EX-99.2 3 tm203570d1_ex99-2.htm EXHIBIT 99.2

EXHIBIT 99.2

  

 

December 31, 2019QUARTERLY REPORT

 

Dear Shareholder:

 

On December 18, 2019, Citizens & Northern Corporation announced its agreement to acquire Covenant Financial, Inc. and its subsidiary Covenant Bank in a transaction valued at approximately $77 million. Covenant is a $512 million community bank headquartered in Bucks County, PA, with one community office in Doylestown and another in Chester County, PA. This action builds on C&N’s 2019 acquisition of Monument Bank, also located in Bucks County, and expands our presence in attractive southeastern Pennsylvania markets. Covenant’s Team has deep roots in the region and its relationship-based, community focused culture aligns well with C&N’s mission and values. We are excited about the opportunities created by the combined customer base and expanded C&N Team serving the market that enhances our capacity to bring treasury management, mortgage, wealth management, and mobile and online services. This strategic investment provides scale, leverages our recent investments in people and technology, effectively deploys our strong capital base, and is expected to produce substantial earnings accretion beginning in the fourth quarter of 2020. The addition of the Covenant franchise is another significant step in positioning C&N to enhance long-term shareholder value.

 

The team that creates value in each of our regional markets is critical to the success of our relationship focused business model. Covenant’s President and COO Blair Rush will join C&N as EVP and Region President and Chief Lending Officer Kelley Cwiklinski will continue as SVP and Regional Lending Executive. They will join Chris Nardo, Michelle Pederson, and Ben Crowley to form an expanded southeastern regional leadership team to strengthen and build upon local relationships. In addition, two members of the Covenant board will join the C&N corporate and bank boards of directors. We expect the transaction to close in the third quarter of 2020 and the combined organization is projected to have total assets of approximately $2.3 billion. We wish to extend a warm welcome to the Covenant Team and customers.

 

Supporting our expansion efforts, C&N’s ongoing focus remains on creating value and deepening relationships with our customers and communities. Our full set of banking, lending and wealth management products and services meet a wide set of needs for the small/family-owned businesses, professionals, and individuals that we have built the Company to serve. The broad set of solutions also provides C&N with a diverse revenue mix that complements net interest income with a variety of noninterest income sources. We continue to improve our products, develop the Team, and invest in systems to connect with customers and deliver value.

 

Net income for the quarter of 2019, excluding merger related items and securities gains, decreased by approximately 2% compared to the fourth quarter of 2018, while EPS decreased approximately 11%, the difference due to the additional shares issued in the Monument acquisition. Year-to-date, on the same basis, adjusted net income increased nearly 10% and adjusted EPS grew 1%.

 

Overall loan growth was strong during the fourth quarter mainly due to production in Southeastern PA and York, combined with solid performance in legacy markets. Deposit totals declined during the quarter as a result of seasonal fluctuations in municipal balances and a combination of short- and long-term borrowing provided funding for loan growth. This balance sheet growth produced a modest increase in net interest income during the quarter despite a modest decrease in the net interest margin.

 

Credit quality remains strong and most key metrics are stable or improving. Our recent growth and expansion is supported by an historically conservative credit culture and consistent policies and underwriting standards. Management maintains a robust process to assess individual credits and trends in the overall portfolio as well as adequacy of the allowance for potential losses. Loan loss provisions during the fourth quarter 2019 and year ended December 31, 2019 were higher than in the comparative periods of 2018 due to substantial growth in the loan portfolio.

 

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Noninterest income for the quarter was at its highest level of the year. Overall wealth management revenue, which includes both trust and brokerage, was outstanding. Trust assets under management eclipsed the $1 billion mark for the first time due to ongoing relationship management efforts and strong financial markets. Additionally, relationships connected to brokerage activity have assets totaling greater than $300 million. Deposit service charges and interchange revenue produced solid growth, while gains from the sale of mortgage loans were steady for the quarter and increased substantially year-over-year.

 

Noninterest expense growth was driven by the addition of Monument, technology related costs, marketing expenses related to the re-branding effort and general increases in other operating expenses.

 

C&N’s capital position remains strong and supports our capacity to continue growth and expansion activities, such as the Covenant acquisition . Earnings also remain positive and support the continuation of a strong cash dividend. On January 16, 2020, the Board of Directors declared a cash dividend on common stock of $.27 per share payable on February 7, 2020, to shareholders of record on January 27, 2020. This results in an annualized dividend rate of $1.08 and annualized yield of 3.82% based on C&N’s December 31, 2019 closing price of $28.25.

 

Thank you to all our loyal shareholders for your continued support and interest in C&N.

 

J. Bradley Scovill

President and CEO

 

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CONDENSED, CONSOLIDATED EARNINGS INFORMATION

(Dollars In Thousands, Except Per Share Data) (Unaudited)

 

    4TH    4TH           
    QUARTER    QUARTER           
    2019    2018           
    (Current)    (Prior Year)    $ Incr. (Decr.)    % Incr. (Decr.) 
Interest and Dividend Income  $17,290   $13,304   $3,986    29.96%
Interest Expense   2,999    1,312    1,687    128.58%
Net Interest Income   14,291    11,992    2,299    19.17%
Provision for Loan Losses   652    252    400    158.73%
Net Interest Income After Provision for Loan Losses   13,639    11,740    1,899    16.18%
Noninterest Income   5,066    5,040    26    0.52%
Gain on Restricted Equity Security   0    0    0      
Net Gains (Losses) on Available-for-sale Debt Securities   3    (4)   7    -175.00%
Merger-Related Expenses   281    128    153    119.53%
Other Noninterest Expenses   11,834    9,946    1,888    18.98%
Income Before Income Tax Provision   6,593    6,702    (109)   -1.63%
Income Tax Provision   1,135    1,021    114    11.17%
Net Income  $5,458   $5,681   $(223)   -3.93%
Net Income Attributable to Common Shares (1)  $5,431   $5,653   $(222)   -3.93%
PER COMMON SHARE DATA:                    
Net Income - Basic  $0.40   $0.46   $(0.06)   -13.04%
Net Income - Diluted  $0.40   $0.46   $(0.06)   -13.04%
Dividend Per Share - Quarterly  $0.27   $0.27   $0.00    0.00%
Number of Shares Used in Computation - Basic   13,642,286    12,246,900           
Number of Shares Used in Computation - Diluted   13,663,736    12,283,041           

 

CONDENSED, CONSOLIDATED EARNINGS INFORMATION

(Dollars In Thousands, Except Per Share Data) (Unaudited)

 

   YEARS ENDED         
   DECEMBER 31,         
   2019   2018         
   (Current)   (Prior Year)   $ Incr. (Decr.)   % Incr. (Decr.) 
Interest and Dividend Income  $64,771   $50,328   $14,443    28.70%
Interest Expense   10,283    4,625    5,658    122.34%
Net Interest Income   54,488    45,703    8,785    19.22%
Provision for Loan Losses   849    584    265    45.38%
Net Interest Income After Provision for Loan Losses   53,639    45,119    8,520    18.88%
Noninterest Income   19,284    18,597    687    3.69%
Gain on Restricted Equity Security   0    2,321    (2,321)   -100.00%
Net Gains (Losses) on Available-for-sale Debt Securities   23    (288)   311    -107.99%
Merger-Related Expenses   4,099    328    3,771    1149.70%
Other Noninterest Expenses   45,438    39,158    6,280    16.04%
Income Before Income Tax Provision   23,409    26,263    (2,854)   -10.87%
Income Tax Provision   3,905    4,250    (345)   -8.12%
Net Income  $19,504   $22,013   $(2,509)   -11.40%
Net Income Attributable to Common Shares (1)  $19,404   $21,903   $(2,499)   -11.41%
PER COMMON SHARE DATA:                    
Net Income - Basic  $1.46   $1.79   $(0.33)   -18.44%
Net Income - Diluted  $1.46   $1.79   $(0.33)   -18.44%
Dividend Per Share - Quarterly  $1.08   $1.08   $0.00    0.00%
Dividend Per Share - Special  $0.10   $0.00   $0.10      
Number of Shares Used in Computation - Basic   13,298,736    12,219,209           
Number of Shares Used in Computation - Diluted   13,321,559    12,257,368           

 

(1) Basic and diluted net income per common share are determined based on net income less earnings allocated to nonvested restricted shares with nonforfeitable dividends.

 

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CONDENSED, CONSOLIDATED BALANCE SHEET DATA

(In Thousands) (Unaudited)

 

   DEC. 31,   DEC. 31,   DEC. 31, 2019 vs 2018 
   2019   2018   $ Incr. (Decr.)   % Incr. (Decr.) 
ASSETS                    
Cash & Due from Banks  $35,202   $37,487   $(2,285)   -6.10%
Available-for-sale Debt Securities   346,723    363,273    (16,550)   -4.56%
Loans Held for Sale   767    213    554    260.09%
Loans, Net   1,172,386    818,254    354,132    43.28%
Intangible Assets   29,635    11,951    17,684    147.97%
Other Assets   69,432    59,715    9,717    16.27%
TOTAL ASSETS  $1,654,145   $1,290,893   $363,252    28.14%
                     
LIABILITIES                    
Deposits  $1,252,660   $1,033,772   $218,888    21.17%
Repo Sweep Accounts   1,928    5,853    (3,925)   -67.06%
     Total Deposits and Repo Sweeps   1,254,588    1,039,625    214,963    20.68%
Borrowed Funds   136,419    42,915    93,504    217.88%
Subordinated Debt   6,500    0    6,500      
Other Liabilities   12,186    10,985    1,201    10.93%
TOTAL LIABILITIES   1,409,693    1,093,525    316,168    28.91%
                     
SHAREHOLDERS' EQUITY                    
Common Shareholders' Equity, Excluding Accumulated Other Comprehensive Income (Loss)   240,761    201,538    39,223    19.46%
Accumulated Other Comprehensive Income (Loss):                    
  Net Unrealized Gains/Losses on Available-for-sale Debt Securities   3,511    (4,307)   7,818    -181.52%
  Defined Benefit Plans   180    137    43    31.39%
TOTAL SHAREHOLDERS' EQUITY   244,452    197,368    47,084    23.86%
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY  $1,654,145   $1,290,893   $363,252    28.14%

  

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