“A
Bank that’s potentially headed South instead of North”
By:
Danny Smerz, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
Citizens
& Northern Corporation (NASDAQ:CZNC) Is a holding
company whose principal activity is community banking. The largest subsidiary
is Citizens & Northern Bank and the other wholly-owned subsidiaries are
Citizens & Northern Investment Corporation and Bucktail Life Insurance
Company (“Bucktail”). Citizens & Northern Investment Corporation engages in
investment activities and Bucktail reinsures credit and mortgage life and
accident and health insurance on behalf of C&N Bank.
- Net
loans outstanding were $817,136,000 for Q1 2019 as compared to
$818,254,000 as of Q4 2018. However, on a YOY basis, loans outstanding
were up 1.1% from $808,300,000 when comparing Q1 2018 to Q1 2019.
- Q1
2018 vs. Q1 2019 showed increases in the loan origination across most
sectors of the business: total residential mortgage loans increased $12.5
million (2.8%), total consumer loans increased $1.6 million (10.5%),
however total commercial loans decreased $6.1 million (1.7%).
- Net
income of $5,090,000 in Q1 2019 was up $715,000 (16.3%) from Q1 2018.
CZNC has recently completed a merger
with Monument Bancorp, Inc. (“Monument”). Monument is the parent company of
Monument Bank, a commercial bank which operates two community bank offices and
one loan production office in Bucks County, Pennsylvania. The estimated total
purchase consideration would be valued at approximately $42.7 million.
Key
points:
Citizens & Northern Corporation remains a
laggard as we move forward in 2019. Over the last three years, Citizens & Northern
Corporation has not seen its earnings per share change much—rising only from
$1.50 (2013) to $1.79 (2018). Its revenue is up 12% over last year. Unfortunately,
there is a complete lack of earnings per share improvement over the past 5 years.
While it’s good to see some good revenue growth recently, the growth isn’t fast
enough to put aside concerns around earnings.
With C&N’s
merger with Monument, the company will now enter a crowded Bucks County, which
is home to 34 banks, 234 branches and $18 billion in deposits. Unfortunately,
this means that there will be more competition in central Pennsylvania for
C&N. In fact, the five biggest banks— Wells Fargo, TD Bank, PNC Bank,
Citizens Bank and Bank of
America — consume 66 percent of the
region’s deposits. While there are several sizable regional and community banks
still jockeying for position, these large banks pose an imminent threat.
Lastly,
the company’s ability to increase its market dominance in the northeast has
lagged. In fact, total assets amounted to $1,290,000,000 compared to $1,258,116,000
at March 31, 2018 (an increase of 2.5%). While the company has made a few acquisitions
in the last 5 years, the synergies don’t seem to be playing out.
What
has the stock done lately?
Over the last month the
stock has traded between $26.13 and $28.84. During this time the stock spiked a
bit when the company missed earnings by $0.02 (actually paid $0.41) on April 18th.
Since then, the stock has reached a 5-year high. This increase is likely driven
by the recent announcement of the agreement to merge with Monument Bancorp, Inc.
Past
Year Performance:
CZNC has increase 17.3% in
value over the past year. Considering their YOY Net Income, AUM, loan originations,
and EPS growth, it appears that this would be a good time to sell considering the
stagnant/slow growth we have seen in the former coupled with a 5-year high in
the stock’s price.
Source:
FactSet
My
Takeaway:
Citizens & Northern Corporation’s
stock performance is heavily dependent on interest rates, regulation, and the
competitive landscape within the northeast. The synergies from their partnership
with Monument could potentially come to fruition, but this is in light of “big bank”
competition and their failure to successfully integrate past acquisitions as
evident through slow margin growth (top and bottom line). With commercial loans
maintaining 40-44% of the loan portfolio, the failure of the company (as seen
in 2018) to increase this category could have a material effect on the company’s
future performance.
Source:
FactSet
