Citizens & Northern Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Financial statements are unaudited. The company is a community bank holding company operating primarily in Pennsylvania and New York.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $11.715 million | $10.897 million, Q1 2018; up 7.5% |
| Net interest margin | 4.04% (fully taxable-equivalent basis) | 3.84%, Q1 2018 |
| Noninterest income | $4.406 million | $4.406 million, Q1 2018 |
| Noninterest expense | $11.007 million | $9.895 million, Q1 2018; up 11.2% |
| Net income / diluted EPS | $5.090 million / $0.41 | $4.375 million / $0.36, Q1 2018 |
| Return on average assets / equity | 1.59% / 10.33%, annualized | Not stated here for Q1 2018 |
| Total assets | $1.290 billion | $1.291 billion at Dec. 31, 2018 |
| Gross loans / allowance | $825.392 million / $8.256 million | $827.563 million / $9.309 million at Dec. 31, 2018 |
| Total deposits | $1.040 billion | $1.034 billion at Dec. 31, 2018 |
| Borrowings | $37.976 million total | $48.768 million at Dec. 31, 2018 |
| Stockholders’ equity | $202.127 million | $197.368 million at Dec. 31, 2018 |
Operating cash flow was $2.820 million, versus $6.330 million in Q1 2018; investing activities provided $12.537 million and financing activities used $8.742 million. Cash and cash equivalents ended the quarter at $39.442 million, compared with $34.340 million a year earlier. The company reported $395.399 million of available borrowing capacity across its listed credit facilities.
Material changes and notable items
- Net income rose 16.3% year over year. Higher interest income and a wider net interest margin supported results, while interest expense increased 36.0% as deposit and borrowing costs rose.
- The $957,000 credit for loan losses, compared with a $292,000 provision in Q1 2018, materially benefited earnings. Management attributed the credit mainly to eliminating $1.365 million of specific allowances on two commercial loans after improved borrower and collateral conditions; the loans returned to full accrual status.
- Noninterest expense increased $1.112 million. Drivers included higher salaries, data-processing and professional fees, other-real-estate costs, and loan-collection expense. Q1 included $311,000 of Monument merger-related non-payroll costs and $188,000 related to a lending office in York, Pennsylvania.
- Nonperforming loans were $11.343 million, or 1.37% of loans, down from $16.019 million, or 1.94%, at year-end. Nonperforming assets were $13.218 million, or 1.02% of assets, versus $17.722 million, or 1.37%, at year-end.
- Other comprehensive income was $3.529 million, compared with a $3.754 million loss in Q1 2018, primarily reflecting the change in unrealized available-for-sale securities gains and losses. Comprehensive income was $8.619 million versus $621,000.
Outlook, risks, contingencies and unusual items
- The Monument Bancorp merger closed April 1, 2019, after the reporting date. Estimated purchase consideration was approximately $42.7 million; former Monument shareholders received stock and cash under the transaction terms and owned approximately 9.4% of the combined company’s shares after closing. Monument reported March 31 assets of $376 million, gross loans of $263 million and deposits of $224 million. Acquisition-date fair-value accounting was still in progress when the filing was issued.
- Management estimated additional merger-related expenses of $2.9 million to $3.5 million for Q2 2019. This is an expense estimate, not earnings guidance. The filing says Q1 results may not indicate full-year results and provides no broader earnings or revenue guidance.
- Key stated risks include interest-rate and economic changes, regulatory or legislative changes, competition, technology costs, and failure to realize merger synergies or integrate acquired operations. Lending is concentrated in the company’s Pennsylvania and New York markets; management notes local economic conditions affect borrowers’ ability to repay.
- Management considered the allowance for loan losses adequate but emphasized that estimates are subjective and actual losses could differ materially. It also identified participation and leveraged participation lending, loan-sale representation-and-warranty exposures, and collateral-dependent valuations as areas to monitor. The MPF Original program had a maximum credit-enhancement obligation of $4.188 million, with a $315,000 recorded allowance.
- Management said pending legal proceedings were not expected to materially affect financial condition or results. It reported no significant concerns regarding off-balance-sheet commitments or standby letters of credit. The company had not early adopted the expected-credit-loss standard and was assessing its impact ahead of required adoption in 2020.
- C&N Bank’s March 31 capital ratios included total capital to risk-weighted assets of 20.71%, common equity tier 1 of 19.64%, and tier 1 capital to average assets of 12.62%. Management stated the bank met applicable requirements and expected capital to remain above well-capitalized standards, including after the merger.
Important facts for investors to verify
- Whether the commercial-loan improvements supporting the Q1 allowance release persist, and how credit quality and the allowance develop in subsequent quarters.
- The final purchase accounting, acquired-loan credit review, realized synergies, integration progress, and total costs of the Monument merger.
- Whether higher deposit costs continue to offset loan and securities yield improvements, and the resulting effect on net interest margin.
- Trends in noninterest expenses, including merger costs, loan workouts, real estate, staffing and technology spending.
- How the expected-credit-loss standard affects the allowance and retained earnings at adoption, and how local-market and participation-loan exposures perform.