Citizens Financial Services, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company is a Pennsylvania-based community banking group operating through First Citizens Community Bank and related subsidiaries. The April 17 acquisition of MidCoast Community Bancorp added operations in Wilmington and Dover, Delaware. Financial amounts below are in U.S. dollars; balance-sheet and cash-flow figures are stated in millions unless noted.
Financial performance and condition
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net income | $5.34 million; up 10.2% | Q2 2019: $4.85 million |
| Basic and diluted EPS | $1.39 | Q2 2019: $1.36 |
| Six-month net income and EPS | $9.87 million; $2.67 per share | Six months 2019: $9.25 million; $2.60 per share |
| Net interest income | Q2: $16.29 million, up 32.0%; six months: $29.18 million, up 20.3% | Q2 2019: $12.34 million; six months 2019: $24.25 million |
| Net interest margin, tax-equivalent | Q2: 4.15%; six months: 4.01% | Q2 2019: 3.74%; six months 2019: 3.66% |
| Provision for loan losses | Q2: $0.55 million; six months: $0.95 million | Q2 2019: $0.35 million; six months 2019: $0.75 million |
| Total assets | $1,800.1 million | December 31, 2019: $1,466.3 million |
| Total loans / net loans | $1,363.6 million / $1,348.8 million | December 31, 2019: $1,115.6 million / $1,101.7 million |
| Total deposits | $1,513.3 million | December 31, 2019: $1,211.1 million |
| Borrowed funds | $85.1 million | December 31, 2019: $85.1 million |
| Stockholders’ equity | $183.1 million | December 31, 2019: $154.8 million |
Revenue growth and improved net interest margin reflected MidCoast, loan growth, and lower funding costs following interest-rate cuts. Six-month noninterest income declined 3.4% to $3.92 million, including $0.24 million of equity-security losses, partly offset by $0.43 million of gains on loans sold and $0.12 million of securities gains. Noninterest expense rose 22.8% for the first half to $20.33 million, including $2.18 million of merger and acquisition expense. The quarter also included a $0.31 million pension-plan partial-settlement cost.
Six-month cash flow was $5.71 million used in operating activities, $47.00 million used in investing activities, and $73.22 million provided by financing activities. Cash and cash equivalents ended at $39.03 million, versus $18.52 million at year-end. Financing inflows included deposit growth; operating cash flow was affected by increased originations of loans held for sale. Management cited available cash, core deposits, FHLB financing, correspondent-bank lines, and maturing assets as liquidity sources. It reported $672.9 million of FHLB borrowing capacity, with $113.9 million outstanding, and $34.0 million of undrawn federal funds lines.
The Bank reported a community bank leverage ratio of 8.90% and stated it met applicable capital adequacy requirements. The filing does not provide formal earnings or margin guidance.
Material changes and unusual items
- MidCoast was acquired for approximately $26.84 million, funded with 373,356 company shares and approximately $7.6 million in cash. The acquisition added $223.2 million of loans and $208.8 million of deposits, as well as $8.08 million of goodwill; reported results include MidCoast only from April 17, 2020.
- Reported loan growth of $248.1 million included the acquired portfolio and $53.7 million of Paycheck Protection Program loans. Excluding the acquisition and PPP loans, management said loans declined $28.9 million from year-end.
- COVID-19 relief modifications had been made on 509 loans totaling $196.2 million; $55.4 million remained modified at June 30, including $23.6 million requiring a second round of relief. Most outstanding modifications were scheduled to mature by September 2020.
- The company had 570 PPP loans outstanding totaling $53.7 million, earning 1% interest, with estimated fee revenue of approximately $2.1 million over 24 months. Some loans may be forgiven, subject to SBA requirements.
Credit, outlook, and risks
- The allowance for loan losses was $14.83 million, or 1.09% of total loans, compared with $13.85 million, or 1.24%, at year-end. Management increased reserves in response to pandemic-related economic deterioration and unemployment; it said the allowance was adequate, while noting estimates could change with economic and borrower conditions.
- Nonperforming loans were $11.35 million, or 0.83% of loans, and nonperforming assets were $14.20 million. Nonaccrual loans were $10.69 million. Three borrower relationships represented 58.7% of nonperforming loans; one agricultural relationship had a $0.22 million specific reserve.
- COVID-19 risks include borrower repayment stress, collateral-value declines, higher credit losses, deferred foreclosure actions, operational and cybersecurity risks, and uncertainty around loan demand and interest rates. Hotel and restaurant exposures were $34.8 million and $25.5 million, respectively. Agricultural loans represented $360.1 million, or 26.4%, of loans; dairy exposure was $146.9 million, or 10.8%.
- Management stated that the interim results are not necessarily indicative of full-year performance. It identified acquisition integration, the pandemic, competition, interest-rate changes, agricultural conditions, and regional economic conditions as risks. No material litigation or material changes to previously reported risk factors were disclosed.
- The company has not yet quantified the effect of adopting the expected-credit-loss standard (CECL); it expects adoption could increase the allowance. Its stated effective date for this smaller reporting company was fiscal years beginning after December 15, 2022.
Important facts for investors to verify
- Whether COVID-19 loan modifications, including repeat relief requests, resume scheduled payments and how those loans perform after modification periods end.
- Credit trends in commercial real estate, agriculture, hospitality, restaurants, and dairy, and whether the allowance adequately reflects changing economic conditions.
- MidCoast integration progress, recurring costs, realized benefits, and the effect of acquired-loan accounting on future earnings and credit metrics.
- PPP forgiveness and fee recognition, and the durability of net interest margin as deposit costs and asset yields reset.
- Liquidity and capital headroom, including the relationship between reported FHLB capacity and outstanding borrowings, and the impact of commitments to extend credit.