CITIZENS & NORTHERN CORP quarterly report, Q2 FY2019

Abrir documento

Citizens & Northern Corporation — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019. Unaudited interim results. The company completed its acquisition of Monument Bancorp on April 1, 2019; consolidated results include Monument from that date.

Financial performance

  • Q2 earnings: Net income was $3.65 million, or $0.27 per diluted share, versus $6.37 million and $0.52 a year earlier. Results included $3.30 million of merger expenses. Excluding merger expenses and net securities gains or losses, management’s non-GAAP adjusted net income was $6.27 million, or $0.46 per diluted share, versus $5.21 million and $0.42 in Q2 2018.
  • First-half earnings: Net income was $8.74 million, or $0.67 per diluted share, compared with $10.75 million and $0.87 in 2018. Adjusted non-GAAP net income was $11.61 million, or $0.89 per diluted share, versus $9.59 million and $0.78.
  • Net interest: Q2 net interest income was $14.21 million, up 26.2%; first-half net interest income was $25.92 million, up 17.0%. Fully taxable-equivalent net interest margin was 3.89% for Q2 and 3.96% for the first half, versus 3.87% and 3.86%, respectively, in 2018. Higher funding costs compressed the interest-rate spread.
  • Other income and expenses: Q2 noninterest income was $4.86 million, compared with $6.16 million, which included a $1.75 million Visa-related gain in 2018. Q2 noninterest expense rose to $14.72 million from $9.68 million, including merger costs; excluding merger costs, it increased 17.9%. First-half noninterest expense was $25.73 million, including $3.61 million of merger costs.
  • Credit costs: The company recorded a $4,000 credit to loan-loss expense in Q2 and a $961,000 credit for the first half, versus a $272,000 provision in first-half 2018. The first-half credit primarily reflected reversals of specific reserves on two commercial loans that returned to full accrual status.
  • Cash flow: First-half operating cash flow was $7.58 million; investing activities provided $74.99 million, substantially reflecting securities sales; financing activities used $80.45 million. Cash and cash equivalents ended the period at $34.95 million.

Financial position and material changes

  • Total assets were $1.61 billion at June 30, up from $1.29 billion at year-end 2018. Net loans were $1.11 billion, compared with $818.3 million; deposits were $1.28 billion, compared with $1.03 billion.
  • The Monument acquisition had $42.65 million of stated consideration, including $32.95 million in stock and cash consideration. It added $259.3 million of loans and $223.3 million of deposits at acquisition-date fair values, as well as $16.68 million of preliminary goodwill and a $1.46 million core deposit intangible. Purchase accounting valuations remain subject to refinement for up to one year after closing.
  • Borrowings at June 30 included $27.49 million short-term borrowings, $38.27 million long-term borrowings and $7.00 million subordinated debt. The subordinated debt carries a 6.50% fixed rate, matures in 2027 and is redeemable at par beginning in 2022.
  • Stockholders’ equity was $239.7 million, up from $197.4 million at year-end. Accumulated other comprehensive income improved to $3.43 million from a $4.17 million loss, mainly due to unrealized gains on available-for-sale securities.
  • The allowance for loan losses was $8.20 million, or 0.73% of loans, versus $9.31 million, or 1.12%, at year-end. Management said the ratio was lower partly because performing Monument loans were excluded from allowance pools and had no allowance recorded at quarter-end.
  • Nonperforming loans were $11.92 million, or 1.07% of loans, and nonperforming assets were $15.23 million, or 0.95% of assets, down from 1.94% and 1.37%, respectively, at year-end. Foreclosed assets increased to $3.31 million from $1.70 million.
  • Available-for-sale securities were $363.47 million. Unrealized losses were $1.28 million at June 30, versus $7.23 million at year-end; management considered the losses temporary.

Liquidity, capital, outlook and risks

  • At June 30, the company reported $536.11 million of available credit facilities, including $473.54 million available from the Federal Home Loan Bank of Pittsburgh, $17.58 million at the Federal Reserve discount window and $45.00 million from correspondent banks. Management said it was well-positioned to meet obligations and potential lending needs.
  • C&N Bank’s total risk-based capital ratio was 18.93%, Tier 1 and common equity Tier 1 ratios were 18.12%, and Tier 1 leverage ratio was 12.27%. Management said the bank exceeded applicable requirements; capital ratios were lower than at year-end, reflecting the acquisition. Management expected capital to remain above well-capitalized standards.
  • Management expected additional Monument merger expenses after June 30 to be insignificant. It provided no specific earnings or revenue guidance and cautioned that interim operating results may not indicate full-year results.
  • Key risks include changes in interest rates and economic conditions, local demand and competition, regulatory or accounting changes, technology costs, and failure to achieve merger synergies or integrate acquired operations. Credit-loss estimates are subjective and may change; regional economic conditions affect borrowers.
  • Loan-sale representations and warranties may require repurchases or reimbursements. The company reported $1.87 million of outstanding repurchased loans and a $4.55 million maximum credit-enhancement obligation under the MPF Original program, with a $297,000 related allowance. Management reported no material concern regarding off-balance-sheet commitments and believed pending legal matters would not materially affect results.
  • Management stated disclosure controls were effective, but integration of Monument’s internal controls was not complete at June 30. The core-system conversion was completed in late June; the filing notes that integration changes remained in progress.
  • The company was assessing adoption of the expected-credit-loss standard, then expected in 2020; the filing noted a possible implementation delay for smaller reporting companies, potentially to 2023 if finalized.

Most important facts for investors to verify

  • Whether Monument integration delivers anticipated growth and whether post-acquisition expenses and operating costs normalize as expected.
  • How sustainable net interest margin and earnings are as deposit and borrowing costs rise and purchase-accounting accretion changes.
  • Whether the allowance adequately reflects acquired loans, particularly given that performing Monument loans were excluded from allowance pools at quarter-end.
  • Developments in nonperforming loans, foreclosed property values, commercial credit exposures and MPF credit-enhancement obligations.
  • Final acquisition fair values, goodwill and core-deposit-intangible accounting, and the timing and impact of expected-credit-loss accounting adoption.