Citizens Financial Services, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. The Pennsylvania-based bank operates across Pennsylvania, southern New York and, following its April 2020 MidCoast acquisition, Delaware. The quarter’s year-over-year comparisons reflect the acquisition and are not solely organic growth.
Key financial metrics
| Metric | Q1 2021 / March 31, 2021 | Comparable / prior balance |
|---|---|---|
| Net interest income | $16.44 million | $12.89 million, Q1 2020; up 27.6% |
| Net interest margin, tax-equivalent | 3.73% | 3.84%, Q1 2020 |
| Provision for loan losses | $0.65 million | $0.40 million, Q1 2020 |
| Noninterest income | $4.24 million | $1.85 million, Q1 2020 |
| Noninterest expense | $9.95 million | $8.92 million, Q1 2020 |
| Net income / diluted EPS | $8.46 million / $2.16 | $4.53 million / $1.27, Q1 2020 |
| Operating cash flow | $13.97 million | $4.73 million, Q1 2020 |
| Total assets | $2.00 billion | $1.89 billion, Dec. 31, 2020 |
| Total loans / allowance | $1.40 billion / $16.56 million | $1.41 billion / $15.82 million, Dec. 31, 2020 |
| Deposits / borrowed funds | $1.69 billion / $86.17 million | $1.59 billion / $88.84 million, Dec. 31, 2020 |
| Cash and cash equivalents | $150.83 million | $68.71 million, Dec. 31, 2020 |
| Stockholders’ equity | $198.81 million | $194.26 million, Dec. 31, 2020 |
Annualized return on assets was 1.77% and return on equity was 17.25%, versus 1.24% and 11.48%, respectively, in Q1 2020. The allowance was 1.18% of loans; nonperforming loans were $11.16 million, or 0.79% of loans. The bank reported an 8.84% community bank leverage ratio and said it was well-capitalized. Cash increased by $82.12 million; financing activities provided $93.61 million, primarily reflecting $98.61 million of deposit growth, while investing activities used $25.46 million.
Material changes versus the prior period
- Net income rose 86.8%; net interest income increased with higher average earning assets, including MidCoast-related commercial loan growth, and lower funding costs. The tax-equivalent net interest margin nevertheless declined as asset yields fell.
- Noninterest income increased $2.38 million. Notable drivers included $1.16 million more bank-owned life insurance income, reflecting a $1.155 million death benefit on two former employees; higher mortgage-sale gains; and a swing in equity-security results from a loss to a gain.
- Expenses rose 11.5%, including higher salaries and benefits and occupancy costs; MidCoast-related merger costs recorded in Q1 2020 did not recur.
- Deposits grew $98.61 million, which management attributed mainly to pandemic-related stimulus funds. Loans were nearly flat versus year-end; growth in commercial real estate and construction loans was offset by declines in other categories and PPP loan balances.
- Unrealized losses on available-for-sale securities drove a $1.59 million decline in other comprehensive income. The company also recorded $2.05 million of pretax other comprehensive income related to interest-rate swaps.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management cautions that the quarter’s results are not necessarily indicative of full-year performance.
- Management said liquidity was adequate, citing cash and access to core deposits, FHLB financing, correspondent-bank lines, brokered CDs and maturing loans and securities. The bank reported about $727.4 million of FHLB borrowing capacity, with $109.9 million outstanding, plus $34.0 million of undrawn federal-funds lines and a $12.8 million undrawn Federal Reserve borrower-in-custody line.
- COVID-19 remains a credit and operating risk. Four loans totaling $13.9 million remained under modification at quarter-end; $7.7 million of these were scheduled to mature by the end of May 2021. The company had 326 PPP loans outstanding totaling $28.3 million, with approximately $1.2 million of deferred fees remaining to be amortized.
- Credit exposures include agricultural loans of $356.7 million (25.4% of loans), dairy-industry loans of $135.5 million (9.7%), and hotel/motel, restaurant and amusement/theme-park loans of $59.3 million, $26.8 million and $13.9 million, respectively. Management highlighted borrower and sector risks, including pandemic effects, agricultural conditions, local economic weakness and natural-gas-related activity.
- Three borrower relationships represented 50.5% of nonperforming loans; one agricultural relationship had a $131,000 specific reserve. Management considered the allowance adequate but warned that economic deterioration, collateral declines or regulatory examination could require additional provisions.
- After quarter-end, on April 16, 2021, the company issued $10 million of 4.00% fixed-to-floating subordinated notes due 2031, intended to qualify as Tier 2 capital. This was a subsequent event, not quarter-end debt.
- Other stated risks include interest-rate changes, competition, acquisition integration, fraud and cybersecurity, regulatory changes, and concentration-related credit risk. Management reported no material change in risk factors from its 2020 Form 10-K and no material pending litigation known to it.
Most important facts for investors to verify
- How much of the earnings increase is repeatable: specifically, the impact of the $1.155 million BOLI death benefit, securities gains and equity-market results.
- Whether deposit growth persists as stimulus-related balances change, and how excess liquidity is deployed without further margin pressure.
- Credit performance in agricultural, commercial real estate, hospitality and other higher-risk exposures, including the modified loans and significant nonperforming relationships.
- The effects of MidCoast integration and acquired-loan performance on future growth, expenses and credit costs.
- The terms and regulatory treatment of the post-quarter $10 million subordinated debt issuance, and the company’s capital and funding position after issuance.