Citizens & Northern Corporation — Q1 2016 Form 10-Q
Business context and reporting period. The Pennsylvania bank holding company reports unaudited consolidated results for the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are to December 31, 2015. The company cautions that quarterly results may not indicate full-year performance.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / December 31, 2015 |
|---|---|---|
| Net interest income | $10.03 million | $9.95 million in Q1 2015 |
| Net interest margin | 3.81% | 3.74% in Q1 2015 |
| Net income | $3.57 million | $3.82 million in Q1 2015 |
| Diluted earnings per share | $0.29 | $0.31 in Q1 2015 |
| Return on average assets / equity | 1.18% / 7.60% | Not stated here for Q1 2015 |
| Total assets | $1,216.54 million | $1,223.42 million |
| Total loans, net of allowance | $693.94 million | $696.99 million |
| Total deposits | $955.85 million | $935.62 million |
| Short- and long-term borrowings | $25.95 million / $38.69 million | $53.50 million / $38.77 million |
| Stockholders’ equity | $188.31 million | $187.49 million |
- Revenue, expenses and margins: GAAP interest and dividend income was $10.94 million, versus $11.16 million. Other income was $4.07 million, including $383,000 in securities gains, compared with $3.63 million including $74,000 in gains. Other expenses increased 6.3% to $9.07 million. Income before tax was $4.67 million versus $5.04 million.
- Cash flow: Operating activities provided $3.74 million; investing activities provided $14.54 million; financing activities used $13.17 million. Cash and cash equivalents ended the quarter at $38.43 million, up from $33.31 million at year-end.
- Credit quality: The allowance for loan losses was $7.66 million, or 1.09% of loans. Nonaccrual loans were $10.94 million; total nonperforming loans were $14.90 million, and nonperforming assets were $16.49 million (1.36% of assets). Loans 30–89 days past due and still accruing increased to $11.37 million from $7.06 million at year-end.
- Liquidity and capital: Management reported $360.78 million in available credit facilities, including $297.19 million of unused FHLB capacity, and said the company was well-positioned to meet obligations. Consolidated total capital and common equity tier 1 ratios were 24.19% and 23.12%, respectively; management said both the company and bank exceeded applicable requirements.
Material changes versus comparable periods
- Net income fell 6.3% year over year; diluted EPS declined from $0.31 to $0.29. Compared with Q4 2015, diluted EPS was down from $0.33.
- Net interest income rose modestly, and margin improved, principally as lower borrowing costs outweighed lower interest income. The company attributed lower borrowing costs in part to 2015 prepayments of higher-rate debt.
- Average loans rose 12.4% year over year, while average available-for-sale securities fell 18.7% and average deposits declined 2.2%. At quarter-end, however, deposits were up 2.2% from year-end, partly reflecting resolution of Pennsylvania’s state budget impasse and a rise in municipal deposits.
- The loan-loss provision increased to $368,000 from $3,000. A $595,000 partial charge-off on one commercial loan contributed to higher net charge-offs and the provision.
- Noninterest expenses rose 6.3%, led by higher salaries and professional fees. Average full-time equivalent employees increased to 288 from 278.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expected capital expenditures not to have a material adverse effect in 2016 and expected capital levels to remain above regulatory standards and buffers.
- Management highlighted sensitivity to interest rates, economic conditions, regulation, competition, loan and deposit demand, technology costs, and accounting changes. Its interest-rate model showed projected one-year net interest income declining 20.0% in a +400-basis-point scenario and 11.4% in a −400-basis-point scenario; modeled effects were within policy limits. The filing cautions that model assumptions may differ from actual outcomes.
- Credit risk is concentrated geographically in the Pennsylvania and New York markets. Management noted that a limited number of commercial relationships can materially affect provisions and charge-offs; one commercial entity accounted for $4.96 million of certain impaired, nonaccrual, or nonperforming restructured exposures.
- Mortgage loan sales carry representation-and-warranty exposure; the company reported $1.95 million of repurchased loans outstanding and had not established an allowance for these exposures or for credit losses under the MPF Original program. Management said historical repurchases were limited.
- A broker-dealer repurchase borrowing of $27 million is putable by the lender at quarterly intervals and is effectively due in December 2017. A rate rise could require refinancing or repayment, potentially at higher cost or through securities sales.
- On April 21, 2016, the board authorized a new repurchase program for up to 600,000 shares. The prior 622,500-share authorization was completed in April 2016 for $12.14 million in total, at an average $19.50 per share.
- Management said pending legal proceedings were not expected to materially affect financial condition or results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the elevated early-stage delinquencies and the $595,000 commercial-loan charge-off lead to further credit deterioration or provisions.
- Performance and collectability of the large commercial borrower exposure and participation loans, including leveraged loans originated through a national network.
- Whether improved net interest margin can be sustained as rates, deposit costs, funding mix, and securities balances change.
- The effect of operating-cost growth and securities gains on recurring earnings, and progress under the new 600,000-share repurchase authorization.
- Any developments in mortgage repurchase/representation-and-warranty exposure and the putable repurchase borrowing.