from $61.8 million, while long-term borrowings rose to $33.0 million from $9.2 million. The filing attributes the funding changes in part to borrowing maturities and new FHLB advances.
- Liquidity included $386.2 million of available credit facilities, within $422.2 million of total facilities. Management stated it believed the Corporation was well-positioned to meet obligations.
- The allowance for loan losses was $8.815 million, 1.07% of loans, versus $8.856 million and 1.09% at year-end. Year-to-date provision was $0.332 million, compared with $0.778 million in 2017.
- Nonperforming loans were 1.71% of loans, down from 2.10% at year-end; nonperforming assets were 1.30% of assets, down from 1.47%. Foreclosed assets increased to $2.678 million from $1.598 million. The portfolio is geographically concentrated, and management notes that local economic conditions affect borrowers’ ability to repay.
- Bank regulatory capital ratios remained well above stated requirements: C&N Bank’s total capital to risk-weighted assets was 21.26%, and its common equity tier 1 ratio was 20.14%.
Material changes, outlook and risks
- Reported earnings benefited from the $2.321 million Visa Class B gain; the shares were fully sold by September 30. Excluding that gain and securities results, management cited stronger underlying earnings, supported by loan growth, higher asset yields and growth in trust, deposit-service and debit-card revenues.
- Available-for-sale securities produced a $6.584 million after-tax other comprehensive loss year to date, versus $1.272 million of other comprehensive income in 2017. Accumulated other comprehensive loss reached $8.368 million, largely reflecting unrealized securities losses. Management considered the debt-security impairments temporary.
- Management provided no specific earnings guidance and cautioned that interim results may not indicate full-year results. It noted rising interest rates, deposit-cost increases, competition, economic conditions, regulation and technology costs as risks. Its rate-simulation model projected one-year net interest income down 7.8% under an immediate 400-basis-point increase and down 13.5% under a 400-basis-point decrease; modeled outcomes are subject to assumptions and may differ from actual results.
- On September 28, the Corporation agreed to acquire Monument Bancorp, whose reported assets were $361 million. Estimated consideration was approximately $42.7 million; Monument shareholders may elect cash or C&N shares, subject to an overall 20% cash/80% stock allocation. Closing was expected in Q2 2019, subject to shareholder and regulatory approvals and other conditions. Q3 included $0.2 million of merger-related expense.
- Other unusual items included a $0.250 million donation of the Towanda banking-property book value, with a temporary leaseback, and a $0.122 million increase in state tax benefits associated principally with that donation. The Ralston branch was scheduled to close in November 2018.
- Mortgage-sale representations and warranties expose the Corporation to possible repurchase or reimbursement obligations; no allowance was recorded for these exposures. Under the MPF Original program, the maximum credit-enhancement obligation was $3.907 million, with a $0.310 million related allowance. Management said pending legal proceedings were not expected to materially affect financial condition or results.
Most important facts for investors to verify
- How much future earnings growth is recurring versus attributable to the Visa gain, securities activity and tax-related items.
- Whether net interest margin can hold up as deposit costs rise and market rates change.
- Credit quality trends, including foreclosed property values, commercial loan workouts and the adequacy of the allowance.
- Monument merger approvals, final consideration, integration costs and expected completion timing.
- Realized liquidity and capital effects if funding needs, loan demand or interest-rate conditions differ from management’s assumptions.