Citizens & Northern Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed August 4, 2016. Citizens & Northern is a bank holding company operating primarily in Pennsylvania and New York. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance
- Q2 earnings: Net income was $3.871 million, down 11.2% from $4.357 million in Q2 2015. Diluted EPS was $0.32 versus $0.36.
- First-half earnings: Net income was $7.444 million, down 8.9% from $8.172 million; diluted EPS was $0.61 versus $0.67. First-half return on average assets was 1.22% and return on average equity was 7.94%.
- Net interest: Q2 net interest income was $9.999 million, essentially flat year over year; first-half net interest income was $20.032 million, up 0.4%. Fully taxable-equivalent net interest margin rose to 3.76% in Q2 from 3.69%, and to 3.79% for the first half from 3.71%.
- Other income and costs: Q2 total other income was $4.028 million versus $4.894 million; first-half total other income was $8.101 million versus $8.524 million. Q2 expenses were $8.535 million versus $8.874 million, while first-half expenses were $17.607 million versus $17.407 million. The 2015 comparisons include a $0.910 million debt-prepayment loss; excluding that item, expenses rose $0.571 million in Q2 and $1.110 million in the first half.
- Credit costs: Provision for loan losses was $0.318 million in Q2 versus $0.221 million and $0.686 million for the first half versus $0.224 million. Management attributed the increase primarily to loan growth and higher loss experience and qualitative allowance factors.
- Cash flow: First-half operating cash flow was $8.580 million, compared with $9.857 million in 2015. Investing used $13.223 million and financing used $4.702 million; cash and cash equivalents declined $9.345 million to $23.968 million.
Financial position, liquidity and capital
- Total assets were $1.231 billion at June 30, 2016, up from $1.223 billion at year-end 2015. Loans were $727.842 million, up 3.3%; deposits were $967.951 million, up 3.5%.
- Available-for-sale securities were $417.205 million, down from $420.290 million at year-end. Net unrealized securities gains in accumulated other comprehensive income rose to $6.849 million from $2.493 million.
- Short-term borrowings fell to $25.702 million from $53.496 million; long-term borrowings were $38.615 million, little changed. Total borrowings were $64.317 million.
- Management reported $356.657 million of available credit facilities, including $294.372 million available from the Federal Home Loan Bank of Pittsburgh. Securities available beyond existing pledging and repurchase obligations had a carrying value of $224.393 million. Management said it believed liquidity was sufficient for short- and long-term obligations.
- Stockholders’ equity was $190.530 million. At June 30, consolidated total capital to risk-weighted assets was 23.47% and common equity Tier 1 was 22.41%; management said the company and bank exceeded regulatory requirements. Management expected capital levels to remain above well-capitalized standards over the next 12 months and foreseeable future.
Changes, outlook and risks
- Loan growth supported interest income: average loans rose 11.7% in the first half year over year, while average securities declined 19.2%. Lower yields on loans and securities partly offset volume gains. Lower funding costs, reflecting 2015 repayment of higher-cost debt, supported margin.
- First-half salary and wage expense increased 10.0%, and professional fees increased 92.9%; management cited additional staffing, training, technology, marketing and outsourced credit review. Lower occupancy costs partly offset increases.
- Credit indicators were mixed: nonaccrual loans declined to $10.504 million from $11.517 million at year-end, and impaired loans declined to $9.330 million from $9.974 million. However, loans 90 days or more past due and still accruing rose to $4.654 million from $3.229 million; foreclosed assets increased to $2.052 million from $1.260 million. The allowance was $7.929 million, or 1.09% of loans.
- A single commercial borrower accounted for $4.925 million of specified impaired/nonaccrual exposures. Its forbearance agreement was extended for another 12 months in July 2016; the borrower had made required payments under the agreement. The filing cautions that actual losses on monitored commercial relationships could differ materially from estimates.
- Participation loans totaled $35.940 million, including $11.089 million originated through a nationwide network. Management described these network loans as leveraged, with limited tangible equity and collateral, but with strong recent cash flow histories. The bank’s lending is geographically concentrated in its Pennsylvania and New York market area.
- Interest-rate risk is material because long-term, fixed-rate assets are funded mainly by shorter-term deposits and borrowings. The model showed all scenarios within policy limits, but a modeled immediate +400-basis-point shock reduced projected one-year net interest income 17.8% and portfolio equity value 21.4%. Results depend on model assumptions and may differ from actual outcomes.
- No specific earnings guidance was provided. Management said 2016 capital expenditures were not expected to materially harm financial condition. It also noted that interim results may not indicate full-year results. Legal proceedings were not expected by management to materially affect financial position or results; no material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether loan growth and funding costs can sustain net interest margin as asset yields and market rates change.
- Credit quality developments, especially past-due accruing loans, the large commercial workout, and leveraged participation exposures; assess allowance adequacy.
- Whether staffing, professional-fee and technology costs continue to rise faster than revenue, and whether loan-sale and tax-credit-related income is repeatable.
- Liquidity and funding resilience, including borrowing-facility availability, collateral requirements and the putable $27 million broker repurchase agreement due effectively in December 2017.
- Potential earnings and equity effects from interest-rate movements, securities valuations, and adoption of new accounting standards, including the expected 2020 credit-loss standard.