Citizens Financial Services, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results; dollar amounts below are in millions unless noted. The company operates First Citizens Community Bank and related insurance and realty subsidiaries across Pennsylvania, southern New York, and Delaware. The 2020 comparison includes MidCoast Community Bancorp, acquired in April 2020, so year-over-year growth also reflects acquisition-related scale.
Financial performance and position
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income | $6.647; diluted EPS $1.69 | Q2 2020: $5.338; $1.37 EPS |
| Six-month net income and diluted EPS | $15.110; $3.83 | Six months 2020: $9.869; $2.64 |
| Net interest income | Q2: $16.212 | Q2 2020: $16.286 |
| Six-month net interest income | $32.653 | Six months 2020: $29.176 |
| Net interest margin, tax-equivalent | Q2: 3.46%; six months: 3.59% | Q2 2020: 4.15%; six months 2020: 4.01% |
| Provision for loan losses | Q2: $0.500; six months: $1.150 | Q2 2020: $0.550; six months 2020: $0.950 |
| Total assets | $2,003.3 | December 31, 2020: $1,891.7 |
| Loans, net of allowance | $1,398.2 | December 31, 2020: $1,389.5 |
| Total deposits | $1,682.4 | December 31, 2020: $1,588.9 |
| Borrowed funds | $97.8 | December 31, 2020: $88.8 |
| Cash and cash equivalents | $108.2 | December 31, 2020: $68.7 |
| Stockholders' equity | $204.4 | December 31, 2020: $194.3 |
- Six-month operating cash flow was $21.7, versus cash used of $5.7 in the prior-year period. Investing activities used $80.2; financing activities provided $98.0. Cash increased $39.5 during the first half.
- Six-month annualized return on assets was 1.54% and return on equity was 15.19%, compared with 1.24% and 11.90%, respectively, in 2020. Q2 annualized ROA and ROE were 1.32% and 13.19%.
- The allowance for loan losses was $16.9, or 1.20% of loans, versus $15.8, or 1.13%, at year-end. Nonperforming loans fell to $9.1 from $11.3; nonperforming assets were $10.9, or 0.77% of loans net of unearned income.
- The Bank reported an 8.67% community bank leverage ratio and stated it was well-capitalized under that framework. The company reported $296.4 of commitments to extend credit and standby letters of credit.
Material changes versus comparable periods
- Six-month net income increased 53.1%, while Q2 net income increased 24.5%. Six-month net interest income rose 11.9%, but Q2 net interest income declined 0.5%.
- Management attributed higher six-month net interest income chiefly to loan and asset growth, including MidCoast and Delaware-market growth, and lower funding costs. Lower yields in the low-rate environment compressed tax-equivalent net interest margin: 3.59% versus 4.01% for the six-month comparison.
- Six-month noninterest income increased $3.0, or 77.1%, to $6.9. Drivers included a $1.155 death benefit within bank-owned life insurance earnings, $0.494 of fees from customer interest-rate swaps, improved equity-security results, higher loan-sale gains, and stronger service, trust, and brokerage income.
- Six-month noninterest expense was nearly flat at $20.3, partly because 2021 had no MidCoast merger and acquisition expense versus $2.2 in 2020. Q2 expense fell 9.6%, principally because Q2 2020 included $1.8 of acquisition costs; salaries, occupancy, and software costs increased.
- Deposits grew $93.5 in the first half, which management linked primarily to government stimulus funds and PPP-related deposits. The investment portfolio increased $74.0, while the unrealized gain on available-for-sale securities decreased $2.7.
Outlook, commentary, risks, and unusual items
- No formal earnings or financial guidance is provided. Management said results for the first six months are not necessarily indicative of full-year results. It expected municipal-loan activity to remain challenging in the second half and anticipated student-loan balances to recover in that period.
- COVID-19 risks include effects on borrowers, economic conditions, credit quality, and financial markets. In 2021 the company modified 19 loans totaling $26.7; at June 30, one $6.2 commercial relationship remained modified, with the agreement due to mature by August 31, 2021. The company also reported 419 outstanding PPP loans totaling $27.1, generally bearing 1% interest and eligible for SBA forgiveness subject to program rules.
- Credit exposures include agricultural lending of $344.0, or 24.3% of loans, and a dairy-industry concentration of $134.6, or 9.5%. Hotels/motels, restaurants, and amusement/theme parks were identified as higher-risk industries, with exposures of $70.9, $26.7, and $9.4, respectively. Three borrower relationships represented 62% of nonperforming loans; management cited collateral and repayment uncertainties for those relationships.
- The company issued $10.0 of fixed-to-floating subordinated notes in April 2021, due in 2031, initially bearing 4% interest through April 2026 and thereafter at a floating benchmark plus 323 basis points. Management described the borrowing strategy as addressing liquidity and interest-rate risk.
- Other unusual items included $1.478 of six-month bank-owned life insurance earnings, largely reflecting the death benefits; $0.050 of available-for-sale securities gains; and $0.216 of equity-security gains versus a $0.243 loss in the prior-year first half.
- Management warned of sensitivity to interest rates, regional and agricultural economic conditions, credit concentrations, cyber and fraud losses, regulatory changes, and acquisition integration. It said the allowance was adequate but could require adjustment if economic or collateral assumptions change. Adoption of the expected-credit-loss standard (CECL) was deferred for the company as a smaller reporting company to fiscal years beginning after December 15, 2022; the impact was not yet estimable and could increase the allowance.
- Management reported no material change in risk factors from the 2020 Form 10-K, no known litigation expected to materially affect the company, and effective disclosure controls. The filing reports no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings growth is sustainable after separating acquisition scale, the $1.155 life-insurance death benefit, swap fees, securities results, and the absence of prior-year merger costs.
- Whether deposit growth persists as stimulus-related balances recede, and how the company can deploy excess liquidity without further margin compression.
- Credit performance in commercial real estate, agriculture, dairy, and pandemic-sensitive industries, including the status and collateral coverage of the three large nonperforming relationships and modified loans.
- The effect of the $10.0 subordinated notes, other borrowings, and interest-rate changes on funding costs, capital, and net interest income.
- The eventual CECL allowance impact, regulatory capital position, and capacity to fund off-balance-sheet commitments while maintaining dividends and share repurchases.