Citizens & Northern Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited interim results; amounts below are in millions unless otherwise noted. The company is a Pennsylvania-based banking organization serving markets in Pennsylvania and New York.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $12.209 | $10.856 | $35.306 | $31.679 |
| Net income | $5.989 | $4.864 | $17.227 | $14.171 |
| Income available to common shareholders | $5.989 | $4.135 | $17.227 | $12.697 |
| Diluted earnings per share | $0.49 | $0.34 | $1.42 | $1.05 |
| Provision (credit) for loan losses | ($0.037) | $0.189 | ($0.198) | $0.472 |
For the first nine months, fully taxable-equivalent net interest income was $37.735 million, up 11.1%. Net interest margin on an FTE basis was 4.18%, versus 3.76%; the interest-rate spread was 3.91%, versus 3.47%. Q3 FTE net interest income rose 11.9% year over year, and the quarterly spread was 4.05%, versus 3.58%. The filing reports total interest income of $48.487 million on an FTE basis for the first nine months; the GAAP statement reports $46.058 million.
Noninterest income was $12.255 million for the first nine months, including $2.028 million of net securities gains; noninterest expense was $24.109 million, up 1.4%. The nine-month effective tax rate was 27.16%, compared with 23.65% in 2010.
Financial position, cash flow and capital
- At September 30, total assets were $1.312 billion, compared with $1.317 billion at December 31, 2010. Available-for-sale securities were $472.113 million; gross loans were $705.879 million and net loans were $697.702 million.
- Deposits were $995.730 million, down from $1.004 billion. Short- and long-term borrowings totaled $147.258 million, down from $166.908 million. Stockholders’ equity rose to $161.210 million from $138.944 million, including a $10.138 million after-tax increase in unrealized securities gains during the nine months.
- Nine-month operating cash flow was $27.302 million; investing cash flow was $15.865 million and financing cash flow was negative $33.714 million. Cash and cash equivalents increased $9.453 million to $55.754 million.
- Available credit facilities totaled $373.223 million, of which $332.699 million was available. Management said it was well-positioned to meet obligations. Consolidated total capital to risk-weighted assets was 20.16%; the bank’s ratio was 18.74%. Management reported both met applicable requirements.
Material changes and notable items
- Net income increased 23.1% in Q3 and 21.6% year to date. Common earnings and EPS benefited in 2011 from having no U.S. Treasury preferred dividends, compared with $0.729 million in Q3 2010 and $1.474 million for the first nine months of 2010.
- Lower deposit and borrowing costs drove much of the net interest income improvement. Nine-month interest expense fell 28.0%; average borrowed funds declined $57.730 million and average deposits increased 4.6%.
- The allowance for loan losses declined to $8.177 million from $9.107 million. Nonaccrual loans fell to $7.890 million from $10.809 million, while nonperforming assets were $10.541 million, or 0.80% of assets, versus $12.073 million, or 0.92%.
- Q3 included a $0.329 million gain from a sale-leaseback of the Williamsport facility. The company leases back about 18% of the building for two years and expects annual pretax expense savings of approximately $0.150 million.
- The company recorded a $0.948 million first-quarter impairment of a real estate limited-partnership investment; it also held a $1.040 million loan receivable from the partnership. Securities gains included $1.510 million from two previously written-off pooled trust-preferred securities. Accretion income on another impaired trust-preferred security was $0.500 million year to date.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management expected capital to remain above well-capitalized regulatory standards over the next 12 months and foreseeable future; it did not expect capital spending to materially harm financial condition. Management cautioned that interim results may not indicate full-year results.
- Credit risk remains sensitive to local economic conditions, collateral values and a limited number of larger commercial relationships. Applying new TDR guidance identified $1.535 million of additional impaired loans without a related allowance. Total TDRs were $3.946 million, up from $0.645 million at year-end, partly because of the accounting change. A commercial forbearance arrangement involved a reduced payoff amount due by December 1, 2011; failure to pay would terminate the agreement to accept less than the full amount.
- Management’s valuation of the $7.103 million Level 3 pooled trust-preferred security depends on sensitive cash-flow and discount-rate assumptions; different assumptions could produce materially different fair values. Management judged impairment temporary and recorded no OTTI loss in 2011. The related security carries credit and liquidity risk.
- Interest-rate simulations showed projected one-year net interest income down 20.3% under an immediate 400-basis-point rise, within the stated policy limit. Results depend on model assumptions and may differ from actual outcomes.
- Debit-card interchange revenue could be pressured by market responses to new rate limits for larger institutions, although those limits did not directly apply to the company. Management could not estimate the timing or amount of any effect.
- Management said pending legal proceedings were not expected to materially affect financial condition or results. The filing reported effective disclosure controls and no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether the commercial forbearance payoff was received by the December 1, 2011 deadline, and how the TDR and impaired-loan balances subsequently developed.
- Whether loan quality, charge-offs and the allowance remain consistent with management’s estimates, particularly for commercial and real-estate-secured credits.
- How the Level 3 trust-preferred valuation and expected cash flows change, and whether further impairment is recognized.
- Whether net interest margin, deposit costs and interchange revenues respond as management expected to rate and market conditions.
- Whether the stated cost savings from the facility sale-leaseback and continued capital strength materialize.