Citizens & Northern Corporation — Q1 2020 Form 10-Q
Business context and reporting period. Citizens & Northern Corporation is a bank holding company serving customers in Pennsylvania and nearby areas. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. The company completed its Monument Bancorp acquisition on April 1, 2019, so Q1 2020 results include Monument while Q1 2019 results do not.
Key financial results
- Profit: Net income was $4.166 million, down 18.2% from $5.090 million. Basic and diluted EPS were $0.30, versus $0.41.
- Interest income and margin: GAAP net interest income rose 21.9% to $14.282 million. On a fully taxable-equivalent basis, net interest income was $14.506 million, up 20.7%; net interest margin declined to 3.83% from 4.04%, and interest rate spread fell to 3.54% from 3.81%.
- Other income and expenses: Noninterest income increased 19.9% to $5.281 million, including higher mortgage loan-sale gains and tax-credit-related income. Noninterest expense rose 18.6% to $13.053 million; excluding merger costs, it increased 20.7% to $12.912 million.
- Credit costs: The loan-loss provision was $1.528 million, compared with a $0.957 million provision credit in Q1 2019. The allowance for loan losses increased to $11.330 million from $9.836 million at year-end 2019.
- Cash flow: Operating activities provided $4.127 million and investing activities provided $27.307 million; financing activities used $33.958 million. Cash and cash equivalents decreased $2.524 million during the quarter to $28.598 million.
- Balance sheet and liquidity: Total assets were $1.629 billion, down from $1.654 billion at December 31, 2019. Net loans were $1.156 billion, versus $1.172 billion at year-end; deposits were $1.250 billion, versus $1.253 billion. Available credit facilities totaled $518.826 million, with $108.144 million outstanding.
- Borrowings and capital: At March 31, short-term borrowings were $37.607 million, long-term borrowings $72.944 million, and subordinated debt $6.500 million. C&N Bank’s leverage ratio was 12.38% and total capital-to-risk-weighted-assets ratio was 19.18%; management said the bank exceeded well-capitalized thresholds.
- Equity: Stockholders’ equity was $251.228 million, up from $244.452 million at year-end, including $5.783 million of net other comprehensive income, principally unrealized securities gains.
Material changes and drivers
- Higher net interest income reflected acquired and organic loan growth: average loans increased 41.9% year over year. The acquisition also contributed to higher average deposits and interest expense. Higher funding costs, particularly on time deposits, contributed to the lower net interest margin.
- Net income fell despite higher net interest income and noninterest income, principally because the provision shifted from a credit to an expense and operating costs increased.
- At March 31, loans classified as nonperforming were 1.23% of loans, up from 0.88% at year-end; nonperforming assets were 0.99% of assets, up from 0.80%. The increases included a $3.5 million commercial loan classified as impaired, for which the company recorded a $1.193 million specific allowance.
- Loans declined modestly from year-end, including a $10.0 million reduction in loans to political subdivisions. Compared with March 31, 2019, total loans were up 41.5%, reflecting Monument and subsequent growth.
Outlook, risks, and unusual items
- COVID-19: Management said the pandemic’s economic and credit effects were uncertain and not quantifiable. It increased qualitative loan-loss factors by $402,000 in Q1. Through April 30, the company had modified 602 loans with recorded investment of $180.178 million, typically for 90 days; these modifications were not reported as past due or troubled debt restructurings during the deferral period.
- PPP lending: The company began processing Paycheck Protection Program loans in April. At April 30, outstanding PPP loans totaled $84.478 million, with another $11.709 million conditionally approved; fees on loans originated through that date totaled $3.106 million. These are post-quarter-end figures.
- Covenant acquisition: The planned acquisition of Covenant Financial remained subject to regulatory and shareholder approvals and was expected to close in Q3 2020. Its stated transaction value was approximately $77 million based on December 2019 terms, or approximately $60 million using the company’s late-March share price. Management estimated about $7.4 million of pretax merger expenses ($6.0 million after tax), mostly expected in Q3 2020.
- Other items: Management tested goodwill for impairment in Q1 in light of COVID-19 and reported no impairment. It reported no material expected impact from pending legal proceedings. Management provided no earnings or margin guidance; it cautioned that Q1 results may not indicate full-year results.
- Forward-looking risks include pandemic-related credit deterioration and market volatility, interest-rate and economic changes, demand and competition, regulatory or accounting changes, and acquisition integration or delay. The company noted that borrower performance and collateral values could change materially.
Most important facts for investors to verify
- Whether credit quality and the allowance adequately reflect pandemic effects, especially the $3.5 million impaired commercial loan and subsequent loan modifications.
- How PPP lending, forgiveness, fee recognition, funding, and any participation in the Federal Reserve’s PPP Liquidity Facility affect future balances and earnings.
- Whether the Covenant transaction closes on schedule and whether the estimated $7.4 million of merger costs, deal value, and expected benefits change.
- Whether elevated expenses and funding costs persist, and whether net interest margin stabilizes after its year-over-year decline.
- Whether the reported capital and available borrowing capacity remain sufficient under adverse credit, liquidity, or economic scenarios.