Citizens Financial Services, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Figures are unaudited and generally in millions unless noted. The company is a Pennsylvania-based bank holding company. Its MidCoast acquisition closed on April 17, 2020, after quarter-end.
Financial performance and condition
| Metric | Q1 2020 | Prior comparable / year-end |
|---|---|---|
| Net interest income | $12.89 | $11.92 in Q1 2019; up 8.2% |
| Provision for loan losses | $0.40 | $0.40 in Q1 2019 |
| Noninterest income | $1.85 | $2.03 in Q1 2019; down 9.0% |
| Noninterest expense | $8.92 | $8.32 in Q1 2019; up 7.2% |
| Net income / diluted EPS | $4.53 / $1.29 | $4.41 / $1.25 in Q1 2019 |
| Tax-equivalent net interest margin | 3.84% | 3.62% in Q1 2019 |
| Annualized ROA / ROE | 1.24% / 11.48% | 1.22% / 12.12% in Q1 2019 |
| Total assets | $1,464.7 | $1,466.3 at year-end |
| Loans, net of allowance | $1,079.5 | $1,101.7 at year-end |
| Deposits | $1,205.2 | $1,211.1 at year-end |
| Borrowed funds | $83.6 | $85.1 at year-end |
| Cash and cash equivalents | $21.5 | $18.5 at year-end |
| Stockholders’ equity | $159.9 | $154.8 at year-end |
Net interest income improved primarily as funding costs fell and average loans grew. Interest expense declined $0.65 million year over year, while tax-equivalent interest income rose $0.32 million. Noninterest income was pressured by a $0.25 million equity-security loss, compared with an $0.01 million gain in Q1 2019. Salaries and benefits rose $0.39 million, and the company recorded $0.38 million in MidCoast acquisition costs.
Operating cash flow was $4.73 million, investing cash flow was $9.03 million, and financing cash flow was negative $10.76 million; cash increased $3.00 million. The allowance for loan losses was $14.25 million, or 1.30% of loans, versus $13.85 million, or 1.24%, at year-end. Nonperforming loans were $11.47 million, down from $12.02 million. The company reported a 9.45% bank community bank leverage ratio and said the Bank met applicable capital requirements.
Material changes and notable items
- Available-for-sale securities increased to $257.8 million from $240.7 million; the quarter included a $4.33 million pre-tax increase in unrealized gains, recognized through other comprehensive income.
- Gross loans declined 2.0% from year-end, largely following payoffs by two large relationships. Agricultural lending was $346.8 million, or 31.7% of loans; dairy-industry exposure was $149.7 million, or 13.7%.
- Deposits fell 0.5%, mainly due to a $14.3 million decline in certificates of deposit. Borrowed funds decreased $1.6 million; management described using FHLB advances and other funding to manage liquidity and interest-rate exposure.
- The company declared dividends of $0.55 per share and repurchased 23,412 shares for $1.28 million during the quarter.
- After quarter-end, MidCoast merged into the company on April 17. Consideration was a choice of $6.50 cash or 0.1065 company shares per MidCoast share; approximately 25% of MidCoast shares, including dissenters’ shares, were paid in cash.
Outlook, management commentary and risks
The filing provides no quantitative earnings guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results. COVID-19’s effects were highly uncertain; management cited potential borrower payment stress, market volatility, changes in funding costs, and operating and liquidity pressures.
- By April 30, 2020, the company had modified 169 loans totaling $52.0 million, primarily business loans. Relief included late-fee waivers and temporary interest-only or payment-deferral options; foreclosure actions were paused during March and April.
- Through the first PPP round, 422 loans totaling $47.2 million had been approved, carrying a 1% interest rate and expected fee revenue of approximately $2.0 million over 24 months. The filing also reports that, as of April 30, 557 loans totaling $52.3 million had been approved in the second phase.
- Management identified hotels/motels and restaurants as higher-risk industries, with exposures of $18.9 million and $13.1 million, respectively. It also cited pandemic-related strain on agricultural borrowers and rising unemployment as factors in its allowance assessment.
- Three borrower relationships accounted for approximately 59.1% of nonperforming loans. One agricultural relationship had a $199,000 specific reserve; management reported no specific reserve for the other two relationships.
- Liquidity sources included core deposits, FHLB capacity, correspondent-bank lines and a Federal Reserve borrower-in-custody line. At quarter-end, approximately $114.1 million of the Bank’s $537.8 million FHLB borrowing capacity was outstanding; $34.0 million of federal funds lines and a $9.0 million Federal Reserve line were undrawn.
- Principal risks include pandemic-related credit deterioration, agricultural and regional industry concentration, interest-rate and securities-value changes, acquisition integration, cybersecurity and third-party operational disruptions. Management said it considered the allowance adequate but noted that a prolonged downturn or weaker collateral values could require additional provisions.
Important facts for investors to verify
- Subsequent-quarter trends in loan deferrals, delinquencies, nonaccrual balances, charge-offs and allowance coverage, particularly for agricultural, hospitality and other stressed borrowers.
- Actual PPP loan balances, forgiveness, fee recognition and resulting yields; distinguish the filing’s first-round figures from its April 30 second-phase figures.
- MidCoast’s post-close contribution to assets, earnings, capital, funding and integration costs; the Q1 financial statements exclude the completed merger.
- Deposit stability, brokered-deposit levels, use of FHLB and other borrowing, and liquidity available for commitments to extend credit.
- The sensitivity of earnings and securities values to interest rates, and the effect of the reported unrealized securities gains on equity.
- The timing and estimated impact of adopting the expected-credit-loss accounting standard; the filing says the impact could not yet be reasonably estimated.