Citizens & Northern Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The interim financial statements are unaudited. Amounts below are in millions of dollars except per-share data and ratios.
Business context and financial performance
The company is a Pennsylvania community banking organization. Results reflect the COVID-19 disruption, participation in the SBA Paycheck Protection Program (PPP), mortgage refinancing activity, and merger-related costs. The Covenant Financial acquisition closed on July 1, 2020, after the reporting date.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest and dividend income | $16.5 | $17.1 | $33.6 | $30.2 |
| Net interest income | $14.2 | $14.2 | $28.5 | $25.9 |
| Noninterest income | $5.5 | $4.9 | $10.8 | $9.3 |
| Net income | $5.4 | $3.6 | $9.6 | $8.7 |
| Diluted EPS | $0.39 | $0.27 | $0.70 | $0.67 |
| Net interest margin | 3.65% | 3.89% | 3.73% | 3.96% |
Q2 noninterest income growth included higher mortgage loan-sale gains ($1.6 million versus $0.2 million), largely from refinancing. Deposit service charges fell by $0.4 million, and loan servicing fees were negative, partly reflecting lower-rate-driven prepayment assumptions. Six-month net interest income grew 10.1%, aided by Monument acquisition effects and loan growth, while net interest margin contracted.
Reported six-month diluted EPS rose to $0.70 from $0.67. Excluding merger-related expenses and securities gains, management’s non-GAAP adjusted diluted EPS was $0.76 versus $0.89; adjusted net income was $10.5 million versus $11.6 million. These adjustments are not GAAP results.
Financial position, cash flow and liquidity
- At June 30, total assets were $1.745 billion, up from $1.654 billion at year-end 2019. Gross loans were $1.241 billion; loans net of the $11.0 million allowance were $1.230 billion.
- Deposits totaled $1.381 billion, up $128.5 million from year-end. Cash and cash equivalents were $73.8 million, compared with $31.1 million at year-end.
- Short-term borrowings were $14.4 million, long-term borrowings $72.9 million, and subordinated debt $6.5 million. Combined borrowings and subordinated debt were $93.8 million, down from $144.8 million at year-end.
- For the first six months, operating cash flow was $5.8 million; investing activities used $33.8 million and financing activities provided $70.7 million. Cash and cash equivalents increased $42.7 million.
- Available credit facilities totaled $631.2 million, of which $545.7 million was available at June 30. Management said it believed the company was positioned to meet obligations and potential needs related to Covenant.
- C&N Bank’s leverage ratio was 10.63% and total capital to risk-weighted assets was 17.20%; management reported both above well-capitalized thresholds. These are bank-level regulatory ratios.
Material changes, outlook and risks
- Credit quality: The allowance for loan losses increased to $11.0 million from $9.8 million at year-end. First-half provision expense was $1.35 million, versus a $0.96 million credit in the prior-year period. Management cited specific commercial loan allowances and a $646,000 increase in qualitative factors for potential economic deterioration.
- Nonperforming loans were 1.74% of loans, versus 0.88% at year-end; nonperforming assets were 1.33% of assets, versus 0.80%. Nonaccrual loans rose to $18.8 million. Management noted that a limited number of commercial relationships could materially affect future provisions and losses.
- COVID-19 modifications: By June 30, 706 loans with approximately $202.1 million outstanding at the time of modification had received deferrals; 541 loans totaling $158.7 million remained on deferral at quarter-end. By July 31, the remaining deferrals had fallen to 78 loans totaling $29.6 million, excluding Covenant-acquired loans. The company warned that ultimate pandemic and economic impacts were not determinable.
- PPP: Recorded PPP loans were $97.1 million at June 30, including $3.0 million of net deferred fees; $337,000 of fee accretion was recognized in interest income. PPP loans carry a 1% rate and are SBA-guaranteed subject to program requirements.
- Covenant acquisition: The July 1 merger had estimated purchase consideration of approximately $63.3 million. Covenant reported $608 million of assets, $472 million of gross loans and $480 million of deposits at June 30. Purchase accounting fair values were not yet complete when this filing was issued. Management estimated total pre-tax merger costs of about $8.0 million, with approximately $6.6 million remaining and most expected in Q3 2020.
- No formal earnings guidance was provided. Management emphasized uncertainty around COVID-19, interest rates, credit performance and integration of acquired institutions. Other disclosed risks include economic conditions, competition, regulatory or accounting changes, and execution of merger synergies.
- Other notable items: the company recorded an estimated $300,000 accrual for penalties related to certain information returns. Management reported no material expected impact from pending legal proceedings. Goodwill impairment testing at June 30 resulted in no impairment charge.
Important facts for investors to verify
- Whether loan deferrals, delinquency and nonaccrual trends worsened after July 31, particularly in commercial real estate, hospitality and other exposed borrowers.
- Future credit-loss provisions, specific allowances and adequacy of the allowance as pandemic-related economic effects become clearer.
- Covenant purchase accounting, integration progress, realized synergies and actual merger costs compared with management’s estimate.
- Whether PPP fee accretion and refinancing-driven mortgage gains can be sustained, and how lower rates affect net interest margin and servicing rights.
- Underlying earnings trends after separating reported results from merger-related and other unusual items.